UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(Mark One)
[ X ] Quarterly report under Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the quarterly period ended March 31, 2000
[ ] Transition report under Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from _________ to _________
Commission File No. 0-27121
TANGIBLE ASSET GALLERIES, INC.
(Name of Small Business Issuer in Its Charter)
NEVADA 88-0396772
(State or Other Jurisdiction of (IRS Employer
Incorporation or Organization) Identification Number)
3444 VIA LIDO
NEWPORT BEACH, CALIFORNIA 92663
(Address of Principal Executive Offices) (Zip Code)
(949) 566-0021
(Issuer's Telephone Number)
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
(None)
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
Common Stock, par value $0.001
(Title of Class)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports); and (2)
has been subject to such filing requirements for the past 90 days.
Yes X No
----
Indicate the number of shares outstanding of each of the issuer's class of
common stock as of the latest practicable date:
Title of each class of Common Stock Outstanding as April 28, 2000
- ---------------------------------------- ---------------------------------
Common Stock, $0.001 par value 18,402,215
Transitional Small Business Disclosure Format (check one):
Yes No X
----
<PAGE>
TABLE OF CONTENTS
-----------------
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
Condensed Consolidated Balance Sheets at March 31, 2000 (Unaudited) and December
31, 1999.
Condensed Consolidated Statements of Operations (Unaudited) for the three months
ended March 31, 2000 and 1999.
Condensed Consolidated Statements of Cash Flows (Unaudited) for the three months
ended March 31, 2000 and 1999.
Notes to Interim Consolidated Financial Statements (Unaudited) at March 31,
2000.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
Item 2. Changes in Securities.
Item 3. Defaults Upon Senior Securities.
Item 4. Submission of Matters to a Vote of Security Holders.
Item 5. Other Information.
Item 6. Exhibits and Reports on Form 8-K.
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
<S> <C> <C>
March 31, 2000 December 31, 1999
ASSETS (Unaudited)
---------------- -----------------
CURRENT ASSETS
Cash $ 82,823 $ 81,882
Accounts receivable 998,221 1,057,403
Inventories 7,314,475 6,419,136
Prepaid expense and other 59,694 58,162
---------------- -------------------
Total current assets 8,455,213 7,616,583
---------------- -------------------
PROPERTY AND EQUIPMENT, NET 219,545 144,041
OTHER ASSETS 310,823 329,068
---------------- -------------------
Total Assets $ 8,985,581 $ 8,089,692
================ ===================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Line of credit $ 1,840,000 $ 1,840,000
Accounts payable and accrued expenses 2,095,485 1,241,392
Note payable 200,000 200,000
Notes payable to related parties 800,000 339,229
Obligations under capital lease 8,411 8,797
---------------- -------------------
4,943,896 3,629,418
---------------- -------------------
LONG-TERM LIABILITIES
Notes payable to related parties, net of current portion 2,481,283 2,481,283
Obligations under capital lease, net of current portion 11,030 13,436
Deferred taxes 10,000 10,000
---------------- -------------------
2,502,313 2,504,719
---------------- -------------------
TOTAL LIABILITIES 7,446,209 6,134,137
---------------- -------------------
STOCKHOLDERS' EQUITY
Common stock, $0.001 par value, 50,000,000 shares 18,372 18,170
authorized; 18,372,215 (2000) and 18,170,354 (1999)
issued and outstanding
Common stock committed - 202
Addition paid in capital 2,429,480 2,423,230
Accumulated deficit (908,480) (486,047)
---------------- -------------------
1,539,372 1,955,555
---------------- -------------------
Total Liabilities and Stockholders' Equity $ 8,985,581 $ 8,089,692
================ ===================
</TABLE>
See accompanying notes to unaudited interim condensed consolidated
financial statements
<PAGE>
TANGIBLE ASSET GALLERIES, INC.
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
<S> <C> <C>
Three Months Ended
March 31, 2000 March 31, 1999
---------------- ----------------
NET SALES $ 6,932,511 $ 4,745,407
COST OF SALES 5,872,533 3,549,120
---------------- ----------------
GROSS PROFIT 1,059,978 1,196,287
Selling, general and administrative expenses 1,286,833 806,948
---------------- ----------------
Income (loss) from operations (226,855) 389,339
---------------- ----------------
OTHER INCOME (EXPENSE)
Interest income 1,271 1,680
Interest expense (196,850) (28,269)
Other income (expense) - (21,247)
---------------- ----------------
(195,579) (47,836)
---------------- ----------------
INCOME (LOSS) BEFORE PROVISION FOR TAXES (422,434) 341,503
INCOME TAXES - 6,000
---------------- ----------------
NET (LOSS) INCOME $ (422,434) $ 335,503
================ ================
NET (LOSS) INCOME PER SHARE
Basic $ (0.02) $ 0.02
================ ================
Diluted $ (0.02) $ 0.02
================ ================
</TABLE>
See accompanying notes to unaudited interim condensed consolidated
financial statements
<PAGE>
TANGIBLE ASSET GALLERIES, INC.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
<S> <C> <C>
Three Months Ended
March 31, 2000 March 31, 1999
---------------- ---------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net (loss) income $ (422,434) $ 335,503
Adjustments to reconcile net (loss) income to net cash
(used in) provided by operating activities:
Depreciation and amortization 28,828 7,218
Write-off of customer list - 21,247
Fair value of options granted 6,250 -
Fair value of warrants granted - 134,185
Changes in assets or liabilities:
Accounts receivable 59,182 157,113
Inventories (895,339) (897,772)
Prepaid expenses and other (1,532) (962)
Accounts payable and accrued expenses 854,093 338,697
---------------- ---------------
Net cash (used in) provided by operating activities (370,952) 95,229
---------------- ---------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment (89,332) (6,704)
Decrease (increase) in other assets 3,246 -
---------------- ---------------
Net cash used in investing activities (86,086) (6,704)
---------------- ---------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in related party debt 460,771 1,400,000
Repayment on obligations under capital lease (2,792) (1,062)
Exercise of stock options - 4,328
Stockholder distributions - (1,524,456)
---------------- ---------------
Net cash provided by (used in) financing activities 457,979 (121,190)
---------------- ---------------
Net increase (decrease) in cash 941 (32,665)
CASH, beginning of period 81,882 42,285
---------------- ---------------
CASH, end of period $ 82,823 $ 9,620
================ ===============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the period for:
Interest $ 156,850 $ 28,269
Income taxes $ 7,200 $ -
================ ===============
</TABLE>
See accompanying notes to unaudited interim condensed consolidated
financial statements
<PAGE>
TANGIBLE ASSET GALLERIES, INC.
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2000
(Unaudited)
1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated interim financial
statements have been prepared in accordance with the rules and regulations of
the Securities and Exchange Commission for the presentation of interim financial
information, but do not include all the information and footnotes required by
generally accepted accounting principles for complete financial statements. The
consolidated balance sheet as of December 31, 1999 has been derived from the
audited consolidated financial statements of Tangible Asset Galleries, Inc.
("TAG") at that date.
In the opinion of management, all adjustments considered necessary for a
fair presentation have been included. Operating results for the three month
period ended March 31, 2000 are not necessarily indicative of the results that
may be expected for the year ended December 31, 2000. For further information,
refer to the consolidated financial statements for the year ended December 31,
1999 contained in TAG's annual report on Form 10-KSB filed on March 17, 2000.
2. DESCRIPTION OF BUSINESS AND REVERSE ACQUISITION
Tangible Asset Galleries, Inc. ("TAG") and its wholly owned subsidiary,
Gehringer and Kellar dba Keystone Stamp & Coin Exchange ("Keystone")
(collectively the "Company") are wholesalers and retailers of rare coins, fine
art and collectibles. The Company is based in Newport Beach, California. The
Company's Keystone unit operates in Allentown, Pennsylvania, and, the Company
operates a retail rare coin outlet in Las Vegas, Nevada, and a buying office in
Chicago, Illinois.
TAG is the successor to Austin Land & Resources, Inc. ("ALR"), which was
originally incorporated in the state of Nevada, and was merged with TAG's
predecessor, Tangible Investments of America, Inc. ("TIA") on April 28, 1999.
On April 28, 1999, ALR acquired all the outstanding shares of common stock
of TIA and merged the operations of TIA into ALR in a business combination which
has been accounted for as a reverse acquisition. Effective with the reverse
acquisition, TIA became the successor company and ALR's name was changed to
Tangible Asset Galleries, Inc. The consolidated financial statements reflect
the financial condition, results of operating and cash flows of TIA for the
three month period ended March 31, 1999.
Prior to the reverse acquisition, ALR had 1,650,000 shares of common stock
outstanding. As part of the reverse acquisition, ALR issued 16,000,000 shares of
common stock to shareholders of TIA in exchange for 490 shares of TIA common
stock. The 490 shares represented 100% of the outstanding common stock of TIA.
ALR had no revenue and no significant operations prior to the reverse
acquisition. Subsequent to the reverse acquisition, the former shareholders of
TIA constituted approximately 91% of the total outstanding common shares of the
Company and the former shareholders of ALR constituted approximately 9% of the
total outstanding shares of common stock of the Company.
On December 30, 1999 the Company acquired 100% of the outstanding common
stock of Keystone, a competitor located in Allentown, Pennsylvania. All
significant inter-company balances and transaction have been eliminated in
consolidation.
<PAGE>
3. BUSINESS ACQUISITIONS
On December 30, 1999 the Company acquired 100% of the outstanding common
stock of Gehringer and Kellar, Inc. d/b/a/ Keystone Coin & Stamp Exchange
("Keystone"). In connection with the acquisition, the Company acquired 100%
ownership interest in Keystone in exchange for 201,861 shares of the Company's
common stock valued at approximately $1.49 per share for a total investment of
$300,000.
The acquisition has been accounted for under the purchase method of
accounting. In connection therewith, the Company acquired $339,229 of assets
and $339,229 of liabilities, in the form of a note payable to certain Keystone
directors. Goodwill in the amount of $300,000 was recorded as a result of the
acquisition.
4. LINE-OF-CREDIT
The Company had a $600,000 line-of-credit agreement with a bank that was
cancelled on September 2, 1999. This line of credit bore interest at the prime
rate (7.75% as of March 31, 1999), plus 2.625%, collateralized by the Company's
inventories and certain furniture and fixtures and the personal guarantee of the
Company's principal stockholder. With the acquiring of a new line-of-credit on
August 30, 1999, the Company paid off and cancelled such line of credit. The
outstanding balance as of March 31, 1999 was $600,000.
On August 30, 1999, the Company obtained a $2,000,000 line-of-credit
agreement with a bank that expires on July 31, 2000. The line-of-credit bears
interest at the bank's prime rate, plus 1.50% (10.50% at March 31, 2000), and is
collateralized by substantially all of the assets of the Company and the
personal guarantee of the Company's president and principal stockholder. The
outstanding balance as of March 31, 2000 was $1,840,000.
The Company's line-of-credit has certain restrictive financial covenants,
certain of which are required to be met on an annual basis and others of which
are required to be met at all times. Such covenants include minimum tangible
net worth requirements, maximum asset to net worth ratios, minimum net income
requirements and other restrictions with respect to specified activities. At
December 31, 1999, the Company was in compliance with, or had obtained waivers
for, all annual and other financial covenants. At March 31, 2000, the Company
was in compliance with all non-annual financial covenants.
5. NOTE PAYABLE
On November 10, 1999 the Company entered into a short-term loan agreement
in the amount of $200,000, with interest payable monthly at the prime rate
(9.00% as of March 31, 2000) plus 4.50% per annum. The short-term loan is
collateralized by specific rare coins in inventory, which are being held by the
lender. The outstanding balance as of March 31, 2000 was $200,000.
6. NOTES PAYABLE TO RELATED PARTIES
<TABLE>
<CAPTION>
Notes payable to related parties consist of the following:
<S> <C> <C>
MARCH 31, December 31,
2000 1999
----------- -----------
Unsecured note payable to Company's president and
principal stockholder, bearing interest monthly at 10% per
annum. The note matures April 1, 2001, at which time all
outstanding principal and interest is due. $1,081,283 $1,081,283
Unsecured convertible note payable to principal stockholder;
principal and interest are due in quarterly installments as
specified in the agreement, bearing interest at 9.0% per
annum. The note is convertible into common shares of the
Company at $1 per share, as specified in the agreement.
The note matures in March 2004. 1,400,000 1,400,000
<PAGE>
Note payable to the previous owners and current officers of
Keystone; principal is due in full on demand, with interest
payable monthly at the prime rate less 0.50% per annum;
secured by all assets of Keystone. 800,000 339,229
----------- -----------
3,281,283 2,820,512
Less current portion (800,000) (339,229)
----------- -----------
$ 2,481,283 $2,481,283
============ ============
</TABLE>
7. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted income
(loss) per share for the periods indicated:
<TABLE>
<CAPTION>
<S> <C> <C>
Three Months Ended March 31, 2000 1999
---- ----
Basic:
Net (loss) income $ (422,434) $ 335,503
=========== ===========
Weighted average number of common shares outstanding 18,372,215 17,727,816
=========== ===========
Basic net (loss) income per common share $ (0.02) $ 0.02
=========== ===========
Diluted:
Net (loss) income $ (422,434) $ 335,503
Adjustments to net (loss) income:
Interest on convertible stockholder note payable (net of income tax) - -
----------- -----------
Diluted net (loss) income $ (422,434) $ 335,503
=========== ===========
Weighted average number of common shares outstanding 18,372,215 17,727,816
Weighted average number of common shares equivalents:
Stock options and warrants - -
Convertible stockholders note payable - -
----------- ------------
Weighted average number of common and common equivalent shares 18,372,215 17,727,816
=========== ============
Diluted net (loss) income per common share $ (0.02) $ 0.02
============ ============
</TABLE>
The effects of the stock options, warrants and convertible stockholder note
payable were anti-dilutive and accordingly have been excluded from the
calculation of diluted net (loss) income per share.
<PAGE>
8. COMMITMENTS
On January 1, 2000, the Company's subsidiary, Keystone, entered into a
lease agreement to rent 2,500 square feet of retail and administrative space in
Allentown, Pennsylvania at a rental rate of $3,000 per month. The lease is
scheduled to terminate on December 31, 2002. Keystone's former owners, who are
current the president and vice president of Keystone, own the facility.
9. SUBSEQUENT EVENTS
On May 1, 2000, the Company discontinued operations at its retail location
located in Las Vegas, Nevada. The Company has no significant commitments with
regard to the Las Vegas location and any commitments will be satisfied by May
31, 2000.
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
CAUTIONARY STATEMENTS:
This Quarterly Report on Form 10-QSB contains certain forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933 and Section 21E
of the Securities Exchange Act of 1934. The Company intends that such
forward-looking statements be subject to the safe harbors created by such
statutes. The forward-looking statements included herein are based on current
expectations that involve a number of risks and uncertainties. Accordingly, to
the extent that this Quarterly Report contains forward-looking statements
regarding the financial condition, operating results, business prospects or any
other aspect of the Company, please be advised that the Company's actual
financial condition, operating results and business performance may differ
materially from that projected or estimated by the Company in forward-looking
statements. The differences may be caused by a variety of factors, including
but not limited to adverse economic conditions, intense competition, including
intensification of price competition and entry of new competitors and products,
adverse federal, state and local government regulation, inadequate capital,
unexpected costs and operating deficits, increases in general and administrative
costs, lower sales and revenues than forecast, loss of customers, customer
returns of products sold to them by the Company, termination of contracts, loss
of supplies, technological obsolescence of the Company's products, technical
problems with the Company's products, price increases for supplies, inability to
raise prices, failure to obtain new customers, litigation and administrative
proceedings involving the Company, the possible acquisition of new businesses
that result in operating losses or that do not perform as anticipated, resulting
in unanticipated losses, the possible fluctuation and volatility of the
Company's operating results, financial condition and stock price, inability of
the Company to continue as a going concern, losses incurred in litigating and
settling cases, adverse publicity and news coverage, inability to carry out
marketing and sales plans, loss or retirement of key executives, changes in
interest rates, inflationary factors and other specific risks that may be
alluded to in this Quarterly Report or in other reports issued by the Company.
In addition, the business and operations of the Company are subject to
substantial risks that increase the uncertainty inherent in the forward-looking
statements. The inclusion of forward-looking statements in this Quarterly
Report should not be regarded as a representation by the Company or any other
person that the objectives or plans of the Company will be achieved.
COMPANY OVERVIEW
Tangible Asset Galleries, Inc. ("Tangible" or the "Company") is a retailer and
wholesaler of rare coins, fine art, and antique collectibles. The Company was
organized as a Nevada corporation on August 30, 1995 and is currently based in
Newport Beach, California.
On April 28, 1999, Tangible Asset Galleries, Inc. (which at the time was
designated Austin Land & Resources, Inc., a Nevada corporation ("Austin"))
acquired all of the outstanding common stock of Tangible Investments of America,
Inc., a Pennsylvania corporation ("TIA") in a business combination described as
a "reverse acquisition." For accounting purposes, the acquisition has been
treated as the acquisition of Austin (the Registrant) by TIA. TIA was
originally incorporated in Pennsylvania in 1984. At the time of its reverse
acquisition with Austin, TIA operated as a retailer and wholesaler of rare
coins, fine art, and antique collectibles. TIA agreed to be acquired by the
Company in order to become a publicly trade company. Management of TIA believes
that the Company's status as a publicly traded company would facilitate the
raising of capital. Prior to the acquisition by Austin, management of TIA had
no relationship with the Company.
Immediately prior to the acquisition, Austin had 1,650,000 shares of Common
Stock outstanding. As part of Austin's reorganization with TIA, Austin issued
16,000,000 shares of its Common Stock to the shareholders of TIA in exchange for
490 (100%) shares of TIA Common Stock. Immediately following the merger, Austin
changed its name to "Tangible Asset Galleries, Inc." Austin had no revenues and
no significant operations prior to the merger. Subsequent to the acquisition,
the former shareholders of TIA constituted approximately 88% of the total
outstanding shares of the Common Stock of the Company and the original
shareholders of Austin constituted approximately 9% of the total outstanding
shares of the Common Stock of the Company.
<PAGE>
BUSINESS OF THE ISSUER
The Company's principal line of business is the sale of rare coins on a retail
and wholesale basis. Additionally, the Company also offers, primarily on a
retail basis, collectibles such as fine artworks, antique furniture, lamps,
pottery, and china. The Company's primary storefront is currently located in
Newport Beach, California. In January 2000, the Company completed the
relocation of all its Southern California operations to its new headquarters and
primary retail outlet located in Newport Beach, California. The Company's
services are also marketed nationwide through broadcasting and print media and
independent sales agents.
Beginning on September 1, 1999, the Company launched the first phase of its
Internet auction Web site located at www.tagz.com. The first phase offered the
sale of rare coins by the Company to the public via an auction format. On
October 1, 1999, the Company initiated the second phase of its Internet auction
Web site, expanding it to offer the sale of fine art and collectibles via an
auction format. In November 1999, the Company held its first simultaneous live
and Internet fine art and collectibles auction. The Internet portion of the
auction was run in conjunction with Amazon.com and the Company's own fully
auction capable Web site. The Company's auction site offers graded and certified
coins and guarantees as to authenticity and condition of all items offered for
sale.
In contrast to other auction sites such as Ebay.com, where the site operator
merely acts as a facilitator of transactions, the Company acts as principals in
its auctions. This means that the Company evaluates offerings, collects funds,
pays consignors, and therefore seeks to eliminate the risks to the public of
bidding on items sold by unknown third parties. To date, there are only a small
number of auction Web sites that offer guarantees comparable to the Company's.
The Company also currently publishes a monthly newsletter, distributed to its
existing customers detailing and describing current events in the numismatic and
fine collectibles world. The Company's newsletter also provides customers with
the opportunity to view the Company's current rare coin and fine collectibles
offerings as well as order such offerings via telephone.
On May 28, 1999, the Company expanded its operations by opening a retail outlet
in the Las Vegas area. Although the Company believes that the Las Vegas area is
viewed as a prime location for development in the coin and art collection arena,
the Company ceased operations in Las Vegas on May 1, 2000 to focus its attention
and resources on its Internet based operations. In June 1999, the Company
opened a Tustin, California customer service center, staffed by trained
professionals who are tasked with answering customer inquiries regarding the
Company's monthly newsletter as well responding to customer requests regarding
availability of certain fine collectibles. In January 2000, the Tustin customer
service center was consolidated into the Company's headquarters located in
Newport Beach, California.
On December 30, 1999 the Company acquired all the outstanding common shares of
Gehringer and Keller, Inc. d.b.a. Keystone Coin & Stamp Exchange ("Keystone").
Keystone is a wholesale, retailer and auctioneer of rare coins located in
Allentown, Pennsylvania. The Company believes that acquisition of Keystone will
significantly strengthen the Company's market position on the East Coast of the
United States and enable the Company to continue to position itself as a
nationally recognized dealer in rare coins. The staff of Keystone will add
further numismatic expertise to the Company. The Company intends to expand
Keystone to include the sale of fine art and collectibles.
RISK FACTORS
COMPETITION
The business of selling rare coins and other collectibles is highly competitive.
The Company competes with a number of smaller, comparably sized, and larger
firms throughout the United States. These include: Heritage Rare Coin, a large
scale coin firm in Dallas, Texas; National Gold Exchange, a large wholesale coin
and bullion seller located in Tampa, Florida; Superior Stamp & Coin, a medium
sized coin firm in Beverly Hills, California; Spectrum, a medium sized coin
wholesaler located in Newport Beach, California; Collectors Universe, Inc., a
publicly traded company; and U.S. Coins, a medium size coin wholesaler located
in Houston, Texas. These competitors are generally larger and better
capitalized. However, the Company believes that it is able to compete with these
competitors due to its generally higher quality inventory, staff expertise, and
Web presence. However, there can be no assurances that the Company can continue
to compete successfully with other established companies with greater financial
resources, experience and market share.
<PAGE>
FLUCTUATION IN QUARTERLY OPERATING RESULTS
The Company's revenues and operating results have in the past fluctuated, and
may in the future fluctuate, from quarter to quarter and period to period as a
result of a number of factors. These include, without limitation, the following:
the supply and demand of rare coins on a wholesale and retail basis; the
fluctuation of precious metal bullion prices; the pricing policies or price
reductions by the Company and its competitors; the Company's success in
expanding its sales of rare coins and collectibles at a retail level; personnel
changes; and general economic trends.
Unlike many organizations with significant retail sales, the Company does not
have any predictable seasonal sales patterns.
Due to all of the foregoing factors, it is possible that in some future quarter,
the Company's operating results may be below the expectations of the public
market analysts and investors. In such event, the Company's common stock would
likely be materially adversely affected.
ABILITY TO MANAGE GROWTH
The Company has experienced periods of growth, increased personnel and marketing
costs that have placed, and may continue to place, a significant strain on the
Company's resources. The Company anticipates expanding its on-line auction and
sales efforts. The Company's ability to manage future increases, if any, in the
scope of its operations or personnel will depend on the expansion of its
marketing and sales, management and financial capabilities. The failure of the
Company's management to effectively manage expansion in its business could have
a material adverse effect on the Company's business, results of operations and
financial condition.
The following discussion should be read in conjunction with, and is qualified in
its entirety by, the Interim Consolidated Financial Statements and related notes
thereto included elsewhere herein and the annual Consolidated Financial
Statements and related notes thereto for the year ended December 31, 1999
contained in the Company's Annual Report on Form 10-KSB filed on March 17, 2000.
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.
RESULTS OF OPERATIONS
The following table sets forth the periods indicated, the percentage of net
revenue represented by each item in the Company's consolidated statements of
operations. The information presented in this table assumes the acquisition of
TIA by the Company. The information includes the operations of Keystone as of
January 1, 2000 only as Keystone was acquired at the close of business on the
last operating day of the fiscal year that ended on December 31, 1999.
<TABLE>
<CAPTION>
<S> <C> <C>
Three Months Ended
March 31,
--------------
2000 1999
------ ------
Net Revenues 100.0% 100.0%
Cost of Sales 84.7% 74.8%
------ ------
Gross Profit 15.3% 25.2%
Selling, General and Administrative Expenses 18.6% 17.0%
----- ------
Income from Operations (3.3)% 8.2%
Other Income (Expense) (2.8)% (1.0)%
----- ------
Income Before Income Taxes (6.1)% 7.2%
Income Taxes 0.0% 0.1%
----- ------
Net Income (Loss) (6.1)% 7.1%
====== ======
</TABLE>
<PAGE>
FOR THE THREE MONTHS ENDED MARCH 31, 2000 AND 1999
The Company's net loss for the three months ended March 31, 2000 was $422,434 or
$0.02 per share on a basic and diluted basis, as compared to net income of
$335,503 or $0.02 per share on a basic and diluted basis, for the three months
ended March 31, 1999. The decrease in profitability was primarily the result of
increased selling, general and administrative expenses as discussed below.
NET REVENUES
The table below reflects the breakdown of the Company's primary areas of
revenue.
Three Months Ended Three Months Ended
March 31, 2000 March 31, 1999
-------------------- -----------------
Amount % Amount %
------------------- -------------------
Net Revenues
Coins - Wholesale $ 5,414,250 78.1% $3,409,602 71.9%
Coins - Retail 1,207,086 17.4 1,069,350 22.5
Fine Art & Collectibles 311,175 4.5 266,455 5.6
Total Net Revenues $ 6,932,511 100.0% $4,745,407 100.0%
====================== ==================
Net revenues for the three months ended March 31, 2000 increased 46.1% to
$6,932,511 from $4,745,407 for the three months ended March 31, 1999. This
increase was primarily due to the impact of the inclusion of Keystone's net
revenues during the current quarter. Wholesale rare coin sales increased 58.8%
to $5,414,250 for the three months ended March 31, 2000 from $3,409,602 for the
three months ended March 31, 1999. This increase was primarily attributed to
impact of Keystone's net revenue that was substantially generated from wholesale
rare coins revenue. Retail rare coin sales increased 12.9% to $1,207,086 for the
three months ended March 31, 2000 from $1,069,350 for the three months ended
March 31, 1999. This increase was attributable to the Company's continued focus
on retail sales. Fine art and collectible sales for the three months ended March
31, 2000 increased 16.8% to $311,175 from $266,455 for the three months ended
March 31, 1999. This increase was attributable to Company's expanding presence
on the Internet and its increased efforts in live gallery fine art and
collectibles auctions.
COST OF SALES
Cost of sales for the three months ended March 31, 2000 increased 65.5% to
$5,872,533 from $3,549,120 for the three months ended March 31, 1999. This
increase was primarily due to increased sales. The cost of sales as a percentage
of net revenue increased to 84.7% (2000) from 74.8% (1999) during the comparable
periods. The increase in cost of sales as a percentage of revenue, in the
current period over comparable period, was due to the unfavorable mix of
products sold. The Company's cost of sales as percentage of net revenue will
vary from period to period depending on the prevailing market forces and the mix
of products sold. Additionally, the Company's Keystone unit, due to its high
percentage of wholesale revenue has a significantly higher cost of sales as a
percentage of revenue as compared to the Company's Tangible Asset Galleries
("TAG") unit.
GROSS PROFIT
Gross profit for the three months ended March 31, 2000 decreased 11.4% to
$1,059,978 from $1,196,287 for the three months ended March 31, 1999. The gross
profit as a percentage of net revenue decreased to 15.3% (2000) from 25.2%
(1999) during the comparable three months. This decrease was due to the
unfavorable mix of products sold during the period. The decrease in gross profit
was also impacted by the Company's Keystone unit's lower margins. The ability of
the Company to realize the highest possible gross profit on the sales of
products is dependent on market demand for specific types of products that may
or may not be readily available to Company.
<PAGE>
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses for the three months ended March
31, 2000 increased 59.5% to $1,286,833 from $806,948 for the three months ended
March 31, 1999. The increase in these expenses were due to: increases in
selling expenses relating to the shift in focus toward retail sales in both the
rare coin and fine art segments; the expansion of the administrative
infrastructure to support the requirements of public company reporting and the
Company's growing retail and auction operations; the costs associated with
upgrading the Company's Internet based auction and 'e-commerce' site; and, the
inclusion of the operating expenses of the Keystone unit.
OTHER INCOME AND EXPENSES
Other expenses for the three months ended March 31, 2000 increased 308.9% to
$195,579 from $47,836 for the three months ended March 31, 1999. This increase
was primarily due to a 596.3% increase in interest expenses for the three months
ended March 31, 2000 to $196,850 from $28,629 for the three months ended March
31, 1999.
PROVISION FOR INCOME TAXES
The provision for income taxes for the three months ended March 31, 2000 was $ 0
as compared to $6,000 for the three months ended March 31, 1999. Prior to the
Company's reverse acquisition on April 28, 1999, the Company had elected to be
taxed as an S-Corporation for federal and state purposes. Under the provisions
of this election, with the exception of the California 1.5% surtax, the Company
did not pay corporate tax on its income. However, the stockholders were liable
for their respective share of income taxes on the Company's taxable income.
Subsequent to the reverse acquisition, the Company began to provide for
corporate income taxes based on the combined federal and state statutory rates.
LIQUIDITY AND CAPITAL RESOURCES
Cash increased $941 for the three months ended March 31, 2000. Cash remain
relatively constant during the period. This was primarily due to the offsetting
effects of increased financing activities that occurred as inventory levels were
increased as part of the Company's continued expansion into rare coins, fine art
and collectibles on a retail level. Comparatively, cash decreased $32,665 for
the three months ended March 31, 1999 due to increased inventory levels during
the period.
Net cash used in operating activities for the three months ended March 31, 2000
was $370,952, consisting primarily of the Company's net loss and the increases
in the Company's inventory that were partially offset by an increase in accounts
payable and accrued expenses. Net cash provided by operating activities for the
three months ended March 31, 1999 was $95,229, consisting primarily of the
Company's net income of $335,503, adjusted by increases in inventory and
accounts payable and accrued expenses and a decrease in accounts receivable.
Net cash used in investing activities for the three months ended March 31, 2000
was $86,086 consisting primarily of additions to property and equipment. Net
cash used in investing activities for the three months ended March 31, 1999 was
$6,074 consisting of additions to property and equipment.
Net cash provided by financing activities for the three months ended March 31,
2000 was $457,979 consisting primarily of borrowings by the Company's Keystone
unit from its president and vice president. Net cash used in financing
activities for the three months ended March 31, 1999 was $121,190 consisting
primarily of stockholder distributions partially offset by the proceeds of a
convertible, interest-bearing stockholder note payable.
On December 1, 1998, the Company's predecessor, TIA entered into a revolving
credit agreement with a limit of up to $600,000 with a rate of interest at the
prime rate plus 2.625% collateralized by the Company's assets and personal
guarantee of the Company's president. In September 1999, the revolving credit
agreement was terminated and the outstanding balance was repaid in full. The
credit facility was replaced with a revolving credit agreement with a limit of
up to $2,000,000, with a rate of interest at the prime rate plus 1.50%, which is
collateralized by the Company's assets and a personal guarantee of the Company's
<PAGE>
president and principal stockholder. The outstanding balance of the line of
credit at March 31, 2000 was $ 1,840,000. In addition, the Company is attempting
to negotiate an increase in its line of credit to $5,000,000. The Company has
also retained the services of the Michelson Group to assist the Company in a
potential bridge financing in order to finance future growth. See Certain
Relationships and Related Transactions as disclosed in the Company's Annual
Report Form 10-KSB for year ended December 31, 1999. The Company anticipates
that the additional line of credit and funds from the possible bridge financing
will be used for increased inventory, capital expenditures, and potential
acquisitions. However, there can be no assurances that the Company will be able
to secure such financings.
On March 31, 1999 the Company's predecessor, TIA, executed a convertible,
interest-bearing note payable in exchange for cash advanced by the Company's
principal stockholder and president in the amount of $1,400,000. The note bears
interest at the rate of 9.0% per annum and the interest is payable quarterly.
The note, including, any unpaid interest, will become due and payable on March
31, 2004. The note's conversion provision grants the holder the right to convert
the principal amount, in whole or in part, into shares of common stock of the
Company at a conversion price of $1.00 per share at any time. The note grants
the holder the right to extend payment for up to five renewal periods of one
three months each. Management may accelerate the repayment of the note based on
the availability of cash flow. The balance of the convertible stockholder note
payable as of March 31, 2000 was $1,400,000.
During fiscal 1999, the Company's principal stockholder and president advanced
cash, evidenced by unsecured notes payable totaling $1,326,992, to the Company
on a short-term, non-interest bearing basis until September 30, 1999. On October
1, 1999, the notes payable began to accrue interest at the rate of 10% annually
payable on a quarterly basis. On December 31, 1999 the notes payable balance was
$1,081,283, and, the Company and the principal stockholder agreed to revise the
repayment terms of the notes payable so that no repayment would occur until
April 1, 2001. The balance of stockholder notes payable as of March 31, 2000 was
$1,081,283.
On December 30, 1999 in connection with the acquisition of Keystone, the Company
executed note payable, with a rate of interest of 8.0% per annum secured by all
assets of Keystone in exchange for cash advanced in the amount of $339,229 by
Keystone's previous owners currently serving as president and vice president of
the Keystone unit. Effective January 26, 2000 as part of the acquisition
agreement of Keystone, the president and vice president of Keystone agreed to
provide Keystone with a revolving loan agreement with a limit of up to
$1,250,000, with a rate of interest at the prime rate less 0.50% which is
collateralized by the Keystone's assets. The initial note payable executed on
December 30, 1999 was combined with the revolving loan agreement. The balance of
the loan payable to the Keystone president and vice president as of March 31,
2000 was $800,000.
CAPITAL EXPENDITURES
The Company incurred capital expenditures of $89,332 during the three months
ended March 31, 2000 consisting of computer hardware, computer software, office
equipment and leasehold improvements. The Company anticipates the rate of
capital expenditures will significantly decrease for the remaining three
quarters of the fiscal year ending December 31, 2000.
Effective October 7, 1999, the Company began leasing 11,270 square feet of
administrative, customer support, retail, gallery, and auction space located in
Newport Beach, California at a rental rate of $11,000 per month. In January
2000, the Company consolidated its Laguna Beach and Tustin operations into this
location. The lease is scheduled to terminate on October 7, 2001. On April 1,
2000 the Company subleased its Laguna Beach facility that substantially covers
the Company's rental commitment through the termination of the lease on June 30,
2001. The lease on Tustin facility expired on April 30, 2000.
On January 1, 2000, the Company's Keystone unit began leasing 2,500 square feet
of retail and administrative space located in Allentown, Pennsylvania at a
rental rate of $3,000 per month. The lease is scheduled to terminate on December
31, 2002. Keystone's president and vice president own the facility.
YEAR 2000 DISCLOSURE
The Company has completed a review of its computer systems and non-information
technology ("non-IT") systems to identify all systems that could be affected by
the inability of many existing computer and micro-controller systems to process
time-sensitive data accurately beyond the year 1999, referred to as the Year
2000 or Y2K issue. The Company is dependent on third-party applications,
particularly with respect to such critical tasks as accounting, billing, and
<PAGE>
inventory control. The Company also relies on its own computer and non-IT
systems, (which consists of personal computers, internal telephone systems,
internal network server, and operating systems). In conducting the Company's
review of its internal systems, the Company performed operational tests of its
systems that revealed no Y2K problems. As a result of its review, the Company
has discovered no problems with its systems relating to the Y2K issue and
believes that such systems are Y2K compliant. Costs associated with the
Company's review were not material to its results of operations.
Although the Company did not experience any Y2K related problems during the
changeover from the year 1999 to the year 2000, because of the complexity of the
Year 2000 issue and the interdependence of organizations using computer systems,
there can be no assurances that the Company's efforts, or those of third parties
with whom the Company interacts, have fully resolved all possible Year 2000
issues. Failure to satisfactorily address the Year 2000 issue could have a
material adverse effect on the Company. The most likely worst case Y2K scenario
which management has identified to date is that, due to unanticipated Y2K
compliance problems, the Company may be unable to bill its customers, in full or
in part, for product sold. Should this occur, it would result in a material loss
of some or all gross revenue to the Company for an indeterminable amount of
time, which could cause the Company to cease operations. Although the Company
has received written assurances from all of its major suppliers (coin and
collectibles suppliers such as Heritage Rare Coins and Lipton Rare Coins) that
they are, or will be, Year 2000 compliant, should any such supplier fail to
adequately address the Year 2000 problem, the Company's only recourse for any
damages suffered as a result would be through litigation. The Company has not
yet developed a contingency plan to address this worst case Y2K scenario, and
does not intend to develop such a plan in the future.
PART II - OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS
The Company may from time to time be involved in various claims, lawsuits,
disputes with third parties, actions involving allegations of discrimination, or
breach of contract actions incidental to the operation of its business. The
Company is not currently involved in any such litigation that it believes could
have a materially adverse effect on its financial condition or results of
operations.
ITEM 2 - CHANGES IN SECURITIES
On April 4, 2000, the Company issued 30,000 shares of "restricted" (as that term
in defined under Rule 144 of the Securities Act of 1933) Common Stock to World
Wide Web Consortium, Inc., an accredited unrelated third party in exchange for
services to be rendered pursuant to an investor relations services agreement
valued at $15,000. The issuance was an isolated transaction not involving a
public offering conducted pursuant to Section 4(2) of the Securities Act of
1933.
ITEM 3 - DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to the security holders for a vote during the period
covered by this report
ITEM 5 - OTHER INFORMATION
None.
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(A) EXHIBITS
27.1 Financial Data Schedule
(B) REPORTS ON FORM 8-K
On January 31, 2000, the Company filed a Current Report on Form 8-K dated
January 31, 2000 reporting its acquisition of Gehringer & Kellar, Inc., a
Pennsylvania corporation d/b/a Keystone Coin & Stamp Exchange.
SIGNATURES
In accordance with the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this Report to be signed on its behalf by the
undersigned, thereunto duly authorized.
TANGIBLE ASSET GALLERIES, INC.
By /s/ Silvano DiGenova
----------------------------------
Silvano DiGenova
President & CEO
Dated: May 12, 2000
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