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 September 30, 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 of October 31, 2000
---------------------------------------- ---------------------------------
Common Stock, $0.001 par value 18,755,298
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 September 30, 2000 (Unaudited) and
December 31, 1999.
Condensed Consolidated Statements of Operations (Unaudited) for the three months
and nine months ended September 30, 2000 and 1999.
Condensed Consolidated Statements of Cash Flows (Unaudited) for the nine months
ended September 30, 2000 and 1999.
Notes to Interim Consolidated Financial Statements (Unaudited) at September 30,
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>
TANGIBLE ASSET GALLERIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
<S> <C> <C>
September 30, December 31,
2000 1999
(Unaudited)
------------------------------
ASSETS
CURRENT ASSETS
Cash $ 290,162 $ 81,882
Accounts receivable 1,387,207 1,057,403
Inventories 8,094,646 6,419,136
Prepaid expense and other 57,683 58,162
------------------------------
Total current assets 9,829,698 7,616,583
------------------------------
PROPERTY AND EQUIPMENT, NET 207,093 144,041
OTHER ASSETS 277,902 329,068
------------------------------
Total assets $ 10,314,693 $ 8,089,692
==============================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Line of credit $ 1,840,000 $ 1,840,000
Accounts payable and accrued expenses 3,277,324 1,241,392
Notes payable 743,000 200,000
Notes payable to related parties 900,000 339,229
Obligations under capital lease 8,272 8,797
------------------------------
6,768,596 3,629,418
------------------------------
LONG-TERM LIABILITIES
Notes payable to related parties, net of current portion 2,424,052 2,481,283
Obligations under capital lease, net of current portion 7,484 13,436
Deferred taxes 10,000 10,000
------------------------------
2,441,536 2,504,719
------------------------------
TOTAL LIABILITIES 9,210,132 6,134,137
------------------------------
STOCKHOLDERS' EQUITY
Preferred stock, issuable in series, $0.001 par value,
15,000,000 authorized; no shares issued and outstanding
Common stock, $0.001 par value, 50,000,000 shares 18,545 18,170
authorized; 18,545,298 (2000) and 18,170,354 (1999)
issued and outstanding
Common stock committed - 202
Addition paid in capital 2,592,932 2,423,230
Unearned compensation (58,500) -
Accumulated deficit (1,448,416) (486,047)
------------------------------
1,104,561 1,955,555
------------------------------
Total liabilities and Stockholders' equity $ 10,314,693 $ 8,089,692
==============================
</TABLE>
See accompanying notes to unaudited interim condensed consolidated financial
statements
<PAGE>
<TABLE>
<CAPTION>
TANGIBLE ASSET GALLERIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30, September 30, September 30,
2000 1999 2000 1999
--------------------------------------------------------------------------
<S> <C> <C> <C> <C>
NET SALES $ 7,591,879 $ 5,490,967 $ 21,245,943 $ 16,155,138
COST OF SALES 6,112,810 4,471,799 17,628,796 13,161,334
--------------------------------------------------------------------------
GROSS PROFIT 1,479,069 1,019,168 3,617,147 2,993,804
Selling, general and administrative expenses 1,541,710 1,400,213 3,934,909 2,791,156
--------------------------------------------------------------------------
Income (loss) from operations (62,641) (381,045) (317,762) 202,648
--------------------------------------------------------------------------
OTHER INCOME (EXPENSE)
Interest income 1,437 3,188 3,698 6,158
Interest expense (202,965) (105,163) (627,649) (186,588)
Other expense, net - - - (25,797)
--------------------------------------------------------------------------
(201,528) (101,975) (623,951) (206,227)
--------------------------------------------------------------------------
LOSS BEFORE PROVISION FOR TAXES (264,169) (483,020) (941,713) (3,579)
INCOME TAXES 5,656 (49,936) 20,656 10,064
--------------------------------------------------------------------------
NET LOSS $ (269,825) $ (433,084) $ (962,369) $ (13,643)
==========================================================================
NET LOSS PER SHARE
Basic $ (0.01) $ (0.02) $ (0.05) $ -
==========================================================================
Diluted $ (0.01) $ (0.02) $ (0.05) $ -
==========================================================================
</TABLE>
See accompanying notes to unaudited interim condensed consolidated financial
statements
<PAGE>
<TABLE>
<CAPTION>
TANGIBLE ASSET GALLERIES, INC.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
Nine Months Ended
September 30, September 30,
2000 1999
-----------------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss income $ (962,369) $ (13,643)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 87,365 27,187
Write-off of customer list - 21,247
Loss on investments - 4,550
Provision for deferred taxes - 10,000
Fair value of options granted 18,750 -
Fair value of warrants granted - 134,185
Compensation for non-employee stock option granted 500 -
Compensation for warrants granted for public relation services 4,000
Issuance of common stock for computer consulting services 3,125 -
Issuance of common stock for public relations services 15,000 -
Issuance of common stock for legal services - 17,500
Changes in assets or liabilities:
Accounts receivable (329,804) (952,897)
Inventories (1,675,510) (1,911,297)
Prepaid expenses and other 479 (30,680)
Accounts payable and accrued expenses 2,035,932 559,233
-----------------------------------
Net cash used in operating activities (802,532) (2,134,615)
-----------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment (105,417) (59,416)
Decrease (increase) in other assets 6,166 (8,867)
-----------------------------------
Net cash used in investing activities (99,251) (68,283)
-----------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Borrowings under line of credit - 1,400,000
Borrowings under notes payable 543,000 -
Net increase in related party debt 503,540 2,353,629
Repayment on obligations under capital lease (6,477) (2,904)
Issuance of common stock for cash 70,000 -
Exercise of stock options - 4,329
Stockholder distributions - (1,574,455)
-----------------------------------
Net cash provided by financing activities 1,110,063 2,180,599
-----------------------------------
Net increase (decrease) in cash 208,280 (22,299)
CASH, beginning of period 81,882 42,285
-----------------------------------
CASH, end of period $ 290,162 $ 19,986
===================================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the period for:
Interest $ 624,860 $ 169,088
===================================
Income taxes $ - $ 39,226
===================================
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND
FINANCING ACTIVITIES:
Issuance of common stock for inventories $ - $ 135,000
===================================
</TABLE>
See accompanying notes to unaudited interim condensed consolidated financial
statements
<PAGE>
TANGIBLE ASSET GALLERIES, INC.
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 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 and
the nine month periods ended September 30, 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 subsidiaries,
Gehringer and Kellar dba Keystone Stamp & Coin Exchange ("Keystone") and
Tangible Collectibles, Inc. ("TCI") (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 maintains 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 that
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 unaudited condensed consolidated financial
statements include the results of operations and cash flows of TIA through April
28, 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.
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.
In connection with the acquisition, the Company entered into employment
agreements with two of the previous owners who are currently the president and
the vice-president of Keystone. The agreements provide for base compensation and
a profit sharing arrangement whereby each of the officers will earn 25% of
Keystone's income before amortization of goodwill and income taxes, as defined.
The profit sharing compensation earned by the officers for the three and nine
months ended September 30, 2000 was $83,010 and $183,928 respectively.
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
On August 30, 1999, the Company obtained a $2,000,000 line-of-credit agreement
with a bank that expired on July 31, 2000. The line-of-credit bears interest at
the bank's prime rate, plus 1.50% (11.00% at September 30, 2000), and is
collateralized by substantially all of the assets of the Company and the
personal guarantee of the Company's chief executive officer and principal
stockholder. On October 31, 2000 the bank granted the Company an extension to
April 30, 2001. The extension modified the agreement that included an increase
to the line-of-credit interest rate to the bank's prime rate, plus 2.50%, no
further advances against the line, and a provision for repayments at the rate of
$50,000 per month commencing November 30, 2000 for three months and repayments
of $75,000 per month for the final three months of the extension. The
outstanding balance as of September 30, 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 September 30, 2000, the
Company was in compliance with, or had obtained waivers for, all non-annual
financial covenants.
5. NOTES PAYABLE
Notes payable consist of the following:
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
(9.50% as of September 30, 2000) plus 4.50% per annum. On August 25, 2000 and
August 28, 2000, the Company entered into two additional short-term loans with
the same lender under the same conditions as stated above in the amounts of
$199,500 and $143,500 respectively. The short-term loans are collateralized by
specific rare coins in inventory, which are being held by the lender. The book
value of such inventory totaled $480,250 at September 30, 2000. The short-term
loans are due on demand. The outstanding balances as of September 30, 2000 were
$543,000.
On September 30, 2000, the Company's Keystone unit entered into a
short-term loan agreement with a vendor in the amount of $200,000 with interest
payable monthly at 12% per annum. The short-term loan is due on demand. The
outstanding balance as of September 30, 2000 was $200,000.
6. NOTES PAYABLE TO RELATED PARTIES
<TABLE>
<CAPTION>
Notes payable to related parties consist of the following:
SEPTEMBER December 31,
30, 2000 1999
--------------------------
<S> <C> <C>
Unsecured note payable to Company's chief executive officer
and principal stockholder, bearing interest monthly at 10%
per annum. The note matures October 1, 2001, at which
time all outstanding principal and interest is due. $1,024,052 $ 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
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 (9.50% as of September
30, 2000) less 0.50% per annum; secured by all assets of
Keystone. 900,000 339,229
--------------------------
3,324,052 2,820,512
Less current portion (900,000) (339,229)
--------------------------
$2,424,052 $ 2,481,283
==========================
</TABLE>
7. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted loss
per share for the periods indicated:
<TABLE>
<CAPTION>
Three Months Ended September 30, 2000 1999
--------------------------
<S> <C> <C>
Basic:
Net loss $ (269,825) $ (433,084)
==========================
Weighted average number of common shares outstanding 18,482,221 18,170,354
==========================
Basic net loss per common share $ (0.01) $ (0.02)
==========================
Diluted:
Net loss $ (269,825) $ (433,084)
Adjustments to net loss:
Interest on convertible stockholder note payable (net of income tax) - -
--------------------------
Diluted net loss $ (269,825) $ (433,084)
==========================
Weighted average number of common shares outstanding 18,482,221 18,170,354
Weighted average number of common shares equivalents:
Stock options and warrants - -
Convertible stockholders note payable - -
Weighted average number of common and common equivalent shares 18,482,221 18,170,354
==========================
Diluted net loss per common share $ (0.01) $ (0.02)
==========================
Nine Months Ended September 30, 2000 1999
--------------------------
Basic:
Net loss $ (962,369) $ (13,643)
==========================
Weighted average number of common shares outstanding 18,418,985 18,005,544
==========================
Basic net loss per common share $ (0.05) $ -
==========================
Diluted:
Net loss $ (962,369) $ (13,643)
Adjustments to net loss:
Interest on convertible stockholder note payable (net of income tax) - -
--------------------------
Diluted net loss $ (962,369) $ (13,643)
==========================
Weighted average number of common shares outstanding 18,418,985 18,005,544
Weighted average number of common shares equivalents:
Stock options and warrants - -
Convertible stockholders note payable - -
--------------------------
Weighted average number of common and common equivalent shares 18,418,985 18,005,544
==========================
Diluted net loss per common share $ (0.05) $ -
==========================
</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 per share.
8. LIQUIDITY
The Company has incurred losses since July 1999. The Company's line of
credit that expired in July 2000 has not been renewed. The line-of-credit has
been extended to April 2001 and requires monthly repayments of principal
beginning in November 2000. In addition, the Company is dependant on substantial
short term and due-on-demand financing from various vendors, related parties and
retail customers. In order to fund present and future operations, the Company
needs to secure a new line-of-credit, secure long-term financing or raise
additional funds through private equity or debt placements. While the Company
has initiated plans to return to profitability and to secure additional
financing and/or to raise additional capital, there are no assurances that the
Company will be successful in completing these critical tasks. If the Company is
unable to successfully complete these critical tasks, it may be forced to reduce
its operations and/or liquidate inventory at amounts below current carrying
value to generate the necessary working capital to fund its operations.
<PAGE>
9. COMMITMENTS
On August 6, 2000 the Company entered into a consulting agreement with RLH
Enterprise, Inc. ("RLH") to render services relating to all activities
encompassing the purchase, marketing and sale of rare coins on behalf of the
Company on an exclusive basis. The agreement provides for a compensation based
the greater of a guaranteed fee of $285,000 per year or 37.5% of income before
taxes, as defined in the agreement, for the operations within the TAG unit
related to RLH's activities.
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.
10. STOCKHOLDERS' EQUITY
During the three month period ending September 30, 2000 the Company issued
common shares, common share options and common share warrants as follows:
On August 11, 2000 the Company issued 140,000 common shares for a net cash
consideration of $70,000 or $0.50 per share pursuant to a private placement
memorandum.
The Company granted 450,000 common share options to employees with exercise
prices of $0.4375 per share. The Company granted 250,000 common share options to
non-employees with exercise prices of $0.50 per share for sales and marketing
services. The Company cancelled 52,500 unvested common share option granted to
former employees with exercise prices of $2.00 per share.
The Company granted 850,000 common share warrants to non-employees with
exercise prices ranging from $0.75 to $3.00 share for financial public relations
services.
11. SUBSEQUENT EVENTS
On November 14, 2000 the Company entered into a convertible short term loan
agreement in the amount of $1,000,000 with National Recovery Limited Partnership
("NRLP') for the purposes of financing the Company's newly created wholly owned
subsidiary, TCI. In connection with the financing agreement with NRLP, the
business operations relating to the Company's agreement with RLH Enterprises,
Inc. were transferred from the Company's TAG unit to the TCI unit.
The short-term loan bears interest at the rate of 13.50% per annum,
interest is payable monthly, the loan is due on the earlier of demand or March
31, 2001, and the loan is collateralized by the inventories of TCI. The loan is
further secured by guarantees from the Company and the Company's principal
stockholder and chief executive officer. The loan may be repaid in whole or in
part at any time, however any repayment made prior to February 14, 2001 will be
subject to a prepayment penalty of 3% of the loan amount repaid. The loan is
convertible, at any time and at the sole option of NRLP, into the Company's
common shares in two blocks of $500,000. The first $500,000 is convertible into
666,666 common shares and the remaining $500,000 is convertible into 500,000
common shares.
The agreement provides for additional compensation to NRLP in the form of
profit sharing calculated as 25% of TCI's income before income taxes. The
agreement provides NRLP with 250,000 warrants to purchase the Company's common
shares with an exercise price of the Company's closing market price on November
10, 2000 of $0.375 per share. The warrants expire on November 14, 2003.
Pursuant to a consulting agreement dated September 11, 2000, the Company,
on October 12, 2000, issued 200,000 common shares to a financial public
relations firm in exchange for consulting services to be provided for a period
of one year commencing October 1, 2000. The shares were valued at a total of
$75,000, based upon the closing market price of the Company's common stock on
September 11, 2000. The value of these shares will be amortized to expense over
the life of the consulting agreement.
<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 traded company. Management of TIA
believed 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 "Elite" auction. The Internet portion of
the auction was run in conjunction with Amazon.com and the Company's own fully
auction capable Web site. In March 2000 and June 2000, the Company ran its
second and third "Elite" auction in conjunction with Gavelnet.com, Inc. The
Company held its fourth "Elite" auction in September 2000 and is scheduled to
hold another "Elite" auction in December 2000. The Company continued to expand
its Internet presence with the introduction of e-commerce galleries for rare
coins and fine art in May 2000. The Company's auction site offers graded and
certified coins and guarantees as to authenticity and condition of all items
offered for sale. In September 2000 the Company entered into a strategic
relationship with Yahoo.com whereby the Company became Yahoo! Auction's first
featured seller in the coins category.
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 quarterly 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. In connection with
the acquisition, the Company entered into employment agreements with two of the
previous owners who are currently the president and the vice-president of
Keystone. The agreements provide for base compensation and a profit sharing
arrangement whereby each of the officers will earn 25% of Keystone's income
before amortization for goodwill and income taxes, as defined.
<PAGE>
On August 6, 2000 the Company entered into a consulting agreement with RLH
Enterprises, Inc. ("RLH") to render services relating to all activities
encompassing the purchase, marketing and sale of rare coins on behalf of the
Company on an exclusive basis. The agreement provides for a compensation based
the greater of a guaranteed fee of $285,000 per year or 37.5% of income before
taxes, as defined in the agreement, for the operations within the TAG unit
related to RLH's activities. The agreement is for a period of five years, but
can be terminated by either party with 90 days notice. The principal shareholder
and president of RLH, Robert L. Hughes ("Hughes"), has more than forty years
experience in the rare coin industry. The Company believes that the arrangement
with RLH along with the expertise, product knowledge and market savvy that
Hughes brings to the Company will significantly increase the Company's market
presence on a national basis both in the wholesale and retail rare coin markets.
RISK FACTORS
COMPETITION
The business of selling rare coins, fine art and other collectibles to retail
and wholesale consumers and at auction is highly competitive. The Company
competes with a number of smaller, comparably sized, and larger firms throughout
the United States. These include (without limitation): 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 have the ability to attract
customers as a result of their reputation and the quality collectibles they
obtain through their industry connections. These competitors may have greater
name recognition and have greater financial and marketing resources than the
Company. Additionally, other reputable companies that sell or auction rare coins
and fine collectibles may decide to enter the Company's markets to compete with
the Company. 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.
MARKET CONDITIONS
A decline in consumer spending could harm the Company's business. Sales of rare
coins, fine and decorative art and collectibles depend on discretionary consumer
spending and are affected by general market conditions. Many factors affect
discretionary consumer spending, including the unemployment rate, business
conditions, interest rates, inflation and tax rates. Spending on the types of
luxury items that Tangible typically auctions 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
Tangible auctions to decrease include the following: fewer works of art offered
for sale; decline in the prices buyers are willing to pay; and shifts in
consumer trends. As buyers' tastes change and economic conditions fluctuate, the
supply, demand and dollar volume of fine and decorative art and collectibles
sales could decrease, which could have a material adverse effect on the
Company's business, operating results and financial condition.
The popularity of rare coins and fine collectibles 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.
The Company derives a significant portion of its revenues from sales of
collectibles from its own inventory and commissions paid to the Company on the
sale of collectibles in its auctions. A decline in popularity of rare coins and
artwork, and of collectibles generally, likely would cause a decrease in the
number of transactions in the Company's auctions and fewer sales from inventory,
which would reduce revenue and harm the Company's business.
Temporary consumer popularity or "fads" among collectors temporarily may inflate
the volume of collectibles that the Company auctions and sells. These trends may
result in significant fluctuations in the Company's operating results from one
quarter to the next. Any decline in the popularity of the collectibles that the
Company auctions and sells as a result of changes in consumer trends could harm
the Company's business.
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.
<PAGE>
ABILITY TO MANAGE GROWTH
The Company has and is experiencing 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 live
and 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 Unaudited Condensed Consolidated Financial
Statements and related notes thereto included elsewhere herein and the annual
audited 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 for the periods indicated, the percentage of net
sales represented by each item in the Company's condensed 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>
Three Months Ended Nine Months Ended
September 30, September 30,
2000 1999 2000 1999
<S> <C> <C> <C> <C>
--------------------------------------------------
Net sales 100.00% 100.00% 100.00% 100.00%
Cost of sales 80.50% 81.40% 83.00% 81.50%
--------------------------------------------------
Gross profit 19.50% 18.60% 17.00% 18.50%
Selling, general and administrative expenses 20.30% 25.50% 18.50% 17.30%
--------------------------------------------------
Income(loss) from operations -0.80% -6.90% -1.50% 1.20%
Other income (expense) -2.70% -1.90% -2.90% -1.20%
--------------------------------------------------
Loss before income taxes -3.50% -8.80% -4.40% 0.00%
Income taxes 0.10% -0.90% 0.10% 0.10%
--------------------------------------------------
Net loss -3.60% -7.90% -4.50% -0.10%
==================================================
</TABLE>
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
The Company's net loss for the three months ended September 30, 2000 was
$269,825 or $0.01 per share on a basic and diluted basis, as compared to net
loss of $433,084 or $0.02 per share on a basic and diluted basis, for the three
months ended September 30, 1999. The decrease in the loss was primarily the
result of increased sales as discussed below.
NET SALES
The table below reflects the breakdown of the Company's primary areas of sales.
Three Months Ended Three Months Ended
September 30, 2000 September 30, 1999
----------------------------------------------
Amount % Amount %
----------------------------------------------
Net sales
Coins - Wholesale $ 3,716,711 49.0% $ 4,470,228 81.4%
Coins - Retail 2,923,676 38.5 911,840 16.6
Fine art and collectibles 951,492 12.5 108,899 2.0
----------------------------------------------
Total net sales $ 7,591,879 100.0% $ 5,490,967 100.0%
==============================================
Net sales for the three months ended September 30, 2000 increased 38.3% to
$7,591,879 from $5,490,967 for the three months ended September 30, 1999. This
increase was primarily due to the impact of the inclusion of Keystone's net
sales during the current quarter. Wholesale rare coin sales decreased 16.9% to
$3,716,711 for the three months ended September 30, 2000 from $4,470,228 for the
three months ended September 30, 1999. This decrease was attributed to the
reduced focus by the Company's Tangible Asset Galleries ("TAG") unit on
wholesale sales activities, but was partially offset by impact of Keystone's net
sales that was substantially generated from wholesale rare coin sales. Retail
rare coin sales increased 220.6% to $2,923,676 for the three months ended
September 30, 2000 from $911,840 for the three months ended September 30, 1999.
This increase was attributable to the Company's continued focus on retail sales.
Fine art and collectible sales for the three months ended September 30, 2000
increased 773.7% to $951,492 from $108,899 for the three months ended September
30, 1999. This increase was primarily attributable to Company's increased
efforts in live gallery fine art and collectibles auctions and retail sales.
COST OF SALES
Cost of sales for the three months ended September 30, 2000 increased 36.7% to
$6,112,810 from $4,471,799 for the three months ended September 30, 1999. This
increase was primarily due to increased sales. The cost of sales as a percentage
of net sales decreased to 80.5% (2000) from 81.4% (1999) during the comparable
periods. The decrease in cost of sales as a percentage of net sales, in the
current period over comparable period, was due to the favorable mix of products
sold. The Company's cost of sales as percentage of net sales will vary from
period to period depending on the prevailing market forces and the mix of
products sold. Additionally, the cost of sales percentage may be negatively
impacted by the Company's Keystone unit, due to its high percentage of wholesale
sales that generally has a higher cost of sales as a percentage of net sales as
compared to the Company's TAG unit.
<PAGE>
GROSS PROFIT
Gross profit for the three months ended September 30, 2000 increased 45.1% to
$1,479,069 from $1,019,168 for the three months ended September 30, 1999. The
gross profit as a percentage of net sales increased to 19.5% (2000) from 18.6%
(1999) during the comparable three months. This increase was due to the
favorable mix of products sold during the period and the inclusion of the
operations of the Company's Keystone unit. 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 the Company.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses for the three months ended
September 30, 2000 increased 10.1% to $1,541,710 from $1,400,213 for the three
months ended September 30, 1999. The increase in these expenses was primarily
due to the inclusion of the operating expenses of the Keystone unit.
OTHER INCOME AND EXPENSES
Other expenses for the three months ended September 30, 2000 increased 97.6% to
$201,528 from $101,975 for the three months ended September 30, 1999. This
increase was primarily due to a 93.0% increase in interest expense for the three
months ended September 30, 2000 to $202,965 from $105,163 for the three months
ended September 30, 1999. This increase in interest expense was the result of
increases in the Company's operating line and related party debt.
INCOME TAXES
Income taxes for the three months ended September 30, 2000 was $5,656 as
compared to a benefit for income taxes of $49,936 for the three months ended
September 30, 1999 representing an increase of $55,592. The previous period's
benefit for income taxes was the result of the reversal of income taxes provided
for in first six months of the previous fiscal year. 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.
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
The Company's net loss for the nine months ended September 30, 2000 was $962,369
or $0.05 per share on a basic and diluted basis, as compared to net loss of
$13,643 or $0.00 per share on a basic and diluted basis, for the nine months
ended September 30, 1999. The increase in the loss was primarily the result of
increased selling, general and administrative expenses as discussed below.
NET SALES
The table below reflects the breakdown of the Company's primary areas of sales.
Nine Months Ended Nine Months Ended
September 30, 2000 September 30, 1999
----------------------------------------------
Amount % Amount %
----------------------------------------------
Net sales
Coins - Wholesale $13,563,588 63.8% $12,489,785 77.3%
Coins - Retail 6,131,455 28.9 3,204,536 19.8
Fine art and collectibles 1,550,900 7.3 460,817 2.9
----------------------------------------------
Total net sales $21,245,943 100.0% $16,155,138 100.0%
==============================================
Net sales for the nine months ended September 30, 2000 increased 31.5% to
$21,245,943 from $16,155,138 for the nine months ended September 30, 1999. This
increase was primarily due to the impact of the inclusion of Keystone's net
sales during the period. Wholesale rare coin sales increased 8.6% to $13,563,588
for the nine months ended September 30, 2000 from $12,489,785 for the nine
months ended September 30, 1999. This increase was primarily attributed to
impact of Keystone's net sales that was substantially generated from wholesale
rare coins sales, but the increase was significantly reduced by a decline in
wholesale sale in the TAG unit. Retail rare coin sales increased 91.3% to
$6,131,455 for the nine months ended September 30, 2000 from $3,204,536 for the
nine months ended September 30, 1999. This increase was attributable to the
Company's continued focus on retail sales. Fine art and collectible sales for
the nine months ended September 30, 2000 increased 236.6% to $1,550,900 from
$460,817 for the nine months ended September 30, 1999. This increase was
attributable to Company's increased efforts in live gallery fine art and
collectibles auctions and retail sales
<PAGE>
COST OF SALES
Cost of sales for the nine months ended September 30, 2000 increased 33.9% to
$17,628,796 from $13,161,334 for the nine months ended September 30, 1999. This
increase was primarily due to increased sales. The cost of sales as a percentage
of net sales increased to 83.0% (2000) from 81.5% (1999) during the comparable
periods. The increase in cost of sales as a percentage of net sales, 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 sales will vary
from period to period depending on the prevailing market forces and the mix of
products sold. Additionally, the Company's Keystone unit has a high percentage
of wholesale sales that generally has a higher cost of sales as a percentage of
net sales as compared to the Company's TAG unit.
GROSS PROFIT
Gross profit for the nine months ended September 30, 2000 increased 20.8% to
$3,617,147 from $2,993,804 for the nine months ended September 30, 1999. The
gross profit as a percentage of net sales decreased to 17.0% (2000) from 18.5%
(1999) during the comparable nine 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 as compared to
the Company's TAG unit. 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 the
Company.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses for the nine months ended September
30, 2000 increased 41.0% to $3,934,909 from $2,791,156 for the nine months ended
September 30, 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 Company's Keystone unit.
OTHER INCOME AND EXPENSES
Other expenses for the nine months ended September 30, 2000 increased 202.6% to
$623,951 from $206,227 for the nine months ended September 30, 1999. This
increase was primarily due to a 236.4% increase in interest expense for the nine
months ended September 30, 2000 to $627,649 from $186,588 for the nine months
ended September 30, 1999.
INCOME TAXES
Income taxes for the nine months ended September 30, 2000 increased to $20,656
as compared to $10,064 for the nine months ended September 30, 1999. The current
period's expense was primarily due the state income tax expense associated with
the income of the Company's Keystone unit. 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.
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
Cash increased $208,280 for the nine months ended September 30, 2000. This
increase was primarily due to increased borrowings levels as part of the
Company's inventory expansion under the RLH agreement and in the Keystone unit.
Comparatively, cash decreased $22,299 for the nine months ended September 30,
1999 due to increased inventory levels during the period as part of the
Company's expansion of its retail rare coins and fine collectible operations,
but was partially offset by increased financing activities.
Net cash used in operating activities for the nine months ended September 30,
2000 was $802,532, 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 used by operating activities
for the nine months ended September 30, 1999 was $2,134,615, consisting
primarily of increases in accounts receivable and inventory that were partially
offset by an increase in accounts payable and accrued expenses.
Net cash used in investing activities for the nine months ended September 30,
2000 was $99,251 consisting primarily of additions to property and equipment.
Net cash used in investing activities for the nine months ended September 30,
1999 was $68,283 consisting primarily of additions to property and equipment.
Net cash provided by financing activities for the nine months ended September
30, 2000 was $1,110,063 consisting primarily of borrowings by the Company's
Keystone unit from its president and vice president and borrowings under notes
payable. Net cash provided by financing activities for the nine months ended
September 30, 1999 was $2,180,599 consisting primarily of borrowings under a
bank line of credit, proceeds of a convertible, interest-bearing stockholder
note payable and proceeds of stockholder loans payable partially offset by
stockholder distributions.
The Company has incurred losses since July 1999. The Company's line of credit
that expired in July 2000 has not been renewed. The line-of-credit has been
extended to April 2001 and requires monthly repayments of principal beginning in
November 2000. In addition, the Company is dependant on substantial short term
and due-on-demand financing from various vendors, related parties and retail
customers. In order to fund present and future operations, the Company needs to
secure a new line-of-credit, secure long-term financing or raise additional
funds through private equity or debt placements. While the Company has initiated
plans to return to profitability and to secure additional financing and/or to
raise additional capital, there are no assurances that the Company will be
successful in completing these critical tasks. If the Company is unable to
successfully complete these critical tasks, it may be forced to reduce its
operations and/or liquidate inventory at amounts below current carrying value to
generate the necessary working capital to fund its operations.
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
president and principal stockholder. The outstanding balance of the line of
credit at September 30, 2000 was $ 1,840,000. The Company is in default on
several of its loan covenants, for which it has received a waiver through
October 31, 2000. The loan agreement had expired on July 31, 2000, but has been
extended to October 31, 2000. On October 31, 2000 the lender granted the Company
an additional extension to April 30, 2001. The extension modified the agreement
that included an increase to the line-of-credit interest rate to the lender's
prime rate, plus 2.50%, no further advances against the line, and a provision
for repayments at the rate of $50,000 per month commencing November 30, 2000 for
three months and repayments of $75,000 per month for the final three months of
the extension. The lender has indicated the Company's need to return to
profitability and raise additional capital in order to effectuate a renewal of
the line once the six-month extension expires. Should the Company not raise
sufficient capital and return to profitability, it may have to seek a
replacement for its line of credit, which may not have as favorable terms or
conditions. If the Company is not successful in renewing or replacing the line
of credit, it may have to liquidate inventory at amounts that could be below
current carrying values.
<PAGE>
On June 30, 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 June
30, 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
nine 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 September 30, 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
October 1, 2001. Management may accelerate the repayment of the loan based on
the availability of cash flow. The balance of stockholder notes payable as of
September 30, 2000 was $1,024,052.
On December 30, 1999 in connection with the acquisition of Keystone, the Company
executed a note payable, with an interest rate 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 an interest rate at the prime rate less 0.50% per annum 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 September
30, 2000 was $900,000 and is due on demand.
CAPITAL EXPENDITURES
The Company incurred capital expenditures of $105,417 during the nine months
ended September 30, 2000 consisting of computer hardware, computer software,
office equipment and leasehold improvements. The Company anticipates the rate of
capital expenditures will decrease for the remaining quarter 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 the 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.
<PAGE>
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
is defined under Rule 144 of the Securities Act of 1933) Common Stock to World
Wide Web Consortium, Inc., an 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.
Between May 1, 2000 and June 22, 2000 the Company issued 3,083 shares of
"restricted" (as that term in defined under Rule 144 of the Securities Act of
1933) Common Stock to an unrelated third party in exchange for computer
consulting services rendered valued at $3,125. The issuance was an isolated
transaction not involving a public offering conducted pursuant to Section 4(2)
of the Securities Act of 1933.
On August 11, 2000, the Company issued 140,000 shares of "restricted" Common
Stock to unrelated accredited investor, resulting in net proceeds of $70,000.
The issuance was conducted under an exemption provided by Rule 506 of Regulation
D promulgated under the Securities Act of 1933 and Section 4(2) of the
Securities Act.
ITEM 3 - DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On July 7, 2000, a majority of the shareholders of the Company executed the
Written Consent of a Majority of the Stockholders of Tangible Asset Galleries,
Inc. (the "Written Consent"), without meeting, whereby a majority of the
Stockholders consented to amend the Company's Articles of Incorporation granting
the Board of Directors of the Company the power to authorize the issuance of up
to 15,000,000 shares of one or more series of Preferred Stock, and to fix by
resolution or resolutions providing for the issue of each of such series, the
voting powers, designations, preferences, redemption, conversion, exchange or
other special rights, qualifications, limitations or restrictions of such series
and the number of shares in each series, to full extent now or hereafter
permitted by the Nevada Revised Statutes. No other action have been submitted to
a vote of the shareholders of the Company.
ITEM 5 - OTHER INFORMATION
On August 29, 2000, the Company filed a Certificate of Amendment of the Articles
of Incorporation with the Nevada Secretary of State to allow the Company to
issue up to 15,000,000 shares of one or more series of Preferred Stock, and to
fix by resolution or resolutions providing for the issue of each of such series,
the voting powers, designations, preferences, redemption, conversion, exchange
or other special rights, qualifications, limitations or restrictions of such
series and the number of shares in each series, to full extent now or hereafter
permitted by the Nevada Revised Statutes.
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(A) EXHIBITS
27.1 Financial Data Schedule
(B) REPORTS ON FORM 8-K
On July 6, 2000, the Company filed a Current Report on Form 8-K dated June 22,
2000 reporting the execution of an agreement and plan of reorganization that
provides for a newly-formed subsidiary of the Company to merge with and into
Gavelnet.com, Inc., a Delaware corporation.
On September 18, 2000, the Company filed a Current Report on Form 8-K dated
September 5, 2000 reporting the termination of a merger agreement with
Gavelnet.com, Inc.
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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
Chairman of the Board and Chief Executive Officer
By /s/ Paul Biberkraut
---------------------------
Paul Biberkraut
Vice President and Chief Financial Officer
Dated: November 14, 2000
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