UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(Mark One)
[ X ] Quarterly report under Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the quarterly period ended June 30, 2000
[ ] Transition report under Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from _________ to _________
Commission File No. 0-27121
TANGIBLE ASSET GALLERIES, INC.
(Name of Small Business Issuer in Its Charter)
NEVADA 88-0396772
(State or Other Jurisdiction of (IRS Employer
Incorporation or Organization) Identification Number)
3444 VIA LIDO
NEWPORT BEACH, CALIFORNIA 92663
(Address of Principal Executive Offices) (Zip Code)
(949) 566-0021
(Issuer's Telephone Number)
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
(None)
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
Common Stock, par value $0.001
(Title of Class)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports); and (2)
has been subject to such filing requirements for the past 90 days.
Yes X No
----
Indicate the number of shares outstanding of each of the issuer's class of
common stock as of the latest practicable date:
Title of each class of Common Stock Outstanding as of July 31, 2000
---------------------------------------- ---------------------------------
Common Stock, $0.001 par value 18,405,298
Transitional Small Business Disclosure Format (check one):
Yes No X
----
<PAGE>
TABLE OF CONTENTS
-----------------
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
Condensed Consolidated Balance Sheets at June 30, 2000 (Unaudited) and December
31, 1999.
Condensed Consolidated Statements of Operations (Unaudited) for the three months
and six months ended June 30, 2000 and 1999.
Condensed Consolidated Statements of Cash Flows (Unaudited) for the six months
ended June 30, 2000 and 1999.
Notes to Interim Consolidated Financial Statements (Unaudited) at June 30, 2000.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
Item 2. Changes in Securities.
Item 3. Defaults Upon Senior Securities.
Item 4. Submission of Matters to a Vote of Security Holders.
Item 5. Other Information.
Item 6. Exhibits and Reports on Form 8-K.
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
TANGIBLE ASSET GALLERIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
<S> <C> <C>
June 30, 2000 December 31,
(Unaudited) 1999
--------------- --------------
ASSETS
CURRENT ASSETS
Cash $ 39,706 $ 81,882
Accounts receivable 910,351 1,057,403
Inventories 7,104,825 6,419,136
Prepaid expense and other 66,974 58,162
--------------- --------------
Total current assets 8,121,856 7,616,583
--------------- --------------
PROPERTY AND EQUIPMENT, NET 447,182 144,041
OTHER ASSETS 293,106 329,068
--------------- --------------
Total assets $ 8,862,144 $ 8,089,692
=============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Line of credit $ 1,840,000 $ 1,840,000
Accounts payable and accrued expenses 2,368,529 1,241,392
Note payable 200,000 200,000
Notes payable to related parties 673,581 339,229
Obligations under capital lease 8,616 8,797
--------------- --------------
5,090,726 3,629,418
--------------- --------------
LONG-TERM LIABILITIES
Notes payable to related parties, net of current portion 2,459,143 2,481,283
Obligations under capital lease, net of current portion 8,640 13,436
Deferred taxes 10,000 10,000
--------------- --------------
2,477,783 2,504,719
--------------- --------------
TOTAL LIABILITIES 7,568,509 6,134,137
--------------- --------------
STOCKHOLDERS' EQUITY
Common stock, $0.001 par value, 50,000,000 shares 18,405 18,170
authorized; 18,405,298 (2000) and 18,170,354 (1999)
issued and outstanding
Common stock committed - 202
Addition paid in capital 2,453,822 2,423,230
Accumulated deficit (1,178,592) (486,047)
--------------- --------------
1,293,635 1,955,555
--------------- --------------
Total liabilities and Stockholders' equity $ 8,862,144 $ 8,089,692
=============== ==============
</TABLE>
See accompanying notes to unaudited interim condensed consolidated financial
statements
<PAGE>
<TABLE>
<CAPTION>
TANGIBLE ASSET GALLERIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<S> <C> <C> <C> <C>
Three Months Ended Six Months Ended
June 30, 2000 June 30, 1999 June 30, 2000 June 30, 1999
--------------------------------------------------------------------------
NET SALES $ 6,721,553 $ 5,918,764 $ 13,654,064 $ 10,664,171
COST OF SALES 5,643,453 5,140,415 11,515,986 8,689,535
--------------------------------------------------------------------------
GROSS PROFIT 1,078,100 778,349 2,138,078 1,974,636
Selling, general and administrative expenses 1,106,366 583,995 2,393,199 1,390,943
--------------------------------------------------------------------------
Income (loss) from operations (28,266) 194,354 (255,121) 583,693
OTHER INCOME (EXPENSE)
Interest income 990 1,290 2,261 2,970
Interest expense (227,834) (53,156) (424,684) (81,425)
Other expense, net - (4,550) - (25,797)
--------------------------------------------------------------------------
(226,844) (56,416) (422,423) (104,252)
INCOME (LOSS) BEFORE PROVISION FOR TAXES (255,110) 137,938 (677,544) 479,441
INCOME TAXES 15,000 54,000 15,000 60,000
--------------------------------------------------------------------------
NET (LOSS) INCOME $ (270,110) $ 83,938 $ (692,544) $ 419,441
--------------------------------------------------------------------------
NET (LOSS) INCOME PER SHARE
Basic $ (0.01) $ - $ (0.04) $ 0.02
--------------------------------------------------------------------------
Diluted $ (0.01) $ - $ (0.04) $ 0.02
==========================================================================
</TABLE>
See accompanying notes to unaudited interim condensed consolidated financial
statements
<PAGE>
<TABLE>
<CAPTION>
TANGIBLE ASSET GALLERIES, INC.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
<S> <C> <C>
Six Months Ended
June 30, 2000 June 30, 1999
----------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net (loss) income $ (692,544) $ 419,441
Adjustments to reconcile net (loss) income to net cash
(used in) provided by operating activities:
Depreciation and amortization 70,363 17,291
Write-off of customer list - 21,247
Loss on investments - 4,550
Provision for deferred taxes - 10,000
Fair value of options granted 12,500 -
Fair value of warrants granted - 134,185
Issuance of common stock for computer consulting services 3,125 -
Issuance of common stock for public relations services 15,000 -
Issuance of common stock for legal services - 17,500
Changes in assets or liabilities:
Accounts receivable 147,052 (1,281,330)
Inventories (685,689) (857,253)
Prepaid expenses and other (8,812) (29,885)
Accounts payable and accrued expenses 927,137 1,820,511
----------------------------------
Net cash (used in) provided by operating activities (211,868) 276,257
----------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment (143,504) (50,868)
Decrease (increase) in other assets 5,961 (756)
----------------------------------
Net cash used in investing activities (137,543) (51,624)
----------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in related party debt 312,212 1,343,138
Repayment on obligations under capital lease (4,977) (1,788)
Exercise of stock options - 4,329
Stockholder distributions - (1,584,456)
----------------------------------
Net cash provided by (used in) financing activities 307,235 (238,777)
----------------------------------
Net increase (decrease) in cash (42,176) (14,144)
CASH, beginning of period 81,882 42,285
----------------------------------
CASH, end of period $ 39,706 $ 28,141
==================================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the period for:
Interest $ 422,702 $ 54,902
==================================
Income taxes $ 7,400 $ 34,525
==================================
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND
FINANCING ACTIVITIES:
Issuance of common stock for inventories $ - $ 135,000
==================================
Property and equipment purchased with accounts payable $ 200,000 $ -
==================================
</TABLE>
See accompanying notes to unaudited interim condensed consolidated financial
statements
<PAGE>
TANGIBLE ASSET GALLERIES, INC.
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000
(Unaudited)
1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated interim financial
statements have been prepared in accordance with the rules and regulations of
the Securities and Exchange Commission for the presentation of interim financial
information, but do not include all the information and footnotes required by
generally accepted accounting principles for complete financial statements. The
consolidated balance sheet as of December 31, 1999 has been derived from the
audited consolidated financial statements of Tangible Asset Galleries, Inc.
("TAG") at that date.
In the opinion of management, all adjustments considered necessary for a
fair presentation have been included. Operating results for the three month and
the six month periods ended June 30, 2000 are not necessarily indicative of the
results that may be expected for the year ended December 31, 2000. For further
information, refer to the consolidated financial statements for the year ended
December 31, 1999 contained in TAG's annual report on Form 10-KSB filed on March
17, 2000.
2. DESCRIPTION OF BUSINESS AND REVERSE ACQUISITION
Tangible Asset Galleries, Inc. ("TAG") and its wholly owned 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
maintains a buying office in Chicago, Illinois.
TAG is the successor to Austin Land & Resources, Inc. ("ALR"), which was
originally incorporated in the state of Nevada, and was merged with TAG's
predecessor, Tangible Investments of America, Inc. ("TIA") on April 28, 1999.
On April 28, 1999, ALR acquired all the outstanding shares of common stock
of TIA and merged the operations of TIA into ALR in a business combination that
has been accounted for as a reverse acquisition. Effective with the reverse
acquisition, TIA became the successor company and ALR's name was changed to
Tangible Asset Galleries, Inc. The unaudited condensed consolidated financial
statements include the results of operations and cash flows of TIA through April
28, 1999.
Prior to the reverse acquisition, ALR had 1,650,000 shares of common stock
outstanding. As part of the reverse acquisition, ALR issued 16,000,000 shares of
common stock to shareholders of TIA in exchange for 490 shares of TIA common
stock. The 490 shares represented 100% of the outstanding common stock of TIA.
ALR had no revenue and no significant operations prior to the reverse
acquisition. Subsequent to the reverse acquisition, the former shareholders of
TIA constituted approximately 91% of the total outstanding common shares of the
Company and the former shareholders of ALR constituted approximately 9% of the
total outstanding shares of common stock of the Company.
On December 30, 1999 the Company acquired 100% of the outstanding common
stock of Keystone, a competitor located in Allentown, Pennsylvania. All
significant inter-company balances and transaction have been eliminated in
consolidation.
<PAGE>
3. BUSINESS ACQUISITIONS
On December 30, 1999 the Company acquired 100% of the outstanding common
stock of Gehringer and Kellar, Inc. d/b/a/ Keystone Coin & Stamp Exchange
("Keystone"). In connection with the acquisition, the Company acquired 100%
ownership interest in Keystone in exchange for 201,861 shares of the Company's
common stock valued at approximately $1.49 per share for a total investment of
$300,000.
The acquisition has been accounted for under the purchase method of
accounting. In connection therewith, the Company acquired $339,229 of assets
and $339,229 of liabilities, in the form of a note payable to certain Keystone
directors. Goodwill in the amount of $300,000 was recorded as a result of the
acquisition.
4. LINE-OF-CREDIT
The Company had a $600,000 line-of-credit agreement with a bank that was
cancelled on September 2, 1999. This line of credit bore interest at the prime
rate (7.75% as of June 30, 1999), plus 2.625%, collateralized by the Company's
inventories and certain furniture and fixtures and the personal guarantee of the
Company's principal stockholder. With the acquiring of a new line-of-credit on
August 30, 1999, the Company paid off and cancelled such line of credit. The
outstanding balance as of June 30, 1999 was $600,000.
On August 30, 1999, the Company obtained a $2,000,000 line-of-credit
agreement with a bank that expires on July 31, 2000. The bank has granted the
Company an extension under the agreement until October 31, 2000. The
line-of-credit bears interest at the bank's prime rate, plus 1.50% (11.00% at
June 30, 2000), and is collateralized by substantially all of the assets of the
Company and the personal guarantee of the Company's president and principal
stockholder. The outstanding balance as of June 30, 2000 was $1,840,000.
The Company's line-of-credit has certain restrictive financial covenants,
certain of which are required to be met on an annual basis and others of which
are required to be met at all times. Such covenants include minimum tangible
net worth requirements, maximum asset to net worth ratios, minimum net income
requirements and other restrictions with respect to specified activities. At
December 31, 1999, the Company was in compliance with, or had obtained waivers
for, all annual and other financial covenants. At June 30, 2000, the Company was
in compliance with, or had obtained waivers for, all non-annual financial
covenants.
5. NOTE PAYABLE
On November 10, 1999 the Company entered into a short-term loan agreement
in the amount of $200,000, with interest payable monthly at the prime rate
(9.50% as of June 30, 2000) plus 4.50% per annum. The short-term loan is
collateralized by specific rare coins in inventory, which are being held by the
lender. The outstanding balance as of June 30, 2000 was $200,000.
6. NOTES PAYABLE TO RELATED PARTIES
<TABLE>
<CAPTION>
Notes payable to related parties consist of the following:
<S> <C> <C>
JUNE 30, December 31,
----------- --------------
2000 1999
----------- --------------
Unsecured note payable to Company's president and
principal stockholder, bearing interest monthly at 10% per
annum. The note matures July 1, 2001, at which time all
outstanding principal and interest is due. $ 1,059,143 $ 1,081,283
Unsecured convertible note payable to principal stockholder;
principal and interest are due in quarterly installments as
specified in the agreement, bearing interest at 9.0% per
annum. The note is convertible into common shares of the
Company at $1 per share, as specified in the agreement.
The note matures in March 2004. 1,400,000 1,400,000
Note payable to the previous owners and current officers of
Keystone; principal is due in full on demand, with interest
payable monthly at the prime rate (9.50% as of June 30,
2000) less 0.50% per annum; secured by all assets of
Keystone. 673,581 339,229
----------- --------------
3,132,724 2,820,512
Less current portion (673,581) (339,229)
----------- --------------
$2,459,143 $ 2,481,283
=========== ==============
</TABLE>
<PAGE>
7. EARNINGS PER SHARE
<TABLE>
<CAPTION>
The following table sets forth the computation of basic and diluted income
(loss) per share for the periods indicated:
<S> <C> <C>
Three Months Ended June 30, 2000 1999
----------- -------------
Basic:
Net (loss) income $ (270,110) $ 83,938
=========== =============
Weighted average number of common shares outstanding 18,402,487 18,110,854
=========== =============
Basic net (loss) income per common share $ (0.01) $ -
=========== =============
Diluted:
Net (loss) income $ (270,110) $ 83,938
Adjustments to net (loss) income:
Interest on convertible stockholder note payable (net of income tax) - -
----------- -------------
Diluted net (loss) income $ (270,110) $ 83,938
=========== =============
Weighted average number of common shares outstanding 18,402,487 18,110,854
Weighted average number of common shares equivalents:
Stock options and warrants - -
Convertible stockholders note payable - -
----------- -------------
Weighted average number of common and common equivalent shares 18,402,487 18,110,854
=========== =============
Diluted net (loss) income per common share $ (0.01) $ -
=========== =============
Six Months Ended June 30, 2000 1999
----------- -------------
Basic:
Net (loss) income $ (692,544) $ 419,441
=========== =============
Weighted average number of common shares outstanding 18,387,268 17,921,308
=========== =============
Basic net (loss) income per common share $ (0.04) $ 0.02
=========== =============
Diluted:
Net (loss) income $ (692,544) $ 419,441
Adjustments to net (loss) income:
Interest on convertible stockholder note payable (net of income tax) - -
----------- -------------
Diluted net (loss) income $ (692,544) $ 419,441
=========== =============
Weighted average number of common shares outstanding 18,387,268 17,921,308
Weighted average number of common shares equivalents:
Stock options and warrants - -
Convertible stockholders note payable - -
----------- -------------
Weighted average number of common and common equivalent shares 18,387,268 17,921,308
=========== =============
Diluted net (loss) income per common share $ (0.04) $ 0.02
=========== =============
</TABLE>
The effects of the stock options, warrants and convertible stockholder note
payable were anti-dilutive and accordingly have been excluded from the
calculation of diluted net (loss) income per share.
8. COMMITMENTS
On January 1, 2000, the Company's subsidiary, Keystone, entered into a lease
agreement to rent 2,500 square feet of retail and administrative space in
Allentown, Pennsylvania at a rental rate of $3,000 per month. The lease is
scheduled to terminate on December 31, 2002. Keystone's former owners, who are
currently the president and vice president of Keystone, own the facility.
<PAGE>
9. PENDING BUSINESS ACQUISITION
On June 21, 2000, TAG and Gavelnet.com, Inc. ("Gavelnet") executed and
delivered an Agreement and Plan of Reorganization (the "Merger Agreement") that
provides for a newly-formed subsidiary of TAG to merge with and into Gavelnet.
Upon consummation of the merger, Gavelnet will become a wholly owned subsidiary
of TAG. The closing of the merger is subject to numerous conditions, as
described below.
Upon closing of the Merger, Gavelnet will merge with a subsidiary of TAG,
and will be the surviving corporation. Thus, as a result of the merger,
Gavelnet will become a wholly owned subsidiary of TAG. TAG will not assume any
of the obligations of Gavelnet. Rather, Gavelnet will remain responsible for
all of its obligations and liabilities.
The purchase price for all of the Gavelnet shares of capital stock will be
paid exclusively in shares of the common stock of the Company ("Common Stock"),
except that a portion of the proceeds raised from a private placement will be
used to repay a portion of the Gavelnet convertible debt. The number of shares
of Common Stock to be paid in the merger will be calculated as follows: the
initial purchase price will be 9,250,000 shares of Common Stock, less one share
for every dollar that the Gavelnet total liabilities, as adjusted, including
amounts loaned to Gavelnet by TAG, less the total current assets of Gavelnet,
exceeds $1,250,000. Of the shares to be issued in exchange for the Gavelnet
capital stock, 1,911,904 will be either paid directly to the holders of Gavelnet
convertible debt, or if a portion of such debt is repaid with the proceeds of a
private placement, then to the shareholders of Gavelnet. As of June 22, 2000,
the date the potential merger with Gavelnet was announced, the closing price of
Common Stock was $0.625 per share. As a result, the value of the Common Stock
to be paid to former Gavelnet stockholders is approximately $5,781,250.
In addition to the Common Stock, TAG will also assume options to purchase
Gavelnet common stock, which will be converted into options to purchase
approximately 500,000 shares of Common Stock at an average exercise price of
approximately $1.50 per share.
In addition, TAG may deliver additional shares of Common Stock if Benchmark
Merchant Partners, L.P. is able to assist TAG in selling more than $8.0 million
of Common Stock (see discussion below) on or before December 18, 2000. The
Merger Agreement contemplates that TAG, through the services of Benchmark
Merchant Partners, L.P. ("Merchant Partners"), may raise up to an additional
$7.0 million through the sale of Common Stock. TAG has also entered into a
consulting agreement with Merchant Partners pursuant to which TAG has granted
Merchant Partners the non-exclusive right to identify and introduce investors in
such offering. For each $1,000 of net proceeds raised in such sale of Common
Stock in excess of the minimum $8.0 million discussed below, TAG will (a)
deliver 300 shares of Common Stock as a placement fee to Merchant Partners; and
(b) as additional consideration to the former stockholders of Gavelnet, deliver
300 shares of Common Stock to such former stockholders (without the payment of
any additional consideration by such former stockholders to TAG). In no event
will the number of shares delivered to Merchant Partners exceed 2,100,000 shares
nor will the number of shares delivered to the former Gavelnet stockholders
exceed 2,100,000 shares.
As a condition to the execution of the Merger Agreement, TAG and Gavelnet
executed a Financial Support Agreement pursuant to which TAG will lend to
Gavelnet 62.5% of the net proceeds of any equity capital raised up to
$1,250,000. Such loan will be secured by a first priority security interest in
the assets of Gavelnet. In the event that the merger is not consummated,
Gavelnet may be unable to repay this loan and the assets may not have a
liquidation value equal to the loan amount. The Company anticipates, that in
addition to loans to Gavelnet, the proceeds of the equity raise 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 equity
capital.
The merger must be approved by the stockholders of both TAG and Gavelnet.
Additionally, the Common Stock to be issued in the merger must be exempt from
the registration requirements of the Securities Act of 1933. TAG and Gavelnet
have agreed to seek a fairness hearing in California if no other exemption is
available. If the merger is not approved at the fairness hearing, the parties
have agreed to register the shares to be issued in the merger with the
Securities and Exchange Commission, with TAG and the Gavelnet stockholders each
bearing one half of the costs thereof.
The merger must close, if at all, no later than September 19, 2000. The
closing of the merger is subject to the satisfaction or waiver of a number of
conditions. If any of the following conditions is not satisfied, TAG may
terminate the Merger Agreement and cancel the merger. TAG may also waive any
condition, but is under no obligation to do so. The conditions precedent to
TAG's obligations include, among other things, the following: TAG will have
completed a private placement with net proceeds of at least $8 million; All of
the Gavelnet convertible debt shall have agreed to convert into an aggregate of
1,911,904 shares of Common Stock; TAG has completed due diligence on Gavelnet's
business and assets and has determined the business and assets to be
satisfactory; Not more than five percent (5%) of the stockholders of Gavelnet
have exercised their dissenters' rights; There has been no material adverse
change in Gavelnet's assets since the signing of the Merger Agreement.
Gavelnet may terminate the Merger Agreement and cancel the merger if, among
other things, there has been a material adverse change in the business or assets
of TAG or if the Common Stock is not listed on the Over the Counter Bulletin
Board (or some other exchange).
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
CAUTIONARY STATEMENTS:
This Quarterly Report on Form 10-QSB contains certain forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933 and Section 21E
of the Securities Exchange Act of 1934. The Company intends that such
forward-looking statements be subject to the safe harbors created by such
statutes. The forward-looking statements included herein are based on current
expectations that involve a number of risks and uncertainties. Accordingly, to
the extent that this Quarterly Report contains forward-looking statements
regarding the financial condition, operating results, business prospects or any
other aspect of the Company, please be advised that the Company's actual
financial condition, operating results and business performance may differ
materially from that projected or estimated by the Company in forward-looking
statements. The differences may be caused by a variety of factors, including
but not limited to adverse economic conditions, intense competition, including
intensification of price competition and entry of new competitors and products,
adverse federal, state and local government regulation, inadequate capital,
unexpected costs and operating deficits, increases in general and administrative
costs, lower sales and revenues than forecast, loss of customers, customer
returns of products sold to them by the Company, termination of contracts, loss
of supplies, technological obsolescence of the Company's products, technical
problems with the Company's products, price increases for supplies, inability to
raise prices, failure to obtain new customers, litigation and administrative
proceedings involving the Company, the possible acquisition of new businesses
that result in operating losses or that do not perform as anticipated, resulting
in unanticipated losses, the possible fluctuation and volatility of the
Company's operating results, financial condition and stock price, inability of
the Company to continue as a going concern, losses incurred in litigating and
settling cases, adverse publicity and news coverage, inability to carry out
marketing and sales plans, loss or retirement of key executives, changes in
interest rates, inflationary factors and other specific risks that may be
alluded to in this Quarterly Report or in other reports issued by the Company.
In addition, the business and operations of the Company are subject to
substantial risks that increase the uncertainty inherent in the forward-looking
statements. The inclusion of forward-looking statements in this Quarterly
Report should not be regarded as a representation by the Company or any other
person that the objectives or plans of the Company will be achieved.
COMPANY OVERVIEW
Tangible Asset Galleries, Inc. ("Tangible" or the "Company") is a retailer and
wholesaler of rare coins, fine art, and antique collectibles. The Company was
organized as a Nevada corporation on August 30, 1995 and is currently based in
Newport Beach, California.
On April 28, 1999, Tangible Asset Galleries, Inc. (which at the time was
designated Austin Land & Resources, Inc., a Nevada corporation ("Austin"))
acquired all of the outstanding common stock of Tangible Investments of America,
Inc., a Pennsylvania corporation ("TIA") in a business combination described as
a "reverse acquisition." For accounting purposes, the acquisition has been
treated as the acquisition of Austin (the Registrant) by TIA. TIA was
originally incorporated in Pennsylvania in 1984. At the time of its reverse
acquisition with Austin, TIA operated as a retailer and wholesaler of rare
coins, fine art, and antique collectibles. TIA agreed to be acquired by the
Company in order to become a publicly traded company. Management of TIA
believed that the Company's status as a publicly traded company would facilitate
the raising of capital. Prior to the acquisition by Austin, management of TIA
had no relationship with the Company.
Immediately prior to the acquisition, Austin had 1,650,000 shares of Common
Stock outstanding. As part of Austin's reorganization with TIA, Austin issued
16,000,000 shares of its Common Stock to the shareholders of TIA in exchange for
490 (100%) shares of TIA Common Stock. Immediately following the merger, Austin
changed its name to "Tangible Asset Galleries, Inc." Austin had no revenues and
no significant operations prior to the merger. Subsequent to the acquisition,
the former shareholders of TIA constituted approximately 88% of the total
outstanding shares of the Common Stock of the Company and the original
shareholders of Austin constituted approximately 9% of the total outstanding
shares of the Common Stock of the Company.
<PAGE>
BUSINESS OF THE ISSUER
The Company's principal line of business is the sale of rare coins on a retail
and wholesale basis. Additionally, the Company also offers, primarily on a
retail basis, collectibles such as fine artworks, antique furniture, lamps,
pottery, and china. The Company's primary storefront is currently located in
Newport Beach, California. In January 2000, the Company completed the
relocation of all its Southern California operations to its new headquarters and
primary retail outlet located in Newport Beach, California. The Company's
services are also marketed nationwide through broadcasting and print media and
independent sales agents.
Beginning on September 1, 1999, the Company launched the first phase of its
Internet auction Web site located at www.tagz.com. The first phase offered the
sale of rare coins by the Company to the public via an auction format. On
October 1, 1999, the Company initiated the second phase of its Internet auction
Web site, expanding it to offer the sale of fine art and collectibles via an
auction format. In November 1999, the Company held its first simultaneous live
and Internet fine art and collectibles "Elite" auction. The Internet portion of
the auction was run in conjunction with Amazon.com and the Company's own fully
auction capable Web site. In March 2000 and June 2000, the Company ran its
second and third "Elite" auction in conjunction with Gavelnet.com, Inc.
("Gavelnet"). The Company continued to expand its Internet presence with the
introduction of e-commerce galleries for rare coins and fine art in May 2000.
The Company's auction site offers graded and certified coins and guarantees as
to authenticity and condition of all items offered for sale.
In contrast to other auction sites such as Ebay.com, where the site operator
merely acts as a facilitator of transactions, the Company acts as principals in
its auctions. This means that the Company evaluates offerings, collects funds,
pays consignors, and therefore seeks to eliminate the risks to the public of
bidding on items sold by unknown third parties. To date, there are only a small
number of auction Web sites that offer guarantees comparable to the Company's.
The Company also currently publishes a quarterly newsletter, distributed to its
existing customers detailing and describing current events in the numismatic and
fine collectibles world. The Company's newsletter also provides customers with
the opportunity to view the Company's current rare coin and fine collectibles
offerings as well as order such offerings via telephone.
On May 28, 1999, the Company expanded its operations by opening a retail outlet
in the Las Vegas area. Although the Company believes that the Las Vegas area is
viewed as a prime location for development in the coin and art collection arena,
the Company ceased operations in Las Vegas on May 1, 2000 to focus its attention
and resources on its Internet based operations.
In June 1999, the Company opened a Tustin, California customer service center,
staffed by trained professionals who are tasked with answering customer
inquiries regarding the Company's monthly newsletter as well responding to
customer requests regarding availability of certain fine collectibles. In
January 2000, the Tustin customer service center was consolidated into the
Company's headquarters located in Newport Beach, California.
On December 30, 1999 the Company acquired all the outstanding common shares of
Gehringer and Keller, Inc. d.b.a. Keystone Coin & Stamp Exchange ("Keystone").
Keystone is a wholesale, retailer and auctioneer of rare coins located in
Allentown, Pennsylvania. The Company believes that acquisition of Keystone will
significantly strengthen the Company's market position on the East Coast of the
United States and enable the Company to continue to position itself as a
nationally recognized dealer in rare coins. The staff of Keystone will add
further numismatic expertise to the Company. The Company intends to expand
Keystone to include the sale of fine art and collectibles.
On June 21, 2000, Tangible signed a definitive agreement to purchase
Gavelnet.com, Inc. ("Gavelnet") a start-up Internet based auctioneer and broker
of premium fine art and collectibles headquartered in San Francisco, California.
The Company believes that the acquisition of Gavelnet, if completed, will
significantly enhance the Company's presence on the Internet as an
internationally recognized dealer and auctioneer of fine art and collectibles.
Gavelnet's substantial investment in the technology associated with its Internet
based operations will benefit the Company's rare coin business by bringing it
global exposure. The closing of the acquisition is subject to numerous
conditions all of which must be completed by September 19, 2000. A brief history
and description of Gavelnet's business is described below.
Gavelnet was founded in July 1999 by Benchmark Equity Group, Inc., a venture
capital firm in Houston, Texas. Gavelnet launched its online presence in a
limited use "beta" site in September 1999 and then as a fully functioning online
premium auction site on November 15, 1999. Version 2.0 was launched in February
2000. Gavelnet now offers fine art, decorative art and premium collectibles from
a worldwide network of auction houses, dealers and galleries through 24 hour a
day, seven day a week automated auctions and live auction events, complemented
by related news and information. In addition, Gavelnet began offering items for
retail sale on their website in April 2000.
<PAGE>
Gavelnet draws the property that it features on its site from a variety of
sources. This includes property that is originated from dealers identified and
recruited by Gavelnet's own business development personnel in both the U.S. and
Europe. Gavelnet also plans on obtaining property from the senior regional
auction houses with whom there are negotiations to sign agreements to broadcast
their live auctions on the Internet. In addition to the live auctions, Gavelnet
is seeking to provide these auction houses with fully interactive versions of
their catalogs and to feature the underlying property on the Gavelnet site.
For the buyers, Gavelnet requires registration on its web site prior to placing
a bid for auction buyers or making a purchase request for retail buyers. As a
part of the registration, the buyer authorizes Gavelnet to reserve the amount of
the bid or purchase on a credit card provided by the buyer. Once the auction or
retail sale is closed, Gavelnet executes the credit card draft electronically
and automatically with funds held by Gavelnet. Notices are sent by e-mail to the
sellers of the property (who have maintained possession during the entire
selling process) that the item has been sold. A third party service is
contracted to pick up the property, package the property and ship the property
to the buyer. Upon receipt, the buyer has five days to inspect the property to
insure that the property was properly described on the web site. Following the
five day period, the funds are released to the seller, net of commissions to
Gavelnet. Any disputes between the buyer and seller are arbitrated by third
party experts identified by Gavelnet. Expert fees are paid by the buyer if it is
judged that the property was fairly described or alternatively by the seller if
it judged that the property was not fairly described.
RISK FACTORS
COMPETITION
The business of selling rare coins, fine art and other collectibles to retail
and wholesale consumers and at auction is highly competitive. The Company
competes with a number of smaller, comparably sized, and larger firms throughout
the United States. These include (without limitation): Heritage Rare Coin, a
large scale coin firm in Dallas, Texas; National Gold Exchange, a large
wholesale coin and bullion seller located in Tampa, Florida; Superior Stamp &
Coin, a medium sized coin firm in Beverly Hills, California; Spectrum, a medium
sized coin wholesaler located in Newport Beach, California; Collectors Universe,
Inc., a publicly traded company; and U.S. Coins, a medium size coin wholesaler
located in Houston, Texas. These competitors have the ability to attract
customers as a result of their reputation and the quality collectibles they
obtain through their industry connections. These competitors may have greater
name recognition and have greater financial and marketing resources than the
Company. Additionally, other reputable companies that sell or auction rare coins
and fine collectibles may decide to enter the Company's markets to compete with
the Company. However, the Company believes that it is able to compete with
these competitors due to its generally higher quality inventory, staff
expertise, and Web presence. However, there can be no assurances that the
Company can continue to compete successfully with other established companies
with greater financial resources, experience and market share.
MARKET CONDITIONS
A decline in consumer spending could harm the Company's business. Sales of rare
coins, fine and decorative art and collectibles depend on discretionary consumer
spending and are affected by general market conditions. Many factors affect
discretionary consumer spending, including the unemployment rate, business
conditions, interest rates, inflation and tax rates. Spending on the types of
luxury items that Tangible typically auctions are impacted by these factors more
than sales of consumer products in general.
Some of the market conditions that could cause the dollar volume spent in
Tangible auctions to decrease include the following: fewer works of art offered
for sale; decline in the prices buyers are willing to pay; and shifts in
consumer trends. As buyers' tastes change and economic conditions fluctuate, the
supply, demand and dollar volume of fine and decorative art and collectibles
sales could decrease, which could have a material adverse effect on the
Company's business, operating results and financial condition.
<PAGE>
The popularity of rare coins and fine collectibles may vary, over time, due to
perceived scarcity, subjective value, general consumer trends, changes in the
prices of precious metals, interest rates and other general economic conditions.
The Company derives a significant portion of its revenues from sales of
collectibles from its own inventory and commissions paid to the Company on the
sale of collectibles in its auctions. A decline in popularity of rare coins and
artwork, and of collectibles generally, likely would cause a decrease in the
number of transactions in the Company's auctions and fewer sales from inventory,
which would reduce revenue and harm the Company's business.
Temporary consumer popularity or "fads" among collectors temporarily may inflate
the volume of collectibles that the Company auctions and sells. These trends may
result in significant fluctuations in the Company's operating results from one
quarter to the next. Any decline in the popularity of the collectibles that the
Company auctions and sells as a result of changes in consumer trends could harm
the Company's business.
FLUCTUATION IN QUARTERLY OPERATING RESULTS
The Company's revenues and operating results have in the past fluctuated, and
may in the future fluctuate, from quarter to quarter and period to period as a
result of a number of factors. These include, without limitation, the following:
the supply and demand of rare coins on a wholesale and retail basis; the
fluctuation of precious metal bullion prices; the pricing policies or price
reductions by the Company and its competitors; the Company's success in
expanding its sales of rare coins and collectibles at a retail level; personnel
changes; and general economic trends.
Unlike many organizations with significant retail sales, the Company does not
have any predictable seasonal sales patterns.
many organizations with significant retail sales, the Company does not have any
predictable seasonal sales patterns.
Due to all of the foregoing factors, it is possible that in some future quarter,
the Company's operating results may be below the expectations of the public
market analysts and investors. In such event, the Company's common stock would
likely be materially adversely affected.
ABILITY TO MANAGE GROWTH
The Company has and is experiencing periods of growth, increased personnel and
marketing costs that have placed, and may continue to place, a significant
strain on the Company's resources. The Company anticipates expanding its on-line
auction and sales efforts. The Company's ability to manage future increases, if
any, in the scope of its operations or personnel will depend on the expansion of
its marketing and sales, management and financial capabilities. The failure of
the Company's management to effectively manage expansion in its business could
have a material adverse effect on the Company's business, results of operations
and financial condition.
The following discussion should be read in conjunction with, and is qualified in
its entirety by, the Interim Unaudited Condensed Consolidated Financial
Statements and related notes thereto included elsewhere herein and the annual
audited Consolidated Financial Statements and related notes thereto for the year
ended December 31, 1999 contained in the Company's Annual Report on Form 10-KSB
filed on March 17, 2000. Historical results of operations, percentage margin
fluctuations and any trends that may be inferred from the discussion below are
not necessarily indicative of the operating results for any future period.
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth for the periods indicated, the percentage of net
sales represented by each item in the Company's condensed consolidated
statements of operations. The information presented in this table assumes the
acquisition of TIA by the Company. The information includes the operations of
Keystone as of January 1, 2000 only as Keystone was acquired at the close of
business on the last operating day of the fiscal year that ended on December 31,
1999.
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Three Months Ended Six Months Ended
June 30, June 30,
2000 1999 2000 1999
------------------------------------
Net sales 100.00% 100.00% 100.00% 100.00%
Cost of sales 84.00% 86.80% 84.30% 81.50%
------------------------------------
Gross profit 16.00% 13.20% 15.70% 18.50%
Selling, general and administrative expenses 16.40% 9.90% 17.60% 13.00%
------------------------------------
Income from operations -0.40% 3.30% -1.90% 5.50%
Other income (expense) -3.40% -1.00% -3.10% -1.00%
------------------------------------
Income before income taxes -3.80% 2.30% -5.00% 4.50%
Income taxes 0.20% 0.90% 0.10% 0.60%
------------------------------------
Net income (loss) -4.00% 1.40% -5.10% 3.90%
====================================
</TABLE>
FOR THE THREE MONTHS ENDED JUNE 30, 2000 AND 1999
The Company's net loss for the three months ended June 30, 2000 was $270,110 or
$0.01 per share on a basic and diluted basis, as compared to net income of
$83,938 or $0.00 per share on a basic and diluted basis, for the three months
ended June 30, 1999. The decrease in profitability was primarily the result of
increased selling, general and administrative expenses as discussed below.
NET SALES
The table below reflects the breakdown of the Company's primary areas of sales.
Three Months Ended Three Months Ended
June 30, 2000 June 30, 1999
--------------------- -----------------------
Amount % Amount %
--------------------- -----------------------
Net sales
Coins - Wholesale $ 4,432,627 65.9% $ 4,609,955 77.9%
Coins - Retail 2,000,693 29.8 1,223,346 20.7
Fine art and
collectibles 288,233 4.3 85,463 1.4
--------------------- -----------------------
Total net sales $ 6,721,553 100.0% $ 5,918,764 100.0%
===================== =======================
<PAGE>
Net sales for the three months ended June 30, 2000 increased 13.6% to $6,721,553
from $5,918,764 for the three months ended June 30, 1999. This increase was
primarily due to the impact of the inclusion of Keystone's net sales during the
current quarter. Wholesale rare coin sales decreased 3.8% to $4,432,627 for the
three months ended June 30, 2000 from $4,609,955 for the three months ended June
30, 1999. This decrease was attributed to the reduced focus by the Company's
Tangible Asset Galleries ("TAG") unit on wholesale sales activities, but was
mostly offset by impact of Keystone's net sales that was substantially generated
from wholesale rare coin sales. Retail rare coin sales increased 63.5% to
$2,000,693 for the three months ended June 30, 2000 from $1,223,346 for the
three months ended June 30, 1999. This increase was attributable to the
Company's continued focus on retail sales. Fine art and collectible sales for
the three months ended June 30, 2000 increased 237.3% to $288,233 from $85,463
for the three months ended June 30, 1999. This increase was attributable to
Company's expanding presence on the Internet and its increased efforts in live
gallery fine art and collectibles auctions.
COST OF SALES
Cost of sales for the three months ended June 30, 2000 increased 9.8% to
$5,643,453 from $5,140,415 for the three months ended June 30, 1999. This
increase was primarily due to increased sales. The cost of sales as a percentage
of net sales decreased to 84.0% (2000) from 86.8% (1999) during the comparable
periods. The decrease in cost of sales as a percentage of net sales, in the
current period over comparable period, was due to the favorable mix of products
sold. The Company's cost of sales as percentage of net sales will vary from
period to period depending on the prevailing market forces and the mix of
products sold. Additionally, the cost of sales percentage can be negatively
impacted by the Company's Keystone unit, due to its high percentage of wholesale
sales that generally has a higher cost of sales as a percentage of net sales as
compared to the Company's TAG unit.
GROSS PROFIT
Gross profit for the three months ended June 30, 2000 increased 38.5% to
$1,078,100 from $778,349 for the three months ended June 30, 1999. The gross
profit as a percentage of net sales increased to 16.0% (2000) from 13.2% (1999)
during the comparable three months. This increase was due to the favorable mix
of products sold during the period and the inclusion of the operations of the
Company's Keystone unit. The ability of the Company to realize the highest
possible gross profit on the sales of products is dependent on market demand for
specific types of products that may or may not be readily available to Company.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses for the three months ended June 30,
2000 increased 89.4% to $1,106,366 from $583,995 for the three months ended June
30, 1999. The increase in these expenses were due to: increases in selling
expenses relating to the shift in focus toward retail sales in both the rare
coin and fine art segments; the expansion of the administrative infrastructure
to support the requirements of public company reporting and the Company's
growing retail and auction operations; the costs associated with upgrading the
Company's Internet based auction and 'e-commerce' site; and, the inclusion of
the operating expenses of the Keystone unit.
OTHER INCOME AND EXPENSES
Other expenses for the three months ended June 30, 2000 increased 302.1% to
$226,844 from $56,416 for the three months ended June 30, 1999. This increase
was primarily due to a 328.6% increase in interest expense for the three months
ended June 30, 2000 to $227,834 from $53,156 for the three months ended June 30,
1999. This increase in interest expense was the result of increases in the
Company's operating line and related party debt.
INCOME TAXES
Income taxes for the three months ended June 30, 2000 decreased 72.2% to $15,000
from $54,000 for the three months ended June 30, 1999. This decrease was
primarily due to a loss before income taxes in the current three month period as
compared to an income before income taxes for the prior year's comparable
period. Prior to the Company's reverse acquisition on April 28, 1999, the
Company had elected to be taxed as an S-Corporation for federal and state
purposes. Under the provisions of this election, with the exception of the
California 1.5% surtax, the Company did not pay corporate tax on its income.
However, the stockholders were liable for their respective share of income taxes
on the Company's taxable income. Subsequent to the reverse acquisition, the
Company began to provide for corporate income taxes based on the combined
federal and state statutory rates.
<PAGE>
FOR THE SIX MONTHS ENDED JUNE 30, 2000 AND 1999
The Company's net loss for the six months ended June 30, 2000 was $692,544 or
$0.04 per share on a basic and diluted basis, as compared to net income of
$419,441 or $0.02 per share on a basic and diluted basis, for the six months
ended June 30, 1999. The decrease in profitability was primarily the result of
increased selling, general and administrative expenses as discussed below.
NET SALES
The table below reflects the breakdown of the Company's primary areas of sales.
Six Months Ended Six Months Ended
June 30, 2000 June 30, 1999
---------------------- -------------------------
Amount % Amount %
---------------------- -------------------------
Net sales
Coins - Wholesale $ 9,846,877 72.1% $ 8,019,557 75.2%
Coins - Retail 3,207,779 23.5 2,292,696 21.5
Fine art and
collectibles 599,408 4.4 351,918 3.3
---------------------- -------------------------
Total net sales $ 13,654,064 100.0% $ 10,664,171 100.0%
====================== =========================
Net sales for the six months ended June 30, 2000 increased 28.0% to $13,654,064
from $10,664,171 for the six months ended June 30, 1999. This increase was
primarily due to the impact of the inclusion of Keystone's net sales during the
period. Wholesale rare coin sales increased 22.8% to $9,846,877 for the six
months ended June 30, 2000 from $8,019,557 for the six months ended June 30,
1999. This increase was primarily attributed to impact of Keystone's net sales
that was substantially generated from wholesale rare coins sales. Retail rare
coin sales increased 39.9% to $3,207,779 for the six months ended June 30, 2000
from $2,292,696 for the six months ended June 30, 1999. This increase was
attributable to the Company's continued focus on retail sales. Fine art and
collectible sales for the six months ended June 30, 2000 increased 70.3% to
$599,408 from $351,918 for the six months ended June 30, 1999. This increase was
attributable to Company's expanding presence on the Internet and its increased
efforts in live gallery fine art and collectibles auctions.
COST OF SALES
Cost of sales for the six months ended June 30, 2000 increased 32.5% to
$11,515,986 from $8,689,535 for the six months ended June 30, 1999. This
increase was primarily due to increased sales. The cost of sales as a percentage
of net sales increased to 84.3% (2000) from 81.5% (1999) during the comparable
periods. The increase in cost of sales as a percentage of net sales, in the
current period over comparable period, was due to the unfavorable mix of
products sold. The Company's cost of sales as percentage of net sales will vary
from period to period depending on the prevailing market forces and the mix of
products sold. Additionally, the Company's Keystone unit, has a high percentage
of wholesale sales that generally has a higher cost of sales as a percentage of
net sales as compared to the Company's TAG unit.
GROSS PROFIT
Gross profit for the six months ended June 30, 2000 increased 8.3% to $2,138,078
from $1,974,636 for the six months ended June 30, 1999. The gross profit as a
percentage of net sales decreased to 15.7% (2000) from 18.5% (1999) during the
comparable six months. This decrease was due to the unfavorable mix of products
sold during the period. The decrease in gross profit was also impacted by the
Company's Keystone unit's lower margins as compared to the Company's TAG unit.
The ability of the Company to realize the highest possible gross profit on the
sales of products is dependent on market demand for specific types of products
that may or may not be readily available to Company.
<PAGE>
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses for the six months ended June 30,
2000 increased 72.1% to $2,393,199 from $1,390,943 for the six months ended June
30, 1999. The increase in these expenses were due to: increases in selling
expenses relating to the shift in focus toward retail sales in both the rare
coin and fine art segments; the expansion of the administrative infrastructure
to support the requirements of public company reporting and the Company's
growing retail and auction operations; the costs associated with upgrading the
Company's Internet based auction and 'e-commerce' site; and, the inclusion of
the operating expenses of the Company's Keystone unit.
OTHER INCOME AND EXPENSES
Other expenses for the six months ended June 30, 2000 increased 305.2% to
$422,423 from $104,252 for the six months ended June 30, 1999. This increase was
primarily due to a 421.6% increase in interest expense for the six months ended
June 30, 2000 to $424,684 from $81,425 for the six months ended June 30, 1999.
INCOME TAXES
Income taxes for the six months ended June 30, 2000 decreased 75.0% to $15,000
as compared to $60,000 for the six months ended June 30, 1999. This decrease was
primarily due a loss before income taxes in the current six month period as
compared to an income before income taxes for the prior year's comparable
period. 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 decreased $42,176 for the six months ended June 30, 2000. This decrease was
primarily due to increased inventories levels as part of the Company's Keystone
unit's expansion, but was partially offset by increased financing activities.
Comparatively, cash decreased $14,144 for the six months ended June 30, 1999 due
to increased inventory levels during the period as part of the Company's
expansion of its retail rare coins and fine collectible operations, but was
partially offset by increased financing activities.
Net cash used in operating activities for the six months ended June 30, 2000 was
$211,868, consisting primarily of the Company's net loss and the increases in
the Company's inventory that were significantly offset by an increase in
accounts payable and accrued expenses. Net cash provided by operating activities
for the six months ended June 30, 1999 was $276,257, consisting primarily of the
Company's net income of $419,441, adjusted by increases in accounts receivable,
inventory and accounts payable and accrued expenses.
Net cash used in investing activities for the six months ended June 30, 2000 was
$137,543 consisting primarily of additions to property and equipment. Net cash
used in investing activities for the six months ended June 30, 1999 was $51,624
consisting of additions to property and equipment.
Net cash provided by financing activities for the six months ended June 30, 2000
was $307,235 consisting primarily of borrowings by the Company's Keystone unit
from its president and vice president. Net cash used in financing activities for
the six months ended June 30, 1999 was $238,777 consisting primarily of
stockholder distributions partially offset by the proceeds of a convertible,
interest-bearing stockholder note payable.
The Company has incurred net losses since July 1, 1999. The Company is in need
of additional working capital to fund its present and future operations, which
it intends to obtain through private equity placements (as discussed below). The
Company has initiated various action plans to return to profitability. Should
the Company not return to profitability and/or not be successful in the raising
of sufficient additional capital, it may have to liquidate inventory at amounts
that could be below current carrying values.
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 June 30, 2000 was $ 1,840,000. The Company is in default on several of
its loan covenants, for which it has received a waiver through October 31, 2000.
The loan agreement had expired on July 31, 2000, but has been extended to
October 31, 2000. The lender has indicated the Company's need to return to
profitability and raise additional capital in order to effectuate a renewal of
the line once the 90-day extension expires. Should the company not raise
sufficient capital and return to profitability, it may have to seek a
replacement for its line of credit, which may not have as favorable terms or
conditions. If the Company is not successful in renewing or replacing the line
of credit, it may have to liquidate inventory at amounts that could be below
current carrying values.
<PAGE>
On June 30, 1999 the Company's predecessor, TIA, executed a convertible,
interest-bearing note payable in exchange for cash advanced by the Company's
principal stockholder and president in the amount of $1,400,000. The note bears
interest at the rate of 9.0% per annum and the interest is payable quarterly.
The note, including, any unpaid interest, will become due and payable on June
30, 2004. The note's conversion provision grants the holder the right to convert
the principal amount, in whole or in part, into shares of common stock of the
Company at a conversion price of $1.00 per share at any time. The note grants
the holder the right to extend payment for up to five renewal periods of one six
months each. Management may accelerate the repayment of the note based on the
availability of cash flow. The balance of the convertible stockholder note
payable as of June 30, 2000 was $1,400,000.
During fiscal 1999, the Company's principal stockholder and president advanced
cash, evidenced by unsecured notes payable totaling $1,326,992, to the Company
on a short-term, non-interest bearing basis until September 30, 1999. On October
1, 1999, the notes payable began to accrue interest at the rate of 10% annually
payable on a quarterly basis. On December 31, 1999 the notes payable balance was
$1,081,283, and, the Company and the principal stockholder agreed to revise the
repayment terms of the notes payable so that no repayment would occur until July
1, 2001. Management may accelerate the repayment of the loan based on the
availability of cash flow. The balance of stockholder notes payable as of June
30, 2000 was $1,059,143.
On December 30, 1999 in connection with the acquisition of Keystone, the Company
executed note payable, with a rate of interest of 8.0% per annum secured by all
assets of Keystone in exchange for cash advanced in the amount of $339,229 by
Keystone's previous owners currently serving as president and vice president of
the Keystone unit. Effective January 26, 2000 as part of the acquisition
agreement of Keystone, the president and vice president of Keystone agreed to
provide Keystone with a revolving loan agreement with a limit of up to
$1,250,000, with a rate of interest at the prime rate less 0.50% which is
collateralized by the Keystone's assets. The initial note payable executed on
December 30, 1999 was combined with the revolving loan agreement. The balance of
the loan payable to the Keystone president and vice president as of June 30,
2000 was $673,581.
On June 21, 2000, TAG and Gavelnet.com, Inc. ("Gavelnet") executed and delivered
an Agreement and Plan of Reorganization (the "Merger Agreement") that provides
for a newly-formed subsidiary of TAG to merge with and into Gavelnet. Upon
consummation of the merger, Gavelnet will become a wholly owned subsidiary of
TAG. The closing of the merger is subject to numerous conditions, as described
below.
Upon closing of the Merger, Gavelnet will merge with a subsidiary of TAG, and
will be the surviving corporation. Thus, as a result of the merger, Gavelnet
will become a wholly owned subsidiary of TAG. TAG will not assume any of the
obligations of Gavelnet. Rather, Gavelnet will remain responsible for all of
its obligations and liabilities.
The purchase price for all of the Gavelnet shares of capital stock will be paid
exclusively in shares of Common Stock, except that a portion of the proceeds
raised from a private placement will be used to repay a portion of the Gavelnet
convertible debt. The number of shares of Common Stock to be paid in the merger
will be calculated as follows: the initial purchase price will be 9,250,000
shares of Common Stock, less one share for every dollar that the Gavelnet total
liabilities, as adjusted, including amounts loaned to Gavelnet by TAG, less the
total current assets of Gavelnet, exceeds $1,250,000. Of the shares to be issued
in exchange for the Gavelnet capital stock, 1,911,904 will be either paid
directly to the holders of Gavelnet convertible debt, or if a portion of such
debt is repaid with the proceeds of a private placement, then to the
shareholders of Gavelnet. As of June 22, 2000, the date the potential merger
with Gavelnet was announced, the closing price of Common Stock was $0.625 per
share. As a result, the value of the Common Stock to be paid to former Gavelnet
stockholders is approximately $5,781,250.
<PAGE>
In addition to the Common Stock, TAG will also assume options to purchase
Gavelnet common stock, which will be converted into options to purchase
approximately 500,000 shares of Common Stock at an average exercise price of
approximately $1.50 per share.
In addition, TAG may deliver additional shares of Common Stock if Benchmark
Merchant Partners, L.P. is able to assist TAG in selling more than $8.0 million
of Common Stock (see discussion below) on or before December 18, 2000. The
Merger Agreement contemplates that TAG, through the services of Benchmark
Merchant Partners, L.P. ("Merchant Partners"), may raise up to an additional
$7.0 million through the sale of Common Stock. TAG has also entered into a
consulting agreement with Merchant Partners pursuant to which TAG has granted
Merchant Partners the non-exclusive right to identify and introduce investors in
such offering. For each $1,000 of net proceeds raised in such sale of Common
Stock in excess of the minimum $8.0 million discussed below, TAG will (a)
deliver 300 shares of Common Stock as a placement fee to Merchant Partners; and
(b) as additional consideration to the former stockholders of Gavelnet, deliver
300 shares of Common Stock to such former stockholders (without the payment of
any additional consideration by such former stockholders to TAG). In no event
will the number of shares delivered to Merchant Partners exceed 2,100,000 shares
nor will the number of shares delivered to the former Gavelnet stockholders
exceed 2,100,000 shares.
As a condition to the execution of the Merger Agreement, TAG and Gavelnet
executed a Financial Support Agreement pursuant to which TAG will lend to
Gavelnet 62.5% of the net proceeds of any equity capital raised up to
$1,250,000. Such loan will be secured by a first priority security interest in
the assets of Gavelnet. In the event that the merger is not consummated,
Gavelnet may be unable to repay this loan and the assets may not have a
liquidation value equal to the loan amount. The Company anticipates, that in
addition to loans to Gavelnet, the proceeds of the equity raise 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 equity
capital.
The merger must be approved by the stockholders of both TAG and Gavelnet.
Additionally, the Common Stock to be issued in the merger must be exempt from
the registration requirements of the Securities Act of 1933. TAG and Gavelnet
have agreed to seek a fairness hearing in California if no other exemption is
available. If the merger is not approved at the fairness hearing, the parties
have agreed to register the shares to be issued in the merger with the
Securities and Exchange Commission, with TAG and the Gavelnet stockholders each
bearing one half of the costs thereof.
The merger must close, if at all, no later than September 19, 2000. The closing
of the merger is subject to the satisfaction or waiver of a number of
conditions. If any of the following conditions is not satisfied, TAG may
terminate the Merger Agreement and cancel the merger. TAG may also waive any
condition, but is under no obligation to do so. The conditions precedent to
TAG's obligations include, among other things, the following: TAG will have
completed a private placement with net proceeds of at least $8 million; All of
the Gavelnet convertible debt shall have agreed to convert into an aggregate of
1,911,904 shares of Common Stock; TAG has completed due diligence on Gavelnet's
business and assets and has determined the business and assets to be
satisfactory; Not more than five percent (5%) of the stockholders of Gavelnet
have exercised their dissenters' rights; There has been no material adverse
change in Gavelnet's assets since the signing of the Merger Agreement.
Gavelnet may terminate the Merger Agreement and cancel the merger if, among
other things, there has been a material adverse change in the business or assets
of TAG or if the Common Stock is not listed on the Over the Counter Bulletin
Board (or some other exchange).
CAPITAL EXPENDITURES
The Company incurred capital expenditures of $343,504 during the six months
ended June 30, 2000 consisting of computer hardware, computer software, office
equipment and leasehold improvements. The Company anticipates the rate of
capital expenditures will significantly decrease for the remaining two quarters
of the fiscal year ending December 31, 2000.
Effective October 7, 1999, the Company began leasing 11,270 square feet of
administrative, customer support, retail, gallery, and auction space located in
Newport Beach, California at a rental rate of $11,000 per month. In January
2000, the Company consolidated its Laguna Beach and Tustin operations into this
location. The lease is scheduled to terminate on October 7, 2001. On April 1,
2000 the Company subleased its Laguna Beach facility that substantially covers
the Company's rental commitment through the termination of the lease on June 30,
2001. The lease on the Tustin facility expired on April 30, 2000.
On January 1, 2000, the Company's Keystone unit began leasing 2,500 square feet
of retail and administrative space located in Allentown, Pennsylvania at a
rental rate of $3,000 per month. The lease is scheduled to terminate on December
31, 2002. Keystone's president and vice president own the facility.
<PAGE>
PART II - OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS
The Company may from time to time be involved in various claims, lawsuits,
disputes with third parties, actions involving allegations of discrimination, or
breach of contract actions incidental to the operation of its business. The
Company is not currently involved in any such litigation that it believes could
have a materially adverse effect on its financial condition or results of
operations.
ITEM 2 - CHANGES IN SECURITIES
On April 4, 2000, the Company issued 30,000 shares of "restricted" (as that term
in defined under Rule 144 of the Securities Act of 1933) Common Stock to World
Wide Web Consortium, Inc., an unrelated third party in exchange for services to
be rendered pursuant to an investor relations services agreement valued at
$15,000. The issuance was an isolated transaction not involving a public
offering conducted pursuant to Section 4(2) of the Securities Act of 1933.
Between May 1, 2000 and June 22, 2000 the Company issued 3,083 shares of
"restricted" (as that term in defined under Rule 144 of the Securities Act of
1933) Common Stock to an unrelated third party in exchange for computer
consulting services rendered valued at $3,125. The issuance was an isolated
transaction not involving a public offering conducted pursuant to Section 4(2)
of the Securities Act of 1933.
ITEM 3 - DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On July 7, 2000, a majority of the shareholders of the Company executed the
Written Consent of a Majority of the Stockholders of Tangible Asset Galleries,
Inc. (the "Written Consent"), without meeting, whereby a majority of the
Shareholders consented to amend the Company's Articles of Incorporation granting
the Board of Directors of the Company the power to authorize the issuance of up
to 15,000,000 shares of one or more series of Preferred Stock, and to fix by
resolution or resolutions providing for the issue of each of such series, the
voting powers, designations, preferences, redemption, conversion, exchange or
other special rights, qualifications, limitations or restrictions of such series
and the number of shares in each series, to the full extent now or hereafter
permitted by the Nevada Revised Statues. No other action was taken pursuant to
the Written Consent.
ITEM 5 - OTHER INFORMATION
None.
<PAGE>
TEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(A) EXHIBITS
27.1 Financial Data Schedule
(B) REPORTS ON FORM 8-K
On July 6, 2000, the Company filed a Current Report on Form 8-K dated June 22,
2000 reporting the execution of an agreement and plan of reorganization that
provides for a newly-formed subsidiary of the Company to merge with and into
Gavelnet.com, Inc., a Delaware corporation.
SIGNATURES
In accordance with the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this Report to be signed on its behalf by the
undersigned, thereunto duly authorized.
TANGIBLE ASSET GALLERIES, INC.
By /s/ Silvano DiGenova
-----------------------------
Silvano DiGenova
President and
Chief Executive Officer
By /s/ Paul Biberkraut
-----------------------------
Paul Biberkraut
Vice President and
Chief Financial Officer
Dated: August 8, 2000
<PAGE>
