10QSB 1 dec01q.txt FORM 10-QSB FOR QUARTER ENDED DECEMBER 31, 2001 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-QSB [x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended December 31, 2001 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to . Commission file number 0-13757 GALLERY OF HISTORY, INC. (Exact Name of Small Business Issuer as Specified in Its Charter) Nevada 88-0176525 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 3601 West Sahara Avenue, Las Vegas, Nevada 89102-5822 (Address of principal executive offices) (Zip Code) Issuer's telephone number: (702) 364-1000 Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 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. [X] Yes [ ] No The Registrant had 5,625,984 shares of Common Stock, par value $.0005, outstanding as of February 1, 2002. Part 1 - FINANCIAL INFORMATION -------------------------------- GALLERY OF HISTORY, INC. and SUBSIDIARIES CONSOLIDATED BALANCE SHEETS ______________________________________________________________________ DECEMBER 31, SEPTEMBER 30, 2001 2001 UNAUDITED ----------- ------------ ASSETS Cash $ 2,567 $ 7,957 Accounts receivable 17,558 32,260 Prepaid expenses 83,316 46,792 Documents owned 6,786,719 6,773,133 Land and building-net 1,265,859 1,278,485 Property and equipment-net 434,602 473,161 Other assets 122,059 123,792 ---------- ---------- TOTAL ASSETS $ 8,712,680 $ 8,735,580 ========== ========== LIABILITIES Accounts payable $ 108,727 $ 58,398 Notes payable 1,667,565 1,619,991 Indebtedness to related parties 2,492,721 2,385,239 Deposits 9,523 10,253 Accrued and other liabilities 170,760 164,193 ---------- ---------- TOTAL LIABILITIES 4,449,296 4,238,074 ---------- ---------- STOCKHOLDERS' EQUITY Common stock: $.0005 par value; 20,000,000 shares authorized; 11,935,308 shares issued and outstanding 5,968 5,968 Additional paid-in-capital 9,848,905 9,813,072 Deferred compensation (64,238) (85,830) Accumulated deficit (2,518,580) (2,227,033) Common stock in treasury (6,309,324 shares), at cost (3,008,671) (3,008,671) ---------- ---------- TOTAL STOCKHOLDERS' EQUITY 4,263,384 4,497,506 ---------- ---------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 8,712,680 $ 8,735,580 ========== ========== See the accompanying notes to consolidated financial statements. GALLERY OF HISTORY, INC. and SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS - UNAUDITED __________________________________________________________________________ THREE MONTHS ENDED DECEMBER 31, 2001 2000 --------- --------- REVENUES $ 292,760 $ 312,386 COST OF REVENUES 155,326 141,771 -------- -------- GROSS PROFIT 137,434 170,615 -------- -------- OPERATING EXPENSES: Selling, general and administrative 294,142 350,777 Depreciation 39,187 43,732 Advertising 3,789 8,639 Maintenance and repairs 24,169 9,046 -------- -------- TOTAL OPERATING EXPENSES 361,287 412,194 -------- -------- OPERATING LOSS (223,853) (241,579) -------- -------- OTHER INCOME (EXPENSE): Interest expense (80,718) (81,406) Other 13,024 49,230 -------- -------- TOTAL OTHER INCOME (EXPENSE) (67,694) (32,176) -------- -------- LOSS BEFORE INCOME TAXES (291,547) (273,755) PROVISION FOR INCOME TAXES -- -- -------- -------- NET LOSS $(291,547) $(273,755) ======== ======== LOSS PER SHARE: Basic $(.05) $(.05) ==== ==== Diluted $(.05) $(.05) ==== ==== See the accompanying notes to consolidated financial statements. GALLERY OF HISTORY, INC. and SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS - UNAUDITED __________________________________________________________________________ THREE MONTHS ENDED DECEMBER 31, 2001 2000 -------- -------- CASH FLOWS FROM OPERATING ACTIVITIES: Net Loss $(291,547) $(273,755) Adjustments to reconcile net loss to net cash used for operating activities: Depreciation and amortization 52,366 56,693 Loss on disposal of property -- 1,520 Common stock issued for services 57,425 39,452 (Increase) decrease in: Accounts receivable 14,702 53,000 Prepaid expenses (36,524) (25,839) Documents owned (13,586) 33,759 Other assets 1,733 2,810 (Decrease) increase in: Accounts payable 50,329 32,393 Deposits (730) (1,197) Accrued and other liabilities 6,567 10,030 -------- -------- Net cash used for operating activities (159,265) (71,134) CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of property and equipment (1,181) (22,512) CASH FLOWS FROM FINANCING ACTIVITIES: Net borrowings from credit facilities and related parties 155,056 76,259 -------- -------- NET DECREASE IN CASH (5,390) (17,387) CASH, BEGINNING OF PERIOD 7,957 30,138 -------- -------- CASH, END OF PERIOD $ 2,567 $ 12,751 ======== ======== SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES: For the three month period ended December 31, 2000: (1) Documents with a net cost of $128,131 were exchanged for a reduction in related party debt of $143,578. See the accompanying notes to consolidated financial statements. GALLERY OF HISTORY, INC. and SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Three Month Period Ended December 31, 2001 and 2000 _____________________________________________________________________________ 1) Summary of Significant Accounting Policies The consolidated financial statements included herein have been prepared by Gallery of History, Inc. (the "Company"), without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. In the opinion of management, all adjustments, consisting of normal recurring items, necessary for a fair presentation of the results for the interim periods have been made. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations. It is suggested that these consolidated financial statements are read in conjunction with the financial statements and the notes thereto included in the Company's 2001 Annual Report on Form 10-KSB. 2) Unclassified Balance Sheet The Company includes in its financial statements an unclassified balance sheet because it believes that such presentation is more meaningful as a consequence of the Company's historical policy of acquiring documents in excess of its current needs, when feasible, and it is not practicable to determine what portion of the documents owned will be sold within the next twelve months. 3) Repurchase of Common Stock In fiscal 2000, the Company purchased 22,500 shares of its common stock at an average price of $3.61 a share. 4) Earnings per Share The computation of earnings or loss per share is based on the weighted average number of shares of common stock outstanding and stock options granted that are outstanding, if applicable. To derive basic earnings per share, the weighted average number of shares outstanding for the quarter periods ended December 31, 2001 and 2000 were 5,584,318 and 5,550,983, respectively. Because of the Company's loss, no potential dilution has been considered; therefore the weighted average number of shares for diluted earnings per share is the same as the basic earnings per share. 5) Restricted Common Stock In April 2000, the Company entered into a consultant agreement with an expert investment banker and money manager. As compensation for the consulting services rendered, the Company has issued 100,000 restricted shares of its common stock which will vest over the three year term of the agreement. As of December 31, 2001, 58,333 shares have vested and the remaining 41,667 shares are restricted. The total 100,000 shares have been included in the Common Stock Issued and Outstanding presented in the Company's Balance Sheet. Additionally, $64,238 of deferred compensation was recorded to reflect the unvested balance of the shares as of December 31, 2001. Part 1 - Item 2 Financial Information MANAGEMENT'S DISCUSSION AND ANALYSIS FINANCIAL CONDITION AND RESULTS OF OPERATIONS Liquidity and Capital Resources ------------------------------- Due to the nature of the Company's inventory of documents owned, the Company has presented an unclassified balance sheet (see Note 2 to the consolidated financial statements). Accordingly, the traditional measures of liquidity in terms of changes in working capital are not applicable. Negative cash flows from operating activities related primarily due to the net operating loss incurred in the first three month period of fiscal 2002. Prepaid expenses increased due to prepayment of audit fees. In addition, document inventory purchases increased due to the availability of some appealing documents to enhance the Company's inventory. Document purchases totaled approximately $87,000 for the three month period ended December 31, 2002. Offsetting the decrease in cash from operating activities was an increase in account payable resulting from the billings of document purchases not yet due. The Company has available a line of credit from its bank in the amount of $100,000 at an interest rate of 1.5% over the prime rate with a maturity date of August 2, 2002. Loans under the line are secured by the Company's inventory. As of December 31, 2001, the Company had available $10,000 under this line of credit. In March 1999, the Company borrowed $1,000,000 from Mr. Axelrod. This note is due April 30, 2002, with interest payments monthly at a rate of 8%. The purpose of this note was to reduce the Company's outstanding line of credit and to finance its stock repurchase program. The Company has also borrowed additional funds during the period, when necessary, from Mr. Axelrod. The Company pays the same interest rate as its bank revolving line of credit and has an outstanding balance of $1,492,721 as of December 31, 2001 on these additional borrowed funds. In November 2000, Todd Axelrod acquired 157 documents from the Company for his personal use. The cost of the documents amounted to $140,131. The Company obtained an outside specialist to perform an independent appraisal of the documents involved. The amount of the appraisal was $152,500. The Company offset this amount against debt owing Mr. Axelrod. The Company also purchased three documents from Mr. Axelrod for a cost to the Company of $12,000. The three documents had an appraised value of $18,000. In addition to reducing the Company's debt to Mr. Axelrod, this transaction also reduced its framed document inventory that was produced for the gallery operations that have since been discontinued. The Company believes that its current cash and working capital requirements will be met by appropriately managing the timing and amount of new document acquisitions, generating revenues from its operations, drawing amounts available under its existing line of credit facilities, seeking additional borrowings or advances against its documents inventory and borrowing amounts from Todd Axelrod, as required. Mr. Axelrod has, to the extent of his reasonable ability to do so, committed to continue funding or guarantee additional debt, should it be required, through September 30, 2002. Results of Operations --------------------- Document revenues decreased 6% comparing December 31, 2001 to December 31, 2000 Auction revenues decreased 25% comparing the three month periods, however retail revenues from the Company's headquarters increased 115% comparing the periods. Retail revenues amounted to 31% of total revenues for the period ended December 31, 2001 compared to 13% of total revenues for the period ended December 31, 2000. The decrease in total revenues can be attributed to increased competition in the auction market and the economy slowdown in general. The average number of winning bidders decreased 15% comparing the two auctions in the quarter ended December 31, 2001 to that of 2000. The number of units sold decreased 14% comparing the two periods. The increase in retail revenues generated can be attributed to the increased exposure on the internet. Total cost of revenues increased to 53% of revenues for the quarter ended December 31, 2001 compared to 45% of revenues for the quarter ended December 31, 2000. Document costs increased 20% comparing the two quarter periods and were 25% of revenues for the quarter period in 2001, compared to 20% of revenues for the quarter period in 2000. The increase in cost can be attributed to lower average sales pricing in the current quarter. Cost of catalogs increased 2% comparing the quarters to 28% of revenues for the quarter ended December 31, 2001 compared to 26% of revenues for the December 2000 quarter. Comparing the two quarter periods, the cost of catalogs remained approximately the same, however, the cost of mailing increased by 15%. Total operating expenses decreased 12% for the three month period ended December 31, 2001 compared to the quarter ended December 31, 2000. Selling, general and administrative expenses decreased 16% comparing the quarter periods. The reduction was largely due to a decrease in salaries and associated payroll taxes that was 37% lower comparing the quarters. The principal owners of the Company have temporarily discontinued taking compensation to assist the Company with cash flows. Depreciation decreased 10% to 13% of revenues for the quarter ended December 31, 2001 compared to 14% of revenues for the quarter ended December 31, 2000. The decrease is due to assets becoming fully depreciated in the current quarter. Advertising expense decreased 56% comparing the quarter periods to 1% of revenues for 2001 compared to 3% of revenues in 2000. This decrease is a result of a new contract with a major advertiser of the Company. Maintenance and repair expenses increased to 8% of revenues in the quarter ended December 31, 2001 compared to 3% of revenues in the previous year quarter. The increase is a result of the Company's expenditure for a software consultant to maintain its auction and inventory software programs. Interest expense decreased 1% comparing the quarter periods mainly due to lower interest rates. Other income is largely the result of the rental operation for the Company's headquarters building. The amount in the prior quarter period included a lease buyout option that was exercised. Part II - Other Information Item 1-5. None. Item 6. Exhibits and Reports on Form 8-K. (a) Exhibits. (27) Financial Data Schedule. (b) Reports on Form 8-K. None. SIGNATURES In accordance with the requirements of the Securities Exchange Act of 1934, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Gallery of History, Inc. _______________________________ (Registrant) Date February 14, 2002 /s Todd M. Axelrod ______________________ ________________________________ Todd M. Axelrod President and Chairman of the Board (Principal Executive Officer) Date February 14, 2002 /s Rod Lynam ______________________ _______________________________ Rod Lynam Treasurer and Director (Principal Accounting Officer)