10QSB 1 q0305.txt FORM 10-KSB FOR QUARTER ENDED 3/31/2005 UNITED STATES 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 March 31, 2005 [ ] 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 May 1, 2005. Part 1 - FINANCIAL INFORMATION GALLERY OF HISTORY, INC. and SUBSIDIARIES CONSOLIDATED BALANCE SHEETS ______________________________________________________________________ MARCH 31, SEPTEMBER 30, 2005 2004 (Unaudited) --------- ---------- ASSETS Cash $ 4,015 $ 59,868 Inventory of documents 6,512,037 6,562,002 Deferred tax assets 1,339,842 1,339,842 Property and equipment, net 1,218,894 1,288,830 Other assets 157,812 140,687 ---------- ---------- TOTAL ASSETS $ 9,232,600 $ 9,391,229 ========== ========== LIABILITIES Accounts payable $ 55,133 $ 95,500 Notes payable: Majority stockholder 4,124,954 3,904,791 Other 1,394,592 1,457,343 Accrued salaries due to majority shareholder 987,998 802,101 Other liabilities and accruals 101,061 137,479 ---------- ---------- TOTAL LIABILITIES 6,663,738 6,397,214 ---------- ---------- STOCKHOLDERS' EQUITY Common stock: $.0005 par value; 20,000,000 shares authorized; 11,935,308 shares issued 5,968 5,968 Additional paid-in-capital 9,851,655 9,851,655 Deficit (4,280,090) (3,854,937) Common stock in treasury, 6,309,324 shares, at cost (3,008,671) (3,008,671) ---------- ---------- TOTAL STOCKHOLDERS' EQUITY 2,568,862 2,994,015 ---------- ---------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 9,232,600 $ 9,391,229 ========== ========== See the accompanying notes to consolidated financial statements. ________________________________________________________________ GALLERY OF HISTORY, INC. and SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS - UNAUDITED ____________________________________________________________________________ THREE MONTHS ENDED SIX MONTHS ENDED MARCH 31, MARCH 31, 2005 2004 2005 2004 -------- -------- --------- --------- REVENUES $ 300,887 $ 314,858 $ 614,252 $ 587,622 COST OF REVENUES 38,334 44,328 76,004 88,328 -------- -------- --------- --------- GROSS PROFIT 262,553 270,530 538,248 499,294 -------- -------- --------- --------- OPERATING EXPENSES: Selling, general and administrative 382,540 399,195 753,824 757,485 Depreciation 26,377 39,957 57,751 81,640 -------- -------- --------- --------- TOTAL OPERATING EXPENSES 408,917 439,152 811,575 839,125 -------- -------- --------- --------- OPERATING LOSS (146,364) (168,622) (273,327) (339,831) -------- -------- --------- --------- OTHER INCOME (EXPENSE) Interest expense Majority stockholder (68,521) (49,504) (132,726) (97,641) Other (31,736) (33,751) (64,296) (68,198) Rental income, net 27,635 15,319 45,196 37,969 Other -- 6 -- 203 -------- -------- --------- --------- TOTAL OTHER EXPENSE (72,622) (67,930) (151,826) (127,667) -------- -------- --------- --------- LOSS BEFORE INCOME TAX BENEFIT (218,986) (236,552) (425,153) (467,498) INCOME TAX BENEFIT -- -- -- 77,023 -------- -------- --------- --------- NET LOSS $(218,986) $(236,552) $ (425,153) $ (390,475) ======== ======== ========= ========= BASIC AND DILUTED LOSS PER SHARE: $(.04) $(.04) $(.08) $(.07) ==== ==== ==== ==== WEIGHTED AVERAGE SHARES OUTSTANDING 5,625,984 5,625,984 5,625,984 5,625,984 ========= ========= ========= ========= See the accompanying notes to consolidated financial statements. ________________________________________________________________ GALLERY OF HISTORY, INC. and SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS - UNAUDITED __________________________________________________________________________ SIX MONTHS ENDED MARCH 31, 2005 2004 -------- -------- CASH FLOWS FROM OPERATING ACTIVITIES: Net Loss $(425,153) $(390,475) Adjustments to reconcile net loss to net cash used for operating activities: Depreciation and amortization 72,136 96,318 (Increase) decrease in: Deferred tax assets -- (77,023) Inventory of documents 49,965 (57,853) Other assets (17,125) (20,717) (Decrease) increase in: Accounts payable (40,367) 58,653 Accrued expenses and other 149,479 176,536 -------- -------- Net cash used in operating activities (211,065) (214,561) -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of property and equipment (2,200) -- -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from borrowings: Majority stockholder 224,782 241,000 Other 160,000 137,000 Repayments of borrowings: Majority stockholder (4,619) (3,021) Other (222,751) (160,365) -------- -------- Net cash provided by financing activities 157,412 214,614 -------- -------- NET INCREASE (DECREASE) IN CASH (55,853) 53 CASH, BEGINNING OF PERIOD 59,868 2,034 -------- -------- CASH, END OF PERIOD $ 4,015 $ 2,087 ======== ======== SUPPLEMENTAL CASH FLOW INFORMATION: Cash paid during period for interest $ 197,022 $ 165,839 ======== ======== See the accompanying notes to consolidated financial statements. _______________________________________________________________ GALLERY OF HISTORY, INC. and SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ____________________________________________________________________________ Basis of Presentation The consolidated financial statements as of March 31, 2005, and for the three month period ended March 31, 2005 and 2004, included herein have been prepared by Gallery of History, Inc. and subsidiaries (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 note disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States have been condensed or omitted pursuant to such rules and regulations. It is suggested that these consolidated financial statements be read in conjunction with the audited financial statements and the notes thereto included in the Company's 2004 Annual Report on Form 10-KSB, from which the September 30, 2004, balance sheet information is derived. Part 1 - Item 2 Financial Information MANAGEMENT'S DISCUSSION AND ANALYSIS FINANCIAL CONDITION AND RESULTS OF OPERATIONS Forward Looking Statements -------------------------- This report contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 relating to the Company's future operations and prospects, including statements that are based on current projections and expectations about the markets in which the Company operates, and management's beliefs concerning future performance and capital requirements based upon current available information. Such statements are based on management's beliefs as well as assumptions made by and information currently available to management. When used in this document, words like "may," "might," "will," "expect," "anticipate," "believe," and similar expressions are intended to identify forward looking statements. Actual results could differ materially from management's current expectations. For example, there can be no assurance that additional capital will not be required or that additional capital, if required, will be available on reasonable terms, if at all, at such times and in such amounts as may be needed by the Company. Overview -------- Gallery of History, Inc. and its 100%-owned subsidiaries (collectively the Company) acquires documents of historical or social significance and markets these documents to the general public as discussed later herein. Except for the cost of documents that are sold and certain selling expenses, most of the Company's other costs and expenses are relatively fixed. While management believes that the Company's inventory of documents has substantially appreciated, the Company has been unable to produce sufficient volume of sales to the general public and has incurred significant operating losses for the past several years. (See also discussion of the Company's operating cycle under "Critical Accounting Estimates, Policies, and Practices," below.) As a result, the Company has been (and will continue to be) dependent upon debt financing, including loans from its majority stockholder, to satisfy its obligations when due. The unique characteristic of some documents may cause them to become rarer with their current market value rising significantly over time. In many instances, the Company has a supply of similar documents that, if marketed simultaneously, could negatively impact market value. As a result, managing the rarity of certain types or categories of documents through the judicious marketing of only a selection of documents available in the Company's inventory is an important element of the Company's business. This element is one of the reasons that the Company has accumulated and maintains a supply of documents that is significantly greater than it intends to sell in a year or even aggressively market. Liquidity and Capital Resources ------------------------------- Negative cash flows from operations incurred in the first six month fiscal period resulted primarily from the net operating loss and a reduction in accounts payable partially offset by an increase in accrued liabilities, primarily accrued salaries. Historically, the cash flow deficiencies have been funded primarily from borrowings from the Company's bank line of credit and from the Company's majority stockholder and president, Todd Axelrod, which we believe will continue. However, net cash provided by financing activities decreased 27% in the current period compared to the previous year six month period. The Company is making an effort to improve operating results by taking steps to increase sales through its direct purchase website and other internet activity, which, combined, have become the Company's highest margin distribution channel. Because of the size and diversity of its inventory, management believes the Company is uniquely positioned to compete favorably with any firm offering similar products. The Company continues to add much more of its available inventory to the website. The Company believes that its current and long-term cash requirements will likely be met by appropriately managing the timing and volume of new document acquisitions, generating revenues from its operations, drawing against its available line of credit, seeking additional borrowings collateralized by its documents inventory (although there can be no assurance that such financing will be obtainable on favorable terms or at all) and borrowing from Mr. Axelrod as required. Mr. Axelrod has also agreed not to demand payment on amounts the Company has borrowed and, if necessary, defer his right to receive interest payments through at least November 2005. Critical Accounting Estimates, Policies and Practices ----------------------------------------------------- Revenues. The Company recognizes revenues from document sales when title passes to the customer upon shipment. Typically, shipment does not occur until payment has been received. Shipping and handling costs and related customer charges are not significant in relation to selling prices. The Company's primary distribution channel over the past few years has been internally promoted and managed auctions to sell its documents. For each item sold through the Company's auctions, a 15% premium is charged. Recently, the Company has greatly increased its use of the internet and its website to increase sales and profitability. The balance of the Company's sales is from repeat customers through its corporate office. Inventory of documents and operating cycle. Documents in inventory are stated at cost, which is determined on a specific- identification method, not to exceed estimated market value. Management reviews the recorded cost and estimated value of the documents owned individually on a regular basis (at least quarterly) to determine the adequacy of the allowance for market value declines, if any. Management believes that any future changes in such allowance are not likely to have any material effect on the Company. Management believes that the Company's inventory of documents is generally appreciating, not depreciating, in value. As a result, as stated earlier, managing the rarity of certain types or categories of documents through the judicious marketing of only a selection of documents available in the Company's inventory is an important element of the Company's business. This element is one of the reasons that the Company has accumulated and maintains a supply of documents that is significantly greater than it intends or expects to market aggressively or even sell in a year. Based on an aggregate historical cost, (not number of documents), only about one-third of the Company's documents are listed on one or more of the various distribution channels or displayed for sale. As the Company's distribution channels have changed over the years and are expected to continue to change in the future, the volume of documents marketed in any one year, or succession of years, changes significantly. For these reasons, it has been impractical for the Company to define its operating cycle and, as a result, the Company presents its balance sheet on an unclassified basis. The Company believes that this presentation better reflects the nature of the Company's business and its principal asset. Over the past several years the cost of the Company's inventory has ranged from its present level of approximately $6.5 million, which management believes is a sufficient supply of documents to provide for managing rarity and its other purposes, to roughly $7.2 million. Management has no current intention of changing significantly the composition of its inventory. Deferred tax assets. The Company provides a valuation allowance against deferred tax assets (primarily associated with tax loss carryforwards) to the extent that such tax assets are not likely to be utilized as a result of any gain on the Company's appreciated document inventory, if sold in bulk. The hypothetical gain and related tax effect is estimated based on management's perception of market activity and value and historical profit margins and trends. Such estimates are revised quarterly. Results of Operations --------------------- Total revenues decreased 4% comparing the quarterly periods ended March 31, 2005 to 2004. For the six month period ended March 31, 2005, total revenues increased 5% compared to the six month period ended March 31, 2004. Comparing the two quarterly periods, revenues decreased 12% for the Company's catalog operation and 15% for revenues generated from the Company's website. Total revenues generated from the Company's catalog amount to 43% of total revenues for the current quarter compared to 46% of total revenues in the previous year quarter. The Company's website produced 40% of the Company's total revenues for the current quarter compared to 45% in the previous year quarter period. With the Company's increased exposure and increased number of documents available, management believes that the decrease can be attributed to increased competition. The increase comparing the two fiscal years six month periods resulted from an increase in revenues generated at the Company's headquarters in the current fiscal year first quarter and an increase with the Company's involvement with eBay's Live Auctions. Comparing the six month fiscal periods, revenues generated from the Company's headquarters increased 69%. The Company's involvement with eBay Live Auctions this current fiscal year resulted in generating 9% of the Company's total revenues for the current six month period compared to less than 1% of total revenues generated in the previous year's six month period. The Company continues to realize improved margins from its internet revenues compared to revenues generated from its other sources. Comparing the quarter periods, cost of revenues for the three month period ended March 31 resulted in 13% of total revenues for 2005 and 14% of total revenues for 2004. Total cost of revenues as a percentage of total sales was 12% of total revenues for the six month period ended March 31, 2005 compared to 15% of total revenues for the previous year six month period. Total operating expenses decreased 7% comparing the two quarter periods ended March 31 and decreased 3% comparing the two six month periods ended March 31, 2005 to 2004. Selling, general, and administrative expenses decreased 4% comparing the quarterly periods and a slight decrease comparing the six month periods. The cause of declining expenses include lower catalog costs from fewer mailings, lower general insurance premiums, and a reduction in the number of employees. Depreciation costs decreased 34% comparing the quarters and 29% comparing the six month periods due to assets becoming fully depreciated, primarily our archive and inventory software programs. Item 3. Controls and Procedures. ------------------------ Based on their evaluation, as of March 31, 2005, the Company's Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended) are effective. There have been no significant changes in internal controls or in other factors that could significantly affect these controls subsequent to the date of their evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Part 2 - Other Information Item 1-5. None. Item 6. Exhibits and Reports on Form 8-K. --------------------------------- (a) Exhibits. Exhibit 31.1 Certification of Chief Executive Officer pursuant to Rule 13a-14(a). Exhibit 31.2 Certification of Chief Financial Officer pursuant to Rule 13a-14(a). Exhibit 32.1 Certification of Chief Executive Officer pursuant to Rule 13a-14(b). Exhibit 32.2 Certification of Chief Financial Officer pursuant to Rule 13a-14(b). (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 May 13, 2005 /s/ Todd M. Axelrod _________________ _______________________________ Todd M. Axelrod President and Chairman of the Board (Principal Executive Officer) Date May 13, 2005 /s/ Rod Lynam _________________ _______________________________ Rod Lynam Treasurer and Director (Principal Financial and Accounting Officer)