-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, RuDMjvk4Mb4UpQyEmAvbmb8kGFC1HJwBu9aMpJhSZFvdO4c5YzD6tjhlDvpNv3GU rdgVfrJGvGLCdEN1rcp+vQ== 0001019687-04-002121.txt : 20040924 0001019687-04-002121.hdr.sgml : 20040924 20040924151036 ACCESSION NUMBER: 0001019687-04-002121 CONFORMED SUBMISSION TYPE: SB-2 PUBLIC DOCUMENT COUNT: 4 FILED AS OF DATE: 20040924 DATE AS OF CHANGE: 20040924 FILER: COMPANY DATA: COMPANY CONFORMED NAME: SUPERIOR GALLERIES INC CENTRAL INDEX KEY: 0001091539 STANDARD INDUSTRIAL CLASSIFICATION: WHOLESALE-JEWELRY, WATCHES, PRECIOUS STONES & METALS [5094] IRS NUMBER: 352208007 STATE OF INCORPORATION: DE FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: SB-2 SEC ACT: 1933 Act SEC FILE NUMBER: 333-119253 FILM NUMBER: 041044882 BUSINESS ADDRESS: STREET 1: 9478 WEST OLYMPIC BLVD STREET 2: # CITY: BEVERLY HILLS STATE: CA ZIP: 90212 BUSINESS PHONE: 310-203-9855 MAIL ADDRESS: STREET 1: 9478 WEST OLYMPIC BLVD STREET 2: N/A CITY: BEVERLY HILLS STATE: CA ZIP: 90212 FORMER COMPANY: FORMER CONFORMED NAME: TANGIBLE ASSET GALLERIES INC DATE OF NAME CHANGE: 19991229 SB-2 1 superior_sb2-092404.txt AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 24, 2004 REGISTRATION NO. 333-______________ - -------------------------------------------------------------------------------- U. S. SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------- FORM SB-2 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 SUPERIOR GALLERIES, INC. (Name of small business issuer in its charter) DELAWARE 35-2208007 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 5094 (Primary Standard Industrial Classification No.) 9478 WEST OLYMPIC BOULEVARD, BEVERLY HILLS, CALIFORNIA 90212 (310) 203-9855 (Address and telephone number of Registrant's principal executive offices and principal place of business) ------------------------- PAUL BIBERKRAUT CHIEF FINANCIAL OFFICER SUPERIOR GALLERIES, INC. 9478 WEST OLYMPIC BOULEVARD BEVERLY HILLS, CALIFORNIA 90212 (310) 203-9855 (Name, Address and Telephone Number of Agent for Service) ------------------------- COPIES TO: THOMAS G. BROCKINGTON, ESQ. KIM RIKER, ESQ. RUTAN & TUCKER, LLP 611 ANTON BOULEVARD, 14TH FLOOR COSTA MESA, CALIFORNIA 92626 (714) 641-5100 APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: From time to time after this registration becomes effective. IF ANY OF THE SECURITIES BEING REGISTERED ON THIS FORM ARE TO BE OFFERED ON A DELAYED OR CONTINUOUS BASIS PURSUANT TO RULE 415 UNDER THE SECURITIES ACT OF 1933, CHECK THE FOLLOWING BOX. [X] If this form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration number of the earlier effective registration statement for the same offering. [ ] If this form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] If this form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] If the delivery of the prospectus is expected to be made pursuant to Rule 434, check the following box. [ ] CALCULATION OF REGISTRATION FEE =================================================================================================================================== PROPOSED MAXIMUM TITLE OF EACH CLASS OF AMOUNT TO BE PROPOSED MAXIMUM AGGREGATE OFFERING AMOUNT OF SECURITIES TO BE REGISTERED REGISTERED (1) OFFERING PRICE PER UNIT PRICE REGISTRATION FEE - ----------------------------------------------------------------------------------------------------------------------------------- Common stock, $.001 par value 4,690,667(2) $1.25 (3) $5,863,334 $742.88 ===================================================================================================================================
(1) The common stock being registered hereby includes both outstanding shares of common stock and shares that are issuable upon the conversion of outstanding shares of convertible preferred stock. The amount being registered includes an indeterminate number of shares issuable upon conversion of the convertible preferred stock, as such number may be adjusted as a result of stock splits, stock dividends and similar transactions in accordance with Rule 416 of the Securities Act of 1933. (2) Represents shares of common stock being offered by selling security holders, including shares of common stock that are issuable upon conversion of convertible preferred stock. (3) The proposed maximum offering price per share has been estimated solely for the purpose of calculating the registration fee pursuant to Rule 457(c) of the Securities Act of 1933 and is based upon the last reported sale price of the Registrant's common stock on the OTC Bulletin Board on August 10, 2004. ------------------------ THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT BECOMES EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING UNDER SECTION 8(a), MAY DETERMINE. - -------------------------------------------------------------------------------- THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. THE SELLING SECURITY HOLDERS IDENTIFIED IN THIS PROSPECTUS MAY NOT SELL SECURITIES UNDER THIS PROSPECTUS UNTIL THE REGISTRATION STATEMENT OF WHICH THIS PROSPECTUS IS A PART BECOMES EFFECTIVE. SUBJECT TO COMPLETION, DATED SEPTEMBER 24, 2004 PROSPECTUS SUPERIOR GALLERIES, INC. 4,690,667 SHARES OF COMMON STOCK An aggregate of 1,524,000 issued and outstanding shares of our common stock and an aggregate of 3,166,667 shares of our common stock underlying convertible preferred stock are being offered for resale under this prospectus by some of our security holders identified in this prospectus for their own accounts. Our common stock currently trades on the OTC Bulletin Board Market under the symbol "SPGR." The last reported sale price of our common stock on August 10, 2004 was $1.25 per share. Our principal offices are located at 9478 West Olympic Boulevard, Beverly Hills, California 90212 and our telephone number is (310) 203-9855. ------------------------- INVESTING IN OUR COMMON STOCK INVOLVES RISKS. PLEASE SEE "RISK FACTORS" BEGINNING ON PAGE 3. ------------------------- You should rely only on the information contained or incorporated by reference in this prospectus. We have not authorized anyone to provide you with information different from that contained in this prospectus. NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF THIS PROSPECTUS IS ACCURATE OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. THIS PROSPECTUS IS NOT AN OFFER TO SELL THOSE SECURITIES AND IS NOT SOLICITING AN OFFER TO BUY THOSE SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED. The date of this prospectus is ___________, 2004. 1 TABLE OF CONTENTS Description Page No. - ----------- -------- Prospectus Summary...........................................................3 Risk Factors.................................................................5 Use of Proceeds.............................................................13 Price Range of Common Stock.................................................14 Capitalization..............................................................16 Management's Discussion and Analysis of Financial Condition and Results of Operations..............................................17 Business....................................................................25 Management..................................................................32 Certain Relationships and Related Transactions..............................36 Principal and Selling Shareholders..........................................37 Plan of Distribution........................................................39 Description of Capital Stock................................................42 Legal Matters...............................................................46 Experts.....................................................................46 Where You Can Find More Information.........................................47 Index to Financial Statements..............................................F-1 2 PROSPECTUS SUMMARY This summary highlights some information from this prospectus. Because it is a summary, it necessarily does not contain all of the information necessary to your investment decision. To understand this offering fully, you should read carefully the entire prospectus. OUR COMPANY Our principal line of business is the sale of rare coins on a retail, wholesale, and auction basis. Our retail and wholesale operations are conducted in virtually every state in the United States and in several foreign countries. We also provide auction services for customers seeking to sell their own coins. We market our services nationwide through broadcasting and print media and independent sales agents, as well as on the Internet through third party websites such as eBay and through our own website at sgbh.com. Our headquarters are in Beverly Hills, California. We were originally organized as a Nevada corporation in 1995. On June 30, 2003, our stockholders approved and we completed a reincorporation of our company in the State of Delaware and changed our corporate name from Tangible Asset Galleries, Inc. ("Tangible") to Superior Galleries, Inc. ("Superior"). These changes were effective at the close of business on June 30, 2003. Unless the context otherwise requires, all references in this prospectus to "us," "we," "our" or "Superior" shall mean Superior Galleries, Inc. and Tangible, as Superior's predecessor. Our principal executive offices are located at 9478 West Olympic Boulevard, Beverly Hills, California 90212, and our telephone number is (310) 203-9855. 3 THE OFFERING Common stock offered by selling security holders 4,690,667 (1) Common stock outstanding prior to this offering 4,509,942 (2) Common stock outstanding following this offering 7,676,609 (1)(2) if all shares are sold Use of Proceeds All proceeds of this offering will be received by selling security holders for their own accounts. Risk Factors You should read the "Risk Factors" section beginning on page 5, as well as other cautionary statements throughout this prospectus, before investing in shares of our common stock. - ------------- (1) Includes 3,166,667 shares of common stock issuable upon conversion of presently outstanding convertible preferred stock. (2) As of September 24, 2004, a total of 4,509,942 shares of common stock were outstanding, excluding: o shares of common stock issuable upon conversion of convertible preferred stock whose underlying shares of common stock are covered by this prospectus; o approximately 970,063 shares of common stock issuable or to become issuable upon exercise or conversion of outstanding warrants, options and other convertible securities, other than the convertible preferred stock whose underlying shares of common stock are covered by this prospectus; and o any additional shares of common stock we may issue from time to time after September 24, 2004. 4 RISK FACTORS AN INVESTMENT IN OUR COMMON STOCK INVOLVES A HIGH DEGREE OF RISK. IN ADDITION TO THE OTHER INFORMATION IN THIS PROSPECTUS, YOU SHOULD CAREFULLY CONSIDER THE FOLLOWING RISK FACTORS BEFORE DECIDING TO INVEST IN SHARES OF OUR COMMON STOCK. IF ANY OF THE FOLLOWING RISKS ACTUALLY OCCURS, IT IS LIKELY THAT OUR BUSINESS, FINANCIAL CONDITION AND OPERATING RESULTS WOULD BE HARMED. AS A RESULT, THE TRADING PRICE OF OUR COMMON STOCK COULD DECLINE, AND YOU COULD LOSE PART OR ALL OF YOUR INVESTMENT. RISKS RELATED TO OUR BUSINESS WE HAVE A RECENT HISTORY OF LOSSES AND MAY INCUR FUTURE LOSSES. We may not be able to sustain profitability or significantly increase our revenues. Although we recorded a net income of $552,266 for the year ended June 30, 2004, we incurred a net loss of $3,491,003 for the year ended June 30, 2003 and have incurred losses in prior fiscal years since July 1999. We cannot assure you that we will be profitable in the future. WE HAVE LIMITED WORKING CAPITAL. Our working capital deficiency at June 30, 2004 was $286,128. There can be no assurance that our revenue or results of operations will not decline in the future, that we will not have losses in the future, or that we will be able to continue funding such losses if they occur. Our limited capital could adversely affect our ability to continue our operations. OUR AUDIT OPINION COULD ADVERSELY AFFECT OUR STOCK PRICE. Our auditors have expressed an opinion on our financial statements for the years ended June 30, 2004 that contains an explanatory paragraph that expresses doubt about our ability to continue as a going concern due to recurring negative cash flows from operations, significant debt that is callable on demand, and limited working capital. OUR BUSINESS OF SELLING PREMIUM COLLECTIBLES IS HIGHLY COMPETITIVE. IF WE ARE UNABLE TO COMPETE SUCCESSFULLY, OUR REVENUE WILL DECREASE. The business of selling coins and other collectibles to retail and wholesale consumers and at auction is highly competitive. We compete with a number of comparably sized and smaller firms, as well as a number of larger firms throughout the United States. Many of our competitors have the ability to attract customers as a result of their reputation and the quality collectibles they obtain through their industry connections. Additionally, other reputable companies that sell or auction rare coins and other collectibles may decide to enter our markets to compete with us. These companies have greater name recognition and have greater financial and marketing resources than we do. If these auction companies are successful in entering the specialized market for premium collectibles in which we participate or if dealers and sellers participate less in our auctions, we may attract fewer buyers and our revenue could decrease. ADVERSE MARKET CONDITIONS COULD REDUCE THE AMOUNT SPENT ON RARE COINS AND REDUCE OUR SALES AND REVENUE. A decline in consumer spending could harm our business. Sales of rare coins depend on discretionary consumer spending and are affected by general market conditions. Many factors affect discretionary consumer spending, 5 including the unemployment rate, business conditions, interest rates, inflation and tax rates. Spending on the types of luxury items that we typically sell and auction are impacted by these factors more than sales of consumer products in general. Some of the market conditions that could cause the dollar volume spent in our auctions to decrease include the following: o fewer rare coins offered for sale; o a decline in the prices buyers are willing to pay; and o shifts in consumer trends. As buyers' tastes change and economic conditions fluctuate, the supply, demand and dollar volume of rare coins sales could decrease, which could have a material adverse effect on our business, operating results and financial condition. IF THE POPULARITY OF RARE COINS DECLINES, OUR SALES AND REVENUES WILL DECREASE. The popularity of rare coins may vary over time due to perceived scarcity, subjective value, general consumer trends, changes in the prices of precious metals, interest rates and other general economic conditions. We derive a significant portion of our revenues from commissions paid to us on the sale of rare coins in our auctions and sales of rare coins from our own inventory. A decline in the popularity of rare coins would cause a decrease in the number of transactions in our auctions and fewer sales from our inventory, which would reduce our sales and revenue and harm our business. TEMPORARY POPULARITY OF CERTAIN RARE COINS COULD CAUSE OUR REVENUES TO FLUCTUATE. Temporary consumer popularity or "fads" among collectors temporarily may inflate the volume of rare coins that we auction and sell. These trends may result in significant fluctuations in our operating results from one quarter to the next. OUR BUSINESS COULD BECOME SUBJECT TO HEIGHTENED GOVERNMENT REGULATION THAT COULD INCREASE OUR OPERATING COSTS. From time to time, there have been indications that the rare coin market may become the subject of possible new government regulation. Compliance with any new regulations governing our business would likely impose costs and administrative burdens on us and could impact our profitability. In addition, any such regulation could require us to change our business practices. WE DO NOT COLLECT CALIFORNIA SALES TAX ON MAIL-ORDER SALES TO OUT-OF-STATE CUSTOMERS, NOR DO WE COLLECT USE TAX ON OUR INTERSTATE MAIL ORDER SALES. We believe that our sales to interstate customers are generally tax-exempt due to varying state exemptions relative to the definitions of being engaged in business in particular states and the lack of current Internet taxation. While we have not been contacted by any state authorities seeking to enforce sales or use tax regulations, there is no assurance that we will not be contacted by authorities in the future with inquiries concerning our compliance with current statutes, nor is there any assurance that future statutes will not be enacted that affect the sales and use tax aspects of our business. 6 OUR SUCCESS DEPENDS ON OUR MANAGEMENT TEAM AND OTHER KEY PERSONNEL, INCLUDING PERSONS WHO HAVE ONLY RECENTLY STARTED WORKING TOGETHER IN OUR RAPIDLY EVOLVING INDUSTRY. Our success and future performance depends on the continued services of our senior management and other key personnel, including persons who have only recently started working together in the rapidly evolving rare coin industry. The loss of the services of any of our senior management or other key personnel could harm our business. Some of our executive officers and key personnel are experts in the market for rare coins and have reputations for purchasing and appraising rare coins and for preparing auctions that will be attractive to buyers of rare coins. In particular, the services of our chief executive officer, Silvano DiGenova, would be difficult to replace. Although our executive management team has experience in operating businesses engaged in the sale of rare coins, due to the changing nature of our industry, it may be more difficult to assess and evaluate management in our industry than it is in other industries. OUR QUARTERLY OPERATING RESULTS MAY VARY, WHICH MAY CAUSE VOLATILITY OR A DECLINE IN THE PRICE OF OUR COMMON STOCK. Our revenue, expenses and operating results may vary significantly from quarter to quarter due to a number of factors, some of which are beyond our control. These factors include (without limitation): o the supply of and demand for rare coins in wholesale and retails markets; o the timing of coin auctions; o consumer trends affecting the popularity of rare coins that we auction and sell from time to time; o fluctuations in the prices of precious metals; o personnel changes; o our inability to maintain customer satisfaction; o the size and timing of capital expenditures and other costs associated with the expansion of our business and infrastructure; o our inability to resell our inventory of rare coins in a timely manner; o price competition or changes in our pricing policies or those of our competitors and pricing changes in our industries; o our inability to maintain gross margins; and o our success in expanding our sales and distribution channels. Additional factors that may affect our quarterly operating results generally include technical difficulties or network downtime and general economic conditions and economic conditions specific to our industries. OUR OPERATING RESULTS ARE PARTICULARLY SENSITIVE TO FLUCTUATIONS IN REVENUE. Because we rely on revenue forecasts when committing to a significant portion of our future expenditures, we may be unable to adjust our spending in the event of revenue shortfalls. Consequently, such shortfalls would negatively affect our operating results and profitability. We also plan on increasing our operating expenditures to finance the cost of our expansion and to fund our expanding sales and marketing efforts and general and administrative activities and to strengthen our infrastructure. To the extent that these expenses are not accompanied by a commensurate increase in revenue, our quarterly results could fluctuate significantly in the future. Due to the factors noted above and the other risks discussed in this section, you should not rely on period-to-period comparisons of our operating results. Further, quarterly results are not necessarily meaningful and you 7 should not rely on them as an indication of future performance. It is possible that in some future periods our operating results may be below the expectations of public market analysts and investors. In that case, the price of our common stock may fall substantially. WE MAY REQUIRE SUBSTANTIAL AMOUNTS OF CAPITAL IN ORDER TO ACCOMPLISH OUR FUTURE PLANS. Since our business involves the financing of inventory, receivables, and auction and customer advances, we may require substantial amounts of capital in order to achieve and accomplish our future business plans. However, to the extent we are in need of any additional financing, there can be no assurance that any such additional financing will be available to us on acceptable terms, or at all. If we raise additional funds through the issuance of equity securities, further dilution to our existing shareholders may result. OUR INABILITY TO EFFECTIVELY MANAGE OUR GROWTH COULD RESULT IN UNFORESEEN COSTS. We have experienced significant periods of growth and increased personnel, marketing and acquisition related costs, and we anticipate that further expansion will be required to address potential growth in our customer base and market opportunities. This expansion has placed, and we expect it will continue to place, a significant strain on our management and our operational and financial resources. Our ability to manage future increases, if any, in the scope of our operations or personnel will depend on the expansion of our marketing and sales, management, operational and financial capabilities. The failure of our management to effectively manage the expansion of our business could result in unforeseen costs and negatively affect our profitability. To manage this growth we must do the following: o establish and develop operational, financial and management systems; o train, manage and motivate our employee base; o hire additional technology and operations personnel; and o hire additional rare coin specialists and appraisers. We may be unable to complete the improvements to our systems, procedures and controls necessary to support our future operations in a timely manner. In addition, we may be unable to attract or retain required personnel, and our management may be unable to develop an effective business strategy to support our continued growth and expansion. If additional appropriate opportunities present themselves, we also intend to acquire businesses, technologies, services or products that we believe will help us develop and expand our business. The process of integrating an acquired business, technology, service or product may result in operating difficulties and expenditures that we cannot anticipate and may absorb significant management attention that would otherwise be available for further development of our existing business. Moreover, the anticipated benefits of any acquisition may not be realized. Any future acquisition of other businesses, technologies, services or products might require us to obtain additional equity or debt financing, which might not be available to us on favorable terms or at all, and might dilute the interests of our existing stockholders. Additionally, we may be unable to identify, negotiate or finance successfully future acquisitions or to integrate acquisitions with our current business. FROM TIME TO TIME, WE MAY DEPEND ON A SMALL NUMBER OF KEY CUSTOMERS FOR A SUBSTANTIAL PORTION OF OUR REVENUE. During the fiscal year ended June 30, 2004, none of our customers accounted for more than 10% of our sales. However, at times we may depend on a small number of key customers for a substantial portion of our sales and 8 revenue. The loss of any of these key customers would reduce our revenue and could negatively impact our profitability. WE MAY INCUR LOSSES AS A RESULT OF ACCUMULATING INVENTORY. In addition to auctioning rare coins on consignment, a substantial portion of the aggregate sales price of rare coins that we sell are from our own inventory. We purchase these rare coins from dealers and collectors and assume the inventory and price risks of these items until they are sold. If we are unable to resell the rare coins that we purchase when we want or need to, or at prices sufficient to generate a profit from their resale, or if the market value of our inventory of purchased rare coins were to decline, our revenue would likely decline. THE SUPPLY OF RARE COINS IS LIMITED AND OUR INABILITY TO OBTAIN RARE COINS FOR RESALE AND FOR SALE AT AUCTIONS COULD HARM OUR BUSINESS. Our business depends substantially on our ability to obtain rare coins for appraisal, sale and auction. We depend on the availability of rare coins through dealers and collectors, and we can provide no assurance that rare coins will continue to be available as before. Although we deal with numerous dealers and collectors from whom we are able to obtain rare coins for resale and for our auctions, only a limited number of dealers exist with the capacity to supply rare coins for resale and auction on a regular basis. A change in our relationships with suppliers or dealers could negatively affect our ability to obtain, resell or auction rare coins in the quantities and at the times we desire. A shortage in the supply of rare coins could impair our ability to attract customers, which would harm our business, operating results and financial condition. OUR AUCTION OPERATIONS MAY NOT BE ABLE TO SUSTAIN PROFITABILITY. Our future operating results also depend on the success of our auction operations and the amount of resources that we will need to devote to the continual upgrade and enhancement of our Internet website, the performance of which may be impacted by fast, continuous changes in technology. Our auction operations were profitable in the most recent fiscal year, however we are presently unable to predict whether our auction division will remain profitable. We will need to achieve significant growth in our Internet business in order for our auction operations to sustain profitability. We are in the process of development and/or enhancement of several portions of our website that will offer content and auctions for rare coins that may have a lower average selling price than many of the rare coins in the markets we currently serve. Continued development of our website will require significant resources. The planned expansion of our website may not result in increased revenue, which could increase our losses and harm our business. OUR OPERATING RESULTS COULD BE HARMED IF WE EXPERIENCE AN INCREASE IN THE RESCISSION OF SALES. Our operating results could suffer if we experience a significant increase in the number of sales that are rescinded due to questions about title, provenance or authenticity of an item. We warrant the title, provenance and authenticity of each item that we sell, including items sold at auction. If a buyer believes that any of these characteristics is in doubt, he or she must notify us in writing within a certain number of days after the date of sale of the property. If we cannot substantiate the questioned characteristics, the buyer may rescind his or her purchase and we will refund the price paid at auction to the buyer. When a purchase is rescinded, the seller is required to refund the hammer (the price for which an item sells) less sellers' commissions and other sellers' fees. 9 OUR WEBSITE MAY NOT BE ADEQUATE TO MEET THE GROWING NEEDS OF OUR BUSINESS. The satisfactory performance, reliability and availability of our website and network infrastructure are and will be critical to our reputation and our ability to attract and retain customers and technical personnel and to maintain adequate customer service levels. Any system interruptions or reduced performance of our website could materially adversely affect our reputation and our ability to attract new customers and technical personnel. OUR WEBSITE MAY BE VULNERABLE TO SECURITY BREACHES AND SIMILAR THREATS WHICH COULD RESULT IN OUR LIABILITY FOR DAMAGES AND HARM TO OUR REPUTATION. Despite the implementation of network security measures, our website is vulnerable to computer viruses, break-ins and similar disruptive problems caused by Internet users. These occurrences could result in our liability for damages, and our reputation could suffer. The circumvention of our security measures may result in the misappropriation of proprietary information. Any such security breach could lead to interruptions and delays and the cessation of service to our customers and could result in a decline in revenue and income. RISKS RELATED TO THIS OFFERING SHARES OF OUR COMMON STOCK ELIGIBLE OR TO BECOME ELIGIBLE FOR PUBLIC SALE COULD ADVERSELY AFFECT OUR STOCK PRICE AND MAKE IT DIFFICULT FOR US TO RAISE ADDITIONAL CAPITAL THROUGH SALES OF EQUITY SECURITIES. As of September 24, 2004, we had outstanding 4,509,942 shares of common stock, of which all but 1,837,685 shares were restricted under the Securities Act of 1933. Of the restricted shares, substantially all are eligible for resale without registration pursuant to Rule 144 under the Securities Act of 1933, as amended, subject to compliance with certain volume limitations and other requirements of that Rule. Of the restricted shares eligible for sale under Rule 144, approximately 325,400 shares are subject to lockup agreements that restrict their resale. These agreements expire at various times through October 31, 2005. As of September 24, 2004, we also had outstanding options, warrants and preferred stock that were exercisable for or convertible into approximately 4,136,730 shares of common stock, including 3,166,667 shares which are being offered pursuant to this prospectus. Sales of a substantial number of shares of our common stock in the public market, or the perception that sales could occur, could adversely affect the market price of our common stock. Any adverse effect on the market price of our common stock could make it difficult for us to raise additional capital through sales of equity securities at a time and at a price that we deem appropriate. IF OUR SECURITY HOLDERS ENGAGE IN SHORT SALES OF OUR COMMON STOCK, INCLUDING SALES OF SHARES TO BE ISSUED UPON CONVERSION OR EXERCISE OF DERIVATIVE SECURITIES, THE PRICE OF OUR COMMON STOCK MAY DECLINE. Selling short is a technique used by a shareholder to take advantage of an anticipated decline in the price of a security. A significant number of short sales or a large volume of other sales within a relatively short period of time can create downward pressure on the market price of a security. The decrease in market price would allow holders of our derivative securities that have conversion or exercise prices based upon a discount on the market price of our common stock to convert or exercise their derivative securities into or for an increased number of shares of our common stock. Further sales of common stock issued upon conversion or exercise of our derivative securities could cause even greater declines in the price of our common stock due to the number of additional shares available in the market, which could encourage short sales that could further undermine the value of our common stock. Therefore, you could experience a decline in the value of your investment as a result of short sales of our common stock. 10 OUR COMMON STOCK PRICE IS SUBJECT TO SIGNIFICANT VOLATILITY, WHICH COULD RESULT IN SUBSTANTIAL LOSSES FOR INVESTORS AND IN LITIGATION AGAINST US. Because we are a small company have low trading volume in our stock, the market price of our common stock may fluctuate significantly in the future in response to various factors, many of which are beyond our control and which include: o variations in our quarterly operating results; o changes in market valuations of similar companies and stock market price and volume fluctuations generally; o economic conditions specific to the markets in which we operate; o regulatory developments; o additions or departures of key personnel; and o future sales of our common stock or other debt or equity securities. If our operating results in future quarters fall below the expectations of market makers, securities analysts and investors, the price of our common stock likely will decline, perhaps substantially. In the past, securities class action litigation often has been brought against a company following periods of volatility in the market price of its securities. We may in the future be the target of similar litigation. Securities litigation could result in substantial costs and liabilities and could divert management's attention and resources. Consequently, the price at which you purchase shares of our common stock may not be indicative of the price that will prevail in the trading market. You may be unable to sell your shares of common stock at or above your purchase price, which may result in substantial losses to you. BECAUSE WE ARE SUBJECT TO THE "PENNY STOCK" RULES, THE LEVEL OF TRADING ACTIVITY IN OUR STOCK MAY BE REDUCED. Broker-dealer practices in connection with transactions in "penny stocks" are regulated by penny stock rules adopted by the Securities and Exchange Commission. Penny stocks, like shares of our common stock, generally are equity securities with a price of less than $5.00 (other than securities registered on certain national securities exchanges or quoted on Nasdaq). The penny stock rules require a broker-dealer, prior to a transaction in a penny stock not otherwise exempt from the rules, to deliver a standardized risk disclosure document that provides information about penny stocks and the nature and level of risks in the penny stock market. The broker-dealer also must comply with several other disclosure and substantive requirements. Consequently, these requirements may have the effect of reducing the level of trading activity, if any, in the secondary market for a security subject to the penny stock rules, and investors in our common stock may find it difficult to sell their shares. BECAUSE OUR STOCK IS NOT LISTED ON A NATIONAL SECURITIES EXCHANGE, YOU MAY FIND IT DIFFICULT TO DISPOSE OF OR OBTAIN QUOTATIONS FOR OUR COMMON STOCK. Our common stock trades under the symbol "SPGR" on the OTC Bulletin Board. Because our stock trades on the OTC Bulletin Board rather than on a national securities exchange, you may find it difficult to either dispose of, or to obtain quotations as to the price of, our common stock. 11 OUR PREFERRED STOCK MAY DELAY OR PREVENT A TAKEOVER OF OUR COMPANY, POSSIBLY PREVENTING YOU FROM OBTAINING HIGHER STOCK PRICES FOR YOUR SHARES. Our board of directors has the authority to issue shares of preferred stock and to fix the rights, preferences, privileges and restrictions, including voting rights of those shares, without any further vote or action by our shareholders. The rights of the holders of our common stock will be subject to, and may be adversely affected by, the rights of the holders of any preferred stock that we may issue in the future. The issuance of preferred stock, while providing desired flexibility in connection with possible acquisitions and other corporate purposes, could have the effect of making it more difficult for a third party to acquire a majority of our outstanding voting stock, which would delay, defer or prevent a change in control of our company. Furthermore, preferred stock may have other rights, including economic rights senior to the common stock, and, as a result, the issuance of preferred stock could adversely affect the market value of our common stock. THE VOTING POWER OF SUPERIOR GALLERIES, INC. IS SUBSTANTIALLY CONTROLLED BY STANFORD VENTURE CAPITAL HOLDINGS, INC. AND A GROUP OF AFFILIATED PERSONS. THIS CONCENTRATION OF VOTING POWER MAY, AMONG OTHER THINGS, DELAY OR FRUSTRATE THE REMOVAL OF INCUMBENT DIRECTORS OR A TAKEOVER ATTEMPT, EVEN IF SUCH EVENTS MAY BE BENEFICIAL TO OUR SHAREHOLDERS. Stanford Venture Capital Holdings, Inc., or "Stanford," and certain of its affiliates collectively hold 58% of our voting securities. Consequently, Stanford and its affiliates have sufficient voting power to control the outcome of virtually all corporate matters submitted to the vote of our common shareholders. Those matters could include the election of directors, changes in the size and composition of the board of directors, and mergers and other business combinations involving Superior Galleries, Inc. In addition, through this control of the board of directors and voting power, Stanford is able to control certain decisions, including decisions regarding the qualification and appointment of officers, dividend policy, access to capital (including borrowing from third-party lenders and the issuance of additional equity securities), and our acquisition or disposition of assets. Also, the concentration of voting power in the hands of Stanford could have the effect of delaying or preventing a change in control of our company, even if the change in control would benefit our shareholders, and may adversely affect the market price of our common stock. SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS This prospectus contains forward-looking statements, including among others: o our business strategy for expanding our presence in the rare coin market; o anticipated trends in our financial condition and results of operations; and o our ability to distinguish ourselves from our current and future competitors. You can identify forward-looking statements generally by the use of forward-looking terminology such as "believes," "expects," "may," "will," "intends," "plans," "should," "could," "seeks," "pro forma," "anticipates," "estimates," "continues," or other variations thereof, including their use in the negative, or by discussions of strategies, opportunities, plans or intentions. You may find these forward-looking statements under the captions "Risk Factors," "Management's Discussion and Analysis of Financial Condition and Results of Operations," and "Business," as well as captions elsewhere in this prospectus. A number of factors could cause results to differ materially from those anticipated by forward-looking statements, including those discussed under "Risk Factors" and "Business." These forward-looking statements necessarily depend upon assumptions and estimates that may prove to be incorrect. Although we believe that the assumptions and estimates reflected in the forward-looking statements are 12 reasonable, we cannot guarantee that we will achieve our plans, intentions or expectations. The forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause actual results to differ in significant ways from any future results expressed or implied by the forward-looking statements. Any of the factors described above or in the "Risk Factors" section below could cause our financial results, including our net income (loss) or growth in net income (loss) to differ materially from prior results, which in turn could, among other things, cause the price of our common stock to fluctuate substantially. USE OF PROCEEDS We will not receive any of the proceeds from the sale of the shares of common stock offered under this prospectus by the selling security holders. Rather, the selling security holders will receive those proceeds directly. 13 PRICE RANGE OF COMMON STOCK MARKET INFORMATION Our common stock is quoted in the National Quotation Bureau's Pink Sheets and listed on the NASD's OTC Electronic Bulletin Board under the symbol "SPGR." Prior to July 1, 2003 our symbol was "TAGZ." Due to the reduced volume of trading over the past 60 days, no public market is deemed to exist for our common stock at this time. The following table shows the trading price data for our common stock as reported by the OTC Bulletin Board as the range of representative bid prices for our common stock for the quarters indicated. The quotations reflect inter-dealer prices, without retail mark-up, markdown or commission, may not represent actual transactions and have been retroactively restated to reflect the one-for-twenty reverse split of our common stock on June 30, 2003. Fiscal 2004 --------------------------- Fiscal Quarter Ended: High Low ------------ ------------ June 30 $2.15 $0.75 March 31 1.92 0.75 December 31 1.06 0.60 September 30 1.01 0.24 Fiscal 2003 --------------------------- Fiscal Quarter Ended: High Low ------------ ------------ June 30 $1.50 $0.02 March 31 0.60 0.02 December 31 0.60 0.20 September 30 2.40 0.60 HOLDERS The number of holders of record of our common stock as of the close of business on September 8, 2004 was approximately 372. Within the holders of record of our common stock are depositories such as Cede & Co. that hold shares of stock for brokerage firms which, in turn, hold shares of stock for beneficial owners. DIVIDENDS To date, we have declared no cash dividends on our common stock, and do not expect to pay cash dividends in the near future. We intend to retain future earnings, if any, to provide funds for the operation of our business. The terms of our Series A Redeemable 8% Convertible Preferred Stock, or Series A Preferred Stock, prohibit us from paying dividends on shares of our common stock unless dividends in such amount shall have been simultaneously paid or declared and set apart for payment to the holders of our Series A Preferred Stock. In addition, the terms of our Series B $1.00 Convertible Preferred Stock, or Series B Preferred Stock, prohibit us from making any distributions on our common stock without the vote or written consent of the holders of a majority of the outstanding shares of the Series B Preferred Stock, voting as a separate class. 14 STOCK OPTIONS At June 30, 2004, there were 426,000 options outstanding under our 2003 Omnibus Stock Option Plan at a weighted average exercise price of $1.50. 15 CAPITALIZATION The following table sets forth our capitalization as of June 30, 2004. You should read this information together with our consolidated financial statements and the notes relating to those statements appearing elsewhere in this prospectus. The table excludes an aggregate of approximately 3,981,730 shares of common stock that were issuable upon conversion or exercise of outstanding convertible notes, options and warrants as of June 30, 2004. JUNE 30, 2004 ------------- Long term debt, less current portion(1) ........................... $ 943,750 ------------- Stockholders' deficit: Series B Preferred Stock, $0.001 par value, Authorized 3,400,000 shares; issued and outstanding 3,400,000 shares ..... $ 2,966,500 Series D Preferred Stock, $0.001 par value, Authorized 2,000,000 shares; issued and outstanding 2,000,000 shares ..... $ 1,931,456 Common stock, $.001 par value. Authorized 12,500,000 shares; .... issued and outstanding, 4,485,942 ............................. 4,486 Additional paid in capital ...................................... 7,911,988 Accumulated deficit ............................................... (13,897,847) ------------- Total stockholders' deficit .................................. $ (1,083,417) ------------- Total capitalization (unaudited) ............................. $ (139,667) -------------
(1) Long term debt includes $343,750 attributable to Series A $5.00 Redeemable 8% Convertible Preferred Stock $0.001 par value, which is currently the subject of redemption. On March 31, 2004, in accordance with the redemption provisions of the Series A Preferred Stock, all the holders of the Series A Preferred Stock requested the redemption of their shares. However, because our liabilities exceeded our assets at the time, and continue to exceed our assets presently, we are prohibited under Delaware corporation law from commencing the redemption. We have informed the stockholders of these restrictions on redemption. We intend to begin the redemption once we are legally allowed to do so. We have reflected the Series A Preferred Stock redemption payable as a liability on our Balance Sheet. As of June 30, 2004, the balance payable with respect to the Series A Preferred Stock redemption was $687,500. Of this amount, $343,750 is reflected as a current liability. We will continue to make quarterly dividend payments as long as the Series A Preferred Stock redemption payable remains outstanding. See Note 11 of Notes to Financial Statements. 16 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS THE FOLLOWING DISCUSSION AND ANALYSIS SHOULD BE READ IN CONJUNCTION WITH OUR CONSOLIDATED FINANCIAL STATEMENTS AND NOTES AND THE INFORMATION INCLUDED UNDER THE CAPTION "RISK FACTORS" INCLUDED ELSEWHERE IN THIS PROSPECTUS. CAUTIONARY STATEMENTS This Prospectus contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. We intend that such forward-looking statements be subject to the safe harbors created by such statutes. The forward-looking statements included herein are based on current expectations that involve a number of risks and uncertainties. Accordingly, to the extent that this Prospectus contains forward-looking statements regarding our financial condition, operating results, business prospects or any other information or aspect of our company, you are advised that our actual financial condition, operating results and business performance may differ materially from that projected or estimated by us in forward-looking statements. The differences may be caused by a variety of factors, including but not limited to: o those identified under "Risk Factors" herein, o adverse economic conditions, o unexpected costs and operating deficits, o lower sales and revenues than forecast, o loss of customers, o litigation and administrative proceedings involving our company, o the possible acquisition of new businesses that result in operating losses or that do not perform as anticipated, resulting in unanticipated losses, o adverse publicity and news coverage, o inability to carry out our marketing and sales plans, o changes in interest rates and inflationary factors, and o other specific risks that may be referred to in this prospectus or in other reports that we have issued. In addition, our business and operations are subject to substantial risks that increase the uncertainty inherent in the forward-looking statements. The inclusion of forward-looking statements in this Prospectus should not be regarded as a representation by us or any other person that we will achieve our objectives or plans. The following discussion should be read in conjunction with, and is qualified in its entirety by, our Financial Statements and related notes thereto included elsewhere herein. Historical results of operations, percentage margin fluctuations and any trends that may be inferred from the discussion below are not necessarily indicative of the operating results for any future period. CRITICAL ACCOUNTING POLICIES Our Financial Statements are based on the selection and application of significant accounting policies, which require our management to make estimates and assumptions that affect the amounts reported in the Balance Sheets and the Statements of Operations. We believe that the following are the most critical areas that may affect our financial condition and results of operations. 17 ACCOUNTS RECEIVABLE. We are required to estimate the collectibility of our accounts receivables. A considerable amount of judgment is required in assessing the collectibility of these receivables, including judgments about the current creditworthiness and financial condition of each client and related aging of past due balances. We evaluate specific accounts receivable balances when we become aware of a situation where a client may not be able to meets its financial obligations to us. The amount of the required allowance is based on the facts available to us and is reevaluated and adjusted as additional information is available. Allowances are also established for probable loss inherent in the remainder of the accounts receivable based on our historical bad debt loss information. As a result of the expansion of our rare coin auction business, we may attract new customers that may adversely affect our estimates of accounts receivable collectibility, and, the creditworthiness of our clients may deteriorate. These factors would require the reassessment of our estimates and additional allowances resulting in a reduction of our operating results. AUCTION AND CUSTOMER ADVANCES. We are required to estimate the collectibility of our auction and customer advances. All of our advances are secured by rare coins. Although we make our decision to advance funds based on customers' creditworthiness, business history, and collateral valuation, the collectibility of advances is primarily based on our estimate of sale of customers' rare coin collateral on a wholesale liquidation basis. We evaluate specific advance balances when we become aware of situations where a client may not be able to meet its financial obligations to us or the value of collateral securing the advance is impaired. Due to the availability of a line of credit from Stanford Financial Group Company, which is an affiliate of our principal shareholder, Stanford Venture Capital Holdings, Inc. ("Stanford"), we have recently and significantly expanded our auction and customer advance activities and we do not have historical data to estimate probable loss nor have we had any significant history of losses. It is difficult to assess future performance of the rare coin market. A rapid adverse change in the rare coin market could diminish the value of the collateral and the creditworthiness of our clients may deteriorate. These factors would require the reassessment of our estimates and additional allowances resulting in a reduction of our operating results. RESULTS OF OPERATIONS The following table sets forth the percentage of net revenue represented by each item in our statements of operations for the periods indicated: YEAR ENDED YEAR ENDED JUNE 30, 2004 JUNE 30, 2003 ------------- ------------- Net Sales 89.7% 88.6% Commission Income 10.3% 11.4% Total Revenue 100.0% 100.0% Cost of Sales 77.9% 78.4% Gross Profit 22.1% 21.6% Selling, general and administrative expenses 19.9% 32.8% Impairment of goodwill 0.0% 2.9% Income (loss) from operations 2.2% -14.1% Other income (expense) -0.3% -3.0% Income (loss) before taxes 1.9% -17.1% Income taxes 0.1% 0.1% Net Income (loss) 1.8% -17.2%
18 YEARS ENDED JUNE 30, 2004 AND 2003 Our net income for the year ended June 30, 2004 was $552,266 or $0.11 and $0.06 per share on a basic and fully diluted basis respectively as compared to a net loss of $3,491,003 or $1.75 per share on both a basic and fully diluted basis for the year ended June 30, 2003. The improvement in our operating results were primarily due to revenue growth resulting from the strength in the rare coin market, decreased overhead costs and lower net interest expenses. TOTAL REVENUE. The table below sets forth our primary sources of revenue for the periods indicated: YEAR ENDED YEAR ENDED JUNE 30, 2004 JUNE 30, 2003 ------------------------------ ------------------------------ Net Sales Coins - Wholesale $ 19,195,220 64% $ 9,050,773 44% Coins - Retail 7,344,986 25% 8,263,941 41% Art, collectibles & other 376,078 1% 729,112 4% ------------- ------------- ------------- ------------- Total Net Sales 26,916,284 90% 18,043,826 89% Commission Income 3,081,028 10% 2,311,082 11% ------------- ------------- ------------- ------------- Total Revenue $ 29,997,312 100% $ 20,354,908 100% ============= ============= ============= =============
We recorded total revenue of $29,997,312 for the year ended June 30, 2004, an increase of $9,642,404 or 47% over the total revenue of $20,354,908 recorded for the year ended June 30, 2003. The increase in revenue is primarily due to increased wholesale coin sales. Wholesale coin sales, which represented 64% of total revenue, increased $10,144,447 or 112% to $19,195,220. This increase was primarily due to the strong market demand from other dealers and our higher level of inventory available for sale. Retail coin sales, which represented 25% of total revenue, decreased $918,955 or 11% to $7,344,986. This decrease was primarily due to our aggressive pricing in 2003 to generate cash from inventory that resulted in higher sales, but reduced gross margins. Fine art, collectibles and other sales decreased $353,034 or 48% to $376,078 during the year ended June 30, 2004. The decrease was primarily due to the completion of the liquidation of our art inventory. In November 2002, we made the decision to substantially reduce our art business segment operations and by March 2003 all operational activities had ceased with the exception of our efforts to liquidate the balance of our art inventory. The final liquidation of our art inventory occurred in October 2003. Since that date that we have had no material sales of fine art and other collectibles. Commission income, which represented 10% of total revenue, increased $769,946 or 33% to $3,081,028 for the year ended June 30, 2004. The increase in commission income was primarily due to the continued strength in the rare coin market and the number of rare auctions increasing to seven in fiscal 2004, as compared to six in fiscal 2003. Auction sales (hammer prices realized) were $30,032,985 for the year ended June 30, 2004 as compared to $25,023,893 for the year ended June 30, 2003. COST OF SALES. Cost of sales increased $7,429,890 to $23,381,949 for the year ended June 30, 2004, representing 78% of total revenue, compared to $15,952,059, for the year ended June 30, 2003, which also represented 78% of total revenue. The stability, year to year, of the cost of sales as percentage of total revenue is primarily due to comparable price increases both when selling and purchasing rare coins and our ability in the current strong market to maintain our historical inventory turn rate of four to five times per year. The cost of sales as a percentage of revenue will vary from period to period 19 with variations in the mix of revenue and margins between wholesale and retail rare coin sales and commission income. GROSS PROFIT. Gross profit for the year ended June 30, 2004 increased $2,212,514 or 50% to $6,615,363. This represented 22% of total revenue for the year ended June 30, 2004, as compared to $4,402,849 for the year ended June 30, 2003, which also represented 22% of total revenue for that year. The stability, year to year, of the gross profit as percentage of total revenue is primarily due to comparable price increases both when selling and purchasing rare coins and our ability in the current strong market to maintain our historical inventory turn rate of four to five times per year. The increase in the gross profit was primarily due to the increase in rare coins sales while maintaining margins and increased auction commission revenue. Gross profit as a percentage of revenue will vary from period to period with variations in the mix of revenue and margins between wholesale and retail rare coin sales and commission income. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and administrative expenses decreased $716,800 or 11% to $5,958,829 for the year ended June 30, 2004 from $6,675,629 for the year ended June 30, 2003. These expenses represented 20% of total revenue for the year ended June 30, 2004 as compared to 33% of total revenue for the year ended June 30, 2003. The decrease in these expenses, both as a percentage of revenue and in the aggregate, were due in part to the effect of our operational consolidation efforts that were completed during the last half of the fiscal year ending June 30, 2003. The prior year also included a $418,000 fee to be the official auctioneer at a national rare coin trade show, and two unusual bad debts totaling $330,714. There were no such costs in the current year. IMPAIRMENT OF GOODWILL. In July 2001, we recorded goodwill of $591,521 in connection with acquisition of our SGBH auction unit. Based on our annual fair value assessment to determine the impairment, if any, of goodwill, we determined that the SGBH goodwill had become fully impaired resulting in charge of $591,521 for the year ended June 30, 2003. There was no similar charge for the year ended June 30, 2004. OTHER INCOME AND EXPENSES. Other expenses decreased $521,494 on a net basis to $91,812 for the year ended June 30, 2004 from $613,306 for the year ended June 30, 2003. This decrease is attributable primarily to an increase in interest income of $350,789 and reductions in interest rates on debt that decreased interest expense by $137,050 for the year ended June 30, 2004 as compared to the year ended June 30, 2003. During the year ended June 30, 2004 we were able to significantly increase auction and customer advances as result of a $7.5 million line of credit facility provided by Stanford Financial Group Company in October 2003. PROVISION FOR INCOME TAXES. Although we recorded income for the current year, we have net operating losses ("NOL") carried forward from previous years and we have only recorded income tax expenses of $12,456 for state and other minimum taxes for the year ended June 30, 2004. We incurred a loss for the year ended June 30, 2003 and we recorded income taxes expense of $13,396 for state and other minimum taxes for that year. For federal income tax purposes, we have a NOL carryforward of approximately $9,620,000 which is available to offset future federal taxable income through 2023. For state income tax purposes, we also have a NOL carryforward of approximately $5,370,000, which is available to offset state taxable income through 2012. The use of these NOL carryforwards in future years will be limited due to past changes in our ownership, the full effect of which has yet to be calculated. In addition, NOL carryforwards for the purposes of offsetting California state taxable income have been suspended for the tax years beginning in 2002 and 2003. 20 LIQUIDITY AND CAPITAL RESOURCES At June 30, 2004, we had working capital deficiency of $286,128. We recorded net income of $552,266 and used cash in operating activities of $6,237,294 for the year then ended. Given our June 30, 2004 cash balance of $446,530 and our projected operating cash requirements, we anticipate that our existing capital resources may not be adequate to satisfy our cash flow requirements through June 30, 2005. We may require additional funding. Our cash flow estimates are based upon achieving certain levels of sales and reductions in operating expenses. Should sales be less than forecast, expenses be higher than forecast or the liquidity not be available through financings of debt and/or equity, we will not have adequate resources to fund operations. We were in default under one of our lines of credit until September 30, 2003 when we renegotiated the line of credit with our lender and cured the default. However, the line of credit is callable by the lender on demand, and although we are continuing to seek an agreement with the lender for extended payments terms, there is no guarantee the lender will agree to provide such extended terms. We do not expect future fixed obligations through June 30, 2005 to be paid solely by cash generated from operating activities. We intend to satisfy fixed obligations from: (i) additional debt/equity financings; (ii) extending vendor payments; and (iii) liquidation of inventory . No assurance can be given that we will be able to pay or satisfy our fixed obligations from these sources. If we are unable to satisfy our fixed obligations as they become due, our creditors will be entitled to take legal action against us. If they do, our business could be materially harmed. OPERATING ACTIVITIES. Cash decreased $242,342 during the year ended June 30, 2004 to $446,530 from $688,872 at June 30, 2003. Cash used in our operating activities totaled $6,237,294, resulting primarily from increases in our accounts receivable, inventories, and auction and customer advances of $887,167, $3,609,158 and $2,906,538 respectively and were partially offset by our net income of $552,266 and an increase in our accounts payable of $422,671. The increases in receivable, inventories, and auction and customer advances are primarily the result the significant increases in total revenues as compared to the previous year. We will continue to strive to gain operating efficiencies by turning our inventory more quickly and monitoring the amount of inventory that we carry, although there is no assurance we will achieve these efficiencies. INVESTING ACTIVITIES. Cash used in investing activities during year ended June 30, 2004 was $45,583 consisting of purchases of property and equipment of $55,757 and offset by $10,174 in proceeds on the sale of property and equipment. FINANCING ACTIVITIES. Until the quarter ending March 31, 2004, we had incurred losses since July 1999 and have financed these losses through short-term and long-term borrowings, by issuing shares in various private placement transactions and by liquidating assets. Cash provided by financing activities totaled $6,040,535 for the year ended June 30, 2004 resulting from the transactions described below. FINANCING ACTIVITIES - DEBT. On October 17, 2000 we entered into a long-term loan agreement, secured by a delivery van, payable in 60 monthly installments of $457 each consisting of principal and interest at an annual interest rate of 5.9%. The loan was repaid in full on December 16, 2003. During the year ended June 30, 2004, the note was reduced by $7,008. On July 6, 2001, we executed a note payable for the acquisition of the assets of SGBH, secured by the assets acquired, and guaranteed by our CEO. The loan provided for periodic payments through January 2002. We failed to pay the loan in full at that date but continued to make loan payments through July 2002. 21 In October 2002 we renegotiated the payment terms by increasing the note balance by $49,110 to cover unpaid interest and establishing a new interest rate of 4.5% over the prime lending rate, to be paid in biweekly installments over one year. On November 1, 2002 we made a lump-sum payment of $179,350 and renegotiated the terms of payment for the balance due with the creditor. This note required ten principal and interest installments of $19,133 each, beginning on December 1, 2002, with interest at the rate of 12% per annum. The note payable was repaid in full on September 1, 2003. During the year ended June 30, 2004, the note was reduced by $56,832. On April 10, 2002 we executed a subordinated note payable to our CEO bearing interest at 9% per annum with quarterly installment payments of $150,000 plus interest. No principal payments had been made through February 2003. On February 14, 2003, the terms of the note were modified to provide for repayment of principal in the amount of $50,000 per quarter commencing on September 30, 2003 and for interest to be paid monthly. As of the June 30, 2004 the outstanding balance was $900,000. During the year ended June 30, 2004, the note was reduced by $100,000. On July 9, 2002 and July 26, 2002 we entered into temporary working capital loan agreements with a private Lender ("Lender") in the amounts of $1,500,000 and $1,000,000 respectively. These loans bore interest at the prime lending rate plus 7% per annum, were secured by our inventory and a personal guarantee of our CEO and were due to be repaid in 60 days. On August 8, 2002 we converted the two loans from the Lender into a Line of Credit with the Lender by executing a Secured Revolving Line of Credit Agreement ("Line of Credit"). The Line of Credit bore interest at the prime lending rate plus 7% per annum, was due on September 9, 2002, and was secured by substantially all the assets of the Company and a personal guarantee of our CEO. The Line of Credit provides for interest payments to be made in cash, inventory or restricted common shares of the Company at the sole discretion of the Lender. On September 16, 2002 the Line of Credit was amended to extend the due date to October 15, 2002. In November 2002 the Lender died and the Line of Credit became an asset of the Estate of the Lender ("Lender Estate"). On September 30, 2003, we executed a Renewal and Modification Agreement that amended the Line of Credit. In exchange for payment of $230,000 representing interest in arrears through September 30, 2003, the Lender Estate agreed to reduce the interest rate to 6% effective October 1, 2003, release its priority lien position on all of our accounts receivable and to consider the default cured at that time. The amendment also required monthly interest payments that began on November 1, 2003. The executor of the Lender Estate orally agreed to discuss repayment terms at a future date, but the Line of Credit is callable with five days notice and there is no guarantee that the Line of Credit will not be called for repayment at any time. There can be no assurance that we will be able to negotiate a repayment schedule for this obligation on terms acceptable to us. As of June 30, 2004 the outstanding balance was $2,500,000, not including accrued interest. No payments were made to reduce the Line of Credit during the year ended June 30, 2004. On December 10, 2002 and December 13, 2002, our CEO advanced us $289,970 and $70,000 respectively for working capital purposes. We executed two unsecured promissory notes both payable on demand and bearing interest at the rate of 12% per annum. On October 23, 2003, we reduced our unsecured notes payable to our CEO by $350,000 as a result of his purchase of our art inventory for $350,000 (see "Other Liquidity Plans.") On February 4, 2004 the remaining balance of the unsecured notes payable to our CEO of $9,970 was repaid. During the year ended June 30, 2004 the notes payable were reduced by $359,970. On February 21, 2003, we entered into an auction line of credit agreement ("Auction LOC") with a private lender whereby the lender would advance funds to us for the sole purpose of providing auction advances to our consignment customers. The maximum limit of the Auction LOC was $2,000,000 and it bore interest at a rate of 10% per annum. The Auction LOC was secured by the collateralization of inventory consigned by our auction advance customers and the assignment of the auction advance agreements to the private lender. The 22 lender had the right to terminate this arrangement at any time. In September 2003, the private lender agreed to temporarily increase the Auction LOC maximum limit to $2,800,000. On October 28, 2003 the Auction LOC was repaid in full and the lender and Superior mutually agreed to terminate the agreement. On October 13, 2003, we executed a Commercial Loan and Security Agreement ("Commercial LOC") with Stanford Financial Group Company, an affiliate of a principal stockholder, Stanford Venture Capital Holdings, Inc., to provide us with a $7.5 million line of credit for purposes of financing our inventory, auction advances and inventory loans to other rare coin dealers and collectors. The Commercial LOC bears interest at the prime-lending rate (4.00% at June 30, 2004) and is secured by substantially all of our assets. As of June 30, 2004 the outstanding Commercial LOC balance was $6,600,000. This balance reflects the net borrowing against the Commercial LOC for the year ended June 30, 2004. FINANCING ACTIVITIES - EQUITY. In April 2002 we raised $3,000,000 through the private placement of our Series B Preferred Stock. In February 2003 we raised an additional $2,000,000 through the private placement of our Series D Preferred Stock and our CEO converted his Series C Preferred Stock, which were equity securities that carry redemption obligations similar to debt, into $700,000 of our common stock at $1.20 per common share, which was the equivalent conversion price of the Series D Preferred Stock. We have invested the net proceeds from each private placement in our current operations and to reduce debt. However, this equity capital may be insufficient to permit us to execute our operating plan. OTHER LIQUIDITY PLANS. In November 2002, we began to reduce our operations focused on the Art segment of our business. Our initial plans included using both our own and third party auction houses and Internet sites to sell our inventory. From July 1, 2002 through June 30, 2003, we sold approximately $700,000 of our Art inventory while still maintaining modest gross margins on these sales. In February 2003, in addition to our exit from the Art business segment, we began to consolidate all our operations into our Beverly Hills, California location. This operational consolidation allowed us to reduce overhead costs by eliminating duplicative operational and administrative expenses. In June 2003, we determined that our initial liquidation plans were no longer effective and we decided to solicit offers from other art dealers and collectors for them to purchase the balance of the Art inventory owned by us. In June 2003, based on our continued assessment of recoverability of the art inventory including our evaluation of the current Art market and informal offers from other art dealers, we established a reserve to $665,000 or approximately 65% of our carrying cost. On October 23, 2003, our Board of Directors, after reviewing other bids to purchase our art inventory, approved the sale of the art inventory to our CEO for $350,000. This amount represented the highest bid that we received. With this transaction, we completed our exit from the Art business segment. However, at some future date, we may resume our activities, on a limited basis, as a consignment auctioneer in some areas of the Art business segment. While we have completed our cost reduction plans and have plans to secure additional financing and/or to raise additional capital, there are no assurances that we will be successful in completing these critical tasks. If we are unable to successfully complete these critical tasks, we may be forced to significantly and materially reduce our operations and/or liquidate inventory at amounts below current carrying value to generate the necessary working capital to fund any ongoing operations. CAPITAL EXPENDITURES The Company did not incur any material capital expenditures for property and equipment during the year ended June 30, 2004 and does not have any plans for material capital expenditures through the current fiscal year ending June 30, 2005. 23 Pursuant to a lease agreement executed on August 6, 2002, we extended our lease on our corporate headquarters and primary gallery located in Beverly Hills, California. The monthly base rent is $17,193 and the lease will expire on September 30, 2007. The following table outlines payments due under our significant contractual obligations over the next four years, exclusive of interest: PAYMENT DUE BY PERIOD --------------------- CONTRACT OBLIGATIONS LESS THAN LESS THAN LESS THAN AFTER AT JUNE 30, 2004 TOTAL 1 YEAR 2 YEARS 3 YEARS 3 YEARS - ---------------------------------------- ------------- ------------- ------------- ------------- ------------- Short Term Debt $ 9,100,000 $ 9,100,000 $ -- $ -- $ -- Long Term Debt 1,587,500 643,750 475,000 268,750 200,000 Operating Leases 765,981 261,135 224,376 224,376 56,094 ------------- ------------- ------------- ------------- ------------- Total Contractual Cash Obligations $ 11,453,481 $ 10,004,885 $ 699,376 $ 493,126 $ 256,094 ============= ============= ============= ============= =============
The above table outlines our obligations as of June 30, 2004 and does not reflect any changes in our obligations that have occurred after that date. 24 BUSINESS COMPANY OVERVIEW Our principal line of business is the sale of rare coins on a retail, wholesale, and auction basis. Our retail and wholesale operations are conducted in virtually every state in the United States and in several foreign countries. We also provide auction services for customers seeking to sell their own coins. We market our services nationwide through broadcasting and print media and independent sales agents, as well as on the Internet through third party websites such as eBay and through our own website at sgbh.com. Our headquarters are in Beverly Hills, California. We were originally organized as a Nevada corporation in 1995. On June 30, 2003, our stockholders approved and we completed a reincorporation of our company in the State of Delaware and changed our corporate name from Tangible Asset Galleries, Inc. ("Tangible") to Superior Galleries, Inc. ("Superior"). These changes were effective at the close of business on June 30, 2003. Unless the context otherwise requires, all references in this prospectus to "us," "we," "our" or "Superior" shall mean Superior Galleries, Inc. and Tangible, as Superior's predecessor. HISTORY OF THE COMPANY Tangible Investments of America, Inc. ("TIA") our predecessor, was originally founded by our current chief executive officer ("CEO"), Silvano DiGenova, in 1977 when Mr. DiGenova first exhibited his coins at a national coin dealer's convention. That same year, Mr. DiGenova first became involved in other collectibles such as fine arts and antiques. Mr. DiGenova has collected rare coins since 1971 (when he was nine years old). While attending the Wharton School of Business in the early 1980s, Mr. DiGenova continued to develop TIA, and in May 1984, prior to graduating, Mr. DiGenova took a leave of absence from Wharton and incorporated TIA in Pennsylvania. In 1991, Mr. DiGenova relocated TIA to Laguna Beach, California and continued to develop its rare coin, fine art and collectibles retail and wholesale business, continuing to expand on a national level. We acquired TIA on April 28, 1999 through a reverse-merger acquisition. In December 1999, we acquired all of the outstanding common shares of Gehringer and Kellar, Inc. d.b.a. Keystone Coin & Stamp Exchange, or Keystone. Keystone is a wholesaler, retailer and auctioneer of rare coins located in Allentown, Pennsylvania. We transferred the operations of this company to certain members of its management in November 2001 and completed the sale of the assets of this company in February 2002. In June 2001, we acquired all of the outstanding common shares of HotelInteractive, Inc., or HI, an Internet-based publisher of news and information. In February 2002, we sold this company to a corporation controlled by Mr. Richard Viola, who was serving as a director on our board at that time. In November 2002, we began to reduce our operations that were focused on the fine art, jewelry and collectibles ("Art") segment of our business. By March 2003, with exception of activities specifically related to the liquidation of our remaining art inventory, all Art business segment operations had ceased. We completed the liquidation of our art inventory in October 2003. We may, at some future date and on a limited basis, re-enter some of the Art business segment as a consignment auctioneer. 25 BACKGROUND OF THE COIN AND COLLECTIBLES INDUSTRY Throughout history, coins have been highly prized and universally regarded as a store of value, particularly those struck in precious metals. Coins have been highly esteemed for their beauty and appeal as a solid store of wealth. Over the past 300 years, coin collecting for enjoyment and profit has gained increasing prominence. The coin industry has been active in trading since the 17th century. Today, coins and collectibles are bought and sold throughout the world in galleries, shops, stores, auctions and on the Internet at fixed prices. According to experts in the field, it is difficult to determine the total annual sales volume of the coin and collectibles business. Sotheby's Holdings, Inc. (NYSE: BID), one of the two largest auctioneers in the world in the coin and collectibles markets, reported annual auction and related revenue from the sale of art and collectibles of $309 million for the year ended December 31, 2003. With specific regard to coins, the U.S. Mint, in its 2003 annual report for the year ending September 30, 2003, reported that there are over 130 million people collecting the new quarter dollar coins from the 50 State Quarters(TM) program developed by the Mint. This program was designed to increase coin collecting and the number of collectors by minting five new designs annually of the quarter dollar with each design featuring one each of the 50 states over a ten year period from 1998 through 2008. In addition, the U.S. Mint reported non-bullion numismatic revenue of $235 million in its 2003 annual report. Typically, the coins that we buy and sell were originally manufactured in the late 1700's to mid-1900's. Many of the items that we sell are one-of-a-kind, or have very few examples on the market at any time. We believe that coin buyers generally start with a modest purchase amount and increase the size of their transactions and the rarity of the items that they purchase as they gain experience as a buyer in the market. COIN GRADING AND TRADING SYSTEMS Determining the market value of a given coin plays a vital role in buying and selling rare coins. Rare coins are graded on a numerical scale from 0 to 70. Zero represents the basal state (or lowest condition or state of preservation) and 70 represents an uncirculated (or mint state) specimen that is perfect in condition or state of preservation in every aspect. As a result of this numerical scale relating to condition or quality, there is a correlation to value in that the higher its numerical grade, the more valuable a coin is to collectors or dealers. A one point difference, not even discernible to a layman's eye, can result in a difference in value of thousands of dollars. Therefore, consistent grading according to a standard universally accepted by the marketplace is very important. In 1986, the first uniform grading system was implemented by the Professional Coin Grading Service, or the PCGS. Silvano DiGenova, our chief executive officer, was a co-founder of the PCGS and assisted in the development of the grading system used by the PCGS. Mr. DiGenova sold his interest in the PCGS in 1987 and, since that time, has not been affiliated with the PCGS, except as a customer of its services. A year after the PCGS was founded, the Numismatic Guaranty Corporation, or the NGC, was formed. Mr. DiGenova is not affiliated with NGC except as a customer of its services. These two firms established a uniform coin-grading standard, which has gained almost universal acceptance throughout the world. Once a coin has been graded and certified, both firms encapsulate the coin in tamper-proof acrylic holders and register them by number, grade, date and mintmark. If applicable, they identify variety and pedigree as well. Rare coins graded and certified by either one of these services can then be traded with confidence. The advent of certified grading has led to the formation of the Certified Coin Exchange, or the CCE, which is a nationwide computerized trading network for rare coins. The CCE is also the number one source of instantaneous price information. Coins can be bought and sold sight unseen because of the certification and confidence instilled in the market place by the CCE, the PCGS and the NGC. Mr. DiGenova was 26 a founder and board member of the CCE, and assisted in the organization of the association. Mr. DiGenova sold his interests in the CCE in the late 1980s and has not been affiliated with that entity since that time except as a user of its services. RETAIL AND WHOLESALE SALES We sell rare coins on a wholesale and retail basis. On a wholesale basis, our contacts include approximately 5,000 rare coin dealers across the country who we contact through telephone, email, fax, electronic exchanges and in person at the approximately 30 shows or expositions annually. Wholesale transactions are usually completed with recognized dealers in the trade and are often for immediate payment or with approved credit relationships, by payment within 30 days from the date of sale. Retail transactions typically do not involve the extension of any credit terms and payment is made at the time of sale. Our CEO in consultation with senior management team members approves trade credit. In wholesale transactions, selling prices for rare coins are determined by the marketplace and usually individually negotiated with the buyer. There are several printed pricing guides, some published weekly, which provide pricing indications as well as the CCE, a real-time exchange with bids and asks on many of the coins in the market. Often, a wholesale customer is buying rare coins from us because the wholesale customer has another customer, whether wholesale or retail, already identified. Wholesale sales prices for rare coins are determined primarily by the grade of the coins and are often influenced by non-market factors such as the purchasing or selling dealer's liquidity, the relative desire or need for the specific rare coin, the length of time the selling dealer has held the rare coins and other factors. We have an inventory turnover of four to five times per year. When selling rare coins on a retail basis, we utilize direct mail, telephone, fax, email and Internet-based retail and auctions, both private and public, as channels of distribution. We maintain a database of over 30,000 potential customers for rare coins who are solicited regularly through these channels. We currently maintain our website, www.sgbh.com to offer rare coins both at retail and at private auction. We have ongoing campaigns on eBay, a third party website, to sell rare coins at its Internet public auction site. At retail, we typically sell for immediate payment, holding the rare coins until good funds are received. In a few instances, on large purchases, we will consider financing a sale for a retail buyer. In these situations, we will hold the rare coins as collateral. In retail transactions, the market determines sale prices for rare coins and there are several pricing guides available to the retail buyer including monthly and weekly publications and auction prices realized. The price to be paid by a retail buyer for a rare coin is primarily based on the coin's condition and rarity as determined by its grade but is also influenced by the buyer's desire for the particular rare coin, the time it has taken to find a suitable example for the buyer's collection, the relative rarity of the coin to others held by the buyer and other factors. In retail transactions, we principally sell rare coins that have been certified for authenticity and quality by an independent recognized authority. ACQUISITION OF INVENTORY We acquire inventory of rare coins at wholesale through other dealers in the trade, retail customers, trusts or estates desiring to sell their holdings or by auction. We are not dependent on any major suppliers. During the year ended June 30, 2004, no supplier provided more than 10% of our aggregate purchases of coins. When purchasing from other dealers in the trade, we are typically offered 15 days to pay the net invoice amount. Purchases from retail customers, trusts and estates or at auction by an independent auction company require immediate payment upon taking title and possession of the property. On occasion, we may trade items from our inventory to either a dealer or a retail customer in exchange for property from the dealer or retail customer. When buying inventory from a dealer, the majority of these purchases are completed at 27 shows and expositions around the country, although a significant volume is transacted over the telephone. Purchasing at auction is another major source of inventory in rare coins. Purchase prices are negotiated by our buyers with dealers in the trade and with the retail customers, trusts and estates. When buying at auction, our buyers compete with other buyers in determining the final bid for any given lot of property. AUCTION OPERATIONS On July 6, 2001, we acquired substantially all of the assets of Superior Galleries, Inc., a California corporation, a company that was an auctioneer of rare coins and collectibles located in Beverly Hills, California ("SGBH," which is not the same legal entity as Superior), for cash and a note. Through June 30, 2003 we were operating this business as a subsidiary under the name Superior Galleries Beverly Hills, Inc. although the seller retained certain rights to the Superior Galleries name in the stamp and space memorabilia markets for a period of two years from the date of the acquisition. As a result, we were restricted until July 6, 2003 from doing business in either the rare stamp or space memorabilia markets under this name for such period. Effective July 1, 2003, the auction operations of SGBH were combined with the remainder of our operations. Superior, as an auctioneer of rare coins and collectibles, has a history dating back to 1929 with sales primarily in the rare coin and rare stamp markets. We believe that we are the largest rare coin auction firm in the Western United States and one of the largest three in the United States. With our long time location in Beverly Hills, our customers and clients include many well-recognized names in the entertainment and sports fields. We solicit and accept consignments of rare coins from individuals, dealers and trusts and estates and charge a seller's commission along with a buyer's premium on each lot sold. The combination of the seller's commission and the buyer's premium on each lot equals approximately 5%-25% but averages approximately 10%. We market our services by advertising in trade journals, direct mail and telemarketing and through attendance at major shows and exhibitions and by personal visits. Each consignment of goods is evidenced by a contract signed by both the consignor and Superior. In some instances, we may loan the consignor funds in an amount up to approximately 60% of the expected prices realized from the sale of the property in the consignment. The consignor loan amount maximums are determined by a loan-to-value ratio based on our estimate of the wholesale liquidation value in the event the consigned items do not sell at auction. In this event, the consignor also executes a note and security agreement evidencing the debt and providing a security interest to us in the consigned items. The proceeds from the sale of the property are used to repay the loan amount and the excess funds are paid to the consignor. Upon receipt of the consigned goods, we record the receipt on our records and then catalog and photograph the items, storing the information in digital format. Auction sale dates are established approximately one year in advance. As deadlines for each auction date approaches, we organize all of the digitized information into a catalog of goods with photographs and subcontract the printing and mailing of the catalog to be sent to our mailing list of buyers. In addition, we load the digitized catalog on our web-site and into software managed by Internet seller eBay, so that bidders on the Internet worldwide may also leave absentee bids to be executed by us at the live auction. Our web-site with its live auction capabilities and eBay's software also allows for Internet bidders to bid competitively with the live auction in real time in competition with the bidders present at the auction site. 28 Generally, the purchase price from the sale of rare coins is due upon the completion of the auction, although we maintain credit relationships with certain dealers in the trade and offers payment terms of 30 days to those selected dealers. A contract with a consignor requires payment to the consignor, less any loan amounts, accrued interest and commissions, to be made within 45 days of the sale date. COMPETITION The business of selling rare coins is highly competitive. We compete with a number of smaller, comparably sized, and larger firms throughout the United States. These include: Heritage Rare Coin Galleries, a large scale coin dealer and auctioneer; National Gold Exchange, a large wholesale coin and bullion dealer; Spectrum, a large scale coin wholesaler and auctioneer and a subsidiary of Greg Manning Auctions, Inc., a publicly traded company; American Numismatic Rarities, a comparably sized coin auction company; U.S. Coins, a medium sized coin wholesaler; and other companies. These competitors are generally larger and better capitalized than we are. However, we believe that we are able to compete with these competitors due to our staff expertise, reputation and generally high quality inventory. However, we cannot assure you that we can continue to compete successfully with other established companies that have greater financial resources, experience and market share than us. REGULATION The rare coin markets are not currently subject to direct federal, state or local regulation. However, the Federal Trade Commission, or FTC, and many state attorneys general have shown an interest in regulating the sales of rare coins and other tangible assets as investments. The State of New York has determined that under certain circumstances, rare coins may be treated as securities under state law, thereby requiring rare coin dealers to register as broker-dealers and permitting investors all legal and equitable remedies otherwise available to buyers of securities. We rely upon a 1998 U.S. Federal Court ruling that the ordinary retail sale of rare coins to investors does not constitute the sale of a security under the federal securities laws, and we believe that our operations are not subject to regulation as involving the sale of securities. There is no assurance, however, that at some time in the future, the sale of rare coins will not be subject to increased regulation, and that our business will not be materially adversely affected by such regulation. Any increased regulation of our business could increase our costs of operation or require us to change our business practices, either of which could have a material and adverse impact on our business. Over the past 15 years, the FTC has filed suits against numerous rare coin dealers alleging that the dealers' representations about coins were false or misleading or that the dealers' retail markups were so high that their representations about investment risk and appreciation potential became misleading or untrue. These cases have not, however, created any clear rules by which dealers such as us can assure themselves of compliance. On January 1, 1996, the FTC's Telemarketing Sales Rule, authorized by the 1994 Telemarketing and Consumer Fraud and Abuse Prevention Act, took effect. "Telemarketing" is defined as any plan, program, or campaign that is conducted to induce payment for goods and services by use of more than one interstate telephone call. This rule applies to all sales of "investment opportunities," which are defined by whether the seller's marketing materials generally promote items on the basis of representations about "income, profit, or appreciation." We believe that all of our retail sales are covered by this rule, even those to collectors. The Telemarketing Sales Rule requires us to inform customers of the following before accepting payment: the number of items being sold, the purchase price, and our refund/exchange/buyback policy. The rule also prohibits us from misrepresenting the "risk, liquidity, earnings potential, and profitability" of the items that we sell. This in itself did not materially change prior law. However, during debates on the Telemarketing Sales Rule in 1995, FTC staff attorneys tried to impose additional specific requirements that dealers in 29 "tangible assets" disclose to retail customers their actual cost for the items they sell, and also disclose "all material facts" about their goods before accepting any money from the customer. This would have required us to disclose our actual margins to our retail customers, as well as impose on us the burden of determining what facts were material to the purchase of coins or other collectibles. Although the FTC ultimately removed these additional requirements from the final version of the rule, the behavior of the FTC staff has demonstrated its particular concern for telemarketing of coins as investments. We cannot assure you that the FTC will not amend the rule in the future to impose these or other additional regulations, or that individual states will not impose such regulations, and that our business will not be harmed as a result. In addition, many investors favor rare coins because they can be bought, owned and sold privately, i.e., without registering with or notifying any government agency. However, the Internal Revenue Service now requires dealers such as us to report all sales of coins in which more than $10,000 in cash or a cash-like instrument is used as payment. The private nature of rare coin ownership has occasionally resulted in rare coins being purchased by taxpayers for the purpose of concealing unreported income, or used to "launder" income derived from unlawful activities. This has caused local authorities to consider imposing registration and/or reporting requirements upon rare coin dealers, although we believe that the only such regulation enacted to date (in the City of Chicago) has not been enforced against full-time dealers in rare coins. We cannot assure you that additional regulations will not be imposed upon us in the future, and that our business will not be harmed as a result. TAXATION OF MAIL ORDER SALES We do not collect California sales tax on mail order sales to out-of-state customers, because interstate sales generally are tax-exempt. Nor do we collect use tax on our interstate mail order sales. Most states impose a use tax on "retailer(s) engaged in business in this state" on sales of "tangible personal property for storage, use, or other consumption in this state." Use tax is usually set at the same rate as sales tax, and its purpose is to equalize the tax affects on local retailers who pay sales tax and out-of-state mail order companies who do not. Some states exempt rare coin sales over $1,000 from sales or use tax, but most do not. Although the United States Constitution restricts the right of states to tax interstate commerce, states can assess use tax on any transaction where the out-of-state mail order firm is deemed to be "engaged in business" in the state. A retailer which has a "nexus" with the state, i.e., any physical presence in the state, regardless of whether the sales themselves arise from that local presence, is deemed to be "engaged in business" in the state. "Nexus" includes attending conventions, although at least one state (California) provides a seven-day "safe harbor" for out-of-state dealers attending conventions and whose sales are less than a certain dollar threshold. It also would include attending auctions or making buying or selling trips. On that basis, we may be deemed to have "nexus" in many states. Payment of use tax is the buyer's obligation, but states require retailers engaged in business in that state to collect the tax on sales to customers in that state and remit it to the state along with a use tax return. There is no statute of limitations for use tax if the dealer has filed no returns. To date, we have not been assessed for use tax by the taxing authority of any other state for sales to customers in that state claiming that we are engaged in business in that state and therefore required to collect and remit the tax, nor have we received any inquiry indicating that we were being audited for the purposes of such an assessment. However, there is no assurance that we will not be audited by state taxing authorities and be assessed for unpaid use taxes (plus interest and penalties) for a period of many years. In addition to use tax, many states impose income and franchise taxes on out-of-state companies that derive net income from business with their residents. For example, California applies an income-based franchise tax to out-of-state corporations operating in California for the privilege of using the 30 corporate form. The maximum California corporate tax rate is approximately 9%, with a minimum tax of $800 per year. Income derived outside of California is not taxed, and in-state income of taxpayers liable for tax in more than one state is calculated using a formula contained in the Uniform Division of Income for Taxation Purposes Act, a statute in effect in about one-half of the states. As with use tax, nexus principles apply, and the U.S. Supreme Court requires "a minimal connection between the interstate activities and the taxing state, and a rational relationship between the income attributed to the State and the intrastate values of the enterprise." Assuming the existence of nexus, we could be subject to income-based taxes in each of the states in which we have had a physical presence at conventions, auctions or otherwise. The only exceptions would be in states where we are protected by a federal law, 15 U.S.C. ss. 381, which immunizes companies from state income taxes if the company's only business activities in the taxing state consists of "solicitation of orders for interstate sales." There is no statute of limitations for income or franchise tax if the dealer has filed no return. To date, we have not been assessed for income tax or franchise tax by the taxing authority of any other state, nor have we received any inquiry indicating that we were being audited for purposes of such an assessment. However, we cannot assure you that we will not be audited by state taxing authorities and be assessed for unpaid income or franchise taxes (plus interest and penalties) for a period of many years. CUSTOMERS/DEPENDENCE ON KEY CUSTOMERS We generally sell to a large variety of individual retail purchasers as well as several wholesale purchasers throughout the nation and world. During the fiscal year ended June 30, 2004, none of our customers accounted for more than 10% of our sales. NUMBER OF EMPLOYEES As of September 24, 2004, we co-employed or obtained contract services from 29 persons, of which 27 were full-time co-employees. Our co-employment relationship is with Administaff, as a professional employer organization. We believe that our future success depends in part upon our ability to recruit and retain qualified numismatists, marketing and other personnel. We consider our relations with our employees to be good. None of our employees is represented by a labor union. FACILITIES Our principal offices are located at 9478 West Olympic Boulevard, Beverly Hills, California. We have another location located at 3444 Via Lido, Newport Beach, California that we closed in September 2003. On June 1, 2004, we entered into a short-term agreement to sub-lease a portion of the Newport Beach facility. The Newport Beach office lease will not be renewed upon the termination of the current lease on September 30, 2004 and the sub-lease ends concurrently with our lease. We believe that our facilities are adequate for our needs for the near future. LEGAL MATTERS From time to time, we may be involved in various claims, lawsuits, disputes with third parties, actions involving allegations of discrimination, or breach of contract actions incidental to the operation of our business. However, we are not currently involved in any litigation which we believe could have a materially adverse effect on our financial condition or results of operations. 31 MANAGEMENT DIRECTORS AND EXECUTIVE OFFICERS Our directors and executive officers are as follows: NAME AGE POSITION - ---- --- -------- Silvano DiGenova 42 Chairman of the Board, Chief Executive Officer and Director J. Michael Wolfe 46 Chief Operating Officer and Executive Vice President Paul Biberkraut 43 Chief Financial Officer, Executive Vice President, Secretary and Director Lee Ittner 42 Director David Rector 57 Director (1) - --------------- (1) Chairman of Compensation Committee; Acting Chairman of Audit Committee. SILVANO DIGENOVA is our chairman of the board, chief executive officer and a director. Mr. DiGenova has also served as our acting chief financial officer from September 2002 through December 2002. Mr. DiGenova founded TIA, which would later become our company, in 1977. Mr. DiGenova is a recognized leader in the numismatic and fine arts field. In 1986, Mr. DiGenova helped form the Professional Coin Grading Service, the first widely accepted uniform grading system for rare coins. Mr. DiGenova attended the Wharton School of Business at the University of Pennsylvania for four years. However, Mr. DiGenova left Wharton in his fourth year to develop TIA, our predecessor, and did not obtain a degree from Wharton. J. MICHAEL WOLFE is our chief operating officer and executive vice president. Mr. Wolfe has served in this role since July 2004. Mr. Wolfe has over twenty years of experience in management roles in sales and marketing, operations and executive management. Prior to joining our company, Mr. Wolfe was a principal in a privately-held direct marketing start-up company from April 2002 to June 2004. Mr. Wolfe was the president and chief operating officer from 1992 to 2000 and chief executive officer from 2000 to 2002 of Concepts Direct, Inc., a publicly traded company specializing in catalog and Internet retailing. PAUL BIBERKRAUT is our chief financial officer, executive vice president, secretary and a director. Mr. Biberkraut has served in this role since December 2002 and previously was our chief financial officer and vice president of finance from October 1999 to December 2000. Mr. Biberkraut has over fifteen years of experience in management roles with varying levels of responsibilities for finance, accounting, information technology, operations and human resources. Prior to returning to our company Mr. Biberkraut was a senior finance manager for information technology at PacifiCare Health Systems, Inc. from December 2000 to November 2002 and was the corporate controller of Quality Systems, Inc. from November 1997 to June 1999. Mr. Biberkraut also served as the chairman of the audit committee for an Orange County, California based credit union from 1997 to 1999 and had served as a board member, treasurer and president of an Orange County, California based not-for-profit social service agency from 1989 to 1998. LEE ITTNER is one of our directors. Mr. Ittner has served in the role since May 2003. Mr. Ittner is currently the Vice President for Latin America for Kyocera Wireless Corp., a position he has held since 2001. Prior to that time, Mr. Ittner was Senior Vice President of the Americas Region for Cellstar Corporation. Mr. Ittner has over 14 years of experience in both domestic and 32 international operational management, sales and marketing, customer relations and strategic planning in the communications industry. DAVID RECTOR is one of our directors. Mr. Rector has served in this role since May 2003. Mr. Rector is currently the chief executive officer, president and director of Nanoscience Technologies, Inc., a publicly traded company, a position he has held since May 2004. From 1992 to 2004, Mr. Rector had been a principal management consultant with The David Stephen Group, where he provided executive management services for several companies, overseeing operations and strategic planning. Mr. Rector has over twenty years of experience as a senior executive focusing on general management with Fortune 100 and developmental companies. All directors hold office until the next annual meeting of shareholders or until their respective successors are elected or until their earlier death, resignation or removal. Executive officers are appointed by and serve at the discretion of the board of directors. We currently have one vacant seat on our board of directors, which we are seeking to fill with a candidate who qualifies as an audit committee financial expert. EXECUTIVE COMPENSATION The summary compensation table below shows certain compensation information for services rendered in all capacities to us by our chief executive officer and by each other executive officer whose total annual salary and bonus exceeded $100,000 during the fiscal years ended June 30, 2004, 2003 and 2002. Other than as set forth below, no executive officer's total annual salary and bonus exceeded $100,000 during our last fiscal year. SUMMARY COMPENSATION TABLE ANNUAL COMPENSATION AWARDS ------------------------------------------ -------------- OTHER SECURITIES ANNUAL OPTIONS/ UNDERLYING NAME AND SALARY BONUS COMPENSATION SARs PRINCIPAL POSITION YEAR ($) ($) ($) (#) - ---------------------------------------- ------ ------------ ------------ ------------ -------------- Silvano DiGenova, 2004 $375,000 $37,500 -0- 10,000 Chairman of the Board, Chief Executive 2003 $350,000 -0- -0- -0- Officer and President 2002 $308,333 -0- -- 2,500 Paul Biberkraut, 2004 $127,500 $30,000 -0- 60,000 Chief Financial Officer, Executive Vice 2003 $61,585 -0- -0- -0- President and Secretary(1) 2002 -- -- -- -- Stephen Deeds, 2004 n/a n/a n/a n/a Executive Vice President(2) 2003 $215,625 -0- $115,436(3) -0- 2002 $210,938 -0- $63,999(3) -0-
- ------------------- (1) Mr. Biberkraut became an officer of the company in December 2002. (2) Mr. Deeds resigned as an officer of our company effective June 30, 2003 and on July 1, 2003 we entered into an independent contractor agreement with Stephen Deeds, Inc., a company controlled by Mr. Deeds, to provide certain consulting services. The agreement to provide consulting services was terminated in February 2004. (3) Consists of sales commissions. 33 STOCK OPTIONS GRANTED TO EXECUTIVE OFFICERS DURING FISCAL 2004 The following table summarizes options to purchase shares of our common stock that we granted during the fiscal year ended June 30, 2004 to each of the executive officers identified in the summary compensation table above. We have never granted any stock appreciation rights. NUMBER OF PERCENT OF SECURITIES TOTAL OPTIONS UNDERLYING GRANTED TO EXERCISE OPTIONS EMPLOYEES IN PRICE(S) EXPIRATION NAME GRANTED (#) FISCAL YEAR (%) ($/SHARE) DATE(S) - ------------------------- --------------- --------------- ------------ ------------- Silvano DiGenova 10,000 4.55% $0.33 May 2009 Paul Biberkraut 10,000 4.55% $0.30 May 2009 Paul Biberkraut 25,000 11.36% $0.30 December 2012 Paul Biberkraut 25,000 11.36% $1.01 April 2013
- --------------- AGGREGATE OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR END OPTION VALUES The following table summarizes exercises of stock options during the fiscal year ended June 30, 2004 by each of the executive officers named in the summary compensation table above and the year-end value of unexercised options for these executive officers. NUMBER OF UNEXERCISED SECURITIES VALUE OF UNEXERCISED SHARES VALUE UNDERLYING OPTIONS IN-THE-MONEY OPTIONS ACQUIRED REALIZED AT FISCAL YEAR END AT FISCAL YEAR END NAME ON EXERCISE ($) EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE - ----------------------- ----------- --------- ------------------------- ------------------------- Silvano DiGenova 0 N/A 37,500/0 $17,950/0 Paul Biberkraut 0 N/A 16,250/43,750 $26,000/$52,250
DIRECTORS' COMPENSATION. Each of our non-employee directors currently receive cash compensation in the amount of $6,000 per year for service on our board of directors and all directors are reimbursed for certain expenses in connection with attendance at board meetings. Committee chairpersons receive an additional $3,000 per year. At the discretion of our board of directors, directors may be granted stock options. During the fiscal year ended June 30, 2004, our five directors were each granted options to purchase 10,000 shares of our common stock at an exercise price of $0.30 per share. These options fully vested on May 31, 2004 and are exercisable for a period of five years after vesting or for three months, if vested, following the termination or resignation of the director from the board. On July 15, 2004, we also issued options to purchase an additional 10,000 shares to each of our directors at an exercise price of $2.00 per share. These options fully vest on June 30, 2005, and are also exercisable for a period of five years after vesting or for three months, if vested, following the termination or resignation of the director from the board. EMPLOYMENT AGREEMENTS. On June 15, 2001, we entered into an employment agreement with Silvano DiGenova under which we agreed to pay an annual salary of $375,000 and bonus arrangements based on a sliding scale of 5% to 50% of base salary based on a corresponding fiscal year pre-tax income (as defined) of our company from $250,000 to $4,000,000, a bonus of 25% of base salary payable in 34 our common stock if market capitalization of our common stock exceeds $50,000,000 for a specified period and a bonus of 5% of the base salary payable in our common stock if average market capitalization increases by 20% over the average market capitalization of the prior fiscal year subject to certain limitations. On December 27, 2002 we entered into an employment agreement with our Chief Financial Officer, Paul Biberkraut, under which we agreed to pay an annual salary of $120,000 and bonus arrangements of up to 50% of base salary based on personal and Company performance. Effective April 1, 2004, Mr. Biberkraut's agreement was modified to increase his annual base salary to $150,000 and reduce the maximum bonus as a percentage of base salary to 30%. INDEMNIFICATION OF DIRECTORS AND OFFICERS We are governed by Section 145 of the Delaware General Corporation Law. This section provides for indemnification of directors, officers and other employees in certain circumstances. Additionally, Section 102(b) (7) of the Delaware General Corporation Law provides for the elimination or limitation of the personal liability for monetary damages of directors under certain circumstances. Article VII of our certificate of incorporation eliminates the personal liability for monetary damages of directors under certain circumstances. In addition, we have entered into indemnification agreements with our executive officers and directors on terms that are consistent with the provisions described above. We believe that such agreements are necessary to attract and retain qualified persons as directors and officers. Our directors and officers are also presently covered by an insurance policy indemnifying them against certain liabilities, including certain liabilities arising under the Securities Act, which might be incurred by them in such capacities and against which they may not be indemnified by us. To the extent indemnification for liabilities arising under the Securities Act of 1933 may be permitted to our directors, officers and controlling persons under the above provisions, or otherwise, we have been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act of 1933 and is, therefore, unenforceable. 35 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS On January 31, 2003, we entered into a consulting agreement with Stanford Venture Capital Holdings, Inc., a principal stockholder, to provide financial and advisory services to us for a three year period commencing on April 1, 2003. The annual fee for such services is $60,000 and is payable on a quarterly basis. In February 2003 we issued 2,000,000 shares of our Series D Preferred Stock in order to raise $2,000,000 in equity capital. As a condition of that transaction, the exercise price of certain outstanding warrants was reduced to $0.001 per common share. On July 24, 2003, these warrants were exercised, resulting in the issuance of 1,845,100 common shares to the following related parties and affiliates: Silvano DiGenova - Chief executive officer and principal stockholder 345,100 shares Stanford Venture Capital Holdings, Inc. - Principal stockholder 750,000 shares Daniel Bogar - Employee of Stanford affiliate 187,500 shares William Fusselmann - Employee of Stanford affiliate 187,500 shares Osvaldo Pi - Employee of Stanford affiliate 187,500 shares Ronald Stein - Employee of Stanford affiliate 187,500 shares
The total proceeds to us from the issuance of the above referenced common stock was $1,845. On October 13, 2003, we executed a Commercial Loan and Security Agreement ("Commercial LOC") with Stanford Financial Group Company, an affiliate of a principal stockholder, Stanford Venture Capital Holdings, Inc., to provide us with a $7.5 million line of credit for purposes of financing our inventory, auction advances and inventory loans to other rare coin dealers and collectors. The Commercial LOC bear interest at the prime-lending rate (4.00% at June 30, 2004) and is secured by substantially all of our assets. On October 23, 2003, our Board of Directors approved the sale of our remaining fine art inventory to Silvano DiGenova, our chief executive officer and a principal stockholder ("CEO"), who is also an independent dealer of fine art, for $350,000. We solicited bids from third parties and the bid from the CEO was the highest. We realized a gross profit of $15,860 on sale of the art inventory to the CEO. The sale was paid in full by reductions in the balances owing on notes payable to the CEO. On May 28, 2004, our Board of Directors approved a short-term sub-lease of a portion of our vacant Newport Beach facility to our CEO. The lease term is from June 1, 2004 through September 30, 2004 and provides for a monthly rental payment of $4,000. The sub-lease terminates concurrently with our master lease of the Newport facility. 36 PRINCIPAL AND SELLING SHAREHOLDERS The following table sets forth, as of September 24, 2004, certain information with respect to the beneficial ownership of our stock by (i) each of our executive officers named in the summary compensation table above, (ii) each of our directors, (iii) each person known to us to be the beneficial owner of more than 5% of each class of our outstanding voting securities, (iv) all of our directors and executive officers as a group; and (v) all selling stockholders. SHARES BENEFICIALLY OWNED SHARES BENEFICIALLY OWNED PRIOR TO OFFERING(1) AFTER OFFERING(3) ------------------------------------ -------------------------------------- SHARES NAME AND ADDRES TITLE NUMBER % OF BEING TITLE OF NUMBER % OF OF BENEFICIAL HOLDER OF CLASS OF SHARES CLASS OFFERED(2) CLASS OF SHARES CLASS - -------------------------------- ----------- ----------- -------- ----------- ----------- ----------- --------- Silvano DiGenova................ Common(4) 2,038,434 42.10% 0 Common 2,038,434 42.10% 9478 West Olympic Blvd. Series B 400,000 11.76% 0 Series B 400,000 100.00% Beverly Hills, CA 90212 Preferred Preferred Stock Stock Stanford Venture Capital Holdings, Inc................ Common(5)(6) 4,566,667 59.49% 3,916,667 Common(5) 0 * 6075 Poplar Avenue Series B 3,000,000 88.24% 0 Series B 0 * Memphis, TN 38119 Preferred Preferred Stock Stock Series D 2,000,000 100.00% 0 Series D 0 * Preferred Preferred Stock Stock Daniel T. Bogar(7).............. Common 162,500 3.6% 162,500 Common 0 * 1016 Sanibel Drive Hollywood, FL 33019 William R. Fusselmann(7)........ Common 162,500 3.6% 162,500 Common 0 * 1541 Crandon Blvd, #427 Key Biscayne, FL 33149 Osvaldo Pi(7)................... Common 162,500 3.6% 162,500 Common 0 * 6405 SW 104th Street Pinecrest, FL 33156 Ronald M. Stein(7).............. Common 162,500 3.6% 162,500 Common 0 * 6520 Allison Road Miami, FL 33141 Coffin Partner LLC.............. Common 24,000 * 24,000 Common 0 * 1530 Ventura Blvd., Suite 303 Sherman Oaks, CA 91403-5866 Cisneros Capital Group, Inc..... Common 149,651(8) 3.32% 100,000 Common 49,651 * 4025 NE 2nd Avenue Miami, FL 33137 All Executive Officers and and Directors as a Group (5 persons)............ Common(4)(9) 2,074,684 42.53% 0 Common(4)(9) 2,074,686 42.56% Series B 400,000 11.76% 0 Series B 400,000 100.00% Preferred Preferred Stock Stock
- ----------------- * Less than 1% (1) Based upon information furnished to us by the directors and executive officers or obtained from our stock transfer books showing 4,509,942 shares of common stock outstanding as of September 10, 2004. We are informed that these persons hold the sole voting and dispositive power with respect to the common stock except as noted herein. For purposes of 37 computing "beneficial ownership" and the percentage of outstanding common stock held by each person or group of persons named above as of September 10, 2004, any security which such person or group of persons has the right to acquire within 60 days after such date is deemed to be outstanding for the purpose of computing beneficial ownership and the percentage ownership of such person or persons, but is not deemed to be outstanding for the purpose of computing the percentage ownership of any other person. (2) The actual number of shares of common stock offered in this prospectus, and included in the registration statement of which this prospectus is a part, includes such additional number of shares of common stock as may be issued or issuable upon conversion of the Series B Convertible Preferred Stock and Series D Convertible Preferred Stock by reason of any stock split, stock dividend or similar transaction involving the common stock, in accordance with Rule 416 under the Securities Act of 1933. (3) Assumes all shares are sold. (4) Includes 132,500 shares of common stock issuable upon the exercise of options and warrants, 200,000 shares of common stock issuable upon the conversion of Series B Preferred Stock, all of which were convertible within 60 days of the date of this table, and 1,000 shares held by Mr. DiGenova's minor children, over which Mr. DiGenova exercises voting control. (5) Includes 1,500,000 shares of common stock issuable upon the conversion of Series B Preferred Stock and 1,666,667 shares of common stock issuable upon the conversion of Series D Preferred Stock both of which are currently convertible within the next 60 days. (6) Includes an aggregate of 650,000 shares of common stock owned by four of Stanford's employees, Daniel Bogar, William Fusselmann, Osvaldo Pi and Ronald Stein, in equal amounts. (7) Messrs. Bogar, Fusselman, Pi and Stein are employees of Stanford Venture Capital Holdings, Inc., which is our majority stockholder, and which has provided us with a line of credit (see "Management's Discussion and Analysis of Financial Condition and Results of Operations--Liquidity and Capital Resources; Financing Activities." We pay Stanford Venture Capital Holdings, Inc. a management fee of $5,000 per month, provide auction services to parties affiliated with them, and from time to time sell coins to them and their affiliates (8) Includes 49,651 shares of common stock held by James B. Cisneros, who is an affiliate of Cisneros Capital Group, Inc. (9) Includes 16,250 shares of common stock issuable upon the exercise of options held by Paul Biberkraut and 10,000 shares each of common stock issuable upon the exercise of options held by Lee Ittner and David Rector, all of which were exercisable within 60 days of the date of this table. 38 PLAN OF DISTRIBUTION The selling security holders and any of their donees, pledgees, assignees and other successors-in-interest may, from time to time, sell any or all of their shares of common stock being offered under this prospectus on any stock exchange, automated inter-dealer quotation system, market or trading facility on which the shares are traded, or in the over-the-counter market, or private transactions. These sales, which may include block transactions, may be at fixed or negotiated prices. The selling security holders may use any one or more of the following methods when disposing of shares: o ordinary brokerage transactions and transactions in which the broker-dealer solicits purchasers; o block trades in which the broker-dealer will attempt to sell the shares as agent but may position and resell a portion of the block as principal to facilitate the transaction; o purchases by a broker-dealer as principal and resales by the broker-dealer for its own account; o an exchange distribution in accordance with the rules of the applicable exchange; o privately negotiated transactions; o short sales, which are contracts for the sale of shares of stock that the seller does not own, or certificates for which are not within the seller's control, so as to be available for delivery at the time when, under applicable rules, delivery must be made; o transactions to cover short sales; o through the distribution of the shares by any selling security holder to its partners, members or stockholders; o broker-dealers may agree with the selling security holders to sell a specified number of shares at a stipulated price per share; o one or more underwritten offerings on a firm commitment or best efforts basis; o a combination of any of these methods of sale; or o any other method permitted by applicable law. The sale price to the public may be: o the market price prevailing at the time of sale; o a price related to the prevailing market price; o at negotiated prices; or o a price the selling security holder determines from time to time. The shares may also be sold under Rule 144 under the Securities Act, if available, rather than under this prospectus. The selling security holders have the sole and absolute discretion not to accept any purchase offer or make any sale of shares if they deem the purchase price to be unsatisfactory at any particular time. The selling security holders may also engage in short sales against the box, which are sales where the seller owns enough shares to cover the borrowed shares, if necessary, puts and calls and other transactions in our securities or derivatives of our securities and may sell or deliver shares in connection with these trades. The selling security holders may pledge their shares to their brokers under the margin provisions of customer agreements. If a selling security holder defaults on a margin loan, the broker may, from time to time, offer and sell the pledged shares. 39 Notwithstanding the terms of this plan of distribution, the selling security holders may not use shares offered under this prospectus to cover short sales or short sales against the box that are made before the registration statement of which this prospectus is a part becomes effective. Broker-dealers engaged by the selling security holders may arrange for other broker-dealers to participate in sales. Broker-dealers may receive commissions or discounts from the selling security holders (or, if any broker-dealer acts as agent for the purchaser of shares, from the purchaser) in amounts to be negotiated, which commissions as to a particular broker or dealer may be in excess of customary commissions to the extent permitted by applicable law. If sales of shares offered under this prospectus are made to broker-dealers as principals, we would be required to file a post-effective amendment to the registration statement of which this prospectus is a part. In the post-effective amendment, we would be required to disclose the names of any participating broker-dealers and the compensation arrangements relating to such sales. The selling security holders and any broker-dealers or agents that are involved in selling the shares offered under this prospectus may be deemed to be "underwriters" within the meaning of the Securities Act in connection with these sales. Commissions received by these broker-dealers or agents and any profit on the resale of the shares purchased by them may be deemed to be underwriting commissions or discounts under the Securities Act. Any broker-dealers or agents that are deemed to be underwriters may not sell shares offered under this prospectus unless and until we set forth the names of the underwriters and the material details of their underwriting arrangements in a supplement to this prospectus or, if required, in a replacement prospectus included in a post-effective amendment to the registration statement of which this prospectus is a part. The selling security holders may sell all or any part of the shares offered under this prospectus through an underwriter. To our knowledge, no selling security holder has entered into any agreement with a prospective underwriter, and we cannot assure you as to whether any such agreement will be entered into. If a selling security holder informs us that it has entered into such an agreement or agreements, any material details will be set forth in a supplement to this prospectus or, if required, in a replacement prospectus included in a post-effective amendment to the registration statement of which this prospectus is a part. The selling security holders and any other persons participating in the sale or distribution of the shares offered under this prospectus will be subject to applicable provisions of the Exchange Act and the rules and regulations under that act, including Regulation M. These provisions may restrict activities of, and limit the timing of purchases and sales of any of the shares by, the selling security holders or any other person. Furthermore, under Regulation M, persons engaged in a distribution of securities are prohibited from simultaneously engaging in market making and other activities with respect to those securities for a specified period of time prior to the commencement of such distributions, subject to specified exceptions or exemptions. All of these limitations may affect the marketability of the shares. This prospectus does not cover the sale or other transfer of any of the derivative securities whose underlying shares of common stock are being offered for sale pursuant to this prospectus. If a selling security holder transfers those derivative securities prior to conversion, then the transferee of those derivative securities may not sell the underlying shares of common stock under this prospectus unless we amend or supplement this prospectus to cover such sales. In addition, if any of the shares of common stock offered for sale pursuant to this prospectus are transferred other than pursuant to a sale under this prospectus, then subsequent holders could not use this prospectus until a post-effective amendment or prospectus supplement is filed, naming such holders. 40 We offer no assurance as to whether any of the selling security holders will sell all or any portion of the shares offered under this prospectus. For the period a selling security holder holds a derivative security whose underlying shares of common stock are being offered for sale pursuant to this prospectus, the selling security holder has the opportunity to profit from a rise in the market price of our common stock without assuming the risk of ownership of the underlying shares of common stock. The terms on which we could obtain additional capital during the period in which those derivative securities remain outstanding may be adversely affected. The holders of derivative securities are most likely to voluntarily convert their derivative securities when the conversion price is less than the market price for our common stock. However, we offer no assurance as to whether any of those derivative securities will be converted. We have agreed to pay expenses, other than broker discounts and commissions, if any, in connection with this prospectus. We have agreed with some of the selling security holders to prepare and file all amendments and supplements to the registration statement of which this prospectus is a part as may be necessary under the rules and regulations of the Securities Act of 1933 to keep it effective until the earlier of: o the date that all shares of common stock offered under this prospectus may be resold by those holders in a public transaction without time, volume or manner limitations pursuant to Rule 144 under the Securities Act; and o the date that all shares of common stock offered by those holders under this prospectus have been resold. We will not receive any of the proceeds from the sale of the shares of common stock offered by the selling security holders. 41 DESCRIPTION OF CAPITAL STOCK Our authorized capital stock consists of 12,500,000 shares of common stock, $0.001 par value per share, and 10,000,000 shares of preferred stock, $.001 par value per share. As of September 24, 2004, there were 4,509,942 shares of common stock, 125,000 shares of Series A Preferred Stock, 3,400,000 shares of Series B Convertible Preferred Stock and 2,000,000 shares of Series D Convertible Preferred Stock outstanding. The following is a summary description of our capital stock. COMMON STOCK The holders of outstanding shares of our common stock are entitled to receive dividends out of assets legally available at times and in amounts as the board of directors may from time to time determine, subordinate to any preferences that may be granted to the holders of preferred stock. Holders of common stock are entitled to one vote per share on all matters on which the holders of common stock are entitled to vote. The common stock is not entitled to preemptive rights and may not be redeemed or converted. Upon our liquidation, dissolution or winding up, the assets legally available for distribution to our shareholders are divided among the holders of the common stock in proportion to the number of shares of common stock held by each of them, after payment of all of our debts and liabilities and fulfillment of the rights of any outstanding class or series of preferred stock that has priority to distributed assets. The rights of holders of common stock are subordinate to those of holders of any series of preferred stock. SERIES A PREFERRED STOCK We currently have 125,000 shares of Series A Preferred Stock outstanding. The Series A Preferred Stock has not voting rights, but is entitled to cumulative dividends, payable either in cash or in shares of our Common Stock at our election, at the rate of 8% per annum. The Series A Preferred Stock is also entitled to participate pari passu with shares of Common Stock in connection with any dividends declared with respect to the our Common Stock, with each Series A Preferred share being treated for this purpose the same as eleven (11) shares of Common Stock. Dividends are payable quarterly. The Series A Preferred Stock is not entitled to preemptive rights. Each share of Series A Preferred Stock is entitled to a liquidation preference of $5.10 per share in preference to our Common Stock and any other shares that are junior in priority to the Series A Preferred Stock. Under the Certificate of Designation for the Series A Preferred Stock, with certain exceptions we are prohibited from granting a lien on our inventory to a third party, unless such interest is subordinated to the interests of the Series A Preferred Stock. Each share of Series A Preferred Stock is convertible into 0.55 shares of Common Stock at the election of the holder, and automatically converts into Common Stock on the sale of substantially all of our assets, the consummation of a merger, or the sale or exchange of all or substantially all of our Common Stock. The conversion ratio is subject to automatic adjustment upon a recapitalization, reorganization, stock dividend, and certain other similar events. The Series A Preferred Stock is subject to redemption at the option of the Company for cash in the amount of $5.10 per share, and may be redeemed for Common Stock at the conversion rate if the closing sale price of our Common Stock has been $0.90 or more for any consecutive 5 trading days. In addition, the Series A Preferred Stock is redeemable at the option of the holder for cash in the amount of $5.50 per share or for shares of our Common Stock in accordance with the conversion rate. If a holder or the Series A Preferred Stock exercises 42 this redemption right, such shares shall be redeemed at the rate of 1/10 of such shares per quarterly period for any 10 consecutive quarterly periods commencing after March 31, 2004. Our obligation to redeem the Series A Preferred Stock is subject to compliance with applicable law, which may prohibit us from redeeming the Series A Preferred Stock if we are insolvent or fail to meet certain financial requirements. SERIES B $1.00 CONVERTIBLE PREFERRED STOCK We currently have 3,400,000 shares of Series B $1.00 Convertible Preferred Stock, or Series B Preferred Stock, outstanding. The Series B Preferred Stock has voting rights with respect to all matters presented to our stockholders, and each share of Series B Preferred Stock is entitled to the number of votes equal to the number of shares of Common Stock into which it is convertible at the time of voting. The Series B Preferred Stock is not entitled to dividends or preemptive rights. Each share of Series B Preferred Stock is entitled to a liquidation preference of $1.00 per share in preference to our Common Stock and pari passu with our Series D Preferred Stock, but subject to payment of the liquidation preference on our Series A Preferred Stock. Each share of Series B Preferred Stock is convertible into 0.5 shares of Common Stock at the election of the holder. The conversion ratio is subject to automatic adjustment upon a merger, stock dividend, stock split, reverse stock split, reclassification, and certain other similar events. In addition, the conversion ratio is adjusted upon our issuance of Common Stock or securities convertible into Common Stock at a price less than $1.00 per share. The Series B Preferred Stock is not subject to redemption. We are prohibited from taking a number of corporate actions without the approval of the holders of a majority of the outstanding Series B Preferred Stock, including: o selling all or substantially all of our assets or taking any action with results in the holders of our capital stock prior to the transaction owning less than 50% of the voting power of our capital stock after such transaction; o amending our Certificate of Incorporation or Bylaws; o changing the nature of our business; o making any distributions on or redemptions of any capital stock other than those made pursuant to the certificates of designation for our Series A Preferred Stock or Series B Preferred Stock; o issuing securities other than pursuant to certain securities, options or warrants outstanding at the time the Series B Preferred Stock was issued; o making certain acquisitions of fixed assets in an amount of more than $100,000 in any 12 month period o entering into any credit facility or incurring debt, with certain exceptions, involving more than $100,000; o increasing the size of our board of directors to more than 5; 43 o entering into transactions with our affiliates; or o filing a bankruptcy petition or taking certain other actions relating to bankruptcy. SERIES D $1.00 CONVERTIBLE PREFERRED STOCK We currently have 2,000,000 shares of Series D $1.00 Convertible Preferred Stock, or Series D Preferred Stock, outstanding. The Series D Preferred Stock has voting rights with respect to all matters presented to our stockholders, and each share of Series D Preferred Stock is entitled to the number of votes equal to the number of shares of Common Stock into which it is convertible at the time of voting. The Series D Preferred Stock is not entitled to dividends or preemptive rights. Each share of Series D Preferred Stock is entitled to a liquidation preference of $1.00 per share in preference to our Common Stock and pari passu with our Series B Preferred Stock, but subject to payment of the liquidation preference on our Series A Preferred Stock. Each share of Series D Preferred Stock is convertible into 0.833 shares of Common Stock at the election of the holder. The conversion ratio is subject to automatic adjustment upon a merger, stock dividend, stock split, reverse stock split, reclassification, and certain other similar events. In addition, the conversion ratio is adjusted upon our issuance of Common Stock or securities convertible into Common Stock at a price less than $1.00 per share. The Series D Preferred Stock is not subject to redemption. We are prohibited from taking a number of corporate actions without the approval of the holders of a majority of the outstanding Series D Preferred Stock, including: o selling all or substantially all of our assets or taking any action with results in the holders of our capital stock prior to the transaction owning less than 50% of the voting power of our capital stock after such transaction; o amending our Certificate of Incorporation or Bylaws; o changing the nature of our business; o making any distributions on or redemptions of any capital stock other than those made pursuant to the certificates of designation for our Series A Preferred Stock or Series B Preferred Stock, and except for redemptions or repurchases of up to $10,000 in any fiscal year; o issuing securities other than pursuant to certain securities, options or warrants outstanding at the time the Series B Preferred Stock was issued; o making certain acquisitions of fixed assets in an amount of more than $100,000 in any 12 month period o entering into any credit facility or incurring debt, with certain exceptions, involving more than $100,000; o increasing the size of our board of directors to more than 5; 44 o entering into transactions with our affiliates; or o filing a bankruptcy petition or taking certain other actions relating to bankruptcy. UNDESIGNATED PREFERRED STOCK Preferred stock may be issued from time to time in one or more series, and our board of directors, without action by the holders of common stock, may fix or alter the voting rights, redemption provisions, dividend rights, dividend rates, claims to our assets superior to those of holders of our common stock, conversion rights and any other rights, preferences, privileges and restrictions of any wholly unissued series of preferred stock. The board of directors, without shareholder approval, can issue shares of preferred stock with rights that could adversely affect the rights of the holders of common stock. The issuance of shares of preferred stock could adversely affect the voting power of the holders of common stock and could have the effect of making it more difficult for a third party to acquire, or could discourage or delay a third party from acquiring, a majority of our outstanding common stock. TRANSFER AGENT AND REGISTRAR The transfer agent and registrar for our common stock is Stalt, Inc. Its telephone number is (775) 831-3335. 45 LEGAL MATTERS The validity of the shares of common stock offered under this prospectus will be passed upon by Rutan & Tucker, LLP, Costa Mesa, California. EXPERTS The financial statements of Superior Galleries, Inc. as of June 30, 2004, and for the year then ended have been included herein and in the registration statement in reliance upon the report of Singer Lewak Greenbaum & Goldstein LLP, independent registered public accounting firm, appearing elsewhere herein, and upon the authority of said firm as experts in accounting and auditing. The consolidated financial statements of Superior Galleries, Inc. and subsidiaries as of June 30, 2003 and for the year then ended have been included herein and in the registration statement in reliance upon the report of Haskell & White LLP, independent registered public accounting firm, appearing elsewhere herein, and upon the authority of said firm as experts in accounting and auditing. 46 WHERE YOU CAN FIND MORE INFORMATION We have filed with the Securities and Exchange Commission a registration statement on Form SB-2 under the Securities Act, and the rules and regulations promulgated under the Securities Act, with respect to the common stock offered under this prospectus. This prospectus, which constitutes a part of the registration statement, does not contain all of the information contained in the registration statement and the exhibits and schedules to the registration statement. While material elements of the contracts and documents referenced in this prospectus are contained in this prospectus, statements contained in this prospectus as to the contents of any contract or other document referred to are not necessarily complete, and in each instance reference is made to the full text of the contract or other document which is filed as an exhibit to the registration statement. For further information with respect to us and the common stock offered under this prospectus, reference is made to the registration statement and its exhibits and schedules. The registration statement, including its exhibits and schedules, may be inspected without charge at the Public Reference Room maintained by the Securities and Exchange Commission at 450 Fifth Street, N.W., Washington, D.C. 20549. Copies of such documents may be obtained from the Securities and Exchange Commission upon the payment of the charges prescribed by the Securities and Exchange Commission. The public may obtain information on the operation of the Public Reference Room by calling the Securities and Exchange Commission at 1-800-SEC-0330. The Securities and Exchange Commission maintains an Internet web site that contains reports, proxy and information statements and other information regarding issuers that file electronically with the Securities and Exchange Commission. The Securities and Exchange Commission's web site address is http://www.sec.gov. Our web site address is http://www.sgbh.com. All trademarks or trade names referred to in this prospectus are the property of their respective owners. 47 SUPERIOR GALLERIES, INC. INDEX TO FINANCIAL STATEMENTS PAGE ---- Independent Registered Public Accounting Firms' Reports.....................F-2 Financial Statements Balance Sheets.........................................................F-4 Statements of Operations...............................................F-6 Statements of Stockholders' Equity (Deficit)...........................F-8 Statements of Cash Flows..............................................F-10 Notes to Financial Statements.........................................F-13 F-1 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM Board of Directors Superior Galleries, Inc. Beverly Hills, California We have audited the balance sheet of Superior Galleries, Inc. as of June 30, 2004, and the related statements of operations, stockholders' equity (deficit) and cash flows for the year then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Superior Galleries, Inc. as of June 30, 2004, and the results of its operations and its cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America. The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 14 to the financial statements, the Company has suffered negative cash flows from operations, has significant debt that is callable on demand, and has limited working capital. This raises substantial doubt about the Company's ability to continue as a going concern. Management's plans in regard to these matters are also described in Note 14. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. /s/ SINGER LEWAK GREENBAUM & GOLDSTEIN LLP Los Angeles, California July 27, 2004 F-2 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM Board of Directors Superior Galleries, Inc. and Subsidiaries Beverly Hills, California We have audited the accompanying consolidated balance sheet of Superior Galleries, Inc. and subsidiaries (the "Company") as of June 30, 2003, and the related consolidated statement of operations, stockholders' equity (deficit) and cash flows for the year ended June 30, 2003. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Superior Galleries, Inc. and subsidiaries as of June 30, 2003, and the results of their operations and their cash flows for the year ended June 30, 2003, in conformity with accounting principles generally accepted in the United States of America. The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 14 to the consolidated financial statements, the Company has suffered recurring losses from operations, negative cash flows from operations, is in default on a significant debt obligation, and has limited working capital that raise substantial doubt about its ability to continue as a going concern. Management's plans in regard to these matters are also described in Note 14. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty. /s/ HASKELL & WHITE LLP Irvine, California September 5, 2003 F-3 SUPERIOR GALLERIES, INC. BALANCE SHEETS June 30, 2004 June 30, 2003 ------------- ------------- ASSETS (NOTE 6 AND 7) CURRENT ASSETS Cash and cash equivalents (Note 1) $ 446,530 $ 688,872 Accounts receivable, net of allowance for uncollectible accounts of $259,007 (2004) and $270,663 (2003) (Note 1) 3,712,866 2,825,699 Auction and customer advances (Notes 1, 5 and 6) 6,401,873 3,495,335 Inventories (Notes 1, 2, 6, 7 and 9) 6,106,593 2,497,435 Prepaid expense and other 50,574 89,788 ------------- ------------- Total current assets 16,718,436 9,597,129 Property and equipment, net (Notes 1 and 3) 135,361 216,424 Other assets 11,100 13,779 ------------- ------------- TOTAL ASSETS $ 16,864,897 $ 9,827,332 ============= ============= Liabilities and Stockholders' Equity (Deficit) Current liabilities Line of credit - related party (Note 6) $ 6,600,000 $ -- Line of credit (Note 7) 2,500,000 2,500,000 Accounts payable and accrued expenses 7,260,814 6,838,143 Notes payable to a related party (Note 9) 300,000 559,970 Series A stock redemption payable (Note 11) 343,750 -- Notes payable (Note 8) -- 56,832 ------------- ------------- Total current liabilities 17,004,564 9,954,945 ------------- ------------- (See accompanying notes to Financial Statements) F-4
SUPERIOR GALLERIES, INC. BALANCE SHEETS (CONTINUED) June 30, 2004 June 30, 2003 ------------- ------------- LONG-TERM LIABILITIES Notes payable to a related party, net of current portion (Note 9) $ 600,000 $ 800,000 Series A stock redemption payable, net of current portion (Note 11) 343,750 -- Notes payable, net of current portion (Note 8) -- 7,008 ------------- ------------- Total long-term liabilities 943,750 807,008 ------------- ------------- TOTAL LIABILITIES 17,948,314 10,761,953 ------------- ------------- Series A $5.00 redeemable 8% convertible preferred stock $0.001 par value, 1,400,000 shares designated, 125,000 shares issued and outstanding with a liquidation preference of $637,500 (Note 11) -- 637,469 ------------- ------------- COMMITMENTS, CONTINGENCIES AND SUBSEQUENT EVENTS (NOTES 5, 6, 7, 9, 10, 11, 12 AND 14) STOCKHOLDERS' EQUITY (DEFICIT) (NOTE 11) Preferred Stock, 3,193,000 shares undesignated, none outstanding -- -- Series B convertible preferred stock $1.00 par value, 3,400,000 shares designated 3,400,000 shares issued and outstanding with a liquidation preference of $3,400,000 2,966,500 2,966,500 Series D convertible preferred stock $1.00 par value, 2,000,000 shares designated 2,000,000 shares issued and outstanding with a liquidation preference of $2,000,000 1,931,456 1,931,456 Common stock, $.001 par value, 12,500,000 shares authorized, 4,485,942 (2004) and 2,640,836 (2003) issued and outstanding 4,486 2,641 Additional paid in capital 7,911,988 7,939,925 Accumulated deficit (13,897,847) (14,412,612) ------------- ------------- Total stockholders' equity (deficit) (1,083,417) (1,572,090) ------------- ------------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) $ 16,864,897 $ 9,827,332 ============= ============= (See accompanying notes to Financial Statements) F-5
SUPERIOR GALLERIES, INC. STATEMENTS OF OPERATIONS Year Ended Year Ended June 30,2004 June 30,2003 ------------- ------------- Net sales $ 26,916,284 $ 18,043,826 Commission income 3,081,028 2,311,082 ------------- ------------- TOTAL REVENUE 29,997,312 20,354,908 COST OF SALES 23,381,949 15,952,059 ------------- ------------- GROSS PROFIT 6,615,363 4,402,849 SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 5,958,829 6,675,629 IMPAIRMENT OF GOODWILL (NOTES 1 AND 4) -- 591,521 ------------- ------------- Income (loss) from operations 656,534 (2,864,301) ------------- ------------- OTHER INCOME (EXPENSE) Interest income 476,300 125,511 Interest expense (Notes 6, 7, 8 and 9) (535,248) (672,298) Other expense, net (32,864) (66,519) ------------- ------------- Total other income (expense) (91,812) (613,306) ------------- ------------- INCOME (LOSS) BEFORE INCOME TAX PROVISION 564,722 (3,477,607) INCOME TAX PROVISION (NOTE 10) 12,456 13,396 ------------- ------------- NET INCOME (LOSS) $ 552,266 $ (3,491,003) ============= ============= (See accompanying notes to Financial Statements) F-6 SUPERIOR GALLERIES, INC. STATEMENTS OF OPERATIONS (CONTINUED) Year Ended Year Ended June 30,2004 June 30,2003 ------------ ------------ Calculation of net income (loss) per share: Net income (loss) $ 552,266 $(3,491,003) Preferred stock accretion (50,031) (66,681) Preferred stock dividend (37,500) (429,267) ------------ ------------ Net income (loss) applicable to common shares $ 464,735 $(3,986,951) ============ ============ NET INCOME (LOSS) PER COMMON SHARE: from net income (loss), basic $ 0.11 $ (1.75) ============ ============ from net income (loss), fully diluted $ 0.06 $ (1.75) ============ ============ WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING: Basic 4,369,675 2,277,672 ============ ============ Fully diluted 8,098,265 2,277,672 ============ ============ (See accompanying notes to Financial Statements) F-7 SUPERIOR GALLERIES, INC. STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) FOR THE YEARS ENDED JUNE 30, 2004 AND 2003 Series B Series D Preferred Stock Preferred Stock Retained Total ---------------------- ---------------------- Additional Earnings Stock- Common paid (Accumulated holder's Shares Amount Shares Amount Shares Amount in Capital Deficit) Equity ---------- ----------- ---------- ----------- ----------- -------- ------------ ------------- ------------ Balance, June 30, 2002 3,400,000 $2,966,500 -- $ -- 2,060,573 $ 2,061 $ 6,938,810 $(10,492,343) $ (584,972) Issuance of Series D Preferred stock, net of offering cost (Note 11) -- -- 2,000,000 1,931,456 -- -- -- -- 1,931,456 Issuance of common stock in exchange for Series C Preferred Stock (Note 11) -- -- -- -- 583,333 583 699,417 -- 700,000 Fair value of re-priced warrants as dividends on Series B Preferred Stock (Note 11) -- -- -- -- -- -- 340,000 (340,000) -- Fair value of re-priced warrants pursuant to Series D Preferred Stock offering (Note 11) -- -- -- -- -- -- 29,020 -- 29,020 Purchase and cancellation of common stock -- -- -- -- (3,070) (3) (641) -- (644) Accretion of redemption value of Series A Preferred Stock (Note 11) -- -- -- -- -- -- (66,681) -- (66,681) Dividends on preferred stock -- -- -- -- -- -- -- (89,266) (89,266) Net loss -- -- -- -- -- -- -- (3,491,003) (3,491,003) ---------- ----------- ---------- ----------- ----------- -------- ------------ ------------- ------------ Balance June 30, 2003 3,400,000 2,966,500 2,000,000 1,931,456 2,640,836 2,641 7,939,925 (14,412,612) (1,572,090) (See accompanying notes to Financial Statements) F-8
SUPERIOR GALLERIES, INC. STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) FOR THE YEARS ENDED JUNE 30, 2004 AND 2003 (continued) Series B Series D Preferred Stock Preferred Stock Retained Total ---------------------- ---------------------- Additional Earnings Stock- Common paid (Accumulated holder's Shares Amount Shares Amount Shares Amount in Capital Deficit) Equity ---------- ----------- ---------- ----------- ----------- -------- ------------ ------------- ------------ Reverse split adjustment -- -- -- -- 6 -- -- -- -- Issuance of common stock (Note 11) -- -- -- -- 1,845,100 1,845 -- -- 1,845 Fair value of options granted -- -- -- -- -- -- 22,094 -- 22,094 Accretion of redemption value of Series A Preferred Stock (Note 11) -- -- -- -- -- -- (50,031) -- (50,031) Dividends on preferred stock -- -- -- -- -- -- -- (37,500) (37,500) Net income -- -- -- -- -- -- -- 552,265 552,265 ---------- ----------- ---------- ----------- ----------- -------- ------------ ------------- ------------ Balance, June 30, 2004 3,400,000 $2,966,500 2,000,000 $1,931,456 4,485,942 $ 4,486 $ 7,911,988 $(13,897,847) $(1,083,417) ========== =========== ========== =========== =========== ======== ============ ============= ============ (See accompanying notes to Consolidated Financial Statements) F-9
SUPERIOR GALLERIES, INC. STATEMENTS OF CASH FLOWS Year Ended Year Ended June 30, 2004 June 30, 2003 ------------- ------------- CASH FLOWS FROM OPERATING ACTIVITIES Net income (loss) $ 552,266 $(3,491,003) Adjustments to reconcile net income (loss) to net cash used in operating activities: Depreciation and amortization 93,781 127,376 Bad debts -- 130,714 Loss on retirement of property and equipment 32,864 48,786 Loss on investments -- 16,872 Impairment of goodwill -- 591,521 Fair value of options, warrants and common stock granted 22,094 29,020 Increase (decrease) in cash from changes in assets and liabilities Accounts receivable (887,167) 2,428,989 Other receivables -- 26,844 Inventories (3,609,158) 786,409 Prepaid expenses and other 39,214 (34,631) Other assets 2,679 222,609 Auction and customer advances, net (2,906,538) (1,647,167) Accounts payable and accrued expenses 422,671 (124,791) Customer deposits -- (241,880) ------------- ------------ Net cash used in operating activities (6,237,294) (1,130,332) ------------- ------------ CASH FLOWS FROM INVESTING ACTIVITIES Purchases of property and equipment (55,757) (48,464) Proceeds from sale of property and equipment 10,174 20,480 Collection on sale note receivable -- 69,286 ------------- ------------ Net cash (used in) provided by investing activities (45,583) 41,302 ------------- ------------ (See accompanying notes to Financial Statements) F-10
SUPERIOR GALLERIES, INC. STATEMENTS OF CASH FLOWS (continued) Year Ended Year Ended June 30, 2004 June 30,2003 ------------- ------------- CASH FLOWS FROM FINANCING ACTIVITIES Borrowings under related party line of credit 11,000,000 -- Repayments under related party line of credit (4,400,000) -- Borrowings under lines of credit 3,300,000 2,500,000 Repayments under lines of credit (3,300,000) (376,393) Borrowings under notes payable -- 2,191,325 Repayments under notes payable (63,840) (4,212,002) Borrowings under related party debt -- 359,970 Repayments under related party debt (459,970) -- Repayments on obligations under capital lease -- (3,646) Repayments under repurchase agreement -- (556,361) Issuance of common shares 1,845 -- Issuance of Series D preferred shares, net of offering expenses -- 1,931,456 Purchase of common stock for cancellation -- (644) Payment of dividends on preferred stock (37,500) (89,267) ------------- ------------ Net cash provided by financing activities 6,040,535 1,744,438 ------------- ------------ Net (decrease) increase in cash and equivalents (242,342) 655,408 Cash and cash equivalents beginning of year 688,872 33,464 ------------- ------------ Cash and cash equivalents, end of year $ 446,530 $ 688,872 ============= ============ SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION Cash paid during the year for: Interest $ 749,393 $ 458,124 ============= ============ Income taxes $ 9,008 $ 2,310 ============= ============ (See accompanying notes to Financial Statements) F-11
SUPERIOR GALLERIES, INC. STATEMENTS OF CASH FLOWS (continued) SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITY During the years ended June 30, 2004 and 2003, the Company completed non-cash transactions as follows: Year Ended Year Ended June 30, 2004 June 30,2003 ------------- ------------ NON-CASH INVESTING AND FINANCING ACTIVITIES Accretion of redemption value of Series A Preferred stock 50,031 66,681 Series A preferred stock redemption liability 687,500 -- Issuance of common stock on conversion of Series C preferred stock -- 700,000 Fair value of re-priced warrants as dividends on Series B preferred stock -- 340,000 Cancellation of treasury common stock -- 644 (See accompanying notes to Financial Statements) F-12
SUPERIOR GALLERIES, INC. NOTES TO FINANCIAL STATEMENTS 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES ORGANIZATION AND BUSINESS Superior Galleries, Inc. ("Superior" or the "Company") is a wholesaler, retailer, and auctioneer of rare coins. The Company is based in Beverly Hills, California. On June 30, 2003 as part of a reincorporation in the State of Delaware the Company's name was changed to Superior Galleries, Inc. from Tangible Asset Galleries, Inc. Additionally, the Company's subsidiary Superior Galleries, Inc., a Nevada corporation, name was changed to Superior Galleries Beverly Hills, Inc. ("SGBH"). As of July 1, 2003, all operations in SGBH ceased and were transferred to Superior. PRINCIPLES OF CONSOLIDATION AND BASIS OF PRESENTATION At June 30, 2003, the consolidated financial statements include the accounts of Superior and SGBH. At June 30, 2004 the financial statements include only the accounts of Superior as all the accounts and operations in SGBH were transferred effective July 1, 2003. For purposes of presentation, the balances as at and the results of operations for the year ended June 30, 2003 were consolidated, but the balances as at and the results of operations for the year ended June 30, 2004 were not consolidated. The corporate charter of SGBH was surrendered during the year ending June 30, 2004. For purposes of the consolidated financial statements during the year ending, and, at June 30, 2003, all significant inter-company balances and transactions have been eliminated in consolidation. See also Note 14 for discussions of going concern matters. RECLASSIFICATIONS Certain amounts may have been reclassified in the 2003 consolidated financial statements to conform to the basis of presentation used in 2004. Such amounts, if any, are not material. CASH AND CASH EQUIVALENTS The Company considers all highly liquid investments with original maturities of three months or less when purchased to be cash equivalents. The Company places its cash with high credit quality institutions. The Federal Deposit Insurance Corporation ("FDIC") insures cash accounts at each institution for up to $100,000. From time to time, the Company maintains cash in excess of the FDIC limit. INVENTORIES Inventories consisting of rare coins are stated at the lower of cost (on a specific identification basis) or market. F-13 SUPERIOR GALLERIES, INC. NOTES TO FINANCIAL STATEMENTS 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) PROPERTY AND EQUIPMENT Property and equipment are stated at cost and are depreciated or amortized (as applicable) using the straight-line method over the estimated useful lives of the related assets, ranging from three to seven years. Maintenance and repairs are charged to expense as incurred. Significant renewals and betterments are capitalized. At the time of retirement or other disposition of property and equipment, the cost and accumulated depreciation and amortization are removed from the accounts and any resulting gain or loss is reflected in operations. The Company assesses the recoverability of property and equipment by determining whether the depreciation and amortization of property and equipment over its remaining life can be recovered through projected un-discounted future cash flows. The amount of property and equipment impairment, if any, is measured based on fair value and is charged to operations in the period in which property and equipment impairment is determined by management. At June 30, 2004 and 2003, management of the Company has not identified any impaired assets. GOODWILL Effective July 1, 2002, the Company adopted Statement of Financial Accounting Standards ("SFAS") No. 142, "Goodwill and Other Intangible Assets". SFAS 142 requires that goodwill be tested for impairment on an annual basis. As the Company recorded goodwill for its purchase of its SGBH subsidiary in July 2001, it tested the goodwill for impairment during the quarter ended December 31, 2002. Management estimated the fair value of the reporting unit (i.e. Company as a whole) using a present value model on estimated future cash flows. This value was then adjusted to calculate the implied fair value of goodwill based on the allocation of the reporting units assets and liabilities. The calculation identified that the implied fair value was less than the carrying amount of goodwill, indicating that the goodwill had been impaired. Based on this analysis, goodwill was determined to be fully impaired and the Company had recorded an impairment of goodwill charge to operations of $591,521 during the quarter ended December 31, 2002. F-14 SUPERIOR GALLERIES, INC. NOTES TO FINANCIAL STATEMENTS 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) USE OF ESTIMATES The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reported periods. Actual results could materially differ from those estimates. Areas where significant estimation is involved include, but are not limited to, the evaluation of the collectibility of accounts receivable, and, auction and customer advances, and the realizability and valuation of inventories. REVENUE RECOGNITION The Company generates revenue from wholesale and retail sales of rare coins and precious metals bullion. The recognition of revenue varies for wholesale and retail transactions and is, in large part, dependent on the type of payment arrangements made between the parties. The Company sells rare coins to other wholesalers/dealers within its industry on credit, generally for terms of 15 to 60 days, but in no event greater than one year. The Company grants credit to new dealers based on extensive credit evaluations and for existing dealers based on established business relationships and payment histories. The Company generally does not obtain collateral with which to secure its accounts receivable when the sale is made to a dealer. The Company maintains reserves for potential credit losses based on an evaluation of specific receivables and the Company's historical experience related to credit losses. As of June 30, 2004 and 2003, management has established an accounts receivable reserve of $259,007 and $270,663, respectively. Revenues for monetary transactions (i.e., cash and receivables) with dealers are recognized when the merchandise is shipped to the related dealer. The Company also sells rare coins to retail customers on credit, generally for terms of 30 to 60 days, but in no event greater than one year. The Company grants credit to retail customers based on extensive credit evaluations and for existing retail customers based on established business relationships and payment histories. When a retail customer is granted credit, the Company generally collects a payment of 25% of the sales price, establishes a payment schedule for the remaining balance and holds the merchandise as collateral as security against the customer's receivable until all amounts due under the credit arrangement are paid in full. If the customer defaults in the payment of any amount when due, the Company may declare the customer's obligation in default, liquidate the collateral in a commercially reasonable manner using such proceeds to extinguish the remaining balance and disburse any amount in excess of the remaining balance to the customer. Under this retail arrangement, revenues are recognized when the customer agrees to the terms of the credit and makes the initial payment. Less than 5% of the Company's sales are retail credit sales. The Company's has a limited-in-duration money back guaranty policies (as discussed below). F-15 SUPERIOR GALLERIES, INC. NOTES TO FINANCIAL STATEMENTS 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) REVENUE RECOGNITION (CONTINUED) In limited circumstances, the Company exchanges merchandise for similar merchandise and/or monetary consideration with both dealers and retail customers, for which the Company recognizes revenue in accordance with APB No. 29, "ACCOUNTING FOR NON-MONETARY TRANSACTIONS." When the Company exchanges merchandise for similar merchandise and there is no monetary component to the exchange, the Company does not recognize any revenue. Instead, the basis of the merchandise relinquished becomes the basis of the merchandise received, less any indicated impairment of value of the merchandise relinquished. When the Company exchanges merchandise for similar merchandise and there is a monetary component to the exchange, the Company recognizes revenue to the extent of monetary assets received and determines the cost of sale based on the ratio of monetary assets received to monetary and non-monetary assets received multiplied by the cost of the assets surrendered. The Company has a return policy (money-back guarantee). The policy covers retail transactions involving graded rare coins only. Customers may return graded rare coins purchased within 7 days of the receipt of the rare coins for a full refund as long as the rare coins are returned in exactly the same condition as they were delivered. In the case of rare coin sales on account, customers may cancel the sale within 7 days of making a commitment to purchase the rare coins. The receipt of a deposit and a signed purchase order evidences the commitment. Historically, the Company's retail customers have not exercised their rights to money-back guarantees and as such, the Company's management has not provided a reserve for sales returns in the accompanying financial statements. Revenues from the sale of consigned goods are recognized as commission income on such sale if the Company is acting as an agent for the consignor. If in the process of selling consigned goods, the Company makes an irrevocable payment to a consignor for the full amount due on the consignment and the corresponding receivable from the buyer(s) has not been collected by the Company at that payment date, the Company records that payment as a purchase and the sale of the consigned good(s) to the buyer as revenue as the Company has assumed all collection risk. The Company's auction businesses generate revenue in the form of commissions charged to buyers and sellers of auction lots. Auction commissions include buyers' commissions, sellers' commissions, and buyback commissions, each of which are calculated based on a percentage of the hammer price. Buyers' and sellers' commissions are recognized upon the confirmation of the identification of the winning bidders. Funds charged to winning bidders include the hammer price plus the commission. Only the commission portion of the funds received by winning bidders is recorded as revenue. F-16 SUPERIOR GALLERIES, INC. NOTES TO FINANCIAL STATEMENTS 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) REVENUE RECOGNITION (CONTINUED) Buyback commissions represent an agreed upon rate charged by the Company for goods entered in the auction and not sold. Goods remain unsold when an auction lot does not meet the consignor reserve, which is the minimum sales price as determined prior to auction, and when items sold at auction are returned subsequent to the winning bidder taking possession. Buyback commission is recognized along with sellers' commission or at the time an item is returned. Returns from winning bidders are very limited and primarily occur when a rare coin sold auction has an error in its description in which the winner bidder relied upon to purchase the item. ADVERTISING Advertising costs are expensed as incurred. During the years ended June 30, 2004 and 2003, advertising expenses were $578,116 and $502,260 respectively. INCOME TAXES The Company accounts for income taxes under Statement of Financial Accounting Standards No. 109, "ACCOUNTING FOR INCOME TAXES", ("SFAS 109"). Under SFAS 109, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. A valuation allowance is provided for significant deferred tax assets when it is more likely than not that such assets will not be recovered. STOCK-BASED COMPENSATION The Financial Accounting Standards Board issued Statement of Financial Accounting Standards ("SFAS") No. 123 "ACCOUNTING FOR STOCK-BASED COMPENSATION," encourages, but does not require companies to record compensation cost for stock-based employee compensation plans at fair value. As permitted under SFAS No. 123 and as amended by SFAS No. 148, "ACCOUNTING FOR STOCK-BASED COMPENSATION - TRANSITION AND DISCLOSURE - AN AMENDMENT OF STATEMENT OF FINANCIAL ACCOUNTING STANDARD NO. 123", the Company accounts for stock-based compensation using the intrinsic value method prescribed by Accounting Principles Board Opinion No. 25 ("APB 25"), "ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES" and related interpretations, and provides the pro forma disclosure. Accordingly, compensation cost for the stock options is measured as the excess, if any, of the fair value of the Company's stock at the date of the grant over the amount an employee must pay to acquire the stock. F-17 SUPERIOR GALLERIES, INC. NOTES TO FINANCIAL STATEMENTS 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) STOCK-BASED COMPENSATION (CONTINUED) Pro forma information regarding net income (loss) and income (loss) per share is required by SFAS 123, and is to be determined as if the Company had accounted for its employee stock options granted under the fair value method pursuant to SFAS 123, rather than the intrinsic method pursuant to APB 25. The fair value of these options was estimated at the date of grant using a Black-Scholes option pricing model with the following range of assumptions for 2004 (there were no options granted in 2003): 2004 2003 ---- ---- Risk free interest rate 1 - 2% n/a Dividends -- n/a Volatility factor 275% n/a Expected life 1 - 3 years n/a For purpose of pro forma disclosures, the estimated fair value of the options is amortized to expense over the options' vesting period. The Company's pro-forma information for years ending June 30, 2004 and 2003 as follows: 2004 2003 ---- ---- Net income (loss) applicable to common shares, as reported $ 464,735 $ (3,986,951) Less: Total stock-based employee compensation Expense determined under Black-Scholes option pricing model, net of tax effects 21,030 -- ------------ -------------- Pro forma net income (loss) $ 443,705 $ (3,986,951) ============ ============== Earnings (loss) per share - as reported: Basic $ 0.11 $ (1.75) Diluted $ 0.06 $ (1.75) Earnings (loss) per share - pro forma: Basic $ 0.10 $ (1.75) Diluted $ 0.05 $ (1.75)
F-18 SUPERIOR GALLERIES, INC. NOTES TO FINANCIAL STATEMENTS 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) EARNINGS (LOSS) PER SHARE Basic "Earnings Per Share ("EPS")," is computed as net income (loss) applicable to common shares divided by the weighted average number of common shares outstanding for the period. Net income (loss) applicable to common shares is calculated as net income (loss) less dividends and accretion on preferred stock. Dividends and accretion on preferred stock totaled $37,500 and $50,031, respectively, for the year ended June 30, 2004. Dividends and accretion on preferred stock totaled $429,267 and $66,681, respectively, for the year ended June 30, 2003. Diluted EPS reflects the potential dilution that could occur from common shares issuable through stock options, warrants and other convertible securities. The total potential common shares that have not been included in the calculation of diluted net loss per common share totaled 5,671,209 at June 30, 2003, as the effects of such are anti-dilutive for that year. All share and per share amounts have been retroactively adjusted for the effect of a one-for-twenty reverse stock split of the Company's common stock at June 30, 2003. SEGMENT REPORTING The Company adopted SFAS No. 131 ("SFAS 131"), "DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION," during fiscal 1999. SFAS 131 establishes standards for the way that public companies report information about operating segments and related disclosures about products and services, geographic areas and major customers in annual financial statements. The Company views its operations and manages its business as one segment, collectibles. COMPREHENSIVE INCOME Effective January 1, 1998, the Company adopted Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS 130"). SFAS 130 established new rules for the reporting and display of comprehensive income and its components in a full set of general-purpose financial statements. The adoption of SFAS 130 had no effect on the accompanying financial statements, because the Company had and continues to have no other components of comprehensive income. F-19 SUPERIOR GALLERIES, INC. NOTES TO FINANCIAL STATEMENTS 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) CUSTOMER AND VENDOR CONCENTRATIONS During the years ended June 30, 2004 and 2003, the Company had no customer that accounted for 10% or more of the Company's net sales. As of June 30, 2004, the Company had one customer that represented 18% of accounts receivable as of such date; and as of June 30, 2003, the Company had two customers that represented 31% of accounts receivable as of such date. During the years ended June 30, 2004 and 2003, the Company did not purchase 10% or more of its inventories from any single vendor. As of June 30, 2004, the Company had no vendor that represented more than 10% of accounts payable of such date; and as June 30, 2003 the Company had one vendor that represented more than 21% of accounts payable as of such date. RISKS AND UNCERTAINTIES MARKET RISK Over time, market demand for investment grade coins will vary due to perceived scarcity, subjective valuation, general consumer trends, variations in the price of precious metals, and other general economic conditions. The Company derives a significant portion of its revenues from wholesale dealers and retail collectors on the sales of investment grade coins. Declines in market demand for investment grade coins would likely cause a decrease in annual sales revenue and have an overall negative effect on operations. INVENTORY RISK The Company purchases investment grade coins from dealers and collectors and assumes the inventory and price risks of these items until sold. If the Company were unable to sell such inventory, or if the prices were insufficient to generate a profit, or if the market value of such inventory were to decline, the ultimate amounts realized by the Company from the sale of such inventory could be less than the carrying values reflected in the accompanying balance sheets. FAIR VALUE OF FINANCIAL INSTRUMENTS Statement of Financial Accounting Standards No. 107, "DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS", requires the disclosure of the fair value, if reasonably obtainable, of the Company's financial instruments. The Company's financial instruments consist of its cash, accounts receivable, line of credit, accounts payable and accrued expense; note payable and notes payable to related parties. Management has determined that, except for notes payable (see Note 9) to related parties, the fair values of the Company's financial instruments approximate their carrying values at June 30, 2004 and 2003. Management was unable to determine the fair value of the notes payable to related parties, as an active market for such instruments does not exist. F-20 SUPERIOR GALLERIES, INC. NOTES TO FINANCIAL STATEMENTS 2. INVENTORIES Inventories are comprised of the following: June 30, 2004 June 30, 2003 ------------- ------------- Rare coins $ 6,106,593 $ 2,147,435 Fine and decorative arts -- 1,015,138 Reserve -- (665,138) ------------ ------------ $ 6,106,593 $ 2,497,435 ============ ============ Inventory totaling $1,228,813 and $904,677 was on consignment with third parties at June 30, 2004 and 2003, respectively. Inventory totaling $0 and $171,562, was held for display at the residence of the chief executive officer at June 30, 2004 and 2003, respectively. The Company, from time to time, enters into joint ventures or purchase financing agreements with third parties that include vendors and customers for the purchase and sale of specific rare coins or fine collectibles. These agreements may include profit sharing provisions ranging from 25% to 50% of the gross profit on specific transactions adjusted for agreed upon expenses and interest costs. At any given time, the Company may be involved in up to 10 of these agreements. As of June 30, 2004 and 2003, inventory totals reflected the Company's total appropriate ownership and does not include any minority interest claims in regard to such joint venture or partnership arrangements. The inventory reserve of $665,138 at June 30, 2003 is the result of management's estimate of the liquidation value of the entire Art inventory based on management's decision to exit the Art business segment. The Company completed the liquidation of the Art inventory in October 2003 (see Note 13). F-21 SUPERIOR GALLERIES, INC. NOTES TO FINANCIAL STATEMENTS 3. PROPERTY AND EQUIPMENT Property and equipment consists of the following: June 30, 2004 June 30, 2003 ------------- ------------- Furniture and equipment $ 133,847 $ 232,615 Computer equipment 216,674 268,906 Vehicles -- 24,676 Leasehold improvements 111,580 152,542 ---------- ---------- 462,101 678,739 Accumulated depreciation and amortization (326,740) (462,315) ---------- ---------- $ 135,361 $ 216,424 ========== ========== Depreciation expense for the years ended June 30, 2004 and 2003 were $93,781 and $127,376, respectively. 4. GOODWILL On July 6, 2001, the Company recorded goodwill for its purchase of its SGBH subsidiary in the amount of $591,521. The Company tested the goodwill for impairment during the quarter ended December 31, 2002. Management estimated the fair value of the reporting unit (i.e. Company as a whole) using a present value model on estimated future cash flows. This value was then adjusted to calculate the implied fair value of goodwill based on the allocation of the reporting units assets and liabilities. The calculation identified that the implied fair value was less than the carrying amount of goodwill, indicating that the goodwill had been impaired. Based on this analysis, goodwill was determined to be fully impaired and the Company recorded an impairment of goodwill charge to operations of $591,521 during the year ended June 30, 2003. 5. AUCTION AND CUSTOMER ADVANCES Superior has established two short-term lending programs consisting of (i) advancing consignment customers cash based on consigned inventory acquired for upcoming auctions, and, (ii) advancing customers cash based on the customer's assigning specific rare coins in their inventory to Superior as collateral. Superior can advance a customer up to 70% of consigned or assigned rare coin(s)' wholesale value. For auction advances, Superior will advance cash to a customer and take control of the inventory to be held on consignment for auction. The customer will sign a note receivable for the funds advanced to be secured by the consigned inventory. As consigned inventory is sold, the proceeds will be collected, repaying Superior for the auction advance and any auction fees, with the remaining amount due to the consignor. For customer inventory advances, Superior will advance cash to a customer and take control of the assigned inventory. The customer will sign a promissory note for the funds advanced to be secured by the assigned inventory. Superior will retain control of the assigned inventory until the customer repays the advance. Auction and customer advances consist of the follows: F-22 SUPERIOR GALLERIES, INC. NOTES TO FINANCIAL STATEMENTS 5. AUCTION AND CUSTOMER ADVANCES (CONTINUED) June 30, 2004 June 30, 2003 ------------- ------------- Auction advances $4,453,873 $3,495,335 Customer inventory advances 1,948,000 -- ----------- ----------- $6,401,873 $3,495,335 =========== =========== 6. LINE-OF-CREDIT - RELATED PARTY On October 13, 2003, Superior executed a Commercial Loan and Security Agreement ("LOC") with Stanford Financial Group Company, an affiliate of a principal stockholder, Stanford Venture Capital Holdings, Inc., to provide the Company with a $7.5 million line of credit for purposes of financing inventory, auction advances and inventory loans to other rare coin dealers and collectors. The LOC bear interest at the prime-lending rate (4.00% at June 30, 2004) and is secured by substantially all of Superior's assets. The LOC expires on October 1, 2004. As of June 30, 2004 the outstanding LOC balance was $6,600,000. This balance reflects the net borrowing against the LOC for the year ended June 30, 2004. During the year ended June 30, 2004, Superior incurred interest expense on the line of credit - related party totaling $104,206. F-23 SUPERIOR GALLERIES, INC. NOTES TO FINANCIAL STATEMENTS 7. LINES-OF-CREDIT On July 9, 2002 and July 26, 2002 the Company entered into temporary working capital loan agreements with a private Lender ("Lender") in the amounts of $1,500,000 and $1,000,000 respectively. These loans bore interest at the prime lending rate plus 7% per annum (11% at June 30, 2003), were secured by the inventory of the Company and a personal guarantee of the Company's chief executive officer and a principal stockholder, and, were due to be repaid in 60 days. On August 8, 2002 the Company converted the two loans from the Lender into a Line of Credit with the Lender by executing a Secured Revolving Line of Credit Agreement ("Line of Credit"). The Line of Credit bore interest at the prime lending rate plus 7% per annum, was due on September 9, 2002, was secured by substantially all the assets of the Company and a personal guarantee of the Company's CEO. The Line of Credit provided for interest payments to made in cash, inventory or restricted common shares of the Company at the sole discretion of the Lender. On September 16, 2002 the Line of Credit was amended to extend the due date to October 15, 2002. In November 2002 the Lender became deceased and the aforementioned Line of Credit became an asset of the Estate of the Lender ("Lender Estate"). On September 30, 2003 the Company and the executor of the Lender Estate executed a Renewal and Modification Agreement that amended the Line of Credit. In exchange for a payment of $230,000 representing interest in arrears through September 30, 2003, the Lender Estate agreed to reduce the interest rate to 6% effective October 1, 2003, release its first priority lien position on all accounts receivable of the Company and to consider the default cured at that time. The amendment also required monthly interest payments beginning on November 1, 2003. The executor of the Lender Estate orally agreed to discuss repayment terms at a future date, but the Line of Credit is callable with five days notice and there is no guarantee that the Line of Credit will not be called for repayment at any time. There can be no assurance that the Company will be able to negotiate a repayment schedule for this obligation on terms acceptable to the Company. The Company is current with monthly interest payments, but has not made principal repayments during the years ended June 30, 2004 and 2003. As of June 30, 2004 the outstanding balance was $2,500,000. On February 21, 2003, the Company entered into an oral auction line of credit agreement ("Auction LOC") with a private lender whereby the lender would advance funds to Superior for the sole purpose of providing auction advances to its consignment customers. The maximum limit of the Auction LOC was $2,000,000 and it bore interest at rate of 10% per annum with interest payable monthly. The Auction LOC was secured by the collateralization of inventory consigned by Superior's auction advance customers and the assignment of the auction advance agreements to the private lender. The lender could have terminated this arrangement and demanded payment at any time. In September 2003, the private lender agreed to temporarily increase the Auction LOC maximum limit to $2,800,000. On October 28, 2003, the Auction LOC was repaid in full and the lender and the Company mutually agreed to terminate the agreement. F-24 SUPERIOR GALLERIES, INC. NOTES TO FINANCIAL STATEMENTS 8. NOTES PAYABLE Notes payable consist of the following: June 30, 2004 June 30, 2003 ------------- ------------- Note payable for acquisition of assets of SGBH, secured by assets acquired, and guaranteed by the Company and principal stockholder and chief executive officer. The loan provided for periodic payments through January 2002, however, payments were suspended by the Company. The Company renegotiated payment terms by increasing the note balance by $49,110 to cover unpaid interest, establishing a new rate of 4.5% over prime lending rate, to be paid in biweekly installments over one year. In November 2002 , the Company and creditor renegotiated the payment terms. The Company made a lump-sum payment of $179,350 and renegotiated the terms of payment for the balance due with the creditor. The Company made ten principal and interest installments of $19,133 each that began on December 1, 2002 with interest at the rate of 12% per annum. The note payable was repaid in full on September 1, 2003. -- $ 56,832 Long-term loan agreement dated October 17, 2000, secured by a delivery van, payable in 60 monthly installments of principal and interest at an annual interest rate of 5.9%. The loan was repaid in full on December 16, 2003. -- 7,008 -------------- ------------- -- 63,840 Less current portion -- (56,832) -------------- ------------- $ -- $ 7,008 ============== ============= F-25
SUPERIOR GALLERIES, INC. NOTES TO FINANCIAL STATEMENTS 9. NOTES PAYABLE TO A RELATED PARTY Notes payable to a related party consist of the following: June 30, 2004 June 30, 2003 ------------- ------------- Subordinated note payable to Company's chief executive officer and principal stockholder "CEO", secured by inventory, bearing interest at 9% per annum. In April 2002 the note was renegotiated to include quarterly installment payments of $150,000 plus accrued interest. No principal payments had been made. In February 2003, pursuant to the sale of Series D preferred stock (Note 10), the note was amended to include quarterly payments of principal of $50,000 commencing September 30, 2003. The current portion of the Notes Payable to a Related Party reflect the current portion of the subordinated note payable. During the year ending June 30, 2004, $100,000 of principal payments were made. The CEO has verbally agreed to delay two principal payments of $50,000 each that were due on March 31, 2004 and June 30, 2004 to September 30, 2004 $ 900,000 $ 1,000,000 Demand note payable to Company's chief executive officer and principal stockholder that bore interest at 12% per annum. On October 23, 2003, the Company repaid the loan as part of the sale of its art inventory to the CEO (see Note 13) - 289,970 Demand note payable to Company's chief executive officer and principal stockholder that bore interest at 12% per annum. On October 23, 2003, the Company repaid $60,030 of the loan principal as part of the sale of its art inventory to the CEO (see Note 13). On February 4, 2004, the remaining balance was repaid - 70,000 ------------- ------------- 900,000 1,359,970 Less current portion (300,000) (559,970) ------------- ------------- $ 600,000 $ 800,000 ============= ============= F-26
SUPERIOR GALLERIES, INC. NOTES TO FINANCIAL STATEMENTS 9. NOTES PAYABLE TO A RELATED PARTY (CONTINUED) Interest expense incurred to related parties during the year ended June 30, 2004 and 2003 totaled $101,392 and $121,855 respectively. Future minimum payments under notes payable to a related party are as follows: Year Ending June 30 Amount ------- -------- 2005 $300,000 2006 $200,000 2007 $200,000 2008 $200,000 --------- $900,000 ========= 10. INCOME TAXES The provision for income taxes consists of the following components: Year Ended Year Ended June 30, 2004 June 30, 2003 --------------- --------------- Current: Federal $ -- $ -- State 12,456 13,396 --------------- --------------- 12,456 13,396 --------------- --------------- Deferred: Federal -- -- State -- -- --------------- --------------- -- -- --------------- --------------- $ 12,456 $ 13,396 =============== =============== F-27 SUPERIOR GALLERIES, INC. NOTES TO FINANCIAL STATEMENTS 10. INCOME TAXES (CONTINUED) Deferred income taxes reflect the net tax effect of temporary differences between the carrying amount of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. The income tax effects of significant items comprising the Company's net deferred income tax assets and liabilities are as follows: June 30, 2004 June 30, 2003 ------------- ------------- Deferred tax assets: Unearned income $ 7,465 $ 6,941 Net operating loss carryforwards 3,746,449 3,040,308 Inventory reserve -- 264,954 Goodwill 202,726 204,211 Intangible asset 8,389 7,800 Accrued vacation pay 29,171 22,096 Allowance for doubtful accounts 110,959 189,762 Contributions 1,187 1,104 Options and warrants not exercised 54,489 41,865 Depreciation 11,553 36,063 Other 7,772 308,538 ------------ ------------ Gross deferred tax assets 4,180,160 4,123,592 Valuation allowance (3,987,921) (4,011,206) ------------ ------------ Deferred tax assets, net of reserve 192,239 112,386 Deferred tax liabilities: Depreciation (192,239) (112,386) ------------ ------------ Net deferred tax liabilities $ -- $ -- ============ ============ At June 30, 2004 and 2003, a 100% valuation allowance has been provided on the net deferred income tax assets since the Company cannot determine that it is "more likely than not" they will be realized. The income tax benefit differs from the amount of income tax determined by applying the expected U.S. Federal income tax rate to pretax loss for the fiscal periods as a result of: Year Ended Year Ended June 30, 2004 June 30, 2003 ------------- ------------- Computed tax benefit $ 192,005 $(1,182,386) Decrease (increase) in income tax benefit resulting from: Nondeductible expenses 12,348 4,152 State income tax expense 46,250 2,112 Change in valuation allowance (238,147) 1,173,586 Other -- 15,932 ------------ ------------ $ 12,456 $ 13,396 ============ ============ F-28 SUPERIOR GALLERIES, INC. NOTES TO FINANCIAL STATEMENTS 10. INCOME TAXES (CONTINUED) At June 30, 2004, the Company has a Federal tax net operating loss ("NOL") carryforward of approximately $9,620,000, which expires at various dates though 2023, and a state net operating loss carryforward of approximately $5,370,000, which expires at various dates through 2012. A portion of the NOLs described above are subject to provisions of the Internal Revenue Code ss.382 which limits the use of NOL carryforwards when changes of ownership of more than 50% occur during a three-year testing period. During the year ended June 30, 2003, the cumulative effects of Stanford's investment in the Company through the Sale of Series B and Series D preferred stock on April 3, 2002 and February 14, 2003, respectively, the Company ownership changed by more than 50%. The issues of common and preferred stock during the years-ended June 30, 2002 and 2003 will limit the use of these NOLs. Further changes in common or preferred stock ownership in future years potentially limit the use of NOLs. The effect of such limitations has yet to be determined. In addition, NOL carryforwards for the purposes of offsetting California state taxable income have been suspended for the tax years beginning in 2002 and 2003. F-29 SUPERIOR GALLERIES, INC. NOTES TO FINANCIAL STATEMENTS 11. EQUITY AUTHORIZED CAPITAL CHANGES On June 30, 2003, the Company's stockholders at the Annual Meeting of the Shareholders approved both an amendment to the Company's articles of incorporation to effect a one-for-twenty reverse split of the Company's common shares and the Company's re-incorporation into the State of Delaware with authorized common stock of 12,500,000 and preferred stock of 10,000,000. The Series A, B and D preferred shares retained the same rights and privileges as previously granted. All common share amounts presented have been retroactively adjusted to reflect a one-for-twenty reverse stock split. COMMON STOCK TRANSACTIONS On December 26, 2002, the Company purchased 3,222 of its own common stock for $644. The common stock was held as treasury shares until they were cancelled on March 26, 2003. On July 24, 2003, the Company issued 1,845,100 common shares pursuant to the exercise of 1,845,100 warrants to purchase the Company's common stock with an exercise price of $0.001 per common share (see additional discussion of warrants in Sale of Series D Convertible Preferred Stock below). SALE AND REDEMPTION OF SERIES A CONVERTIBLE PREFERRED STOCK On July 3, 2001, the Board of Directors of the Company authorized 15,000,000 shares of $.001 par value preferred stock and simultaneously, the Company commenced a private placement of Series A $5.00 Redeemable 8% Convertible Preferred Stock ("Series A Preferred Stock"). The Series A Preferred Stock carried an annual dividend of $0.40 per share payable quarterly in cash or common stock of the Company at the Company's election, was convertible into 11 shares of the Company's common stock and provided for cash redemption or conversion into common stock of the Company based on elections by the holder or by the Company with certain contingencies. In addition, the Series A Preferred Stockholders had lien rights on the Company's inventory. The Company was prevented for allowing any liens on inventory, unless subordinated to the interests of the Series A Preferred Stockholders. The interest was 150% of the aggregate value of the outstanding Series A Preferred Stock, or $937,500 at June 30, 2003. The offering closed on October 31, 2001 with sales of 125,000 shares of preferred stock with aggregate proceeds from the offering of $625,000. The Series A Preferred Stock was redeemable after March 31, 2004 for cash, at the option of the holder, in the amount of $5.50 per share, with such aggregate amount for each holder payable in ten (10) equal quarterly installments, the first such payment due the quarter immediately following the redemption date. Since the option to redeem into cash was at the option of the holder, the Company had classified this security on the balance sheet outside of stockholders' equity. The Series A Preferred Stock would have automatically converted into shares of the Company's common stock upon sale of all the Company's assets, any merger or consolidation where the Company was not to survive, or any sale or exchange of all outstanding shares on the company's common stock. Prior to the reincorporation and merger of the Company into a Delaware corporation on June 30, 2003, the Series A Preferred Stock's certificate of designation was amended, as approved by a majority of the Series A Preferred F-30 SUPERIOR GALLERIES, INC. NOTES TO FINANCIAL STATEMENTS 11. EQUITY (CONTINUED) SALE AND REDEMPTION OF SERIES A CONVERTIBLE PREFERRED STOCK (CONTINUED) Stockholders, so that the Series A Preferred Stock would not automatically convert into shares of the Company's common stock as a result of the reincorporation and merger. The Company had the option to redeem the Series A Preferred Stock for cash in the amount of $5.10 per share, or for shares of the Company's common stock in accordance with the conversion rate, in the event the closing quoted market price of the Company's common stock is greater than or equal to $18.00 for any consecutive five day period. Since the redemption amount of the Series A Preferred Stock exceeded the net proceeds of the offering, the carrying value of the issuance was being increased through accretion up to the future redemption value at the redemption date, March 31, 2004. The offering required that the Company file a registration statement of the common stock of the Company issuable upon the conversion of the Series A Preferred Stock sixty days following the closing of the offering, or March 31, 2002. Because the Company was engaged in negotiations for a private placement of a Series B preferred stock that would also require a registration statement, the Company did not timely file the registration statement pursuant to the offering of the Series A Preferred Stock, but rather planned on combining the two registration statements. As of June 30, 2003 no registration statement had been filed. As a result, the Company was obligated to issue warrants to purchase an aggregate of 6,250 shares of common stock of the Company to the holders of the Series A Preferred Stock with an exercise price equal to the average of the closing price of the common stock for the five days preceding the date the registration statement should have been filed with an exercise period of three years. On March 31, 2004, in accordance with the redemption provisions of the Series A Preferred Stock, all the holders of the Series A Preferred Stock requested the redemption of their shares. However, because the Company's liabilities did and currently exceed its assets, the Company is prohibited under Delaware corporation law from commencing the redemption. The Company has informed the stockholders of the redemption provision. The Company intends to begin the redemption once it is legally allowed to do so. The company has reflected the Series A Preferred Stock redemption payable as a liability on its Balance Sheet. As of June 30, 2004, the balance payable with respect to the Series A Preferred Stock redemption is $687,500. Of this amount, $343,750 is reflect as a current liability. The Company will continue to make quarterly dividend payments as long as the Series A Preferred Stock redemption payable remains outstanding. Future minimum payments under the Series A Preferred Stock redemption payable are as follows: Year Ending June 30 Amount ------- --------- 2005 $343,750 2006 $343,750 --------- $687,500 ========= F-31 SUPERIOR GALLERIES, INC. NOTES TO FINANCIAL STATEMENTS 11. EQUITY (CONTINUED) SALE OF SERIES D CONVERTIBLE PREFERRED STOCK On February 14, 2003, the Company issued 2,000,000 shares of newly created Series D $1.00 convertible preferred stock ("Series D stock") for a purchase price of $2,000,000 pursuant to a stock purchase and warrant agreement ("purchase agreement") with Stanford. On that date $1,500,000 of the purchase price was paid with $500,000 in cash and the conversion of $1,000,000 in bridge loans that Stanford granted to the Company in anticipation of the closing of the purchase agreement. The balance of the purchase price less interest due on the converted bridge loans and legal fees was paid on March 14, 2003. The Series D stock is convertible into common shares of the company at any time at the option of Stanford at the conversion rate 0.833333 common shares for each Series D share subject to certain anti-dilution adjustments. The Series D stockholders are entitled to vote on all matters requiring a vote of the shareholders and are entitled to the number of votes equal to the number of common shares into which the Series D stock is convertible. The purchase agreement also provided for the reduction to $0.001 per common share of the purchase price of 1,500,000 warrants that were issued to Stanford and their designated warrant holders as part of the Series B stock sale in April 2002. In connection with warrant price reduction the Company recorded a dividend of $300,000 on the Series B stock as its estimate of the fair value of the transaction. The reduced warrant price contemplated the reverse stock split that was provided for in the purchase agreement and that was subsequently approved by the Company's stockholders on June 30, 2003. The warrants were exercised on July 24, 2003. Concurrently with the closing of the purchase agreement, the Company, Stanford and the CEO enter into a share exchange and note modification agreement ("modification agreement"). Under the modification agreement the CEO exchanged 7,000 Series C shares of the Company for 583,333 common shares of the Company. The modification agreement provided for a reduction to $0.001 per common share of the exercise price of 345,100 warrants that were previously issued to the CEO. The previously issued warrants consist of 200,000 warrants issued in connection with the Series B stock in April 2002 and 145,100 warrants issued in connection with personal loan guarantees by the CEO for the Company's debt. In connection with the warrant price reductions the Company recorded a dividend of 40,000 on the Series B stock and interest expense of $29,020 as its estimates of the fair value of the transactions. The reduced warrant price contemplated reverse stock split that was provided for in the purchase agreement and that was subsequently approved by the Company's stockholders on June 30, 2003. The warrants were exercised on July 24, 2003. Additionally, the CEO agreed to amend his $1,000,000 promissory note due from the Company, to provide for quarterly principal payments of $50,000 that were to commence on September 30, 2003 (Note 9). The shareholders of preferred stock issued by the Company have a liquidation preference over the common shareholders. The Series A Preferred shareholders have primary preferential liquidation rights at $5.10 per share, followed by the Series B and Series D Preferred shareholders at $1.00 per share each. F-32 SUPERIOR GALLERIES, INC. NOTES TO FINANCIAL STATEMENTS 11. EQUITY (CONTINUED) SERIES B CONVERTIBLE PREFERRED STOCK The Company currently has 3,400,000 shares of Series B $1.00 Convertible Preferred Stock, or Series B Preferred Stock, outstanding. The Series B Preferred Stock has voting rights with respect to all matters presented to our stockholders, and is entitled to the number of votes equal to the number of shares of Common Stock into which it is convertible. The Series B Preferred Stock is not entitled to dividends or preemptive rights. Each share of Series B Preferred Stock is convertible into 0.5 shares of Common Stock at the election of the holder subject to certain adjustments, and is adjustable upon our issuance of Common Stock or securities convertible into Common Stock at a price less than $1.00 per share. STOCK OPTIONS During the year ended June 30, 2004, the Company granted to certain employees and non-employees, 410,000 stock options to purchase common stock at an average exercise price of $0.77. The range of exercise prices of options issued during the year was $0.24 to $1.01. Certain stock options vest immediately and others vest over time. All are exercisable over period of up to four years and expire at earlier of five years after the vesting date of each option or one month after the termination of employment or service agreement with the Company. The stock options were granted at strike prices, which were set at closing price of the Company's stock as listed on the NASDAQ Over-the-counter Bulletin Board and Pink Sheets as of the date of grant. During the year ended June 30, 2004, the Company cancelled 97,750 that expired or had not vested at the time of employees and non-employees discontinued service with the Company. The stock option grants during the year ended June 30, 2004 include 50,000 stock options to Board of Director members. No options were granted during the year ended June 30, 2003. The following table summarizes information about stock option transactions for the years shown: Year Ended Year Ended June 30, 2004 June 30, 2003 -------------------- -------------------- Weighted Weighted Average Average Option Exercise Option Exercise Shares Price Shares Price -------- --------- -------- --------- Outstanding at beginning of period 113,750 $ 6.05 119,750 $ 14.20 Options granted 410,000 0.77 -- -- Options canceled (97,750) 3.74 (6,000) 25.45 Options exercised -- -- -- -- Outstanding at end of period 426,000 $ 1.50 113,750 $ 6.05 Exercisable at end of period 121,250 $ 2.96 95,667 $ 6.76 The weighted average remaining contractual life of the options outstanding at June 30, 2004, is 7.6 years. F-33
SUPERIOR GALLERIES, INC. NOTES TO FINANCIAL STATEMENTS 11. EQUITY (CONTINUED) As of June 30, 2004 and 2003, the Company had reserved shares of common stock for the following purposes: June 30, June 30, 2004 2003 ---------- ---------- Options 426,000 113,750 Warrants 189,063 2,122,042 Series A Convertible Preferred Stock -- 68,750 Series B Convertible Preferred Stock 1,700,000 1,700,000 Series D Convertible Preferred Stock 1,666,667 1,666,667 ---------- ---------- Total 3,981,730 5,671,209 ========== ========== F-34 SUPERIOR GALLERIES, INC. NOTES TO FINANCIAL STATEMENTS 12. COMMITMENTS AND CONTINGENCIES LEASES The Company leases office space in Beverly Hills and Newport Beach, California under operating lease agreements expiring in September 2007 and September 2004, respectively. Future minimum rental payments required under the above leases as of June 30, 2004 are as follows: YEARS ENDING JUNE 30 2005 $ 261,135 2006 224,376 2007 224,376 2008 56,094 --------------- $ 765,981 ================ Rent expense for all leases for the years ended June 30, 2004 and 2003 was $385,966 and $387,750 respectively. 2003 OMNIBUS STOCK OPTION PLAN On May 1, 2003, the Company's Board of Directors approved, subject to shareholder approval which was obtained on June 30, 2003, a stock option plan to attract and retain competent personnel and to provide to participating officers, directors, employees and consultants long-term incentive for high levels of performance and for unusual efforts to improve the financial performance of the Company. The Plan provides for both incentive stock options specifically tailored to the provisions of the Internal Revenue Code and for options not qualifying as incentive stock options. Employees and consultants of the Company, including officers and directors, are eligible to receive options granted under the Plan. The shares subject to the options will generally be made available from authorized, but unissued shares. The Board of Directors ("Board") will administer the Plan. The Board has full authority to award options under the Plan, to establish the terms of the option agreements, and to take all other action deemed appropriate for administration of the Plan. This Plan replaced the 2000 Omnibus Stock Option Plan. 2000 OMNIBUS STOCK OPTION PLAN On August 1, 2000, the Company's Board of Directors approved, subject to shareholder approval which was obtained, a stock option plan to attract and retain competent personnel and to provide to participating officers, directors, employees and consultants long-term incentive for high levels of performance and for unusual efforts to improve the financial performance of the Company. The Plan provides for both incentive stock options specifically tailored to the provisions of the Internal Revenue Code and for options not qualifying as incentive stock options. Employees and consultants of the Company, including officers and directors, are eligible to receive options granted under the Plan. The shares subject to the options will generally be made available from authorized, but unissued shares. The Board of Directors ("Board") will administer the Plan. The Board has full authority to award options under the Plan, to establish the terms of the option agreements, and to take all other action deemed appropriate for administration of the Plan. This Plan was terminated on May 1, 2003 and was replaced by the 2003 Omnibus Stock Option Plan. F-35 SUPERIOR GALLERIES, INC. NOTES TO FINANCIAL STATEMENTS 12. COMMITMENTS AND CONTINGENCIES (CONTINUED) GUARANTEED LIQUIDITY AND BUY BACK The Company provides a Guaranteed Liquidity and Buy Back at Grade warranty (the "Guarantee") to its retail rare coin customers. Retail rare coin sales amounted to $7,344,986 and $8,263,941 for years ended June 30, 2004 and 2003 respectively. The policy grants the customer the opportunity to sell their coins back to the Company at the prevailing market "bid" (below the current wholesale price). The Company determines the "bid" price based on the prevailing market price at which the Company believes it could readily liquidate the coin. The "bid" price may be substantially below what the customer originally paid for the coin. The values of the rare coins sold to retail customers continually fluctuate. Furthermore, retail customers continually resell or trade coins purchased from the Company with third parties. Once retail customers resell the rare coins to third parties, the Guarantee is void. Lastly, the Company has had minimal historical experience with customers exercising the Guarantee. As a result, it is not possible for the Company to determine the potential repurchase obligation pursuant to the Guarantee that it may be subject to as a result of previous sales of retail rare coins. PROFIT SHARING PLANS The Company had a 401(k) profit sharing plan covering all employees who have met certain service requirements. Through December 31, 2002, employees were allowed to make contributions to the plan of up to 15% of their salary. The Company was required to make nondiscretionary matching contributions of 3% of eligible employees' salaries. Effective January 1, 2003 no further contributions by employees were permitted as all of the Company's employees became co-employees of Administaff, a professional employer organization. The Company terminated the plan effective January 1, 2004. The Company had failed to make timely nondiscretionary matching contributions, caught up prior to the plan termination, but may be subject to penalties. The amount of the potential penalties, if any, is indeterminable at this time. LEGAL PROCEEDINGS The Company may from time to time be involved in various claims, lawsuits, disputes with third parties, actions involving allegations of discrimination, or breach of contract actions incidental to the operation of its business. The Company is not currently involved in any such litigation which it believes could have a material adverse effect on its financial condition or results of operations. STATE SALES AND USE TAXES The Company does not collect sales and use taxes for interstate sales. Management believes that the Company's sales to interstate customers are generally tax-exempt due to varying state exemptions relative to the definitions of being engaged in business in particular states and the lack of current Internet taxation. While the Company has not been contacted by any state authorities seeking to enforce sales or use tax regulations, there is no assurance that the Company will not be contacted by authorities in the future with inquiries relative to compliance with current statutes, nor is there any assurance that future statutes will not be enacted that affect the sales and use aspects of the Company's business. F-36 SUPERIOR GALLERIES, INC. NOTES TO FINANCIAL STATEMENTS 13. RELATED PARTY TRANSACTIONS On January 31, 2003, the Company entered into a consulting agreement with Stanford Venture Capital Holdings, Inc., a principal stockholder to provide financial and advisory services for a three year period commencing on April 1, 2003. The annual fee for such services is $60,000 and is payable on a quarterly basis. On October 23, 2003, the Company's Board of Directors approved the sale of Superior's remaining fine art inventory to the Company's chief operating officer and a principal stockholder ("CEO"), who is also an independent dealer of fine art, for $350,000. The Company solicited bids from third parties and the bid from the CEO was the highest. The Company realized a gross profit of $15,860 on sale of the art inventory to the CEO. The sale was paid in full by reductions of notes payable to the CEO (see Note 8). On May 28, 2004, the Company's Board of Directors approved a short-term sub-lease of a portion of Superior's vacant Newport Beach facility to the CEO. The lease term is from June 1, 2004 through September 30, 2004 and provides for a monthly rental payment of $4,000. The sub-lease terminates concurrently with the Company's master lease of the Newport facility. See also notes 2, 6, 7, 8, 9 and 11 for discussion of additional transactions with related parties. 14. GOING CONCERN The accompanying financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America, which contemplate continuation of the Company as a going concern. However, although the Company has returned to profitability in the last six month of the year ended June 30, 2004, the Company continues to have negative cash flows from operations, significant debt that is callable on demand by the creditor, and has limited working capital. These items raise doubt about the Company's ability to continue as a going concern. The Company has made and is continuing to make efforts to raise additional permanent debt and equity and renegotiate debt. On February 14, 2003, the Company completed an additional equity capital financing of $2 million with Stanford and the Company's chief executive officer converted 7,000 shares of the Company's $100 Series C Preferred Stock into $700,000 of the Company's common stock (see Note 11). On September 30, 2003, the Company renegotiated a $2.5 million dollar line of credit (Note 7) that was in default and callable by the creditor. The default was cured, but the line of credit is callable with 5 days notice. Although management does not anticipate the creditor calling the loan, there can be no assurance that this obligation will not become immediately due. Given the current cash position of the Company, it would be unable to satisfy this obligation in cash. The Company continues to seek opportunities to refinance the line of credit with Stanford and is having on-going discussions with the lender to grant extended payments terms. However there can be no assurance that this obligation will be able to be refinanced on terms acceptable to the Company. F-37 SUPERIOR GALLERIES, INC. NOTES TO FINANCIAL STATEMENTS 14. GOING CONCERN (CONTINUED) In October 2003, the Company completed negotiations with Stanford to provide a line of credit of $7.5 million (see Note 6) for auction advances, inventory financing, and, inventory loans to other dealers and collectors. The Company is intending to request an expansion of the line of credit over the current limit of $7.5 million when the line of credit comes up for renewal on October 1, 2004. Although there can be no assurance that the Stanford line of credit will be renewed and expanded on terms acceptable to the Company, management believes that the line of credit will be sufficient to continue to fund the Company's operations. F-38 PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS Section 145 of the Delaware General Corporation Law permits a corporation to indemnify its directors and officers against expenses, judgments, fines and amounts paid in settlement actually and reasonably incurred in connection with a pending or completed action, suit or proceeding if the officer or director acted in good faith and in a manner the officer or director reasonably believed to be in the best interests of the corporation. The registrant's amended and restated certificate of incorporation provides that, except in certain specified instances, a director of the registrant shall not be personally liable to the registrant or its stockholders for monetary damages for breach of fiduciary duty as a director. Those provisions require the registrant to indemnify the executives in connection with third party actions and in connection with proceedings by or in the right of the registrant, and to advance expenses prior to the final disposition of an action or proceeding, to the fullest extent permitted by Section 145 of the DGCL. Those provisions also prohibit the registrant from bringing an action against the executives after the expiration of two years from the date the executives cease to serve in the capacities covered by the employment agreements. The registrant and certain of the selling security holders in the offering covered by this registration statement each have agreed to indemnify the other and their respective officers, directors and other controlling persons against certain liabilities in connection with this registration statement, including liabilities under the Securities Act, and to contribute to payments such persons may be required to make in respect thereof. To the extent that indemnification for liabilities arising under the Securities Act may be permitted to directors, officers or persons controlling the registrant under the provisions described above, the registrant has been informed that in the opinion of the Commission, indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. II-1 ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION The following table sets forth the estimated expenses in connection with the offering described in this Registration Statement: SEC Registration $ 743 NASD Fees -- Accounting Fees and Expenses 20,000 Legal Fees and Expenses 30,000 Blue Sky Fees and Expenses 10,000 Placement Agent Fees and Expenses -- Printing Costs 2,000 Miscellaneous Expenses 1,000 --------- TOTAL $ 63,743 ========= All of the above estimated expenses have been or will be paid by the Registrant. ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES. All of the share amounts and prices described below have been adjusted to give effect to the 1-for-20 reverse stock split that we performed in June 2003. There were no underwriters for any of the transactions described below. 1. On November 27, 2001, we issued options to purchase 10,000 shares of our common stock to an employee. The options have an exercise price of $2.00 per share and expire November 26, 2011. On that same date, we issued options to purchase 2,500 shares of our common stock to each of our 6 directors. These options had an exercise price of $1.00 per share and expire November 26, 2006. This issuance was made without general solicitation, was made to sophisticated purchasers, and was exempt from registration under Section 4(2) of the Securities Act. 2. On November 27, 2001, in connection with the extension of the maturity date of a financing agreement between us and NRLP, a lender controlled by Carl Fusco, one of our former directors, we agreed to issue to NRLP 24,000 shares of our common stock and a warrant to purchase 50,000 shares of our common stock. We valued the stock at $24,000. The exercise price of the warrant is $1.00 per share and it expires on November 26, 2006. The common stock and the warrants were issued to a sophisticated purchaser in a transaction not involving any general solicitation, and which was exempt from the registration requirements of the Securities Act pursuant to Section 4(2) of that Act. 3. On November 27, 2001, in connection with the agreement to issue his personal guaranty for certain obligations of the company, we agreed to issue to Silvano DiGenova, our chief executive officer, a warrant to purchase 20,000 shares of our common stock. The exercise price of the warrant is $1.00 per share and it expires on November 26, 2006. The common stock was issued to a sophisticated purchaser in a transaction not involving any general solicitation, and which was exempt from the registration requirements of the Securities Act pursuant to Section 4(2) of that Act. II-2 4. On June 25, 2001, we entered into an advisory agreement with Robert Escobio, who at that time was a director of our company. Under the terms of that agreement, Mr. Escobio was to provide us with advice regarding financial planning and corporate capital structure. In consideration for rendering such services, we agreed to pay Mr. Escobio certain fees and granted him a warrant to purchase 5,000 shares of our common stock at an exercise price of $6.80 per share. The warrant expired on June 25, 2002. On November 27, 2001, we issued 66,667 shares of our common stock to Mr. Escobio in full satisfaction of our future obligations under this agreement and the agreement was terminated. We valued the shares at $66,667. The common stock was issued to a sophisticated purchaser in a transaction not involving any general solicitation, and which was exempt from the registration requirements of the Securities Act pursuant to Section 4(2) of that Act. 5. On December 31, 2001, we issued a stock dividend of 2,750 shares of common stock to the holders of our Series A Preferred Stock. These shares were issued without the receipt of consideration by us, and therefore did not involve a "sale" under the Securities Act of 1933. There were a total of 12 holders of the Series A Preferred Stock. 6. On January 1, 2002 we issued 6,250 warrants to purchase common stock to the 12 holders of our Series A Preferred Stock. These warrants were issued in settlement of the stockholders' claims as a result of our failure to file a registration statement on their behalf. The warrants have an exercise price of $1.00 per share, and expire January 1, 2005. This issuance was made without general solicitation, was made to sophisticated purchasers, and was exempt from registration under Section 4(2) of the Securities Act. 7. On January 1, 2002, we issued a warrant to purchase 300 shares of our common stock to a placement agent with an exercise price of $18.00 per share. This warrant expires on January 1, 2005. This issuance was made without general solicitation, was made to a sophisticated purchaser, and was exempt from registration under Section 4(2) of the Securities Act. 8. On February 22, 2002 we issued 16,250 shares of our common stock to 2 persons, in consideration of their agreement to assume certain obligations that had been incurred by us. We valued these shares at $16,250. This issuance was made without general solicitation, was made to sophisticated purchasers, and was exempt from registration under Section 4(2) of the Securities Act. 9. On April 10, 2002, we completed the sale to Stanford Venture Capital Holdings, Inc., or Stanford, of 3,000,000 shares of our Series B Convertible Preferred Stock and three warrants, each to purchase 500,000 shares of our common stock. Each share of the Series B Preferred Stock is convertible into shares of our common stock at the option of the holder at the conversion price of $2.00 per common share, subject to certain anti-dilution adjustments. Upon issuance, the Series B Preferred Stock was immediately convertible into shares of our common stock and the warrants were immediately exercisable for five years at the option of the holder with one-third of the shares underlying each warrant exercisable for $2.00 per share, one-third for $3.00 per share and one-third for $4.00 per share. The shares of Series B Preferred Stock and the warrants were issued to a sophisticated purchaser in a transaction not involving any general solicitation, and which was exempt from the registration requirements of the Securities Act pursuant to Section 4(2) of that Act. 10. Also on April 10, 2002, pursuant to a Stock Purchase Agreement, we sold 400,000 shares of our Series B Convertible Preferred Stock, issued a warrant to purchase 200,000 shares of our common stock and sold 7,000 shares of our newly created Series C Convertible Preferred Stock to Mr. DiGenova, our II-3 chief executive officer. Each share of the Series C Convertible Preferred Stock carries a 9% dividend payable quarterly and is convertible into shares of our common stock at the option of the holder at the conversion price of $0.22 per common share, subject to certain anti-dilution adjustments. In connection with the issuance of our Series B Preferred Stock, we issued a secured and subordinated note to Mr. DiGenova in the principal amount of $1,000,000 bearing interest at the annual rate of 9% with interest and a principal reduction payable quarterly of $150,000 until the principal is paid in full. In payment for the aggregate amount of $2,100,000 in new securities issued, Mr. DiGenova tendered two notes previously issued by us to Mr. DiGenova in the amounts of $1,400,000 and $700,000. The warrant is immediately exercisable for a period of five years with one-third of the shares underlying the warrant exercisable for $2.00 per share, one-third exercisable for $3.00 per share and one-third exercisable for $4.00 per share. These securities were issued to a sophisticated purchaser in a transaction not involving any general solicitation, and which was exempt from the registration requirements of the Securities Act pursuant to Section 4(2) of that Act. 11. On February 14, 2003, we issued 2,000,000 shares of newly created Series D $1.00 Convertible Preferred Stock for a purchase price of $2,000,000 pursuant to a stock purchase and warrant agreement with Stanford Venture Capital Holdings, Inc. ("Stanford"). The Series D Convertible Preferred Stock and the common shares issued upon exercise of those warrants were issued to sophisticated purchasers in a transaction not involving any general solicitation, and which was exempt from the registration requirements of the Securities Act pursuant to Section 4(2) of that Act. 12. On July 24, 2003, we issued 1,845,100 shares of our common stock to our principal stockholders, Silvano DiGenova and Stanford Venture Capital Holdings, Inc. ("Stanford"), and four Stanford employees pursuant to the exercise of warrants held by those persons. The total proceeds to the Company as a result of this transaction were $1,845, constituting the exercise price of these warrants. The common stock issued pursuant to the exercise of these warrants was exempt from registration under the Securities Act pursuant to Section 4(2) and Regulation D thereunder. Both the warrants and the underlying shares were issued to a small number of persons, without general advertising or solicitation. Each of the purchasers was a sophisticated investor with substantial experience in investing in small companies. 13. On August 6, 2003 we issued options to purchase our common stock to 6 persons, each of whom was an officer, director or consultant to the company. A total of 110,000 shares were covered by such options. The option term expires five years after the date of issuance. The option exercise prices range from $0.30 to 0.33 per share. The options were issued in a private transaction exempt from registration under Section 4(2) of the Securities Act of 1933, with persons who had a preexisting business relationship with us. No advertising or general solicitation was made in connection with these issuances. Of these options, 35,000 were subsequently cancelled. 14. On September 12, 2003 we issued options to purchase our common stock to 1 person who was a consultant to the company. A total of 25,000 shares were covered by such options. The options contain vesting provisions that provide that they will become exercisable over a period of from one to four years after the issuance date, and the option term expires five years after the vesting date. The option exercise price was $0.24 per share. The options were issued in a private transaction exempt from registration under Section 4(2) of the Securities Act of 1933, with a person who had a preexisting business relationship with us. No advertising or general solicitation was made in connection with this issuance. II-4 15. On April 26, 2004 we issued options to purchase our common stock to 12 persons, each of whom was an officer, employee or consultant to the company. A total of 275,000 shares were covered by such options. The options contain vesting provisions that provide that they will become exercisable over a period of from one to four years after the issuance date, and the option term expires five years after the vesting date. The option exercise price was $1.01 per share. The options were issued in a private transaction exempt from registration under Section 4(2) of the Securities Act of 1933, with persons who had a preexisting business relationship with us. No advertising or general solicitation was made in connection with these issuances. 16. On July 15, 2004 we issued options to purchase our common stock to 6 persons, each of whom was an officer or director of the company. A total of 150,000 shares were covered by such options. The options contain vesting provisions that provide that they will become exercisable over a period of from one to three years after the issuance date, and the option term expires five years after the vesting date. The option exercise price was $2.00 per share. The options were issued in a private transaction exempt from registration under Section 4(2) of the Securities Act of 1933, with persons who had a preexisting business relationship with us. No advertising or general solicitation was made in connection with these issuances. 17. On August 20, 2004 we issued 24,000 shares of our common stock to an investor relations firm in exchange for services with a value of $30,000. The shares were issued in a private transaction exempt from registration under Section 4(2) of the Securities Act of 1933, with persons who had a preexisting business relationship with us. No advertising or general solicitation was made in connection with these issuances. ITEM 27. EXHIBITS. (a) EXHIBITS. EXHIBIT NUMBER DESCRIPTION 2.1 Agreement and Plan of Merger dated June 30, 2003 by and between Tangible Asset Galleries, Inc. and Superior Galleries, Inc. (incorporated herein by this reference to Exhibit C to the definitive Proxy Statement of Tangible Asset Galleries, Inc. filed under the Exchange Act on June 5, 2003). 3.1 Certificate of Incorporation of Superior Galleries, Inc. (including Certificates of Designation of Superior Galleries, Inc., relating to Series A $5.00 Redeemable 8% Convertible Preferred Stock, Series B $1.00 Convertible Preferred Stock and Series D $1.00 Convertible Preferred Stock) (incorporated herein by this reference to Exhibit D to the definitive Proxy Statement of Tangible Asset Galleries, Inc. filed under the Exchange Act on June 5, 2003). 3.2 Bylaws of Superior Galleries, Inc. (incorporated herein by this reference to Exhibit E to the definitive Proxy Statement of Tangible Asset Galleries, Inc. filed under the Exchange Act on June 5, 2003). 4.1 2003 Omnibus Stock Option Plan (incorporated herein by this reference to Exhibit A to the definitive Proxy Statement of Tangible Asset Galleries, Inc., filed under the Exchange Act on June 5, 2003). 4.2 Form of Nonqualified Stock Option Agreement for 2003 Omnibus Stock Option Plan (incorporated herein by this reference to Exhibit 4.2 to the Annual Report on Form 10-KSB of Superior Galleries, Inc., filed under the Exchange Act, for the fiscal year ended June 30, 2003). II-5 EXHIBIT NUMBER DESCRIPTION 4.3 Form of Employee Incentive Stock Option Agreement for 2003 Omnibus Stock Option Plan (incorporated herein by this reference to Exhibit 4.3 to the Annual Report on Form 10-KSB of Superior Galleries, Inc., filed under the Exchange Act, for the fiscal year ended June 30, 2003). 4.4 Lockup Agreement dated April 3, 2002 by and among Stanford Venture Capital Holdings, Inc. and certain stockholders of Tangible Asset Galleries, Inc. (incorporated herein by this reference to Exhibit G included in Exhibit 10.1 to the Current Report on Form 8-K of Tangible Asset Galleries, Inc., filed under the Exchange Act on April 24, 2002). 4.5 Form of Warrant to Purchase Common Stock Issued to Series A Preferred Stock Investors (incorporated herein by this reference to Exhibit 4.14 of the Annual Report on Form 10-KSB of Tangible Asset Galleries, Inc., for the year ended June 30, 2002, filed under the Exchange Act on February 19, 2003). 4.6 Warrant to Purchase 1,500,000 Shares of Common Stock dated June 15, 2001 Issued to Silvano DiGenova (incorporated herein by this reference to Exhibit 4.9 of the Annual Report on Form 10-KSB of Tangible Asset Galleries, Inc., for the year ended June 30, 2002, filed under the Exchange Act on February 19, 2003). 4.7 Warrant to Purchase 1,000,000 Shares of Common Stock dated November 27, 2001 Issued to NRLP (incorporated herein by this reference to Exhibit 4.10 of the Annual Report on Form 10-KSB of Tangible Asset Galleries, Inc., for the year ended June 30, 2002, filed under the Exchange Act on February 19, 2003). 4.8 Warrant to Purchase 250,000 Shares of Common Stock dated June 26, 2001 Issued to NRLP (incorporated herein by this reference to Exhibit 4.11 of the Annual Report on Form 10-KSB of Tangible Asset Galleries, Inc., for the year ended June 30, 2002, filed under the Exchange Act on February 19, 2003). 4.9 Warrant to Purchase 250,000 Shares of Common Stock dated November 14, 2000 Issued to NRLP (incorporated herein by this reference to Exhibit 4.12 of the Annual Report on Form 10-KSB of Tangible Asset Galleries, Inc., for the year ended June 30, 2002, filed under the Exchange Act on February 19, 2003). 4.10 Warrant to Purchase 500,000 Shares of Common Stock dated July 3, 2001 Issued to KSH Investment Fund LLP (incorporated herein by this reference to Exhibit 4.13 of the Annual Report on Form 10-KSB of Tangible Asset Galleries, Inc., for the year ended June 30, 2002, filed under the Exchange Act on February 19, 2003). 5.1 Opinion of Rutan & Tucker, LLP re legality (filed herewith) 9.1 Shareholders' Agreement dated April 3, 2002 by and among Silvano DiGenova, Stanford Venture Capital Holdings, Inc. and Tangible Asset Galleries, Inc. (incorporated herein by this reference to exhibit E included in Exhibit 10.1 to the Current Report on Form 8-K of Tangible Asset Galleries, Inc., filed under the Exchange Act on April 24, 2002). 10.1 Lease dated September 20, 1999 by and between Tangible Asset Galleries, Inc. and LJR lido Partners LP (incorporated herein by this reference to Exhibit 10.6 to the Registration Statement on Form 10-SB/A of Tangible Asset Galleries, Inc. filed under the Exchange Act on November 24, 1999). 10.2 First Amendment to Lease Agreement dated August 2001 by and between LWB Lido Financial, LLC and Tangible Asset Galleries, Inc. (incorporated herein by this reference to Exhibit 10.13 to the Annual Report on Form 10-KSB of Tangible Asset Galleries, Inc. for the year ended June 30, 2002, filed under the Exchange Act on February 19, 2003). 10.3 Standard Multi-Tenant Office Lease-Gross dated August 6, 2002 by and between DBKK, LLC and Tangible Asset Galleries, Inc. (incorporated herein by this reference to Exhibit 10.14 to the Annual Report on Form 10-KSB of Tangible Asset Galleries, Inc. for the year ended June 30, 2002, filed under the Exchange Act on February 19, 2003). II-6 EXHIBIT NUMBER DESCRIPTION 10.4 Registration Rights Agreement dated April 3, 2002 by and among Tangible Asset Galleries, Inc. and holders of our Series B Preferred Stock, Series C Preferred Stock and Certain Warrants (incorporated herein by this reference to exhibit D included in Exhibit 10.1 to the Current Report on Form 8-K of Tangible Asset Galleries, Inc., filed under the Exchange Act on April 24, 2002). 10.5 Employment Agreement dated June 1, 2001 between Tangible Asset Galleries, Inc. and Silvano DiGenova. (incorporated herein by this reference to Exhibit 10.16 to the Annual Report on Form 10-KSB of Tangible Asset Galleries, Inc. for the year ended June 30, 2002, filed under the Exchange Act on February 19, 2003). 10.6 Employment Agreement dated December 27, 2002 between Tangible Asset Galleries, Inc. and Paul Biberkraut (incorporated herein by this reference to Exhibit 10.6 to the Annual Report on Form 10-KSB of Superior Galleries, Inc., filed under the Exchange Act, for the fiscal year ended June 30, 2003). 23.1 Consent of Haskell & White LLP 23.2 Consent of Singer Lewak Goldstein & Greenbaum LLP 23.3 Consent of Rutan & Tucker, LLP (included in Exhibit 5.1) - ----------------- ITEM 28. UNDERTAKINGS The undersigned Registrant hereby undertakes: (1) To file, during any period in which offers or sales are being made, a post-effective amendment to this Registration Statement to: (i) include any prospectus required by Section 10(a)(3) of the Securities Act of 1933 (the "Securities Act"); (ii) reflect in the prospectus any facts or events which, individually or together, represent a fundamental change in the information in the Registration Statement; and (iii) include any additional or changed material information on the plan of distribution. (2) That, for determining liability under the Securities Act, each such post-effective amendment shall be treated as a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. (3) To file a post-effective amendment to remove from registration any of the securities being registered that remain unsold at the end of the offering. Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of the Registrant pursuant to the foregoing provisions, or otherwise, the Registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. II-7 In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a director, officer or controlling person of the Registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue. II-8 SIGNATURES In accordance with the requirements of the Securities Act of 1933, the Registrant certifies that it has reasonable grounds to believe that it meets all of the requirements for filing on Form SB-2 and authorized this registration statement to be signed on its behalf by the undersigned, in the city of Beverly Hills, State of California, on September 24, 2004. SUPERIOR GALLERIES, INC. By: /S/ SILVANO DIGENOVA ------------------------------------- Silvano DiGenova President and Chief Executive Officer II-9 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that the undersigned officers and directors of Superior Galleries, Inc., a Delaware corporation, which is filing a registration statement on Form SB-2 with the Securities and Exchange Commission under the provisions of the Securities Act of 1933, as amended, hereby constitute and appoints Silvano DiGenova and Paul Biberkraut, and each of them, their true and lawful attorney-in-fact and agent; with full power of substitution and resubstitution, for him or her and in his or her name, place and stead, in any and all capacities, to sign such registration statement and any or all amendments to the registration statement, including a prospectus or an amended prospectus therein, and all other documents in connection therewith to be filed with the Securities and Exchange Commission, granting unto said attorney-in-fact and agent full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all interests and purposes as they might or could do in person, hereby ratifying and confirming all that said attorney-in-fact and agents, or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed by the following persons in the capacities and on the dates indicated. Name Title Date - ----------------------------- --------------------------------------- ------------------ /S/ SILVANO DIGENOVA President, Chairman of the Board, Chief September 24, 2004 - ----------------------------- Executive Officer (principal executive Silvano DiGenova officer) and Director /S/ PAUL BIBERKRAUT Chief Financial Officer, Secretary September 24, 2004 - ----------------------------- (principal accounting officer) and Paul Biberkraut Director /S/ LEE ITTNER Director September 24, 2004 - ----------------------------- Lee Ittner /S/ DAVID RECTOR Director September 24, 2004 - ----------------------------- David Rector II-10
INDEX TO EXHIBITS ATTACHED TO THIS REGISTRATION STATEMENT Exhibit Number Description ------ ----------- 5.1 Opinion of Rutan & Tucker, LLP 23.1 Consent of Haskell & White LLP, independent registered public accounting firm 23.2 Consent of Singer Lewak Goldstein & Greenbaum LLP, independent registered public accounting firm 23.3 Consent of Rutan & Tucker, LLP (contained in Exhibit 5) II-11 EX-5.1 2 superior_sb2ex5-1.txt EXHIBIT 5.1 (Rutan & Tucker, LLP Letterhead) September 23, 2004 Superior Galleries, Inc. 9478 West Olympic Boulevard Beverly Hills, California 90212 Re: Registration Statement on Form SB-2 Ladies and Gentlemen: We have acted as counsel to Superior Galleries, Inc., a Delaware corporation (the "Company"), in connection with the filing of a registration statement on Form SB-2 on or about the date hereof, to which this opinion is an exhibit (the "Registration Statement"). The Registration Statement contains a prospectus that covers the resale by the persons and entities named in the Registration Statement (the "Selling Security Holders") of an aggregate of 4,690,667 shares of the Company's common stock, $.001 par value per share ("Shares"), that are not presently covered by any other registration statement. The Shares include an aggregate of 1,524,000 shares of common stock that are issued and outstanding ("Issued Shares") and an aggregate of 3,166,667 shares of common stock that are or may become issuable upon conversion of convertible preferred stock (collectively, "Underlying Shares") as described in the Registration Statement. We are familiar with the corporate actions taken and proposed to be taken by the Company in connection with the authorization, issuance and sale of the Shares and have made such other legal and factual inquiries as we deem necessary for purposes of rendering this opinion. We have assumed the genuineness of all signatures, the authenticity of all documents submitted to us as originals, the conformity to original documents of all documents submitted to us as copies and the authenticity of the originals of such copied documents. We have also assumed that all of the Shares are and will be evidenced by appropriate certificates that have been properly executed and delivered. Based on the foregoing and in reliance thereon, and subject to the qualifications and limitations set forth below, we are of the opinion that: 1. The Issued Shares were validly issued and are fully paid and non-assessable. 2. The Underlying Shares have been duly authorized and reserved and, when issued upon conversion of the shares of preferred stock in accordance with the terms of the preferred stock, including surrender of the shares of preferred stock being converted, will be validly issued, fully paid and non-assessable. You have informed us that the Selling Security Holders may sell the Shares from time to time on a delayed or continuous basis. This opinion is limited to the General Corporation Law of the State of Delaware ("DGCL"), including the statutory provisions of the DGCL, all applicable provisions of the Constitution of the State of Delaware and all reported judicial decisions interpreting these laws, and federal law, exclusive of state securities and blue sky laws, rules and regulations. Superior Galleries, Inc. September 23, 2004 Page 2 We hereby consent to the use of our name under the caption "Legal Matters" in the prospectus forming a part of the Registration Statement and to the filing of this opinion as Exhibit 5.1 to the Registration Statement. In giving this consent, we do not admit that we are within the category of persons whose consent is required under Section 7 of the Securities Act of 1933, as amended, or the General Rules and Regulations of the Securities and Exchange Commission. Very truly yours, /s/ RUTAN & TUCKER, LLP EX-23.1 3 superior_sb2ex23-1.txt EXHIBIT 23.1 CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM We consent to the use in this Registration Statement of Superior Galleries, Inc. on Form SB-2 of our report dated September 5, 2003, appearing in the Prospectus, which is part of this Registration Statement. Our report dated September 5, 2003 contains an explanatory paragraph that states the Company has suffered recurring losses from operations, negative cash flows from operations, is in default on a significant debt obligation, and has limited working capital that raise substantial doubt about its ability to continue as a going concern. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty. We also consent to the reference to us under the headings "Selected Financial Data" and "Experts" in such Prospectus. /s/ HASKELL & WHITE LLP Irvine, California September 24, 2004 EX-23.2 4 superior_sb2ex23-2.txt EXHIBIT 23.2 CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM We consent to use in this Registration Statement of Superior Galleries, Inc. on Form SB-2 of our report, dated July 27, 2004, which includes an emphasis paragraph relating to an uncertainty as to the Company's ability to continue as a going concern, appearing in the Prospectus, which is part of this Registration Statement, and of our report dated July 27, 2004, relating to the financial statement schedules appearing elsewhere in this Registration Statement. We also consent to the reference to our firm under the caption "Experts" in such Prospectus. SINGER LEWAK GOLDSTEIN & GREENBAUM LLP Los Angeles, California September 24, 2004 -----END PRIVACY-ENHANCED MESSAGE-----