10QSB 1 r10qmar.txt 10-QSB FOR QUARTER ENDED 3/31/01 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, 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 May 1, 2001. Part 1 - FINANCIAL INFORMATION GALLERY OF HISTORY, INC. and SUBSIDIARIES CONSOLIDATED BALANCE SHEETS ______________________________________________________________________ MARCH 31, SEPTEMBER 30, 2001 2000 UNAUDITED ----------- ------------ ASSETS Cash $ 7,476 $ 30,138 Accounts receivable 15,957 60,388 Prepaid expenses 55,059 39,210 Documents owned 6,939,480 7,176,068 Land and building-net 1,303,737 1,328,990 Property and equipment-net 523,520 584,260 Other assets 127,756 131,329 ---------- ---------- TOTAL ASSETS $ 8,972,985 $ 9,350,383 ========== ========== LIABILITIES Accounts payable $ 33,348 $ 41,386 Notes payable 1,627,900 1,732,190 Indebtedness to related parties 1,983,905 1,801,890 Deposits 12,449 11,448 Accrued and other liabilities 151,976 125,899 ---------- ---------- TOTAL LIABILITIES 3,809,578 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 9,725,466 9,715,750 Deferred compensation (105,741) (183,992) Accumulated deficit (1,453,615) (891,485) Common stock in treasury (6,309,324 shares), at cost (3,008,671) (3,008,671) ---------- ---------- TOTAL STOCKHOLDERS' EQUITY 5,163,407 5,637,570 ---------- ---------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 8,972,985 $ 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 SIX MONTHS ENDED MARCH 31, MARCH 31, 2001 2000 2001 2000 -------- -------- -------- -------- REVENUES $ 323,255 $ 574,313 $ 635,641 $ 995,610 COST OF GOODS SOLD 154,979 230,242 296,750 434,511 -------- -------- -------- -------- GROSS PROFIT 168,276 344,071 338,891 561,099 -------- -------- -------- -------- OPERATING EXPENSES: Selling, general and administrative 355,431 325,502 706,208 660,614 Depreciation 36,707 29,431 80,439 54,027 Advertising 8,802 8,800 17,441 17,913 Maintenance & repairs 8,605 9,262 17,651 12,961 -------- -------- -------- -------- TOTAL OPERATING EXPENSES 409,545 372,995 821,739 745,515 -------- -------- -------- -------- OPERATING LOSS (241,269) (28,924) (482,848) (184,416) -------- -------- -------- -------- OTHER INCOME (EXPENSE) Interest expense (80,290) (66,321) (161,696) (121,852) Other 33,184 18,725 82,414 35,440 -------- -------- -------- -------- TOTAL OTHER EXPENSE (47,106) (47,596) (79,282) (86,412) -------- -------- -------- -------- LOSS BEFORE INCOME TAXES (288,375) (76,520) (562,130) (270,828) PROVISION FOR INCOME TAX -- -- -- -- -------- -------- -------- -------- NET LOSS $(288,375) $ (76,520) $(562,130) $(270,828) ======== ======== ======== ======== LOSS PER SHARE: Basic $(.05) $(.01) $(.10) $(.05) ==== ==== ==== ==== Diluted $(.05) $(.01) $(.10) $(.05) ==== ==== ==== ==== 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, 2001 2000 -------- -------- CASH FLOWS FROM OPERATING ACTIVITIES: Net Loss $(562,130) $(270,828) Adjustments to reconcile net loss to net cash used for operating activities: Depreciation and amortization 106,360 87,053 Gain on disposal of property (20,773) -- Common stock issued for services 72,520 -- (Increase) decrease in: Accounts receivable 44,431 186,904 Prepaid expenses (15,849) (18,422) Documents owned 108,457 (200,717) Other assets 3,573 3,600 (Decrease) increase in: Accounts payable (8,038) (98,217) Deposits 1,001 2,313 Accrued and other liabilities 26,077 27,446 -------- -------- Net cash used for operating activities (244,371) (280,868) -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of property and equipment (40,594) (82,574) Proceeds from sale of property 23,094 -- -------- -------- Net cash used for investing activities (17,500) (82,574) -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: Net borrowings from credit facilities and related parties 239,209 213,039 Repurchase of common stock -- (81,118) -------- -------- Net cash provided by financing activities 239,209 131,921 -------- -------- NET DECREASE IN CASH (22,662) (231,521) CASH, BEGINNING OF PERIOD 30,138 258,263 -------- -------- CASH, END OF PERIOD $ 7,476 $ 26,742 ======== ======== SUPPLEMENTAL SCHEDULE OF NON-CASH OPERATING AND INVESTING ACTIVITIES: For the six month period ended March 31, 2001: (1) Documents with a net cost of $128,131 were exchanged for a reduction in related party debt of $143,578. (2) Sale of property included a note paid in full in the amount of $17,906. See the accompanying notes to consolidated financial statements. ------------------------------------------------------------------------------ GALLERY OF HISTORY, INC. and SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Six Month Period Ended March 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 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 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 March 31, 2001 and 2000 were 5,559,318 and 5,525,984, respectively. The weighted average number of shares outstanding for the six months ended March 31, 2001 and 2000 were 5,559,318 and 5,526,475, 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 March 31, 2001, 33,333 shares have vested and the remaining 66,667 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, $105,741 of deferred compensation was recorded to reflect the unvested balance of the shares as of March 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. The Company incurred a decrease in cash provided by operating activities in its six month period ended March 31, 2001, largely due to the net operating loss. Offsetting the operating loss, the Company realized a decrease in document inventory and accounts receivable. Purchases of document inventory totaled approximately $40,000 for the six month period ended March 31, 2001 compared to approximately $420,000 for the six month period ended March 31, 2000. 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 March 31, 2001, the Company had available $100,000 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 $983,905 as of March 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. This amount was offset against 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. 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. 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 44% comparing the three month periods ended March 31, 2001 to March 31, 2000 and decreased 36% comparing the two six month periods ended March 31, 2001 to March 31, 2000. Auction sales decreased 53% comparing the three month period ended March 31, 2001 to the three month period ended March 31, 2000. Auction sales decreased 43% comparing the two six month periods ended March 31, 2001 to March 31, 2000. The decrease is the results of increased competition in the auction market and the economy slowdown in general. The average number of winning bidders decreased 14% comparing the four auctions in the two six month periods. The number of units sold decreased 28% comparing the six month periods. Retail sales generated out of the headquarters operation increased 111% comparing the quarter periods and increased 54% comparing the six month period ended March 31, 2001 to March 31, 2000. Retail sales were 17% of total sales for the six month period ended March 31, 2001 compared to 7% of total sales for the six month period in 2000. The increase can be attributed to the increased exposure on the internet in addition to increased traffic at the headquarters' gallery. Also, in February 2001, the Company started testing the possibility of selling items on eBay. During the three month period ended March 31, 2001, eBay sales amounted to 20% of total retail sales. Total cost of revenues increased to 48% of revenues for the quarter ended March 31, 2001 compared to 40% of revenues for the quarter ended March 31, 2000. For the six month periods, cost of revenues increased to 47% of revenues for 2001 compared to 44% of revenues for 2000. The increase is due to the decrease in revenues which increased the cost of auction catalogs as a percentage of revenues. Document costs decreased to 22% of revenues for the quarter period ended March 31, 2001 compared to 23% of revenues for the quarter ended March 31, 2000. Comparing the six month periods, document costs were 21% of revenues for 2001 down from 24% of revenues for 2000. Cost of catalogs increased to 26% of revenues for the current quarter 2001 compared to 17% of revenues for the previous year quarter. For the six month periods, cost of catalogs amount to 26% of revenues in 2001 compared to 20% of revenues for 2000. The Company had decreased the number of mailing of catalogs by 10% and the total cost of catalogs decreased by 18% comparing the two six month periods. Total operating expenses increased 10% for both the three month period and the six month period ended March 31, 2001 compared to March 31, 2000. Selling, general and administrative expenses increased 9% comparing the quarter periods and increased 7% comparing the six month 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 additional 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 25% to 11% of revenues for the quarter ended March 31, 2001 compared to 5% of revenues for the quarter ended March 31, 2000. For the six month periods, depreciation increased 49% to 13% of revenues for 2001 compared to 5% of revenues for 2000. The increase is largely due to a complete rewrite of its inventory system software and the creation of auction software which is currently being amortized. Maintenance and repair expenses decreased slightly comparing the quarter period and increased to 3% of revenues for the six month period ended March 31, 2001 compared to 1% of revenues for the six month period ended March 31, 2000. The increase in the six month period is attributed to the Company utilizing an outside specialist to maintain its computer systems. This service has been renegotiated in the current quarter reducing the cost to the Company. Interest expense increased 21% comparing the quarter periods and 33% comparing the six month periods. The increase is a result of higher outstanding loan balances that were utilized to finance the Company's 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 May 15, 2001 /s Todd M. Axelrod ______________________ ________________________________ Todd M. Axelrod President and Chairman of the Board (Principal Executive Officer) Date May 15, 2001 /s Rod Lynam ______________________ _______________________________ Rod Lynam Treasurer and Director (Principal Accounting Officer)