10QSB 1 r10qdec.txt 10-QSB FOR QUARTER 12/31/00 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, 2000 [ ] 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, 2001. Part 1 - FINANCIAL INFORMATION GALLERY OF HISTORY, INC. and SUBSIDIARIES CONSOLIDATED BALANCE SHEETS ______________________________________________________________________ DECEMBER 31, SEPTEMBER 30, 2000 2000 UNAUDITED ----------- ------------ ASSETS Cash $ 12,751 $ 30,138 Accounts receivable 7,388 60,388 Prepaid expenses 65,049 39,210 Documents owned 7,014,178 7,176,068 Land and building-net 1,316,364 1,328,990 Property and equipment-net 561,185 584,260 Other assets 128,519 131,329 ---------- ---------- TOTAL ASSETS $ 9,105,434 $ 9,350,383 ========== ========== LIABILITIES Accounts payable $ 73,779 $ 41,386 Notes payable 1,737,400 1,732,190 Indebtedness to related parties 1,729,361 1,801,890 Deposits 10,251 11,448 Accrued and other liabilities 135,929 125,899 ---------- ---------- TOTAL LIABILITIES 3,686,720 3,712,813 ---------- ---------- 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 9,726,509 9,715,750 Deferred compensation (139,852) (183,992) Accumulated deficit (1,165,240) (891,485) Common stock in treasury (6,309,324 shares), at cost (3,008,671) (3,008,671) ---------- ---------- TOTAL STOCKHOLDERS' EQUITY 5,418,714 5,637,570 ---------- ---------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 9,105,434 $ 9,350,383 ========== ========== See the accompanying notes to consolidated financial statements. GALLERY OF HISTORY, INC. and SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS - UNAUDITED _____________________________________________________________________________ THREE MONTHS ENDED DECEMBER 31, 2000 1999 -------- -------- REVENUES $ 312,386 $ 421,296 COST OF GOODS SOLD 141,771 204,269 -------- -------- GROSS PROFIT 170,615 217,027 -------- -------- OPERATING EXPENSES: Selling, general and administrative 350,777 335,112 Depreciation 43,732 24,596 Advertising 8,639 9,113 Maintenance & repairs 9,046 3,699 -------- -------- TOTAL OPERATING EXPENSES 412,194 372,520 -------- -------- OPERATING LOSS (241,579) (155,493) -------- -------- OTHER INCOME (EXPENSE) Interest expense (81,406) (55,531) Other 49,230 16,716 -------- -------- TOTAL OTHER EXPENSE (32,176) (38,815) -------- -------- LOSS BEFORE INCOME TAXES (273,755) (194,308) PROVISION FOR INCOME TAX -- -- -------- -------- NET LOSS $ (273,755) $(194,308) ======== ======== LOSS PER SHARE: Basic $(.05) $(.04) ==== ==== Diluted $(.05) $(.04) ==== ==== 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, 2000 1999 -------- -------- CASH FLOWS FROM OPERATING ACTIVITIES: Net Loss $(273,755) $(194,308) Adjustments to reconcile net loss to net cash used for operating activities: Depreciation and amortization 56,693 41,109 Loss on disposal of property 1,520 -- Common stock issued for services 39,452 -- (Increase) decrease in: Accounts receivable 53,000 182,676 Prepaid expenses (25,839) (56,120) Documents owned 33,759 (229,294) Other assets 2,810 3,245 (Decrease) increase in: Accounts payable 32,393 (48,322) Deposits (1,197) 8,641 Accrued and other liabilities 10,030 22,200 -------- -------- Net cash used for operating activities (71,134) (270,173) -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of property and equipment (22,512) (35,910) -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: Net borrowings from credit facilities and related parties 76,259 139,689 Repurchase of common stock -- (81,118) -------- -------- Net cash provided by financing activities 76,259 58,571 -------- -------- NET DECREASE IN CASH (17,387) (247,512) CASH, BEGINNING OF PERIOD 30,138 258,263 --------- -------- CASH, END OF PERIOD $ 12,751 $ 10,751 ========= ======== SUPPLEMENTAL SCHEDULE OF NON-CASH OPERATING AND INVESTING 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, 2000 and 1999 _____________________________________________________________________________ 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 2000 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 1999, the Company purchased 576,584 shares of its common stock at an average price of $.86 a share. 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 three months ended December 31, 2000 and 1999 were 5,550,983 and 5,526,962, 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, 2000, 25,000 shares have vested and the remaining 75,000 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, $140,000 of deferred compensation was recorded to reflect the unvested balance of the shares as of December 31, 2000. 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. The Company incurred a decrease in cash provided by operating activities in its three month period ended December 31, 2000, due to the net operating loss. Offsetting the operating loss, the Company realized a decrease in accounts receivable and an increase in accounts payable, largely due to the timing of the end of quarter auction. The Company greatly reduced its document inventory purchases which totaled approximately $40,000 for the three month period ended December 31, 2000 compared to approximately $320,000 for the three month period ended December 31, 1999. 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 July 15, 2001. Loans under the line are secured by the Company's inventory. As of December 31, 2000, the Company had available $25,000 on 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 $729,361 as of December 31, 2000 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, $152,500, was used to reduce debt owing Mr. Axelrod by the Company. The Company also purchased three documents from Mr. Axelrod for a cost to the Company of $12,000, which was less than their 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. Currently, the majority of the Company's sales through its auction operations are unframed documents. The Company believes that, by appropriately managing the timing and amount of additional document acquisitions and generating new revenues from its headquarters operations, the Company's current cash and working capital requirements will be satisfied for the near term by revenue generated from operations and amounts available under the existing lines of credit, and inventory management techniques that have been utilized in the past. Results of Operations --------------------- Document revenues decreased 26% comparing the three month periods ended December 31, 2000 to December 31, 1999. Auction sales decreased 30%, whereas retail sales increased 6%. In addition to the increased competition in the auction market, consigned revenues also decreased from 12% of revenues for the three month period ended December 31, 1999 to 6% of revenues for the three month ended December 31, 2000. The number of units sold had decreased by 14% comparing the two quarter periods. Cost of revenues decreased 31% to 45% of revenues for the quarter ended December 31, 2000 compared to 48% of revenues for the quarter ended December 31, 1999. Document costs decreased 40% to 20% of revenues for the period ended December 31, 2000 compared to 24% of revenues for the period ended December 31, 1999. Cost of catalogs decreased 22% comparing the two quarters due to 20% fewer catalogs being mailed in the current quarter compared to the previous quarter period. Total operating expenses increased 11% comparing the quarters ended December 31, 2000 to December 31, 1999. Selling, general and administrative expenses increased 5% comparing the quarter periods. The increase is largely due to increases in insurance premiums and professional fees. The Company has experienced an increase in its medical insurance premiums for covered employees in addition to a premium increase resulting from expanded document inventory coverage. Professional fees increased due to a consultant agreement that the Company had entered into (see note 5 to Notes to Consolidated Financial Statements). Depreciation increased 78% to 14% of revenues for the quarter ended December 31, 2000 compared to 6% of revenues for 1999. The increase is largely due to a complete rewrite of its inventory and auction software. Maintenance and repair expenses increased to 3% of revenues for the quarter ended December 31, 2000 compared to 1% of revenues for the quarter ended December 31, 1999. The increase is attributed to the Company utilizing an outside specialist to maintain its computer systems. Interest expense increased 47% comparing the quarter periods to 26% of revenues for the quarter ended December 31, 2000 from 13% of revenues for the quarter ended December 31, 1999. The increase is a result of higher outstanding loan balances on the Company's lines of credit, which were drawn on to finance its operations. Other income is largely the result of the rental operation for the Company's headquarters building. The increase in the current period is a result of 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 13, 2001 /s Todd M. Axelrod ______________________ ________________________________ Todd M. Axelrod President and Chairman of the Board (Principal Executive Officer) Date February 13, 2001 /s Rod Lynam ______________________ _______________________________ Rod Lynam Treasurer and Director (Principal Accounting Officer)