UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
(Mark One)
[ X ] Annual report under Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the fiscal year ended December 31, 1999
[ ] 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
Check if there is no disclosure of delinquent filers pursuant to Item 405
of Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [ X ]
Issuer's revenues for its most recent fiscal year totals $20,659,346.
The aggregate market value of voting and non-voting common equity held by
non-affiliates computed by reference to the price at which the common equity was
sold, or the average bid and asked prices of such common equity, as of February
25, 2000 (See definition of affiliate in rule 12b-2 of the Exchange Act.),
totals $4,016,031.
The number of shares outstanding of each of the issuer's classes of common
equity, as of February 25, 2000, totals 18,372,215.
DOCUMENTS INCORPORATED BY REFERENCE
If the following documents are incorporated by reference, briefly describe
them and identify the part of the form 10-KSB (e.g., Part I, Part II, etc. )
into which the document is incorporated: (1) any annual report to security
holders; (2) any proxy or information statement; and (3) any prospectus filed
pursuant to rule 424(b) or (c) of the Securities Act of 1933 ("Securities Act").
The listed documents should be clearly described for identification purposes
(e.g., annual report to security holders for fiscal year ended December 24,
1990).
None.
Transitional Small Business Disclosure Format (check one):
Yes [ ] No [ X ]
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TABLE OF CONTENTS
PART I
Item 1 Description of Business.
Item 2 Description of Property.
Item 3 Legal Proceedings.
Item 4 Submission of Matters to a Vote of Security Holders.
PART II
Item 5 Market for Common Equity and Related Stockholder Matters.
Item 6 Management's Discussion and Analysis of Financial Condition and
Results of Operations.
Item 7 Financial Statements.
Item 8 Changes In and Disagreements With Accountants on Accounting and
Financial Disclosure.
PART III
Item 9 Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act.
Item 10 Executive Compensation.
Item 11 Security Ownership of Certain Beneficial Owners and Management.
Item 12 Certain Relationships and Related Transactions.
Item 13 Exhibits and Reports on Form 8-K.
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PART I
This Annual Report includes forward-looking statements within the meaning of the
Securities Exchange Act of 1934 (the "Exchange Act"). These statements are based
on management's beliefs and assumptions, and on information currently available
to management. Forward-looking statements include the information concerning
possible or assumed future results of operations of the Company set forth under
the heading "Financial Information-Management's Discussion and Analysis of
Financial Condition and Results of Operations." Forward-looking statements also
include statements in which words such as "expect," "anticipate," "intend,"
"plan," "believe," "estimate," "consider" or similar expressions are used.
Forward-looking statements are not guarantees of future performance. They
involve risks, uncertainties and assumptions. The Company's future results and
shareholder values may differ materially from those expressed in these
forward-looking statements. Readers are cautioned not to put undue reliance on
any forward-looking statements.
ITEM 1 - DESCRIPTION OF BUSINESS
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.
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.tagzinc.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.
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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. The Company believes that the Las Vegas area is viewed
as a prime location for development in the coin and art collection arena and the
Company is working on strategies to expand that marketplace. 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.
HISTORY OF THE COMPANY
TIA, the Company's predecessor, was originally founded by the Company's current
president, Silvano DiGenova in 1977 when Mr. DiGenova first exhibited his coins
at a national coin dealer's convention. That same year, Mr. DiGenova first
became involved in other collectibles such as fine arts and antiques. Mr.
DiGenova has collected rare coins since 1971 (when he was nine years old) and by
age 13 was trading coins among his peers. While attending the Wharton School of
Business in the early 1980s, Mr. DiGenova continued to develop TIA, and in May
1984, Mr. DiGenova, prior to graduating, took a leave of absence from Wharton
and incorporated TIA in Pennsylvania.
In 1991, Mr. DiGenova relocated TIA to Laguna Beach, California and continued to
develop TIA's rare coin, fine art and collectibles retail and wholesale
business, continuing to expand it on a national level. The Company currently
provides coins, fine arts and collectibles on a wholesale level to many retail
outlets across the nation and conducts retail sales via telephone to virtually
every state in the United States and several countries around the world.
As previously discussed above, TIA was acquired by the Company on April 28,1999.
BACKGROUND OF THE COIN AND COLLECTIBLES INDUSTRY
Throughout history, from ancient time to the present day, coins have been highly
prized and universally regarded as a store of value, particularly those struck
in precious metals. Coins have been highly esteemed for their beauty and appeal
as a solid store of wealth. Over the past three hundred years, coin collecting
for enjoyment and profit has gained increasing prominence. The coin industry
has been actively traded since the 17th century.
The legendary House of Rothschild (famed European Banking Family) actually got
its start dealing in rare coins and medals at Frankfurt's great spring and
summer fairs. Meyer Rothschild, the founder of the banking empire, began by
selling coins at the fairs as well as running a mail-order coin business.
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Starting in 1771, he published the first of many printed coin catalogs which he
sent out during the next 20 years at regular intervals to potential customers
all over Germany. To this day, many prestigious European banks still maintain
active numismatic departments.
THE REVOLUTION IN THE COIN BUSINESS
Determining the market value of a given coin plays a vital role. Rare coins are
graded on a numerical scale from 0 to 70. Zero represents the basal state and
70 represents an uncirculated (or mint state) specimen that is perfect in every
aspect. The higher its numerical grade, the more valuable a coin is to
collectors or dealers. A one-point difference, not even discernible to a
layman's eye, can mean literally thousands of dollars difference in value.
Therefore, the importance of consistent grading, according to a universally
accepted standard by the marketplace cannot be overemphasized. In 1986, the
first uniform grading system was implemented by the Professional Coin Grading
Service (the "PCGS"). Silvano DiGenova, the Company's president, was a
co-founder of PCGS and helped to develop the grading system used by PCGS. Mr.
DiGenova sold his interest in PCGS in 1987 and has not been affiliated with
PCGS, except as a customer of its services, since that time. A year after the
founding of the PCGS, the Numismatic Guaranty Corporation ("NGC") was formed.
Mr. DiGenova is not affiliated with NGC in any way except as a customer of its
services.
These two firms established a uniform coin-grading standard, which has gained
almost universal acceptance throughout the world. Once a coin has been graded
and certified, both firms encapsulate the coin in tamper-proof acrylic holders,
register them by number, grade, date and mintmark. If applicable, they identify
variety and pedigree as well. Rare coins graded and certified by either one of
these services can now be traded with confidence. The advent of certified
grading has led to another revolution of sorts, the formation of the Certified
Coin Exchange (CCE). Mr. DiGenova was a founder and board member of CCE, and
helped to organize the association. Mr. DiGenova sold his interests in CCE in
the late 1980s and has not been affiliated with the company in any way since
that time except as a user of their services. CCE is a nationwide computerized
trading network for rare coins. CCE is also the number one source of
instantaneous price information. Coins can be bought and sold sight unseen
because of the certification and confidence instilled in the market place by
CCE, PCGS and NGC
NUMBER OF EMPLOYEES
As of February 25, 2000, the Company employed 24 persons, of which 20 were
full-time employees. The Company believes that its future success depends in
part upon recruiting and retaining qualified numismatists, fine art experts,
marketing and other personnel.
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.
In an effort to remain competitive in the marketplace, the Company has
implemented the following policies so its customers can be confident in their
purchases:
-Certified Coins: All coins purchased through the Company are independently
graded and certified by either the Professional Coin Grading Service or the
Numismatic Guaranty Corporation. These are nationally recognized unbiased
third-party grading services that render an expert consensus opinion by the
industry's foremost numismatic experts. Although Mr. DiGenova was a founder of
PCGS, he is no longer affiliated with the Company and does not take part in
PCGS's grading of the Company's coins. The coins, along with their grade
designations, are sonically sealed in a tamper proof acrylic holder designed to
protect the coin's condition from environmental damage. The coin cannot be
removed from its holder, or the grade change, without destroying the holder.
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-Guaranteed Authenticity: the Company unconditionally guarantees the
authenticity of every coin it sells. This guarantee is limited to a full refund
of the original purchase price plus ten (10) percent per annum simple interest
on the original purchase price from the date purchased from the Company to the
date returned because of lack of authenticity, provided that the coin is
returned in its original unbroken holder.
-Guaranteed Liquidity and Buy Back at Grade: the Company guarantees to
repurchase any coin originally sold by the Company to the original retail
purchaser at the same numerical grade level at which the coin was originally
purchased from the Company. The repurchase would be at the Company's current
"Bid" price for the grade level indicated on the holder (the amount the Company
is then offering to buy similar coins of the same grade on a below wholesale
basis or "Bid"). The Company guarantees that this "Bid" price will be between
5% to 17.5%, and will never exceed 17.5%, below the then current retail asking
price for coins with similar grades. The Company's current bid price and the
corresponding retail price could be substantially below the purchaser's original
purchase price. The Company does not guarantee that a purchaser will be able to
recover his or her entire original purchase price but does guarantee liquidity
based on current market conditions. The Company guarantees to provide an
immediate cash offer, or at the client's discretion, a consignment sale estimate
on any coin which was originally purchased from the Company. The Company's
pledge is to provide our clientele with a liquid marketplace at any and all
times.
-Unconditional Seven-Day Refund: Every coin purchased (not including
bullion) through the Company carries an unconditional 7-day full money back
guarantee. If, after inspecting the purchase, the customer wishes to return any
coin for a full refund under this guarantee, the coin must be received by the
Company no later than seven days after postmark (or air bill date) of said coin.
The purchaser is, therefore, encouraged to carefully inspect and evaluate all
coins during this period. Fine art and collectibles returns privilege is 30
days.
-Thirty-Day Same as Cash Exchange: Any item(s) sold by the Company may be
exchanged for other item(s) of equal or greater value (at the full original
purchase price) within 30-days of the sale. Bullion and generic coins, however,
are excluded. Generic coins (or generic issues) are U.S. coins which are very
common coins with graded populations of 1,000 or more.
-Approval Service: The Company may send coins and fine art (on a case by
case basis) on an approval basis (i.e. allow qualified customers to view items
in their homes or to have such items independently inspected) to qualified
buyers subject to credit verification and approval.
-Low Price Guarantee: If any item purchased from the Company (excluding
bullion and selected common generic issues) is advertised by a legitimate dealer
for less than the Company's selling price (within 30 days), The Company will
refund the difference, plus 10% of the difference.
-Statements of Value: A thorough and complete evaluation of the coins and
fine art purchased from the Company will be provided to all clients upon
request. These reports provide current liquidation values as well as accurate
data concerning profit and/or loss position.
-Commission Free Selling Service: The Company will liquidate gold and silver
bullion or generic U.S. coins for top market prices, free of commissions or
selling fees, provided that the proceeds are used to purchase coins from the
Company. Otherwise, a service charge of 2.5% (for bullion and/or common
generic issues) or 10% (for rare U.S. coinage) will be assessed.
-Appraisals of Currently Owned Materials: The Company will evaluate grade,
performance potential and identify liquidation or hold strategy for its
customers. This service is free of charge if the proceeds from the coins that
are liquidated are used to acquire coins through the Company. Otherwise, a
service charge of 2.5% of the total appraised value will be assessed.
-Auction Representation: The Company attends most major numismatic auctions,
and will act as an agent on customers' behalf, for the purpose of acquisition,
for a nominal fee of 2.5% to 10%, depending upon the amount purchased.
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-Full service PCGS and NGC Submission Center: The Company will examine
customer's uncertified coins to determine suitability for grading (there is no
charge for this service). The Company will then submit the coins on the
customers' behalf (at our dealer cost) to PCGS or NGC for grading.
-Rare Coin Strategy Planning Sessions: The Company provides personal
one-on-one consultations with an experienced, knowledgeable numismatic
professional to assist with portfolio planning, rare coin acquisitions and/or
liquidations. This is a free service provided to qualified individuals.
-Research Services: The Company will provide a free complete historical,
providence, price history and current population data for any coin(s) and fine
art purchased from the Company.
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.
REGULATION
The rare coin and collectibles markets are not currently subject to direct
federal, state or local regulation, although the sales of certain artwork and
autographed sports memorabilia is regulated in some states. However, the Federal
Trade Commission and many state attorneys general have shown an interest in
regulating the sales of rare coins and other tangible assets as investments, and
the State of New York has determined that under certain circumstances rare coins
may be treated as securities under state law, thereby requiring rare coin
dealers to register as broker-dealers and permitting investors all legal and
equitable remedies otherwise available to buyers of securities. The Company
relies upon the February 1998 ruling of U. S. District Court Judge Kimba Wood in
the case of Llewellyn v. North American Trading that the ordinary retail sale of
rare coins to investors is not a security under the federal securities laws, and
believes that its operations are not subject to regulation as the sale of
securities. There is no assurance, however, that at some time in the future the
sale of rare coins will be so regulated, and that the Company's business will
not be materially adversely affected thereby.
Over the past 15 years, the FTC has filed suits against numerous rare coin
dealers alleging that the dealers' representations about coins were false or
misleading to a person of average intellect, or that the dealers' retail markups
were so high that their representations about investment risk and appreciation
potential became misleading or untrue. These cases have not, however, created
any clear rules by which dealers such as the Company can assure themselves of
compliance. On January 1, 1996, the FTC's Telemarketing Sales Rule, authorized
by the 1994 Telemarketing and Consumer Fraud and Abuse Prevention Act, took
effect. "Telemarketing" is defined as any plan, program, or campaign that is
conducted to induce payment for goods and services by use of more than one
interstate telephone call. The Rule applies to all sales of "investment
opportunities", which is defined by whether the seller's marketing materials
generally promote items. On the basis of representations about "income, profit,
or appreciation." The Company believes that all of its retail sales are covered
by the Rule, even those to collectors.
The Telemarketing Sales Rule requires the Company to inform customers of the
following before accepting payment: the number of items being sold, the purchase
price, and the Company's refund / exchange / buyback policy. The Rule also
prohibits the Company from misrepresenting the "risk, liquidity, earnings
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potential, and profitability" of the items it sells. This in itself did not
materially change prior law. However, during debates on the Telemarketing Sales
Rule in 1995, FTC staff attorneys tried to impose additional specific
requirements that dealers in "tangible assets" disclose to retail customers
their actual cost for the items they sell, and also disclose "all material
facts" about their goods before accepting any money from the customer. This
would have required the Company to disclose its actual margins to its retail
customers, as well as impose on the Company a near impossible burden of
determining what facts were material to the purchase of coins or other
collectibles. Although the FTC ultimately removed these additional requirements
from the final version of the Rule, the FTC staff's behavior demonstrated its
particular concern for telemarketing of coins as investments. There is no
assurance that the FTC will not amend the Rule in the future to impose these or
other additional regulations, or that individual states will not impose such
regulations, and that the Company's business will not be materially adversely
affected thereby.
In addition, many investors favor rare coins because they can be bought, owned
and sold privately, i.e., without registering with or notifying any Government
agency. However, the Internal Revenue Service now requires dealers such as the
Company to report on Form 8300 all sales of coins in which more than $10,000 in
cash or cash-like instruments is used as payment. The private nature of rare
coin ownership has occasionally resulted in rare coins being purchased by
taxpayers for the purpose of concealing unreported income, or used to "launder"
income derived from unlawful activities. This has caused local authorities to
consider imposing registration and/or reporting requirements upon rare coin
dealers, although the only such regulation enacted to date (in the City of
Chicago) has not been enforced against full-time dealers in rare coins. There is
no assurance that additional regulations will not be imposed upon the Company in
the future, and that the Company's business will not be materially adversely
affected thereby.
TAXATION OF MAIL ORDER SALES
The Company does not collect California sales tax on mail order sales to
out-of-state customers, because interstate sales generally are tax-exempt. Nor
does the Company collect use tax on its interstate mail order sales. Most
states impose a use tax on "retailer(s) engaged in business in this state" on
sales of "tangible personal property for storage, use, or other consumption in
this state" (language from '6203 of the California Sales and Use Tax Law). Use
tax is usually set at the same rate as sales tax, and its purpose is to level
the playing field between local retailers who pay sales tax and out-of-state
mail order companies who do not. Some states exempt rare coin sales over $1,000
from sales or use tax, but most do not. Although the federal Constitution
restricts the right of states to tax interstate commerce, states can assess use
tax-on any transaction where the out-of-state mail order firm has a "nexus",
i.e., any physical presence, in the state, regardless of whether the sales
themselves arise from that local presence. "Nexus" includes attending
conventions, although at least one state (California) provides a seven-day "safe
harbor" for out-of-state dealers attending conventions and whose sales are less
than a certain dollar threshold. It also would include attending auctions or
making buying or selling trips. On that basis, the Company may be deemed to have
"nexus" in many states.
Use tax is the buyer's obligation, but states require retailers to collect the
tax and remit it to the state along with a use tax return. There is no statute
of limitations for use tax if the dealer has filed no returns. To date, the
Company has not been assessed for use tax by the taxing authority of any other
state, nor has it received any inquiry indicating that it was being audited for
purposes of such an assessment. However, there is no assurance that the Company
will not be audited by taxing authorities of the states and be assessed for
unpaid use taxes (plus interest and penalties) for a period of many years.
In addition to use tax, many states impose income and franchise taxes on
out-of-state companies that derive net income from business with their
residents. For example, California applies an income-based franchise tax to
out-of-state corporations operating in California for the privilege of using the
corporate form. The maximum tax rate is 8.84%, with a minimum tax of $800 per
year. Income derived outside California is not taxed, and in-state income of
taxpayers liable for tax in more than one state is calculated using a formula
contained in the Uniform Division of Income for Taxation Purposes Act, a statute
in effect in Alabama, Alaska, Arizona, Arkansas, California, Colorado, Hawaii,
Idaho, Kansas, Kentucky, Maine, Michigan, Missouri, Montana, Nebraska, Nevada,
New Mexico, North Dakota, Oregon, South Carolina, South Dakota, Texas, Utah, and
Washington. As with use tax, nexus principles apply, and the U.S. Supreme Court
requires "a minimal connection between the interstate activities and the taxing
state, and a rational relationship between the income attributed to the State
and the intrastate values of the enterprise."
Assuming the existence of nexus, the Company could be subject to income-based
taxes in each of the states in which it has had a physical presence at
conventions, auctions or otherwise. The only exceptions would be in states where
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the Company is protected by a federal law, 15 U.S.C. '381, which immunizes
companies from state income taxes if the company's only business activities in
the taxing state consist of "solicitation of orders for interstate sales." There
is no statute of limitations for income or franchise tax if the dealer has filed
no return. To date, the Company has not been assessed for income tax or
franchise tax by the taxing authority of any other state, nor has it received
any inquiry indicating that it was being audited for purposes of such an
assessment. However, there is no assurance that the Company will not be audited
by taxing authorities of the states and be assessed for unpaid income or
franchise taxes (plus interest and penalties) for a period of many years.
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.
MAJOR SUPPLIERS
The Company obtains its coins and collectibles from many different individuals
and entities and is not dependent on any major suppliers. However, during 1999,
one wholesale vendor, Heritage Rare Coins located in Dallas, Texas represented
11% of inventory purchases. The Company anticipates that Heritage Rare Coins
will represent less than 10% of inventory purchases during the 2000 fiscal year.
DEPENDENCE ON KEY CUSTOMERS
The Company is not dependent on any key customers but rather sells to a large
variety of individual retail purchasers as well as several wholesale purchasers
throughout the nation and world. However, during 1999 and 1998, one wholesale
purchaser, Mike's Coin Gallery, located in Redondo Beach, California represented
16% and 13% of the Company's wholesale sales, respectively. During 1999 the
Company had no customers that represented more than 10% of the Company's sales.
PATENTS, TRADEMARKS, LICENSES
The Company does not depend upon any patents, trademarks, or licenses to conduct
its business; or does the Company hold any such patents or trademarks.
COST OF COMPLIANCE WITH ENVIRONMENTAL REGULATIONS
The Company currently has no costs associated with compliance with environmental
regulations. However, there can be no assurances that the Company will not
incur such costs in the future.
ITEM 2 - DESCRIPTION OF PROPERTY
Effective June 15, 1996, the Company began leasing approximately 4,092 square
feet of administrative and retail space in Laguna Beach, California at a monthly
rental rate of $5,000 per month beginning on September 1, 1996. Until January
2000, this facility served as the Company's headquarters and primary retail
location. The monthly rental rate is scheduled to increase in accordance with
the Consumer Price Index on an annual basis, up to a limit of 6% per year but
subject to a 3% minimum increase. The lease is scheduled to terminate on June
30, 2001. The Company is actively negotiating with a third party to sub-lease
the Laguna Beach, California location. It is an anticipated the sub-lease will
be effective as of April 1, 2000. However, there can be no assurances that the
Company will be able to sub-lease the Laguna Beach facility. In the event that
the Company is unable to sub-lease the Laguna Beach facility, it will continue
to be obligated to pay the monthly lease payments of $5,000 per month until June
30, 2001.
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Effective May 1, 1999, the Company began leasing approximately 1,722 square feet
of administrative space in Tustin, California at a monthly rental rate of
$2,066.40. Until January 2000, this facility served as the Company's customer
service site. The lease will terminate on April 30, 2000.
Beginning on June 1, 1999, the Company began leasing approximately 2,350 square
feet of retail space in Las Vegas, Nevada pursuant to an oral month-to-month
lease with Commercial West Property Management at a rate of $2,023 per month.
The Company is currently investigating alternative retail locations for its Las
Vegas operations.
Beginning on October 1, 1999, the Company began leasing approximately 180 square
feet of office space in Barrington, Illinois at a monthly rental rate of $592.
This office serves as the Company's Chicago, Illinois buying office. The lease
will terminate on September 30, 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.
Effective January 1, 2000, the Company began leasing 2,500 square feet of retail
and administrative space located in Allentown, Pennsylvania at a rental rate of
$3,000 per month. This location serves as retail storefront and headquarters of
the Company's subsidiary, Keystone. The president and vice president of Keystone
own the location (See Item 12 - Certain Relationships and Related Transactions).
The lease is schedule to terminate on December 31, 2002.
ITEM 3 - LEGAL PROCEEDINGS
The Company may from time to time be involved in various claims, lawsuits,
disputes with third parties, actions involving allegations of discrimination, or
breach of contract actions incidental to the operation of its business. The
Company is not currently involved in any such litigation which it believes could
have a materially adverse effect on its financial condition or results of
operations.
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
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PART II
ITEM 5 - MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The following table sets forth the high and low bid prices for shares of the
Company Common Stock for the periods noted, as reported by the National Daily
Quotation Service and the NASDAQ Bulletin Board. Quotations reflect
inter-dealer prices, without retail mark-up, mark-down or commission and may not
represent actual transactions. The Company's Common Stock was listed on the
NASDAQ Over-the-Counter Bulletin Board on August 10, 1998 under the trading
symbol ASLR. However, the Company's Common Stock did not begin trading until
subsequent to its acquisition of Tangible, whereas on May 18, 1999, the
Company's Common Stock trading symbol was changed to TAGZ.
BID PRICES
YEAR PERIOD HIGH LOW
------- -------
1999 First Quarter n/a n/a
Second Quarter (5/18/1999 to 6/30/1999) 7.38 3.25
Third Quarter 6.25 1.25
Fourth Quarter 3.00 1.25
Pursuant to NASD Eligibility Rule 6530 (the "Rule") issued on January 4, 1999,
issuers who do not make current filings pursuant to Sections 13 and 15(d) of the
Securities Act of 1934 are ineligible for listing on the NASDAQ Over-the-Counter
Bulletin Board and are subject to de-listing pursuant to a phase-in schedule
depending on each issuer's trading symbol as reported on January 4, 1999. As
previously discussed, the Company's trading symbol on January 4, 1999 was ASLR.
Therefore, pursuant to the phase-in schedule, the Company was subject to
de-listing on September 1,1999. One month prior to an issuer's de-listing date,
non-complying issuers will have their trading symbol appended with an "E". As a
result the Company's trading symbol was changed to TAGZE on August 6, 1999. As
the Company 's was not compliant with the Rule on September 1, 1999, the Company
was delisted from the OTCBB and began trading on National Quotation Bureau's
"Pink Sheets".
Following the filing and clearance of a registration statement on Form 10-SB,
the Company became compliant with the Rule and was reinstated to the NASDAQ
Over-the-Counter Bulletin Board in January 2000.
NUMBER OF SHAREHOLDERS
The number of beneficial holders of record of the Common Stock of the company as
of the close of business on December 31, 1999 was 44. Many of the shares of the
Company's Common Stock are held in "street name" and consequently reflect
numerous additional beneficial owners.
DIVIDEND POLICY
To date, the Company has declared no cash dividends on its Common Stock, and
does not expect to pay cash dividends in the near term. The Company intends to
retain future earnings, if any, to provide funds for operation of its business.
RECENT SALES OF UNREGISTERED SECURITIES
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,
a Pennsylvania corporation ("TIA") in a business combination described as a
"reverse acquisition." As part of the reorganization, the Company issued
16,000,000 shares of its "restricted" (as that term is defined under Rule 144 of
the Securities Act of 1933) Common Stock to the shareholders of TIA in exchange
for all of the outstanding shares of TIA. Such shares include the shares owned
by officers and directors of the Company as set forth in the Section "Security
Ownership of Certain Beneficial Owners and Management" hereunder. This issuance
was an isolated transaction not involving a public offering conducted pursuant
to Section 4(2) of the Securities Act of 1933.
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On April 28, 1999, the Company issued 17,500 shares of "restricted" (as that
term is defined under Rule 144 of the Securities Act of 1933) Common Stock to
MRC Legal Services Corp., the Company's securities counsel, in consideration for
legal services rendered valued at $17,500. The issuance was an isolated
transaction not involving a public offering conducted pursuant to Section 4(2)
of the Securities Act of 1933.
On April 28, 1999, the Company issued 432,854 shares of "restricted" Common
Stock to the Michelson Group in connection with the exercise of a warrant, an
accredited unrelated third-party, pursuant to a Corporate Development Agreement
entered into between the Company and the Michelson Group in exchange for
consulting services valued at $134,185. The issuance was an isolated
transaction not involving a public offering conducted pursuant to Section 4(2)
of the Securities Act of 1933.
On June 4, 1999, the Company issued 70,000 shares of "restricted" Common Stock
to an accredited unrelated third party in exchange for inventory valued at
$135,000. The issuance was an isolated transaction not involving a public
offering conducted pursuant to Section 4(2) of the Securities Act of 1933.
On January 28, 2000, the Company issued 201,861 shares of "restricted" Common
stock in exchange for 100% of the outstanding common shares of Gehringer and
Kellar, Inc. d.b.a. Keystone Coin & Stamp Exchange pursuant to an acquisition
agreement dated December 30, 1999. The issuance was an isolated transaction not
involving a public offering conducted pursuant to Section 4(2) of the Securities
Act of 1933.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
CAUTIONARY STATEMENTS:
This Annual Report on Form 10-KSB 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 Annual 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
Annual 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 Annual 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.
The following discussion should be read in conjunction with, and is qualified in
its entirety by, the Consolidated Financial Statements and related notes thereto
included elsewhere herein. Historical results of operations, percentage margin
fluctuations and any trends that may be inferred from the discussion below are
not necessarily indicative of the operating results for any future period.
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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 below does not include the operations of
Keystone as the company was acquired at the close of business on the last
operating day of the fiscal year.
Year Ended
December 31,
---------------
1999 1998
---------------
Net Revenues 100.0% 100.0%
Cost of Sales 81.5% 82.7%
---------------
Gross Profit 18.5% 17.3%
Selling, General and Administrative Expenses 19.0% 9.6%
---------------
Income from Operations (0.5)% 7.7%
Other Income (Expense) (1.7)% (0.4)%
---------------
Income Before Income Taxes (2.2)% 7.3%
Provision for (Recovery of) Income Taxes 0.1% 0.1%
---------------
Net Income (Loss) (2.3)% 7.2%
===============
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FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998
The Company's net loss for the year ended December 31, 1999 was $473,618 or
$0.03 per share on a basic and diluted basis, as compared to net income of
$1,397,865 or $0.09 per share on a basic and diluted basis, for the year ended
December 31, 1998. 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.
Year Ended Year Ended
December 31, 1999 December 31, 1998
------------------------ ---------------------
Amount % Amount %
------------------------ ---------------------
Net Revenues
Coins - Wholesale $ 15,238,520 73.8% $ 11,722,016 60.0%
Coins - Retail 4,373,799 21.1 6,999,860 35.8
Fine Art & Collectibles 1,047,027 5.1 814,102 4.2
------------------------ ---------------------
Total Net Revenues $ 20,659,346 100.0% $ 19,535,978 100.0%
======================== =====================
Net revenues for the year ended December 31, 1999 increased 5.8% to $20,659,346
from $19,535,978 for the year ended December 31, 1998. This increase was
primarily due to the strength of the wholesale rare coin market, but was offset
by the unanticipated weakness in the retail coin market. Wholesale rare coin
sales increased 30.0% to $15,238,520 for the year ended December 31, 1999 from
$11,722,016 for the year ended December 31, 1998. Retail rare coin sales
decreased 37.5% to $4,373,799 for the year ended December 31, 1999 from
$6,999,860 for the year ended December 31, 1998. This decrease was in spite of
the Company's continued focus on retail sales; market forces resulted in higher
wholesale sales than expected. During the year ended December 31, 1999, the
Company continued its focus on the accumulation of its collectibles inventory in
anticipation of launching its live and online fine art and collectibles
auctions. The Company's first fine art and collectible live and online auction
was held in November 1999. Fine art and collectible sales for the year ended
December 31, 1999 increased 28.6% to $1,047,027 from $814,102 for the year ended
December 31, 1998.
COST OF SALES
Cost of sales for the year ended December 31, 1999 increased 4.2% to $16,828,352
from $16,146,584 for the year ended December 31, 1998. This increase was
primarily due to increased sales. The cost of sales as a percentage of net
revenue decreased to 81.5% (1999) from 82.7% (1998) during the comparable
periods. The decrease in cost of sales as a percentage of revenue, in the
current period over comparable period, was due to a favorable 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.
GROSS PROFIT
Gross profit for the year ended December 31, 1999 increased 13.0% to $3,830,994
from $3,389,394 for the year ended December 31, 1998. The gross profit as a
percentage of net revenue increased to 18.5% (1999) from 17.3% (1998) during the
comparable year. This increase was due to the favorable mix of products sold
during the year. 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.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses for the year ended December 31,
1999 increased 108.2% to $3,920,649 from $1,883,093 for the year ended December
31, 1998. The increase in these expenses were due to: increases in selling
expenses relating to the shift in focus toward retail sales; the costs
associated with the Company's initial public filings; the expansion of the
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administrative infrastructure to support the requirements of public company
reporting and the Company's growing retail operations; and the costs associated
with developing an Internet based auction site. The increase in expenditures
included a one-time consulting expense to the Michelson Group in the amount of
$134,185 that was the assigned fair value of stock warrants granted in exchange
for services rendered in connection with the reverse acquisition. See the
Certain Relationships and Related Transactions section of this document for
further details.
OTHER INCOME AND EXPENSES
Other expenses for the year ended December 31, 1999 increased 293.6% to
$368,963 from $93,736 for the year ended December 31, 1998. This increase was
primarily due to a 282.2% increase in interest expenses for the year ended
December 31, 1999 to $338,006 from $88,428 for the year ended December 31, 1998.
During the current year, the Company's investment in Numismatic Interactive
Network, LLC, customer lists and leasehold improvements amounting to $4,550,
$21,247 and $12,958 respectively were written off.
PROVISION FOR INCOME TAXES
The provision for income taxes for the year ended December 31, 1999 was $15,000
as compared to $14,700 for the year ended December 31, 1998. 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 $39,597 for the year ended December 31, 1999, primarily due to
increased financing activities that occurred as inventory levels were increased
so that Company could continue to expand into rare coins, fine art and
collectibles on a retail level. Comparatively, cash increased $17,740 for the
year ended December 31, 1998 due to increased sales and profitability during the
period.
Net cash used in operating activities for the year ended December 31, 1999 was
$2,118,360, consisting primarily of the Company's net loss and the increases in
the Company's inventory and accounts receivable that was partially offset by
non-cash operating expenses including consulting and legal services exchanged
for stock warrants and common stock, depreciation and amortization and the
write-down of customer lists. Net cash provided by operating activities for the
year ended December 31, 1998 was $914,103, consisting primarily of the Company's
net income of $1,397,865, adjusted by increases in inventory and accounts
payable and a decrease in accounts receivable.
Net cash used in investing activities for the year ended December 31, 1999 was
$107,908 consisting primarily of additions to property and equipment and
long-term rental deposits. Net cash used in investing activities for the year
ended December 31, 1998 was $12,574 consisting primarily of an investment in
Numismatic Interactive Network, LLC.
Net cash provided by financing activities for the year ended December 31, 1999
was $2,265,865 consisting primarily of borrowing's under a revolving credit
agreement, proceeds of interest-bearing stockholder loans and the proceeds of a
convertible, interest-bearing stockholder note payable that were partially
offset by stockholder distributions. Net cash used in financing activities for
the year ended December 31, 1998 was $883,789 consisting primarily consisting of
the reduction of cash overdrafts and stockholder distributions partially offset
by borrowings under a revolving credit agreement.
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NON-CASH INVESTING AND FINANCING ACTIVITIES
During the year ended December 31, 1999, the Company issued 70,000 common shares
in exchange for inventory with a fair value of $135,000 and entered into a
capital lease for equipment with a fair value of $15,436. On December 30, 1999,
in connection with the acquisition of Gehringer & Kellar, Inc. d.b.a Keystone
Coin & Stamp Exchange, the Company purchased assets with a fair value of
$339,229 and assumed liabilities amounting to $339,229. During the year ended
December 31, 1998, the Company entered into a capital lease for equipment with a
fair value of $14,449.
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 December 31, 1999 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. 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
year each. Management may accelerate the repayment of the note based on the
availability of cash flow.
During the year, 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 Company and the principal
stockholder agreed to revise the repayment terms of the notes payable so that no
repayment would occur until January 1, 2001. The balance of stockholder notes
payable as of December 31, 1999 was $1,081,283.
CAPITAL EXPENDITURES
The Company incurred capital expenditures of $85,268 during the year ended
December 31, 1999 consisting primarily of computer hardware, computer software,
office equipment and leasehold improvements. The Company will continue to incur
capital expenditures to further enhance its auction, marketing and accounting
computer hardware and software, and make leasehold improvements at its new
corporate headquarters in Newport Beach, California through the end of the first
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 monthly 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.
Unless the Company is able to negotiate the termination or sublease of its
Laguna Beach and Tustin offices on favorable terms, the Company will be required
to pay an aggregate of approximately $120,000 in rental payments for its Laguna
Beach premises and approximately $8,000 for its Tustin premises over the course
of their respective leases.
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
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.
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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.
ITEM 7 - FINANCIAL STATEMENTS
The consolidated financial statements and corresponding notes to the financial
statements called for by this item appear under the caption Index to Financial
Statements (Page F-1 hereof).
ITEM 8 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Prior to the acquisition of TIA by Austin, as previously described, the Company
engaged Barry L. Friedman, P.C., Certified Public Accountants, to audit the
Company' s financial statements for The fiscal years ended December 31, 1997,
and December 31, 1998. TIA's Certified Public Accountants were Goldenberg
Rosenthal LLP.
Prior to October 1, 1998, TIA's Certified Public Accountants were Schmeltzer
Master Group, PC ("Schmeltzer Master"). On October 1, 1998, Schmeltzer Master,
dissolved and substantially all of the shareholders and staff of Schmeltzer
Master joined Goldenberg Rosenthal Friedlander, LLP to become Goldenberg
Rosenthal, LLP ("Goldenberg Rosenthal") Schmeltzer Master was retained to audit
the financial statements of TIA for the fiscal year ended December 31, 1997.
Although Schmeltzer Master issued an opinion as to TIA's balance sheet,
Schmeltzer Master disclaimed an opinion with respect to the statement of income
and retained earnings and cash flows for the year ended December 31,1997 as
Schmeltzer Master had not been previously audited the physical inventory of TIA
as at December 31, 1996. Subsequently, the Company engaged Goldenberg Rosenthal
to perform additional procedures so as to issue an unqualified opinion for TIA
the year ended December 31, 1997. There have been no disagreements between
management and its former accountants, Schmeltzer Master of the type that are
required to be reported under this Item 8 from January 1, 1997 through the date
of the dissolution of Schmeltzer Master on October 1, 1998.
As of December 21, 1999 Barry L. Friedman, PC, Certified Public Accountants and
Goldenberg Rosenthal, LLP were terminated as the independent accountants of
Registrant and it's predecessor, TIA respectively. The Company had elected to
locate and engage a national certified public accounting firm to audit its
financial statements on an ongoing basis. As of the same date the firm of BDO
Seidman, LLP was engaged as the independent accountant for the Registrant.
PART III
ITEMS 9 - DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16 (A) OF THE EXCHANGE ACT
The following table sets forth the names and ages of the current directors and
executive officers of the Company, the principal offices and positions with the
Company held by each person and the date such person became a director or
executive officer of the Company. The executive officers of the Company are
elected annually by the Board of Directors. The directors serve one year terms
until their successors are elected. The executive officers serve terms of one
year or until their death, resignation or removal by the Board of Directors.
There are no family relationships between any of the directors and executive
officers. In addition, there was no arrangement or understanding between any
executive officer and any other person pursuant to which any person was selected
as an executive officer.
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The directors and executive officers of the Company are as follows:
Name Age Positions
- --------------------- ----- ------------------------------------------
Silvano A. DiGenova 37 Chief Executive Officer, President,
Secretary, and Chairman of the Board
Michael Bonham 41 Vice President of Sales & Marketing,
and Director
Paul Biberkraut 39 Controller and Vice President of
Finance
SILVANO A. DIGENOVA is currently the Company's Chief Executive Officer,
President, Secretary, and Chairman of the Company's Board of Directors. Mr.
DiGenova founded Tangible Investments of America, what would later become the
Company, in 1977. Mr. DiGenova is a recognized leader in the numismatic and
fine arts field. In 1986, Mr. DiGenova helped form the Professional Coin
Grading Service, the first widely accepted uniform grading system for rare
coins. Mr. DiGenova has also worked with several very noted museums,
institutions and world class auction houses, including the San Francisco Mint
Museum, the Philadelphia International Coin Museum, Sotheby's, and Christie's,
functioning as an agent on appraisals and private sales. Mr. DiGenova is on the
Board of Directors of the Professional Numismatists Guild, a non-profit body
overseeing coin and precious metal dealers. Mr. DiGenova is also on the Board
of Directors of ICTA, which represents all tangibles and collectibles dealers in
Washington, D.C. Mr. DiGenova attended the Wharton School of Business at the
University of Pennsylvania for four years. However, Mr. DiGenova left Wharton
in his fourth year to develop TIA, the Company's predecessor and did not obtain
a degree from Wharton.
MICHAEL BONHAM is currently the Company's Vice President of Sales & Marketing
and a member of the Company's Board of Directors. From March 1991 to May 1999,
Mr. Bonham assisted TIA as an independent contractor responsible for sales and
marketing. Mr. Bonham has extensive experience in the bullion markets. Between
January 1987 through March 1991, Mr. Bonham worked with International Rare Coin
& Bullion.
PAUL BIBERKRAUT is currently the Company's Controller and Vice-President of
Finance. From November 1997 to June 1999, Mr. Biberkraut was the Controller of
Quality Systems, Inc., a publicly traded healthcare software company. From
August 1995 to October 1997, Mr. Biberkraut was the Managing director of
Stampendous, Inc., a privately held manufacturer of decorative rubber stamps and
accessories. From June 1991 to June 1995, Mr. Biberkraut was the Vice-President
of Finance of First National Lenders, a privately held mortgage brokerage
company. Mr. Biberkraut attended McGill University where he received a Bachelor
of Commerce and Graduate Diploma in Public Accountancy in 1981 and 1983
respectively. Mr. Biberkraut is a Chartered Accountant and has been a member of
the Canadian Institute of Chartered Accountants since 1984. Mr. Biberkraut
received a Master of Business Administration from Pepperdine University in 1994.
Mr. Biberkraut is also the Chairman of the Supervisory Committee of the Anaheim
Area Credit Union.
COMPLIANCE WITH SECTION 16(A) OF THE SECURITIES EXCHANGE ACT OF 1934.
Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
directors and executive officers and persons who own more than ten percent of a
registered class of the Company's equity securities to file with the SEC initial
reports of ownership and reports of changes in ownership of Common Stock and
other equity securities of the Company. Officers, directors and greater than
ten percent shareholders are required by SEC regulations to furnish the Company
with copies of all Section 16(a) forms they file. To the Company's knowledge,
based solely on the review of copies of such reports furnished to the Company
and written representations that no other reports were required, the Company has
been informed that all Section 16(a) filing requirements applicable to the
Company's officers, directors and greater than ten percent shareholders were
complied with.
Page 18
<PAGE>
ITEM 10 - EXECUTIVE COMPENSATION
On April 30,1999 the Company entered into an oral employment Agreement with
Silvano DiGenova, the Company's President, CEO, Secretary, and Chairman of the
Board of Directors, whereby the Company will pay Mr. DiGenova an annual salary
of $310,000. This agreement may be canceled at any time by either the Company or
Mr. DiGenova. Additionally, the Company has agreed to provide Mr. DiGenova with
an automobile at a cost of up to $10,000 per year.
On April 30,1999 the Company entered into an oral employment Agreement with
Michael Bonham, the Company's Vice President of Sales and Marketing, whereby the
Company will pay Mr. Bonham an annual draw of $50,000 plus commissions on sales
attributable to Mr. Bonham. In addition to his annual compensation, the
Agreement confirmed the prior issuance of options to purchase 75,000 shares of
the Company's common stock at an exercise price of $1.00 per share that vest
over a period of five years.
On October 26,1999 the Company entered into an oral employment Agreement with
Paul Biberkraut, the Company's Controller and Vice President of Finance, whereby
the Company will pay Mr. Biberkraut an annual salary of $90,000 plus
discretionary bonus to be determined by the company's Board of Directors. In
addition to his annual salary, the Agreement issued options to purchase 75,000
shares of the Company's common stock at an exercise price of $2.00 per that
vest over a period of five years.
Page 19
<PAGE>
SUMMARY COMPENSATION TABLE
The Summary Compensation Table shows certain compensation information for
services rendered in all capacities for the year ended December 31, 1999, the
fiscal year ended December 31, 1998, and the fiscal year ended December 31,
1997. Other than as set forth herein, no executive officer's salary and bonus
exceeded $100,000 in any of the applicable years. The following information
includes the dollar value of base salaries, bonus awards, the number of stock
options granted and certain other compensation, if any, whether paid or
deferred.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Annual Compensation Long Term Compensation
----------------------- Awards Payouts
----------------------------------
Restricted Securities
Name and Other Annual Stock Underlying LTIP All Other
Principal Salary Bonus Compensation Awards Options Payouts Compensation
Position Year ($) ($) ($) ($) SARs (#) ($) ($)
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Silvano 1999 250,000 -0- 5,875 -0- -0- -0- -0-
DiGenova
(President,
CEO)
1998 250,000 -0- -0- -0- -0- -0- -0-
1997 150,000 -0- -0- -0- -0- -0- -0-
Michael 1999 -0- -0- 109,987 -0- 75,000 -0- -0-
Bonham
(V.P. Sales &
Marketing)
1998 -0- -0- -0- -0- -0- -0- -0-
</TABLE>
<TABLE>
<CAPTION>
OPTION/SAR GRANTS IN LAST FISCAL YEAR
(INDIVIDUAL GRANTS)
NUMBER OF SECURITIES PERCENT OF TOTAL
UNDERLYING OPTIONS/SAR'S GRANTED
OPTIONS/SAR'S TO EMPLOYEES IN YEAR ENDED EXERCISE OF BASE EXPIRATION
NAME GRANTED (#) DECEMBER 31, 1999 (%) PRICE ($/SH) DATE
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Silvano DiGenova -0- n/a n/a n/a
Michael Bonham 75,000 3.0 1.00 04/30/2009
</TABLE>
<TABLE>
<CAPTION>
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR
AND FY-END OPTION/SAR VALUES
Value of
Number of Unexercised Unexercised In-
Shares Acquired Securities Underlying The-Money Option/SARs
On Exercise Value Options/SARs At FY-End At FY-End ($)
Name (#) Realized ($) Exercisable/Unexercisable Exercisable/Unexercisable
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Silvano DiGenova -0- n/a n/a n/a
Michael Bonham n/a n/a 0/75,000 0/79,500
</TABLE>
Page 20
<PAGE>
COMPENSATION OF DIRECTORS
Currently, Directors of the Company receive no compensation.
ITEM 11 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of February 25, 2000, certain information
with respect to the Company's equity securities owned of record or
beneficially by (i) each Officer and Director of the Company; (ii) each
person who owns beneficially more than 5% of each class of the Company's
outstanding equity securities; and (iii) all Directors and Executive
Officers as a group.
Name and Address of Common Stock Percent of
Title of Class Beneficial Owner Outstanding Outstanding
- ----------------------- ------------------------- ------------- ------------
Silvano A. DiGenova
3444 Via Lido
Common Stock Newport Beach, California 15,492,500 84.33%
Mike Bonham (1)
3444 Via Lido
Common Stock Newport Beach, California 15,000 <1%
Paul Biberkraut (2)
3444 Via Lido
Common Stock Newport Beach, California 500 0%
All Directors and
Officers as a Group (3
Persons) 15,508,000 84.41%
============ =============
Page 21
<PAGE>
1) Includes options to purchase 15,000 shares of the Company's Common Stock
exercisable on April 30, 2000. Does not include an additional 60,000 options to
acquire shares of the Company's common stock which vest in 15,000 share
increments each year over the next four years beginning on April 30, 2001 at an
exercise price of $1.00 per share.
2) Does not include 75,000 options to acquire shares of the Company's common
stock which vest in 20% increments each year over a five year period beginning
on October 26, 2000 at an exercise price of $2.00 per share.
The Company believes that the beneficial owners of securities listed above,
based on information furnished by such owners, have sole investment and voting
power with respect to such shares, subject to community property laws where
applicable. Beneficial ownership is determined in accordance with the rules of
the Commission and generally includes voting or investment power with respect to
securities. Shares of stock subject to options or warrants currently
exercisable, or exercisable within 60 days, are deemed outstanding for purposes
of computing the percentage of the person holding such options or warrants, but
are not deemed outstanding for purposes of computing the percentage of any other
person.
ITEM 12 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
On February 5, 1999, Tangible Investments of America, Inc., the Company's
predecessor, entered into a Corporate Development Agreement with the Michelson
Group, Inc. ("Michelson"). As part of the agreement, Michelson has agreed to
provide consultation and corporate development services on behalf of the
Company. In return, the Company has agreed to compensate Michelson in the
amount of $6,500 per month in addition to warrants to purchase up to 4.9% of the
outstanding shares of the Common Stock of the Company (as calculated
following the completion of a private placement by the Company (the
"Offering")) at an exercise price of $0.01. Pursuant to the Agreement,
Michelson has agreed that the exercise of the warrants adhere to the following
schedule: one half of the warrants can be exercised upon execution of the
Agreement; an additional one fourth when the Company breaks escrow on a bridge
financing in the amount of $1,000,000; and the remaining one fourth upon the
Company breaking escrow on an equity financing of $3,000,000 or more. As of
December 31, 1999, 432,854 warrants have been exercised, resulting in net
proceeds of approximately $4,328 to Company. The Company reflected
compensation expense totaling $134,185 in its consolidated statement of
operations for the year ended December 31, 1999, to reflect the fair value of
such warrant grant.
On March 15, 1999 Tangible Investments of America, Inc., the Company's
predecessor, pursuant to the unanimous consent of the Board of Directors,
declared a distribution of $1,400,000 to Silvano DiGenova, it's sole
shareholder. On March 31, 1999 the Directors of the Company, in consideration
of funds advanced by the sole shareholder to the Company in the amount of
$1,400,000, executed a convertible note in favor of Silvano DiGenova of the same
amount. Interest is payable quarterly at an annual rate of 9%. The note,
including any unpaid accrued interest thereon will become due and payable on
March 31, 2004. The note contains certain acceleration, extension and
conversion provisions. The conversion provision allows Mr. DiGenova the right
to convert the principal amount on this note, or any portion of the principal
amount into shares of the common stock of the Company at a conversion price for
each share equal to $1.00 at any time. The note grants the holder the right to
extend payment for up to five renewal periods of one year each.
On April 28, 1999, the Company (which at the time was designated Austin Land &
Resources, Inc., 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." As part of the
reorganization, the Company issued 16,000,000 shares of its Common Stock to the
shareholders of TIA in exchange for all of the outstanding shares of Common
Stock of TIA. Such shares include the shares owned by officers and directors of
the Company as set forth in the Section "Security Ownership of Certain
Beneficial Owners and Management" hereunder.
During the year, the Company's principal stockholder and president, Silvano
DiGenova 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 Company and Mr. DiGenova agreed to revise the repayment terms of
the notes payable so that no repayment would occur until January 1, 2001. The
balance of notes payable to Mr. DiGenova as at December 31, 1999 was $1,081,283.
On December 31, 1999 the Company's subsidiary, Keystone, entered into a
three-year lease agreement with Stephen J. Gehringer and Kenneth J. Kellar,
Keystone's president and vice president respectively. The property leased is
Keystone's primary retail and administrative location. The lease agreement is
effective January 1, 2000, provides for a monthly rental of $3,000, and expires
on December 31, 2002.
Page 22
<PAGE>
TEM 13 - EXHIBITS AND REPORTS ON FORM 8-K
(A) EXHIBITS
ITEM 1 - INDEX TO EXHIBITS
EXHIBIT NO. DESCRIPTION
(1)* Acquisition Agreement dated April 28, 1999 by and between
Austin Land & Resources, Inc. and Tangible Investments of
America, Inc.
(3.1)* Articles of Incorporation of Austin Land &
Resources, Inc. filed on August 30, 1995.
(3.2)* Amendments to the Articles of Incorporation
of Austin Land & Resources, Inc., changing
the name of the Company to Tangible Asset
Galleries, Inc.
(3.3)* Bylaws of the Company
(10.1)* Lease dated June 15, 1996 by and between Tangible
Investments of America and LBP Enterprises for the
lease of real property located at 1550 South Coast
Highway, Laguna Beach, California.
(10.2)* Lease dated March 31, 1999 by and between Tangible
Investments of America and Tustin Business Center,
L.P. for the lease of real property located at 17842
Irvine, Boulevard, Tustin, California.
(10.3)* Line of Credit between Tangible Investments of
America, Inc. and Wells Fargo Bank, dated December
1, 1999.
(10.4)* Investment Banking Agreement by and between Tangible
Investments of America and the Michelson Group
dated February 3, 1999.
(10.5)* Convertible Note by and between Tangible Investments
of America and Silvano DiGenova dated
March 31, 1999.
(10.6)* Lease dated September 20, 1999 by and between
Tangible Asset Galleries, Inc. and LJR Lido
Partners LP.
(10.7) Lease dated December 31, 1999 by and between
Gehringer and Kellar, Inc. and Stephen J. Gehringer
and Kenneth J. Kellar.
(16.0)* Letter from former accountant Schmeltzer Master Group, PC
(27.0) Financial Data Schedule
________________________
*Previously Filed
Page 23
<PAGE>
(B) REPORTS ON FROM 8-K
On December 22, 1999, the Company filed a Current Report on Form 8-K dated
December 21, 1999 reporting under Item 4, a change in its certifying accountants
from Barry L. Friedman, PC and Goldenberg Rosenthal, LLP to BDO Seidman LLP.
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 dba Keystone Coin & Stamp Exchange.
SIGNATURES
Pursuant to 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
Page 24
<PAGE>
TANGIBLE ASSET GALLERIES, INC.
CONTENTS
Independent Auditors' Reports F-2
Financial Statements F-3
Consolidated Balance Sheets F-4
Consolidated Statements of Operations F-5
Consolidated Statements of Stockholder's Equity F-6
Consolidated Statements of Cash Flows F-7
Notes to Consolidated Financial Statements F-9
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors
Tangible Asset Galleries, Inc.
Newport Beach, California
We have audited the accompanying consolidated balance sheet of Tangible Asset
Galleries, Inc. and subsidiaries (the "Company") as of December 31, 1999, and
the related consolidated statements of operations, stockholder's equity and cash
flows for the year then ended. These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Tangible Asset
Galleries, Inc. and subsidiaries as of December 31, 1999, and the results of
their operations and their cash flows for the year then ended, in conformity
with generally accepted accounting principles.
/s/ BDO Seidman, LLP
BDO Seidman, LLP
Costa Mesa, California
February 25, 2000
F-2
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors
Tangible Asset Galleries, Inc.
Newport Beach, California
We have audited the accompanying balance sheet of Tangible Asset Galleries,
Inc., formally known as Tangible Investments of America, as of December 31,
1998, and the related statements of operations, cash flows and stockholder's
equity for the year then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Tangible Asset Galleries, Inc.,
formally known as Tangible Investments of America, as of December 31, 1998, and
the results of its operations and its cash flows for the year then ended in
conformity with generally accepted accounting principles.
/s/ Goldenberg Rosenthal, LLP
Goldenberg Rosenthal, LLP
Jenkintown, Pennsylvania
August 17, 1999
F-3
<PAGE>
<TABLE>
<CAPTION>
TANGIBLE ASSET GALLERIES, INC.
CONSOLIDATED BALANCE SHEETS
<S> <C> <C>
December 31, December 31
1999 1998
------------------- ------------------
ASSETS (Note 5)
CURRENT ASSETS
Cash $ 81,882 $ 42,285
Accounts receivable 1,057,403 734,148
Inventories (Notes 2 and 6) 6,419,136 4,856,277
Prepaid expenses and other 58,162 12,431
------------------ ------------------
Total current assets 7,616,583 5,645,141
------------------ ------------------
PROPERTY AND EQUIPMENT, net (Notes 3 and 8) 144,041 92,986
OTHER ASSETS (Note 4) 329,068 34,947
------------------ ------------------
Total assets $ 8,089,692 $ 5,773,074
================== ==================
LIABILITIES AND STOCKHOLDER'S EQUITY
CURRENT LIABILITIES
Line of credit (Note 5) $ 1,840,000 $ 600,000
Accounts payable and accrued expenses 1,241,392 1,668,371
Note payable (Note 6) 200,000 -
Notes payable to related parties (Note 7) 339,229 80,000
Obligations under capital leases (Note 8) 8,797 4,445
------------------ ------------------
3,629,418 2,352,816
------------------ ------------------
LONG-TERM LIABILITIES
Notes payable to related parties, net of current portion (Note 7) 2,481,283 -
Obligation under capital leases, net of current portion (Note 8) 13,436 7,642
Deferred taxes (Note 9) 10,000 -
------------------ ------------------
2,504,719 7,642
------------------ ------------------
TOTAL LIABILITIES 6,134,137 2,360,458
------------------ ------------------
COMMITMENTS AND CONTINGENCIES (Note 11)
STOCKHOLDER'S EQUITY
Common stock, $0.001 (Notes 1, 10 and 12) par value,
50,000,000 shares authorized; 18,170,354 (1999)
and 16,000,000 (1998) issued and outstanding 18,170 16,000
Common stock committed, $0.001 par value 202 -
Additional paid in capital 2,423,230 1,834,589
Retained earnings (accumulated deficit) (486,047) 1,562,027
------------------ ------------------
1,955,555 3,412,616
------------------ ------------------
Total liabilities and Stockholder's equity $ 8,089,692 $ 5,773,074
================== ==================
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
<TABLE>
<CAPTION>
TANGIBLE ASSET GALLERIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<S> <C> <C>
Year Ended Year Ended
December 31, December 31,
1999 1998
-------------- -------------
NET SALES $ 20,659,346 $ 19,535,978
COST OF SALES 16,828,352 16,146,584
-------------- -------------
GROSS PROFIT 3,830,994 3,389,394
Selling, general and administrative expenses 3,920,649 1,883,093
-------------- -------------
Income (loss) from operations (89,655) 1,506,301
-------------- -------------
OTHER INCOME (LOSS)
Interest income 7,798 1,979
Interest expense (Notes 5, 6, 7 and 8) (338,006) (88,428)
Other income (loss) (38,755) (7,287)
-------------- -------------
(368,963) (93,736)
INCOME (LOSS) BEFORE PROVISION FOR TAXES (458,618) 1,412,565
INCOME TAXES (Note 9) 15,000 14,700
-------------- -------------
NET (LOSS) INCOME $ (473,618) $ 1,397,865
============== =============
NET (LOSS) INCOME PER SHARE
Basic $ (0.03) $ 0.09
============== =============
Diluted $ (0.03) $ 0.09
============== =============
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
<TABLE>
<CAPTION>
TANGIBLE ASSET GALLERIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY
Common Stock
Committed Common Stock Capital Retained
------------------- ------------------------ Additional earnings Total
paid-in (accumulated Stockholder's
Shares Amount Shares Amount Capital deficit) equity
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balances, at December 31, 1997,
as previously reported - $ - 490 $ 10 $ 1,850,579 $ 789,009 $ 2,639,598
Restatement of common stock
and additional paid-in capital
in connection with reverse
merger (Notes 1 and 10) - - 15,999,510 15,990 (15,990) - -
-------- ---------- ---------- ----------- ---------- ------------ -----------
Balances, at December 31, 1997,
as restated - - 16,000,000 16,000 1,834,589 789,009 2,639,598
Distributions to majority
shareholder - - - - - (624,847) (624,847)
Net income - - - - - 1,397,865 1,397,865
-------- ---------- ---------- ----------- ---------- ------------ -----------
Balance, at December 31, 1998 - - 16,000,000 16,000 1,834,589 1,562,027 3,412,616
Common stock of ALR retained
in connection with reverse
merger (Notes 1 and 10) - - 1,650,000 1,650 (1,650) - -
Fair value of warrant grant
(Note 10) - - - - 134,185 - 134,185
Exercise of warrant (Note 10) - - 432,854 433 3,895 - 4,328
Issuance of stock for legal
services (Note 10) - - 17,500 17 17,483 - 17,500
Issuance of stock for inventories
(Note 10) - - 70,000 70 134,930 - 135,000
Common stock committed in
connection with purchase
business combination
(Note 12) 201,861 202 - - 299,798 - 300,000
Distributions to majority
shareholder - - - - - (1,574,456) (1,574,456)
Net loss - - - - - (473,618) (473,618)
-------- ---------- ---------- ----------- ---------- ------------ -----------
Balance, December 31, 1999 201,861 $ 202 18,170,354 $ 18,170 $ 2,423,230 $ (486,047) (1,955,555)
======== ========== ========== =========== ========== ============ ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
<TABLE>
<CAPTION>
TANGIBLE ASSET GALLERIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<S> <C> <C>
Year Ended Year Ended
December 31, December 31,
1999 1998
------------ --------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net (loss) income $ (473,618) $ 1,397,865
Adjustments to reconcile net (loss) income to net cash
(used in) provided by operating activities:
Depreciation and amortization 36,691 25,436
Loss (gain) on sale or retirement of property
and equipment 12,958 (775)
Write-off of customer list 21,247 -
Loss on investments 12,500 7,950
Provision for deferred taxes 10,000 -
Fair value of warrants granted 134,185 -
Issuance of common stock for legal services 17,500 -
Changes in assets or liabilities, net of effects of
business acquisition:
Accounts receivables (323,255) 636,351
Inventories (1,093,858) (1,804,769)
Prepaid expenses and other (45,731) (7,532)
Accounts payable (583,490) 698,456
Accrued expenses 156,511 (38,879)
------------ --------------
Net cash (used in) provided by operating activities (2,118,360) 914,103
------------ --------------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sales of property and equipment - 4,000
Purchases of property and equipment (85,268) (4,074)
Increases in other assets (27,868) (12,500)
Cash acquired in purchase business combination 5,228 -
------------ --------------
Net cash used in investing activities (107,908) (12,574)
------------ --------------
CASH FLOWS FROM FINANCING ACTIVITIES
Cash overdraft - (735,945)
Net borrowings under line of credit 1,240,000 399,363
Borrowings under notes payable 200,000 -
Net increase in related party debt 2,401,283 80,000
Repayments on obligations under capital lease (5,290) (2,360)
Exercise of stock options 4,328 -
Stockholder distributions (1,574,456) (624,847)
------------ --------------
Net cash provided by financing activities 2,265,865 (883,789)
------------ --------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-7
<PAGE>
<TABLE>
<CAPTION>
TANGIBLE ASSET GALLERIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
<S> <C> <C>
Year Ended Year Ended
December 31, December 31,
1999 1998
------------- -------------
Net increase in cash 39,597 17,740
CASH, beginning of year 42,285 24,545
------------- -------------
CASH, end of year $ 81,882 $ 42,285
============= =============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest $ 338,006 $ 85,683
Income taxes $ - $ 13,872
============= =============
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND
FINANCING ACTIVITIES:
Issuance of common stock for inventories $ 135,000 $ -
Fair value of assets acquired for capital leases $ 15,436 $ 14,449
============= =============
During fiscal 1999, the Company purchased all of the
common stock of Gehringer and Kellar. In conjunction
with acquisition, liabilities were assumed as follows:
Fair value of assets acquired $ 339,229 $ -
Cash paid for the capital stock - -
------------- -------------
Liabilities assumed $ 339,229 $ -
============= =============
</TABLE>
See accompanying notes to consolidated financial statements.
F-8
<PAGE>
TANGIBLE ASSET GALLERIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND BUSINESS
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.
BASIS OF PRESENTATION
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 as of and
for the year ended December 31, 1998 and for the period January 1, 1999 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.
On December 30, 1999 the Company acquired 100% of the outstanding common
stock of Keystone, a competitor located in Allentown, Pennsylvania (see Note 12)
All significant intercompany balances and transaction have been eliminated
in consolidation.
CASH AND CASH EQUIVALENTS
The Company places its cash with high credit quality institutions. The
Federal Deposit Insurance Corporation ("FDIC") insures cash accounts at each
institution for up to $100,000. From time to time, the Company maintains cash
balances in excess of the FDIC limit.
F-9
<PAGE>
TANGIBLE ASSET GALLERIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INVENTORIES
Inventories consisting of rare coins, fine art, antiques and other
collectibles are stated at the lower of cost (on a specific identification
basis) or market.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost and are depreciated or amortized
(as applicable) using the straight-line method over the estimated useful lives
of the related assets, ranging from three to seven years. Maintenance and
repairs are charged to expense as incurred. Significant renewals and betterments
are capitalized. At the time of retirement or other disposition of property and
equipment, the cost and accumulated depreciation and amortization are removed
from the accounts and any resulting gain or loss is reflected in operations.
The Company assesses the recoverability of property and equipment by
determining whether the depreciation and amortization of property and equipment
over its remaining life can be recovered through projected undiscounted future
cash flows. The amount of property and equipment impairment, if any, is
measured based on fair value and is charged to operations in the period in which
property and equipment impairment is determined by management. At December 31,
1999 and 1998, management of the Company has not identified any impaired assets.
OTHER ASSETS
Other assets primarily consist of goodwill and lease security deposits (see
Note 4). Goodwill is related to the acquisition of Keystone (Note 12).
Goodwill is amortized using the straight-line method over five years. The
Company assesses the recoverability of goodwill by determining whether the
amortization over the remaining life can be recovered through projected
undiscounted future cash flows. The amount of impairment, if any, is measured
based on fair value and is charged to operations in the period in which
impairment is determined by management. At December 31, 1999, management of the
Company has not identified any impaired assets.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenues and expenses during the
reported periods. Actual results could materially differ from those estimates.
Areas where significant estimation is involved include, but are not limited to,
the evaluation of the collectibility of accounts receivable and the
realizability and valuation of inventories.
F-10
<PAGE>
TANGIBLE ASSET GALLERIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
REVENUE RECOGNITION
The Company generates revenue from wholesale and retail sales of rare
coins, precious metals bullion, fine art, antiques and collectibles. The
recognition of revenue varies for wholesale and retail transactions and is, in
large part, dependent on the type of consideration (i.e., monetary and/or
non-monetary) and the timing and amount of such consideration.
The Company sells merchandise (generally coins) to other
wholesalers/dealers within its industry on credit, generally for terms of 30 to
60 days, but in no event greater than one year. The Company grants credit to
new dealers based on extensive credit evaluations and for existing dealers based
on established business relationships and payment histories. The Company does
not obtain collateral with which to secure its accounts receivable. The Company
maintains reserves for potential credit losses based on an evaluation of
specific receivables and the Company's historical experience related to credit
losses. As of December 31, 1999 and 1998, management does not believe that there
was any significant credit risk associated with its accounts receivable and,
accordingly, has not established reserves. Revenues for monetary transactions
(i.e., cash and receivables) with dealers are recognized when the merchandise is
shipped to the related dealer.
The Company also sells merchandise (generally coins) to retail customers on
credit, generally for terms of 30 to 60 days, but in no event greater than one
year. The Company grants credit to new retail customers based on extensive
credit evaluations and for existing retail customers based on established
business relationships and payment histories. When a new retail customer is
granted credit, the Company generally collects a 25% deposit on the sales price
and holds the merchandise as collateral against the customer's receivable until
all amounts due under the credit arrangement are paid in full.
The initial deposit and subsequent payments are all non-refundable, subject
to the Company's limited-in-duration money back guaranty policies (as discussed
below). Under this retail arrangement, revenues are recognized under the
installment method. When nonrefundable deposits are less than 25% of the sales
price, revenues are deferred until the Company receives 25% or more of the sales
price, at which time revenues are recognized under the installment method. At
December 31, 1999, the Company had $55,000 in deposits related to retail
installment sales, which is included in accounts payable and accrued expenses of
the accompanying 1999 consolidated balance sheet.
F-11
<PAGE>
TANGIBLE ASSET GALLERIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
In limited circumstances, the Company exchanges merchandise for similar
merchandise and/or monetary consideration with both dealers and retail
customers, for which the Company recognizes revenue in accordance with APB No.
29, "Accounting for Non-monetary Transactions." When the Company exchanges
merchandise for similar merchandise and there is no monetary component to the
exchange, the Company does not recognize any revenue. Instead, the basis of the
merchandise relinquished becomes the basis of the merchandise received, less any
indicated impairment of value of the merchandise relinquished. When the Company
exchanges merchandise for similar merchandise and there is a monetary component
to the exchange, the Company recognizes revenue to the extent of monetary assets
received and determines the cost of sale based on the ratio of monetary assets
received to monetary and non-monetary assets received multiplied by the cost of
the assets surrendered.
The Company also generates revenues from consignment sales. Consignment
sales are in cash and, under limited circumstances, on account. As of December
31, 1999, no consignment sales were included in accounts receivable. There are
two primary methods in which the Company recognizes revenues from consignment
sales: (1) percentage-of-sales, and (2) fixed cost.
Under the percentage-of-sales method, the Company receives the merchandise
from the consignor and mutually agrees to sell or auction the underlying
merchandise to a third party for a predetermined floor price, period of time and
percentage of the ultimate sales price, which generally ranges from 5% to 15%.
Upon sale of the merchandise to a third party and cash tendered, the Company
recognizes net revenues for its allocable percentage of the ultimate sales price
and remits the remaining cash proceeds to the consignor. Under the fixed cost
method, the Company receives the merchandise from the consignor and mutually
agrees to sell or auction the underlining merchandise to a third party for a
predetermined period of time, without regard to the ultimate sales price. The
Company and the consignor mutually agree to a price that the Company will pay
the consignor upon the ultimate sale of the underlining merchandise; otherwise,
a fixed cost. Upon sale of the merchandise to a third party and cash tendered,
the Company recognizes net revenues comprised of the ultimate sales price less
the agreed upon fixed cost, and the proceeds attributed to the fixed cost are
remitted to the consignor.
The Company has two separate return policies (money-back guarantees). Both
policies cover retail transactions only. The first policy relates solely to
graded rare coins. Customers may return graded rare coins purchased within 7
days of the receipt of the rare coins for a full refund as long as the rare
coins are returned in exactly the same condition as they were delivered. In the
case of rare coin sales on account, customers may cancel the sale within 7 days
of making a commitment to purchase the rare coins. The receipt of a deposit and
a signed purchase order evidences the commitment.
F-12
<PAGE>
TANGIBLE ASSET GALLERIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The second policy relates to fine art, antiques and collectibles only.
These items may be returned within 30 days of their receipt for a full refund as
long as the items are returned in exactly the same condition as they were
delivered. In the case of fine art, antiques and collectibles sales on account,
customers may cancel the sale within 30 days of a making a commitment to
purchase the items. The receipt of a deposit and a signed purchase order
evidences the commitment. Historically, the Company's retail customers have not
exercised their rights to money-back guarantees and as such, the Company's
management has not provided a reserve for sales returns in the accompanying
consolidated financial statements.
ADVERTISING
Advertising costs are expensed as incurred. During fiscal 1999 and 1998,
advertising expenses totaled $630,527 and $115,000, respectively.
INCOME TAXES
Prior to the reverse acquisition on April 28, 1999, TIA elected to be taxed
as an S corporation for Federal and state purposes. Under these provisions, the
Company did not pay Federal corporate taxes on its income. Instead, the
stockholders were liable for income taxes on their respective share of the
Company's taxable income and other distributable items. The California tax
treatment is substantially the same as Federal, except for a 1.5% surtax
(minimum of $800) imposed on the Company's taxable income. Concurrent with the
reverse acquisition, the Company's S corporation election was revoked.
The Company now accounts for income taxes under Statement of Financial
Accounting Standards No. 109,"Accounting for Income Taxes", ("SFAS 109"). Under
SFAS 109, deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. A valuation allowance is
provided for significant deferred tax assets when it is more likely than not
that such assets will not be recovered.
F-13
<PAGE>
TANGIBLE ASSET GALLERIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
STOCK-BASED COMPENSATION
The Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 123 ("SFAS 123"), "Accounting for Stock-Based
Compensation," which defines a fair value based method of accounting for
stock-based compensation. However, SFAS 123 allows an entity to continue to
measure compensation cost related to stock and stock options issued to employees
using the intrinsic method of accounting prescribed by Accounting Principles
Board Opinion No. 25 ("APB 25"), "Accounting for Stock Issued to Employees."
Entities electing to remain with the accounting method of APB 25 must make pro
forma disclosures of net income, as if the fair value method of
accounting defined in SFAS 123 had been applied. The Company has elected to
account for stock-based compensation to employees under APB 25.
EARNINGS PER SHARE
The Financial Accounting Standards Board ("FASB") issued Statement of
Financial Accounting Standards No. 128 ("SFAS"), "Earnings Per Share ("EPS"),"
which requires dual presentation of basic EPS and diluted EPS on the face of all
income statements issued after December 15, 1997 for all entities with complex
capital structures. Basic EPS is computed as net income divided by the weighted
average number of common shares outstanding for the period. Diluted EPS
reflects the potential dilution that could occur from common shares issuable
through stock options, warrants and other convertible securities. All years
presented have been restated to adopt the provisions of SFAS No. 128.
The following table illustrates the required disclosure of the
reconciliation of the numerators and denominators of the basic and diluted EPS
computations for the years ended December 31:
Years ended 1999 1998
----------- ----------
Basic:
Net (loss) income $ (473,618) $ 1,397,865
=========== ==========
Weighted average number of common shares
outstanding 18,006,286 16,000,000
=========== ==========
Basic net (loss) income per common share $ (0.03) $ 0.09
=========== ==========
Diluted:
Net (loss) income $ (473,618) $ 1,397,865
Adjustments to net (loss) income:
Interest on convertible stockholder note payable
(net of income tax) - -
----------- ----------
Diluted net (loss) income $ (473,618) $ 1,397,865
=========== ==========
F-14
<PAGE>
TANGIBLE ASSET GALLERIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Years ended 1999 1998
----------- ----------
Weighted average number of common shares outstanding 18,006,286 16,000,000
Weighted average number of common shares equivalents:
Stock options and warrants - -
Convertible stockholders note payable - -
----------- ----------
Weighted average number of common and common
equivalent shares 18,006,286 16,000,000
=========== ==========
Diluted net (loss) income per common share $ (0.03) $ 0.09
=========== ==========
The total potential common shares that have not been included in the
calculation of diluted net (loss) income per share totaled $4,245,357 at
December 31, 1999 (note 10).
SEGMENT REPORTING
The Company adopted SFAS No. 131 ("SFAS 103"), "Disclosures about Segments
of an Enterprise and Related Information," during fiscal 1999. SFAS 131
establishes standards for the way that public companies report information about
operating segments and related disclosures about products and services,
geographic areas and major customers in annual consolidated financial
statements. The Company views its operations and manages its business as
principally one segment, a dealer of collectibles. For information purposes,
the sales of coins and fine art totaled $19,612,319 and $1,047,077 for 1999,
respectively, and $18,721,876 and $814,102 for 1998, respectively.
COMPREHENSIVE INCOME
Effective January 1, 1998, the Company adopted Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS 130").
SFAS 130 established new rules for the reporting and display of comprehensive
income and its components in a full set of general-purpose financial statements.
The adoption of SFAS 130 had no effect on the accompanying consolidated
financial statements, because the Company had no other components of
comprehensive income.
CUSTOMER AND VENDOR CONCENTRATIONS
During 1999, the Company had no customer that accounted for more that 10%
or more of the Company's net sales. As of December 31, 1999, two customers
represented 37% and 14% of accounts receivable, respectively. During 1998 the
Company had one major customer that accounted for 12% of net sales and 62% of
accounts receivable as of December 31, 1998.
During fiscal 1999, the Company purchased a significant portion (11% of
purchases) of its inventories from one vendor. As of December 31, 1999, no
amounts were due to this vendor; two other vendors accounted for 22% and 18% of
accounts payable, respectively.
If the relationship between the Company and these customers and/or vendors
was altered, the future results of operations could be significantly affected.
F-15
<PAGE>
TANGIBLE ASSET GALLERIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
RISKS AND UNCERTAINTIES
Market Risk
Over time, market demand for fine art and investment grade coins will vary
due to perceived scarcity, subjective valuation, general consumer trends,
variations in the price of precious metals, and other general economic
conditions. The Company derives a significant portion of its revenues from
wholesale dealers and retail collectors on the sales of fine art and investment
grade coins. Declines in market demand for fine art and investment grade coins
would likely cause a decrease in annual sales revenue and have an overall
negative affect on operations.
Inventory Risk
The Company purchases fine art and investment grade coins from dealers and
collectors and assumes the inventory and price risks of these items until sold.
If the Company were unable to sell such inventory, or at prices sufficient to
generate a profit, or if the market value of such inventory were to decline, the
ultimate amounts realized by the Company from the sale of such inventory could
be less than the carrying values reflected in the accompanying consolidated
balance sheet.
FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107, "Disclosures about
Fair Value of Financial Instruments", requires the disclosure of the fair value,
if reasonably obtainable, of the Company's financial instruments. The Company's
financial instruments consist of its cash, accounts receivable, line of credit,
accounts payable and accrued expenses, note payable and notes payable to related
parties. Management has determined that, except for notes payable to related
parties, the fair values of the Company's financial instruments approximate
their carrying values at December 31, 1999 and 1998. Management was unable to
determine the fair value of the notes payable to related parties, as an active
market for such instruments does not exist.
RECLASSIFICATIONS
Certain reclassifications have been made to the 1998 financial statements
to conform with the 1999 consolidated financial statement presentation.
F-16
<PAGE>
TANGIBLE ASSET GALLERIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. INVENTORIES
Inventories are comprised of the following:
December 31, 1999 1998
------ ------
Rare coins $ 4,329,057 $ 3,639,144
Fine art, antiques and collectibles 2,090,079 1,217,133
--------------- ---------------
$ 6,419,136 $ 4,856,277
=============== ===============
Inventory totaling $347,945 was on consignment with third parties at December
31, 1999. Inventory totaling $243,760 was held for display at the residence of
the president and majority stockholder at December 31, 1999. Inventory totaling
$232,500 was held for a third party as collateral for a note payable (Note 6).
3. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
December 31, 1999 1998
------ ------
Furniture and equipment $ 103,759 $ 119,572
Computer equipment 105,258 -
Leasehold improvements 11,260 41,601
--------------- -----------
220,277 161,173
Accumulated depreciation (76,236) (68,187)
--------------- ------------
$ 144,041 $ 92,986
=============== ============
4. OTHER ASSETS
Other assets consist of the following:
December 31, 1999 1998
------ ------
Goodwill (Note 12) $ 300,000 $ -
Investment, at cost 5,000 4,550
Customer list - 21,247
Security deposits 24,068 9,150
-------------- -----------
$ 329,068 $ 34,947
============== ===========
F-17
<PAGE>
TANGIBLE ASSET GALLERIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. LINE-OF-CREDIT
The Company had a $600,000 line-of-credit agreement with a bank which was
cancelled on September 2, 1999. This line of credit bore interest at the prime
rate (7.75% as of December 31, 1998), 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 December 31, 1998 was $600,000.
On August 30, 1999, the Company obtained a $2,000,000 line-of-credit
agreement with a bank which expires on July 31, 2000. The line-of-credit bears
interest at the bank's prime rate, plus 1.50% (10.25% at December 31, 1999), 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 December 31, 1999 was $1,840,000.
The Company's line-of-credit has certain restrictive financial covenants.
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 such covenants.
6. 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
(8.75% as of December 31, 1999) plus 4.50% per annum. The short-term loan is
collateralized by specific rare coins in inventory, which are being held by the
lender (Note 2). The outstanding balance as of December 31, 1999 was $200,000.
F-18
<PAGE>
TANGIBLE ASSET GALLERIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. NOTES PAYABLE TO RELATED PARTIES
Notes payable to related parties consist of the following:
December 31, 1999 1998
---------- -------
Unsecured note payable to Company's president and
principal stockholder, bearing interest quarterly at 10%
per annum. The note matures January 1, 2001, at which
time all outstanding principal and interest is due. $1,081,283 $80,000
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 -
Note payable to the previous owners of Gehringer and
Kellar, Inc. d/b/a Keystone Coin & Stamp; principal is
due in full on demand, with interest payable monthly at
8% per annum; secured by all assets of Gehringer and
Kellar, Inc. 339,229 -
---------- ------
2,820,512 80,000
Less current portion 339,229 80,000
---------- ------
$2,481,283 $ -
========== ======
Interest expense incurred to related parties during the years ended December 31,
1999 and 1998, totaled $120,510 and $6,400, respectively, all of which has been
paid.
Principal maturities of notes payable to related parties are as follows:
Years ending December 31,
2000 $ 339,229
2001 1,081,283
2002 -
2003 -
2004 1,400,000
----------
$ 2,820,512
==========
F-19
<PAGE>
TANGIBLE ASSET GALLERIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. OBLIGATIONS UNDER CAPITAL LEASES
The Company leases certain computer equipment under two non-cancelable
capital leases. Future principal payments under these non-cancelable capital
leases are as follows:
Years ending December 31,
2000 $ 11,760
2001 8,836
2002 4,590
---------
25,186
Less: interest at 12% and 18% (2,953)
---------
22,233
Less: current portion (8,797)
---------
$ 13,436
=========
9. INCOME TAXES
Effective with the reverse acquisition on April 28, 1999 (see Note 1), the
Company changed its tax status from an S-Corporation to a C-Corporation.
The provision for income taxes consists of the following components:
Years ended December 31, 1999 1998
------ ------
Current:
Federal $ - $ -
State 5,000 14,700
------- -------
5,000 14,700
------- -------
Deferred:
Federal 8,000 -
State 2,000 -
------- -------
10,000 -
------- -------
$ 15,000 $ 14,700
======= =======
F-20
<PAGE>
TANGIBLE ASSET GALLERIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
9. INCOME TAXES (CONTINUED)
The income tax effects of significant items comprising the Company's net
deferred income tax assets and liabilities are as follows:
December 31, 1999 1998
---------- -------
Deferred tax assets:
Unearned income $ 73,856 $ -
Net operating loss carryforwards 173,426 -
Intangible asset 7,800 -
Accrued vacation pay 1,077 -
---------- -------
Gross deferred tax assets 256,159 -
Valuation allowance (253,781) -
Deferred tax assets, net of reserve 2,378
---------- -------
Deferred tax liabilities:
Depreciation (12,378) -
---------- -------
Net deferred tax liabilities $ (10,000) $ -
========== =======
The income tax benefit differs from the amount of income tax determined by
applying the expected U.S. Federal income tax rate to pretax loss for 1999 as a
result of:
1999
----------
Computed "expected" tax benefit $ (155,930)
Increase (decrease) in income tax benefit resulting from:
Nondeductible expenses 4,845
Income related to period under S corporation status (74,800)
State income tax expense 5,000
Change in tax status (17,896)
Increase in valuation allowance 253,781
---------
$ 15,000
=========
At December 31, 1999, the Company has a Federal tax net operating loss
carryforward of approximately $470,000, which expires in 2019, and a state net
operating loss carryforward of approximately $234,000, which expires in 2004.
F-21
<PAGE>
TANGIBLE ASSET GALLERIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10. EQUITY
On April 28, 1999, TIA merged with ALR as discussed at Note 1. As a
result, the shares of TIA for 1998 have been restated to retroactively reflect
the number of shares of ALR stock received by the shareholders of TIA as a
result of the reverse merger.
The shares of stock held by the shareholders of ALR totaled 1,650,000 prior
to the reverse merger. The Company has reflected such shares as new shares
issued in connection with the reverse merger. The consideration received was
$0, as ALR had no net assets or operations on such date.
During 1999, the Company issued 17,500 shares of common stock in exchange
for services totaling $17,500. The Company recorded the issuance of the shares
at its estimate of market value at the time of issuance. The Company issued
70,000 shares of common stock in exchange for inventories totaling $135,000.
The Company recorded the issuance of the shares at its estimate of market
value at the time of issuance. The Company also issued 201,861 shares of common
stock in connection with an acquisition (see Note 12). The Company valued the
shares issued at approximately $1.49 per share, its estimate of market value at
the time of issuance.
On April 28, 1999, TIA distributed earnings to its majority stockholder
totaling $1,574,456. Immediately following the distribution and in connection
with the reverse merger, the majority stockholder lent back a portion of the
distribution to the Company totaling $1,400,000 as a convertible note payable
(see Note 7).
On April 30, 1999, the Company granted to certain employees and independent
contractors 345,000 stock options to purchase common stock at an exercise price
of $1.00 per share. The stock options vest over a five year period commencing
one year from the date of grant. The stock options were granted at management's
estimate of market value at the date of grant.
On various dates throughout fiscal 1999, the Company granted to certain
employees and independent contractors 400,003 stock options to purchase common
stock at an exercise price of $4.46 per share. The stock options vest over
three to five year periods commencing one year from the date of grant. As of
December 31, 1999, 15,000 stock options had been cancelled. The stock options
were granted at management's estimate of market value at the date of grant.
On August 23, 1999, the Company granted to certain employees 20,000 stock
options to purchase common stock at an exercise price of $4.68 per share. The
stock options vest over a five year period commencing one year from the date of
grant. As of December 31, 1999, all 20,000 stock options had been cancelled. The
stock options were granted at management's estimate of market value at the date
of grant.
F-22
<PAGE>
TANGIBLE ASSET GALLERIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10. EQUITY (CONTINUED)
On various dates throughout fiscal 1999, the Company granted to certain
employees and independent contractors 182,500 stock options to purchase common
stock at an exercise price of $2.00 per share. The stock options vest over
three to five year periods commencing one year from the date of grant. The stock
options were granted at management's estimate of market value at the date of
grant.
On December 29, 1999, the Company granted to certain employees 1,500,000
stock options to purchase common stock at an exercise price of $1.50 per share.
The stock options are exercisable on a pro-rata basis each calendar quarter over
three years with first pro-rata portion vesting on March 31, 2000. The stock
options were granted at management's estimate of market value at the date of
grant.
Total options granted in 1999 to nonemployees, net of cancellations, total
55,000. The fair value of such options, calculated by management using an
option pricing model, totals $0.
All options granted during fiscal 1999 expire at the earlier of five years
after the vesting date of each option or six months after the termination of
employment or independent contractor agreement for vested option grants only.
The following table summarizes information about stock option transactions:
1999 1998
------------------- ---------------------
Weighted Weighted
Option Average Option Average
Shares Exercise Price Shares Price
- --------------------------------------------------------------------------------
Outstanding at beginning of year - $ - - $ -
Options granted 2,447,503 1.98 - -
Options canceled (35,000) 4.59
Options exercised - - - -
- --------------------------------------------------------------------------------
Outstanding at December 31 2,412,503 $ 1.94 - $ -
================================================================================
Exercisable at December 31 - $ - - $ -
================================================================================
Fair value of options granted 2,412,503 $ 1.28 - $ -
================================================================================
F-23
<PAGE>
TANGIBLE ASSET GALLERIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10. EQUITY (CONTINUED)
On February 6, 1999, the Company granted The Michelson Group, Inc. warrants
to purchase 865,708 shares at a price of $0.01 per share, in connection with
consulting and investment advisory services relating to the reverse merger.
Under the terms of the warrant grant agreement, 432,854 warrants became
exercisable on March 15, 1999. Management estimated that the market value of
such warrants was $0.32 per warrant at the date of grant. Management reflected
consulting expense as a result of such warrant grant totaling $134,185 in 1999.
The balance of the warrants will be issued in equal portions based on the
completion of certain tasks, as set forth in the warrant grant agreement. The
warrant agreement has an anti-dilution provision whereby The Michelson Group
will be entitled to additional warrants under certain conditions, as defined.
As of December 31, 1999, 432,854 warrants had been exercised and 432,854
conditional warrants remained outstanding and unvested. No additional
compensation expense has been recorded as the conditions by which the
conditional warrants vest are contingent upon events that have not yet occurred.
Pro forma information regarding net (loss) income is required by SFAS 123,
and is to be determined as if the Company had accounted for its stock options
granted during 1999 under the fair value method pursuant to SFAS 123, rather
than the intrinsic method pursuant to APB 25 discussed herein. As none of the
employee options vested during 1999, pro forma disclosure is not applicable.
11. COMMITMENTS AND CONTINGENCIES
LEASES
The Company leases its offices under non-cancelable operating lease
agreements expiring at various dates through September 2001. Future minimum
rental payments required under the above leases as of December 31, 1999 are as
follows:
Leases Expected
in Sub-Lease Net Lease
Years ending Effect Income Commitment
-------- ----------- ----------
2000 $ 200,264 $ (40,000) $ 160,264
2001 129,000 (30,000) 99,000
--------- ----------- ----------
$ 329,264 $ (70,000) $ 259,264
========= =========== ==========
F-24
<PAGE>
TANGIBLE ASSET GALLERIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
11. COMMITMENTS AND CONTINGENCIES (CONTINUED)
Rent expense for 1999 and 1998 was $131,028 and $63,503, respectively.
GUARANTEED LIQUIDATING AND BUY BACK
The Company provides a Guaranteed Liquidity and Buy Back at Grade warranty
(the "Guarantee") to its retail rare coin customers. Retail rare coin sales
amounted to $4,364,566 and $6,999,860 for the years ended December 31, 1999 and
1998, respectively. The policy grants the customer the opportunity to sell their
coins back to the Company at the prevailing market "bid" (below the current
wholesale price). The Company determines the "bid" price based on the
prevailing market price at which the Company believes it could readily liquidate
the coin. The "bid" price may be substantially below what the customer
originally paid for the coin.
The values of the rare coins sold to retail customers continually
fluctuate. Furthermore, retail customers continually resell or trade coins
purchased from the Company with third parties. Once retail customers resell the
rare coins to third parties, the Guarantee is void. Lastly, the Company has had
minimal historical experience with customers exercising the Guarantee. As a
result, it is not possible for the Company to determine the potential repurchase
obligation pursuant to the Guarantee that it may be subject to as a result of
previous sales of retail rare coins.
CONSULTING AGREEMENT
The Company entered into a consulting agreement with The Michelson Group on
February 5, 1999 (Note 10). The agreement provides for a fee of $6,500 per
month for a period of two years. The fees are payable when the Company breaks
escrow on a $1,000,000 bridge financing.
PROFIT SHARING PLAN
The Company's profit sharing plan covers all employees who have met certain
service requirements. Contributions to the plan are at the discretion of the
board of directors each year, however, contributions can not exceed 15% of each
covered employee's salary. Contributions made to the plan for the years ended
1999 and 1998 were $0 and $47,501, respectively.
12. BUSINESS COMBINATION
KEYSTONE ACQUISITION
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.
F-25
<PAGE>
TANGIBLE ASSET GALLERIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
12. BUSINESS COMBINATION (CONTINUED)
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 (Note 7). Goodwill in the amount of $300,000 was recorded as a result
of the acquisition.
For purposes of pro forma disclosure, revenue and net (loss) income are
reflected as though the Company had acquired Keystone as of the beginning of
1999 and 1998. The Company's unaudited pro forma information is as follows:
December 31, 1999 1998
----------- -------------
Gross revenue $ 31,452,715 $ 27,453,564
=========== =============
Net (loss) income $ (302,783) $ 1,398,049
=========== =============
Net (loss) income per share $ (0.02) $ 0.09
=========== =============
The preceding unaudited proforma disclosure is for informational purposes only
and is not necessarily indicative of the results of operations which would have
been obtained had the acquisition occurred earlier nor are they intended to be
indicative of future results.
F-26
<PAGE>
OFFICE LEASE AGREEMENT
THIS AGREEMENT, made this 31st day December of 1999, by and between STEPHEN
J. GEHRINGER AND KENNETH J. KELLAR (hereinafter called Lessor) , of the one
part, and GEHRINGER AND KELLAR, INC, D/B/A KEYSTONE COIN AND STAMP EXCHANGE
(hereinafter called Lessee) , of the other part,
WITNESSETH:
Lessor does hereby demise and let unto Lessee on the floor of the building
located at 1801 Tilghman Street, Allentown, Pennsylvania 18104 to be used and
occupied as a dealership for and for no other purpose, for the term of three (3)
years commencing on the 1st day of January, 2000, and ending on the 31st day of
December, 2000, for the fixed rental of ONE HUNDRED EIGHT THOUSAND AND 00/100
DOLLARS ($108,000.00), in coin or currency which at the time of payment is legal
tender for public and private debts in the United States of America, payable
monthly in advance in equal installments of THREE THOUSAND AND 00/100 DOLLARS
($3,000.00) each on the 1ST day of each and every month during said term of this
lease or any renewal thereof at the office of Lessor's Agent, or at such other
place or places as Lessor may from time to time after the date hereof designate,
during business hours, the first installment to be paid at the time of the
execution of this lease.
IT IS HEREBY MUTUALLY COVENANTED AND AGREED by and between Lessor and
Lessee that the premises are demised under and subject to the following
covenants and agreements, all of which are to enure to the benefit of Lessor and
be regarded as strict
legal conditions:
<PAGE>
1. Inability to give Possession.
If Lessor is unable to give Lessee possession of the demised premises as
herein provided by reason of the premises not being ready for occupancy, or by
reason of the holding over of a previous occupant, or by reason of any cause
beyond the control of Lessor, Lessor shall not be liable in damages to Lessee
therefor, and during the period that Lessee is thus kept out of possession the
rental shall be abated.
2. Additional Rent.
(a) Damages by Default: Lessee agrees to pay to Lessor as rent in addition
to the fixed rental herein reserved any and all sums which may become due by
reason of the failure of Lessee to comply with all the covenants of this lease
and any and all damages, costs and expenses which Lessor may suffer or incur by
reason of any default of Lessee or failure on his part to comply with the
covenants of this lease, and each of them, and also the cost of repairing any
and all damages to the demised premises caused by any act or neglect of Lessee.
(b) Repairs: Lessee further agrees to pay to Lessor as additional rent all
sums due for repairs made to the demised premises, replacing of glass windows,
doors, partitions, electric wiring and electric lamps, etc., the keeping of
waste and drain pipes open and repairs and replacements to wash basins and
plumbing, heating and air-conditioning apparatus, which are necessitated by or,
caused by misuse or abuse by Lessee. The same shall be paid by Lessee to Lessor
upon presentation by Lessor to Lessee of bills therefor.
3. Affirmative Covenants of Lessee.
(a) Payment of Rent: Lessee will without any previous demand therefor pay
the said fixed and additional rental at the times and at the place at which the
same are hereby made payable. If Lessor at any time accepts payment of said
rental after the same shall have become due and payable, such acceptance will
not excuse delay in payment on subsequent occasions nor constitute or be
construed as a waiver of any of Lessor's rights.
(b) Condition of Premises: Lessee will keep the demised premises in the
same good order in which they now are, reasonable wear and tear and damage by
accidental fire or other casualty not occurring through the negligence of Lessee
alone excepted. Lessee acknowledges that the demised premises are in good order,
condition and repair and require no alterations, additions or improvements to be
made by Lessor except as may be expressly specified in writing by the parties
hereto.
(c) Requirements of Public Authorities: Lessee will at his own cost and
expense comply with any requirements of any constituted public authority and
with the terms of any State or Federal statute or local ordinance or regulation
applicable to Lessee or to Lessee's use of the demised premises, and save Lessor
harmless from penalties, fines, costs or damages resulting from failure to do
so.
(d) Rule and Regulations: The rules and regulations in regard to the said
building, and the tenants occupying offices therein, printed upon the fourth
page of this lease, and such alterations, additions, and modifications thereof
as may from time to time be made by Lessor, shall be deemed a part of this
agreement, with the same effect as though written herein, and Lessee covenants
that said rules and regulations shall be faithfully observed by Lessee, Lessee's
employees, and all persons visiting the leased premises, or claiming under
Lessee, the right being hereby expressly reserved by Lessor to add to, alter or
rescind, from time to time, such rules and regulations, which changes in rules
and regulations shall take effect immediately after notice thereof in writing
shall have been served by leaving the same on the demised premises.
(e) Fire: Lessee will use every reasonable precaution against fire.
(f) Notice of Fire, etc: Lessee will give to Lessor prompt written notice
of any defect, accident, fire, or damage occurring on or to the demised
premises.
(g) Janitors; Damages to or Loss of Lessee's Property: Lessee will permit
the janitors and cleaners of Lessor to have access to and to clean the demised
premises. Lessor shall be in no way responsible to Lessee for any damage done to
the furniture or other effects of Lessee by the janitors or cleaners or other
employees of Lessor or by any other person, or for any loss of property of any
kind whatever from the demised premises, however occurring.
(h) Surrender of Possession: Lessee will peacefully deliver up and
surrender possession of the demised premises to Lessor at or prior to the
expiration or earlier termination of this lease or any renewal thereof in the
same good order and condition in which Lessee has herein agreed to
keep the same during the continuance of this lease. Lessee will at or prior to
the expiration or earlier termination of this lease or any renewal thereof
remove all of his property from the demised premises so that Lessor may again
have and repossess the same not later than noon on the day on which this lease
or the renewal thereof shall terminate, and will immediately thereafter deliver
to Lessor at the aforesaid office of its agent all keys for the demised
premises.
4. Negative Covenants of Lessee.
(a) Assignment and Subletting: Lessee, under penalty of instant forfeiture,
shall not assign, mortgage or pledge this lease, nor underlet or sublease said
premises or any part thereof without the written consent of Lessor first had and
obtained ; nor after such written consent has been given shall any assignee or
sublessee assign, mortgage or pledge this lease or such sublease or underlet or
sublease said premises or any part thereof without an additional written consent
by Lessor; and in neither case without such consent shall any such assignment,
mortgage, pledge, underletting or sublease be valid. An assignment within the
meaning of this lease is understood and intended to comprehend not only the
voluntary action of Lessee, but also any levy or sale on execution or other
legal process and every assignment for the benefit of creditors, adjudication or
sale in bankruptcy or insolvency or under any other compulsory procedure or
order of court. No assignment or sublease, if consented to in the manner
aforesaid, shall in any way relieve or release Lessee from liability upon any of
the covenants under the terms of this lease, and notwithstanding any such
assignment or sublease the. responsibility and liability of Lessee hereunder
shall continue in full force and effect until the expiration of the term hereby
created and any renewals thereof. No assignment or sublease shall be valid
unless the assignee or subtenant shall assent to and agree in writing to be
bound by all of the covenants and conditions herein contained.
(b) Alterations, Additions: Lessee will not make any alterations,
improvements or additions to or about the demised premises, or affix or attach
any articles to or make any holes in or about the demised premises or the
building. If Lessee desires to have such alterations, improvements or additions
made or to have articles so affixed or attached or to have such holes made, he
shall submit the plan therefor to Lessor. If said plan receives Lessor's
approval, Lessor alone will make or do the same on behalf of Lessee and for
Lessee's benefit, solely at the cost, expense and risk of Lessee unless
otherwise provided in writing. All alterations, improvements, additions or
fixtures, whether installed, made or placed before or after the execution of
this lease, shall remain upon the premises at the expiration or earlier
termination of this lease and become the property of Lessor unless Lessor shall,
prior to the termination of this lease, have given written notice to Lessee to
remove the same, in which event Lessee shall remove the same and restore the
premises to the same good order and condition in which they now are.
(c) Machinery: Lessee will not use or operate in the demised premises any
machinery that is in Lessor's opinion harmful to the building or disturbing to
tenants occupying other parts thereof.
(d) Weights: Lessee will not place any weights in any portion of the
demised premises which are in Lessor's opinion beyond the safe carrying capacity
of the structure.
(e) Locks: Lessee will not place any additional locks upon any doors of the
demised premises or permit any duplicate keys to the locks therein to be made
except with the written approval of Lessor.
(f) Insurance: Lessee shall not do or suffer to be done any act, matter or
thing, or employ any person as a result of which the fire insurance or any other
insurance now in force or hereafter to be placed on the demised premises, or any
part thereof, or the building of which the demised premises are a part, shall
become void or suspended, or whereby the same shall be rated as a more hazardous
risk than at the date of execution of this lease, or carry or have any benzine
or explosive matter of any kind in and about the demised premises except in
approved quantities and containers.
(g) Removal of Goods: Lessee will not manifest an intention to terminate
this lease other than in accordance with the terms thereof, nor remove or
attempt to remove Lessee's goods or property from the demised premises otherwise
than in the ordinary and usual course of business, without having first paid and
satisfied Lessor for all rent which may be due or become due during the entire
term of this lease.
(h) Vacate Premises: Lessee will not vacate or desert the demised premises
or permit the same to become empty and unoccupied during the term of this lease.
(i) Sign and Advertising Matter: Lessee will not erect or place any sign,
advertising matter, lettering, stand, booth, show case, or other matter of any
kind upon the door-steps, vestibules, outside walls, outside windows or
pavements of the building. Lessee will not place any sign, advertising matter,
lettering, or other matter of any kind upon the doors giving access into the
demised premises or upon the interior walls of the building without written
approval of Lessor.
(j) Floors, Walls, Wiring: Lessee will not lay any linoleum, oil cloth,
rubber or other airtight covering upon the floors of the demised premises, nor
fasten articles to or drill holes or drive nails or screws into the walls or
partitions of the demised premises; nor will Lessee paint paper or otherwise
cover or in any way mark, deface or break said walls or partitions; nor make any
attachment to the electric lighting wires of the building for storing
electricity, running electric fans or motors or other purposes; nor will Lessee
use any method of heating other than that provided by Lessor. If Lessee desires
to have telephone, telegraph or other similar wires and instruments installed on
the premises, he shall notify Lessor, and Lessor will direct where and how the
same are to be installed. Lessor reserves at all times the right to require
Lessee to install and use in the demised premises such electrical protective
devices and to change wires and their placing and arrangement, as Lessor may
deem necessary, and further, to require compliance on the part of all using or
seeking access to such rules as Lessor may establish relating thereto; and
further reserves, in the event of non-compliance with such requirements and
rules, the right to cut and prevent the use of any wires to which such
non-compliance relates.
<PAGE>
5. Lesser's Rights.
Lessee covenants and agrees that Lessor shall have the right to do the
following things and matters in and about the demised premises:
(a) Inspection, Repairs: At all reasonable times by himself or his duly
authorized agents to enter and go upon the demised premises (i) to inspect the
same and every part thereof; (ii) for the purpose, at his option, of making
repairs, alterations, additions, or improvements thereto; (iii)
for the purpose of making electrical wiring changes in electrical service
outlets in floor, ceiling and/or walls; ( iv) for the purpose of making
adjustments of any nature to the air-conditioning system; (v) for the purpose of
fighting fire within the demised premises or elsewhere in the building or for
the control or correction of conditions resulting from flood, either from a
broken pipe or from outside sources, (vi) for the purpose of performing any
covenants herein contained which Lessee has failed to perform; (vii) for the
purpose of remedying any matter due to breach of covenant of Lessee.
(b) Re-Leasing: At any time after notice properly given by either party to
the other of an intention to terminate this lease to conduct persons who may be
interested in leasing the demised premises in and about the same.
(c) Control and Building: To control and have dominion over the halls,
passages, entrances, elevators, toilets, stairways, balconies and roof of the
building, the same being not for the use of the general public; and Lessor shall
in all cases have the right to control and prevent
access thereto of all persons whose presence, in the judgment of Lessor or his
agents, shall be prejudicial to the safety, character, reputation and interests
of the building and its tenants.
(d) Riot: To prevent access to the building in the event of invasion, mob,
riot, public excitement or other commotion by closing doors or otherwise for the
safety of tenants and for the protection of property in the building.
(e) Discontinuance and Service: To discontinue any and all facilities
furnished and services rendered by Lessor which are not expressly covenanted for
herein, it being understood that they constitute no part of the consideration
for Lessee's entering into this lease.
(f) Rules: At any time and from time to time to make such rules and
regulations as in his judgment may be necessary for the safety, care and
cleanliness of the building and the demised premises and for the preservation of
good order therein, such rules and regulations shall, when notice thereof is
given to Lessee, form a part of this lease.
6. Responsibility of Lessee.
Lessee agrees to indemnify and to relieve and hereby indemnifies and
relieves Lessor from all liability and expense by reason of any loss, damage or
injury to Lessee or any other person or to any property of Lessee or any other
person which may arise from any cause whatsoever on the demised premises. Lessee
further agrees to indemnify and to relieve and hereby indemnifies and relieves
Lessor from all liability and expense by reason of any loss, damage or injury to
Lessee or to any employee or business invitee of Lessee, or to any property of
Lessee or any employee or business invitee of Lessee which may occur on the
pavement, curb, roof, elevators, hallways, passages or other portions (other
than the demised premises) of the building of which the demised premises are a
part, unless caused by the negligence of the Lessor, his servants or agents.
7. Responsibility of Lessor.
(a) Elevators: Lessor will keep in operation in the building during
ordinary business hours, except on Sundays and legal holidays, as many of the
passenger elevators as may in Lessor's judgment be necessary to maintain
adequate elevator service. In case of accident, strike,
repairs, renewals or improvements to the building or machinery therein, or for
any other cause whatsoever deemed sufficient by Lessor, the operation of said
elevators may be changed or suspended.
(b) Heat and Electric: Lessor will keep in operation in said building
heating and air-conditioning apparatus for the use of tenants during such
periods as may in Lessor's judgment be necessary, except on Sundays and legal
holidays, and will cause the demised premises to be cleaned and cared for by
janitors and will also furnish a reasonable amount of electricity, as Lessor may
determine, solely for lighting said premises during regular business hours and
operating such business machines as may be approved by Lessor, reserving the
right, however, in
case Lessee, in the judgment of Lessor, uses electricity for such purposes in an
extravagant or unreasonable manner, to require Lessee at his expense to put in
electricity meters and pay for the amount used by him, or in default thereof to
cut off the supply of electricity to the demised premises. In consideration of
the fact that no extra charge is made by Lessor for light, except as aforesaid,
or for heat, air conditioning, Janitor services and elevator service, Lessor
shall not be liable for any failure to supply the same not due to gross
negligence on Lessor's part.
(c) Destruction of or Damage to Premises: In the event that the demised
premises are totally destroyed or rendered unfit for occupancy or are so damaged
by fire or other casualty not occurring through fault or negligence of Lessee or
of those employed by or acting for him that the same can not be repaired and
restored within a time which Lessor shall deem reasonable, this lease shall
absolutely cease and terminate as of the date of occurrence of said destruction
or damage, and the rental shall thereafter abate for the balance of the term.
If the damage caused as above be only partial and such that the demised
premises can be repaired and restored to their former condition within a time
which Lessor shall deem reasonable, Lessor may, at his option repair and restore
the same with reasonable promptness. The rental shall be apportioned and
suspended during the time Lessor is in possession for the purpose of such repair
and restoration, taking into account the proportion of the demised premises
rendered untenantable and the duration of Lessor's possession.
(d) Liability for Termination or Interrupted Use: Lessor shall not be
liable for any damages, compensation or claim by reason of inconvenience,
annoyance, injury or loss resulting from the termination of this lease by reason
of the destruction of the demised premises, from the making of repairs,
alterations, additions or improvements to any portion of the demised premises,
the building or the facilities thereof, from any of the services or facilities
supplied by Lessor, or from the leaking of rain, snow, water, steam or gas into,
in or about the demised premises or the building which the demised premises are
a part.
8. Miscellaneous Agreements and Conditions.
(a) Effect of Repairs on Rental: No contract entered into or that may be
subsequently entered Into by Lessor with Lessee relating to any alterations,
additions, improvements or repairs except such as Lessor shall have agreed to
make for Lessee's initial occupancy, nor the failure of Lessor to perform any
such contract, nor the performance by Lessor or his contractors, employees or
agents any such contract shall in any way relieve Lessee from his obligation
hereunder to pay the rental, fixed and additional, at the time and place
specified in this lease.
(b) Modification of Terms by Waiver or Custom: It is hereby covenanted and
agreed, any law, usage or custom to the contrary notwithstanding, that Lessor
shall have the right at all times to enforce the covenants and provisions of
this lease in strict accordance with the terms hereof, notwithstanding any
conduct on the part of Lessor in refraining from so doing at any time or times;
and, further, that the failure of Lessor at any time or times to enforce his
rights under said covenants and provisions strictly in accordance with the same
shall not be construed as having created a custom in any way or manner contrary
to the specific terms, conditions and covenants of this lease or as having in
any way or manner modified the same.
9. Default.
If the Lessee during this lease or any renewal thereof
(a) Default: Does not pay in full when due and payable any and all rental,
fixed and additional, herein agreed to be paid by Lessee; or
(b) Breach of Covenant: Violates or falls to perform or otherwise defaults
with respect to any term, condition or covenant herein contained on his part to
be performed; or
(c) Vacating Premises: Vacates the demised premises or leaves them locked
so as to prevent entry therein by lessor, or manifests an intention to terminate
this lease other than in accordance with the terms thereof, or removes or
attempts to remove or manifests an intention
to remove any goods or property from the demised premises without having first
paid and satisfied Lessor in full for all rentals, fixed and additional then due
or that may thereafter become due until the full end and expiration of the then
current term; or
(d) Financial Embarrassment, Bankruptcy Levy, etc: Becomes financially
embarrassed or insolvent or makes an assignment for the benefit of creditors, or
if any petition in bankruptcy or for reorganization of Lessee or for an
arrangement with creditors of Lessee under any State or Federal Law is filed by
or against Lessee, or if any proceedings under any State or Federal insolvency
or bankruptcy laws are instituted by or against Lessee, or if any property of
Lessee is levied upon or sold by any Sheriff, Marshal or Constable, or if a
trustee in bankruptcy or a receiver is appointed for Lessee;
<PAGE>
10. Remedies of Lessor.
Then and in any said event, at the sole option of Lessor,
(a) Acceleration of Rent: The whole balance of rent, fixed and additional,
or any part thereof, shall be taken to be due and payable and in arrears as if
by the terms and provisions of this lease said balance of rent, fixed and
additional, or any part thereof were on that date payable in advance; and
(b) Termination: This lease and the term hereby created, or any renewal
term thereof, shall at the sole option of Lessor and without waiver of any other
rights of Lessor contained herein terminate and become absolutely void without
any right on the part of Lessee to save the forfeiture by payment of any sum due
or by performance of any condition, term or covenant broken, AND ALSO
11. Further Remedies of Lessor.
In the event of any default as above set forth in Section 9, Lessor, at its
option:
(a) Entry and Possession: May, without notice or demand, enter the demised
premises, breaking open locked doors if necessary to effect entrance and may
change the bolts, locks and fastenings, without liability to criminal or civil
action for such entry or for the manner thereof, or
the purpose of distraining or levying and for any other purposes, and may take
possession of and sell all goods and chattels at auction, on three days notice
served in person on Lessee or left on the premises, and pay to Lessor out of the
proceeds, after deducting all costs of such sale, all sums which may then be due
and owing from Lessee to Lessor hereunder.
(b) Distress: May enter the premises, and without demand proceed by
distress and sale of the goods there found to levy the rent and/or other charges
herein payable as rent, and all costs and officers' commissions, including
watchman's wages and a constable's commission of 5%, may be included in the levy
and shall be paid by Lessee, and in such case all costs, officers' commissions
and other charges shall immediately attach and become part of the claim of
Lessor for rent, and any tender of rent without said costs, commissions and
charges made after the issue of a warrant of distress shall not be sufficient to
satisfy the claim of Lessor; and
(c) Collect Rent From Sub-lessee: If this lease or any part thereof is with
Lessor's written consent assigned or if the premises, or any part thereof is
with Lessor's written consent sub-let, Lessee hereby irrevocably constitutes and
appoints Lessor Lessee's agent to collect the rents due by such assignee or
sub-lessee and apply the same to the rent due hereunder without in any way
affecting Lessee's obligation to pay any unpaid balance of rent due hereunder;
and
(d) Lease: Lessor may lease said premises or any part or parts thereof to
such person or persons and for such term or terms as may in Lessor's discretion
seem best, and the Lessee shall be liable for any loss of rent, fixed and
additional, for the balance of the then current term; and
(e) Confession of Judgment: If the rent, fixed and/or additional, shall
remain unpaid on any day when the same ought to be paid, Lessee hereby empowers
any attorney of the Court of Common Pleas of Lehigh County, Commonwealth of
Pennsylvania, or any other Court there or elsewhere to appear as attorney for
Lessee in any and all actions which may be brought for said arrears of rent,
fixed and/or additional, and to sign for Lessee an agreement for entering in any
competent Court, an amicable action or actions for the recovery of all arrears
of rent, fixed and/or additional, and in said suits or in said amicable action
or actions to confess judgment against Lessee for the recovery of all arrears of
rent, fixed and/or additional, as aforesaid. and for interest and costs,
together with an attorney's commission of 5%. Such authority shall not be
exhausted by one exercise thereof, but may be exercised from time to time as
often as any of said rent fixed and/or additional, shall fall due or be in
arrears; and
(f) Ejectment: When this lease shall be determined by the breach of term,
condition or covenant hereof, either during the original term of this lease or
any renewal thereof, and also when and as soon as the term hereby created or any
renewal thereof shall have expired, it
shall be lawful for and Lessee hereby authorizes and empowers any attorney of
the Court of Common Pleas of Lehigh County, Commonwealth of Pennsylvania, or of
any other Court there or elsewhere, to appear as attorney for Lessee, as well as
for all persons claiming by, through or under Lessee, and to sign an agreement
for entering in any competent Court an amicable action in ejectment against
Lessee and all persons claiming by, through or under Lessee, and therein confess
judgment for the recovery by Lessor of possession of the herein demised
premises, for which this lease shall be his sufficient warrant; whereupon, if
Lessor so desires, a Writ of Habere Facias Possessionem may be issued forthwith,
without any prior writ or proceedings whatsoever; and provided that if for any
reason after such action shall have been commenced the same shall be
discontinued, marked satisfied of record or determined or possession of the
premises hereby demised remain in or be restored to Lessee, Lessor shall have
the right for the same default or upon any subsequent default or defaults, or
upon the termination of this lease as hereinbefore set forth, to bring one or
more further amicable action or actions as hereinbefore set forth to recover
possession of the said premises for said default or for any subsequent default
or defaults and confess judgment for the recovery of possession of the demised
premises as hereinabove provided.
(g) Affidavit of Default: In any amicable action of ejectment or for rent
in arrears, Lessor shall first cause to be filed in such action an affidavit
made by his setting forth the facts necessary to authorize the confession of
judgment, of which facts such affidavit shall be conclusive evidence, and if a
true copy of this lease, and of the truth of the copy such affidavit shall be
sufficient evidence, be filed in such action, it shall not be necessary to file
the original as a warrant of attorney, any rule of Court, custom or practice to
the contrary notwithstanding.
<PAGE>
12. Release of Lessor in Exercise of Remedies.
Lessee hereby releases and discharges Lessor from all claims, actions,
suits and penalties, for or by reason or on account of any entry, ejectment,
confession of judgment, distraint, levy, appraisement or sale, or the loss of
goods and chattels left on the premises.
l3. Waivers by Lessee:
Lessee hereby expressly releases and agrees to release Lessor, and any and
all attorneys who may appear for Lessee, from all errors and defects whatsoever
of a procedural nature in entering such actions or judgments or in causing such
Writ or Writs to be issued or in any proceeding thereon or concerning the same
and from all liability therefor. Lessee expressly waives the benefits of all
laws, now or hereafter in force, exempting any goods on the demised premises, or
elsewhere from distraint, levy or sale in any legal proceedings taken by the
Lessor to enforce any rights under this lease. Lessee hereby expressly waives in
favor of Lessor the benefit of all laws now made or which may hereafter be made
regarding any limitation as to the goods upon which, or the time within which,
distress is to be made after the removal of goods, and further relieves the
Lessor of the obligation of proving or identifying such goods, it
being the purpose and intent of this provision that all goods of Lessee, whether
upon the demised premises or not, shall be liable to distress for rent. Lessee
waives in favor of Lessor all rights under the act of Assembly of April 5, 1951,
No.20 (P. L. 69), known as the Landlord and Tenant Act of 1951, and all
supplements and amendments thereto that have been or may hereafter be passed,
and authorizes the sale of any goods distrained for rent at any time after five
days from said distraint without any appraisement and condemnation thereof. The
Lessee further waives the right to issue a Writ of Replevin under the Act of
April 19, 1901 (P. L. 88), of the laws of the Commonwealth of Pennsylvania, or
under the aforesaid Landlord and Tenant Act of 1951, or under any other law
heretofore enacted and now in force or which may be hereafter enacted, and/or
under Pennsylvania Rules of Civil Procedure No.1071 et seq. and/or any similar
or corresponding rules which may hereafter be in force for the recovery of any
articles, household goods, furniture and office equipment seized under a
distress for rent or levy upon an execution for rent, damages or otherwise; all
waivers hereinbefore mentioned are hereby extended to apply to any such action.
Lessee further waives the right of inquisition on any real estate that may
be levied upon to collect any amount which may become due under the terms and
conditions of this lease, and does hereby voluntarily condemn the same and
authorizes the Prothonotary to issue a writ of execution or other process upon
Lessee's voluntary condemnation, and further agrees that the said real estate
may be sold on a writ of execution or other process. If proceedings shall be
commenced by Lessor to recover possession under the Acts of Assembly, either at
the end of the term or sooner termination of this lease, or for nonpayment of
rent or any other reason, Lessee specifically waives the right to the three
months' notice, and to the fifteen or thirty days' notice required by the
aforesaid Landlord and Tenant Act of 1951, and agrees that five days' notice
shall be sufficient in either or any such case.
14. Right of Assignee of Lessor.
The right to confess judgment and to proceed with any amicable action and
confession of judgment therein, and to the issuance of a writ of habere facias
possessionem against Lessee and to enforce all of the other provisions of this
lease hereinabove provided for may, at the option of any assignee of Lessor of
this lease, be exercised as aforesaid by any assignee of the Lessor's right,
title and interest in this lease in said assignee's own name, notwithstanding
the fact that any or all assignments of the said right, title and interest may
not be executed and/or witnessed in accordance with the Act of Assembly of May
28, 1715, I Sm. L. 99. and all supplements and amendments thereto that have been
or may hereafter be passed and Lessee hereby expressly waives the requirements
of said Act of Assembly and any and all laws regulating the manner and form in
which such assignments shall be executed and witnessed.
<PAGE>
15. Remedies Cumulative.
All of the remedies hereinbefore given to Lessor and all rights and
remedies given to him by law and equity shall be at Lessor's option cumulative
and concurrent. No termination of this lease or the taking or recovering of the
premises shall deprive Lessor of any of his remedies or actions against Lessee
for rent due at the time or which, under the terms hereof, would in the future
become due as if there had been no determination, or for sums due at the time or
which, under the terms hereof, would in the future become due as if there had
been no determination, nor shall the bringing of any action for rent or breach
of covenant, or the resort to any other remedy herein provided for the recovery
of rent be construed as a waiver of the right to obtain possession of the
premises.
16. Termination of Lease.
It is hereby mutually agreed that either party hereto may terminate this
lease at the end of said term by giving to the other party written notice
thereof at least three (3) months prior thereto, but in default of such notice
this lease shall continue upon the same terms and conditions governing the same
as are in force immediately prior to the expiration of the term hereof for a
further period of one (1) month and so on from month to month unless or until
terminated by either party hereto, giving the other one (1) month written notice
thereof previous to the
expiration of the then current term; provided, however, that if Lessor shall
have given such written notice prior to the expiration of any term hereby
created of his intention to change the
terms and conditions of this lease, and Lessee shall hold over after the
expiration of the time mentioned in such notice, Lessee shall be considered and
shall be Lessee under the terms and conditions mentioned in such notice for a
further term or terms as above provided. In the event that Lessee shall at any
time give notice, as stipulated in this lease, of his intention to terminate the
lease at the end of the then current term and shall fail or refuse so to vacate
the premises on the date of such termination, then it is expressly agreed that
Lessor shall have the option either (a) to disregard the notice so given as
having no effect, in which case, upon Lessor giving Lessee notice thereof, all
the terms and conditions of this lease shall continue thereafter in full force
precisely as if such notice by Lessee had not been given, or (b) to exercise any
of the rights and remedies herein contained as if Lessee were in default under
the terms, covenants and conditions hereof.
17. Condemnation.
In the event that the demised premises or any part thereof are taken or
condemned for a public or quasi-public use, this lease shall, as to the part so
taken, terminate as of the date title shall vest in the condemnor, and the
rental reserved hereunder shall abate
proportionately to the area of the demised premises so taken or condemned or
shall cease if the entire demised premises be so taken. Lessee hereby waives all
claims arising out of such event against Lessor and as against the condemnor,
and it is agreed that Lessee will make no claim by reason of the complete or
partial taking of the demised premises, and it is further agreed that Lessee
shall not be entitled to any notice whatsoever of the partial or complete
termination of this lease by reason of the aforesaid.
18.Subordination.
This lease shall be subject and subordinate at all times to the lien of any
mortgages and/or rents and/or other encumbrances now or hereafter placed on the
land and building of which the demised premises are a part without the necessity
of any further act or instrument on the part of Lessee to effectuate such
subordination, but Lessee agrees to execute and deliver upon demand such further
instrument or instruments evidencing such subordination of this lease to the
lien of any such mortgage and/or rent and/or other encumbrance as shall be
desired by the mortgagee or proposed mortgagee or any other person. Lessee
hereby irrevocably appoints Lessor the attorney in fact of Lessee to execute and
deliver any such instrument or instruments for and in the name of Lessee.
19. Notice.
All notices required hereunder to be given by either party to the other
must be given by registered or certified mail, and the only admissible proof
that such notice has been given to either party by the other shall be a registry
return receipt signed by or on behalf
of such party.
20.Titles Not to Affect Construction.
It is expressly agreed that the titles contained in the margins of this
lease are merely for the convenience of the parties and are not in any manner or
respect to aid in or affect the interpretation of the, respective paragraphs
beside such titles or of any parts of this lease. The said titles do not and are
not intended to give notice of all of the provisions in the sections beside the
respective titles.
21. Lease Contains all Agreements.
It is expressly understood and agreed by and between the parties hereto
that this lease and the riders attached hereto and forming a part hereof set
forth all the promises, agreements, conditions and understandings between Lessor
or his Agent and Lessee relative to the demised premises, and that there are no
promises, agreements, conditions or understandings, either oral or written,
between them other than are herein set forth. It is further understood and
agreed that, except as herein otherwise provided, no subsequent alteration,
amendment, change or addition to this lease shall be binding upon Lessor or
Lessee unless reduced to writing and signed by them.
22. Heirs and Assignees -- Rights and Duties.
All rights, remedies, powers, responsibilities and liabilities herein given
to, or imposed upon, the respective parties hereto shall extend to and bind the
several and respective heirs, executors, administrators, successors and assigns
of said parties, as well during any extensions of the original term of this
lease as during the original term itself; and if there shall be more than one
Lessee, they shall all be bound jointly and severally by the terms, covenants
and agreements herein, and the word "Lessee" shall be deemed and taken to mean
each and every person or party mentioned as Lessee herein, be the same one or
more; and if there shall be more than one Lessee, any notice required or
permitted by the terms of this lease, may be given by or to anyone thereof, and
shall have the same force and effect as if given by or to all thereof. No
rights, however, shall inure to the benefit of any assignee of Lessee unless the
assignment to such assignee has been approved by Lessor in writing as aforesaid.
Where used herein to refer to Lessor or Lessee, the third person singular
masculine personal pronoun shall be understood to be and shall be read as the
feminine or neuter gender and the plural number if appropriate in the light of
the party or parties mentioned as Lessor or Lessee herein.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed these presents the day
and year first above written, and expressly intend to be legally bound hereby.
SEALED AND DELIVERED IN THE PRESENCE OF :
GEHRINGER AND KELLER, INC.
D/B/A KEYSTONE COIN & STAMP EXCHANGE
ATTEST:
/s/ Kenneth J. Kellar /s/ Stephen J. Gehringer
______________________________ By: ________________________________
KENNETH J. KELLAR, SECRETARY STEPHEN J. GEHRINGER, PRESIDENT
[Affix Corporate Seal Here]
WITNESS:
/s/ Steve Gehringer /s/ Stephen J. Gehringer
______________________________ ____________________________________
STEPHEN J. GEHRINGER, LESSOR
Steve Gehringer
______________________________
(print name of witness)
/s/ Kathleen Pletz /s/ Kenneith J. Kellar
______________________________ ____________________________________
KENNETH J. KELLAR, LESSOR
Kathleen Pletz
______________________________
(print name of witness)
<PAGE>
RULES AND REGULATIONS
1. Tenants will not keep any animals or birds in the demised premises or in the
building nor permit any animals or birds to be brought into or kept in the
demised premises by others.
2. Tenant will not employ any person for the purpose of cleaning the demised
premises, except with the express authority of the lessor.
3. Tenant will not go or authorize or permit anyone to go upon the roof of the
building.
4. Tenant will not make, commit or permit any improper noises or disturbances in
the building, mark or defile the demised premises or the building, or interfere
in any way with other tenants or those having business with them.
5. Tenant agrees that lessor shall in no case be liable for the admission or
exclusion of any person from said building.
6. Tenant will not enter the building or the demised premises between the hours
of 6 :00 P.M. and 8 :00 A.M. or on Sundays without complying with the
regulations established from time to time by lessor.
7. Tenant will not occupy the demised premises as living quarters or sleeping
apartments or in any manner or for any use or purpose other than as herein
stated nor will tenant use the halls, passages, elevators and stairways of the
building of which the demised premises are a part for any purpose other than
ingress and egress.
8. Tenant will not use the toilet rooms, water closets, urinals and other water
fixtures and apparatus on the demised premises or in the building of which the
same are a part for any purpose other than that for which they were designed and
constructed, nor throw sweepings, rubbish, rags, ashes, chemicals or other
injurious substances therein.
<PAGE>
9. Tenant will not hang or shake any carpet, rug or other article out of any
window, or throw or allow anything to be dropped out of the windows or doors or
down the passages or in the elevators of the buildings of which the demised
premises are a part.
10. Tenant will give lessor prompt notice of any canvassers, newsboys, peddlers,
beggars, or unauthorized bootblacks applying their trade in the building of
which the demised premises are a part.
11. Tenant will close the windows and securely lock the doors of the demised
premises before leaving the building each day.
12. Tenant shall abide by the rules and regulations of the lessor with respect
to the manner and method in which and the time when any machinery, heavy
furniture, safes, merchandise, packages or supplies shall be brought into or
taken out of the demised premises and
the building.
GEHRINGER AND KELLER, INC.
D/B/A KEYSTONE COIN & STAMP EXCHANGE
ATTEST:
/s/ Kenneth J. Kellar /s/ Stephen J. Gehringer
______________________________ By: ________________________________
KENNETH J. KELLAR, SECRETARY STEPHEN J. GEHRINGER, PRESIDENT
[Affix Corporate Seal Here]
WITNESS:
/s/ Signature Unknown /s/ Stephen J. Gehringer
______________________________ ____________________________________
STEPHEN J. GEHRINGER, LESSOR
______________________________
(print name of witness)
/s/ Signature Unknown /s/ Kenneith J. Kellar
______________________________ ____________________________________
KENNETH J. KELLAR, LESSOR
______________________________
(print name of witness)
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<NAME> Tangible Asset Galleries, Inc.
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<FISCAL-YEAR-END> JAN-01-2000
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
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0
0
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<TOTAL-LIABILITY-AND-EQUITY> 8809692
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