10KSB 1 r10k01.txt FORM 10-KSB FOR YEAR ENDED 9/30/2001 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-KSB [x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended September 30, 2001 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission file number 0-13757 GALLERY OF HISTORY, INC. (Name of Small Business Issuer 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 (including area code): (702) 364-1000 Securities registered under Section 12(b) of the Act: None Securities registered under Section 12(g) of the Act: Common Stock, par value $.0005 (Title of Class) Check whether the issuer (1) filed all reports 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 Check if there is no disclosure of delinquent filers in response to Item 405 of Regulation S-B contained herein, and no disclosure will be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-KSB or any amendment to this Form 10-KSB. [X] Issuer's revenues for the most recent fiscal year: $1,219,892. The aggregate market value of the Registrant's Common Stock held by non-affiliates of the Registrant (1,344,950 shares) as of December 3, 2001 was approximately $9,387,751 based upon $6.98, the price at which the stock was sold on such date. The Registrant had 5,625,984 shares of Common Stock outstanding as of December 3, 2001. Documents Incorporated by Reference: None PART I Item 1. Description of Business ----------------------- Business Development -------------------- The Gallery of History, Inc. (hereinafter the "Registrant" or the "Company") was incorporated in the State of Nevada on November 10, 1981. The Company is engaged in the business of marketing historical documents such as letters, documents and signatures of presidents and other governmental and political figures, significant physicians, inventors, Nobel Prize winners, explorers, aviators, scientists, entertainers, authors, artists, musicians, composers, clergymen, judges, lawyers, military figures, and well-known persons in sports, among others. Most of the documents were written or executed by persons now deceased, but a significant number were written or executed by persons still living, particularly in the entertainment, sports and political areas. The Company's inventory of documents currently consists of approximately 183,000 different documents. Retail sales of documents are made from a gallery located at its headquarters in Las Vegas, Nevada. However, documents are largely sold through auctions conducted at the Company's headquarters location. The Company's marketing efforts principally target individuals who have appreciated or collected antiques, paintings, lithographs, and other works of art or other collectibles, but not necessarily historical documents, and who may lack awareness of the availability of historical documents for purchase. In early fiscal 1997, the Company formed a new division, called Gallery of History Direct, dedicated to the issuance of bi-monthly catalogs employing a mail/phone/fax/internet auction format featuring original historical documents. For each of the fiscal years 2001 and 2000, the Company held eight auctions. Documents sold through the auction operation are generally sold in a raw unframed state. However, customers have an opportunity to have the Company frame the documents purchased, sometimes together with memorabilia related to the documents, or with current literature related to the signatory. All of the documents are preserved by utilizing museum quality encapsulation materials, mattings and protective coverings that are characteristically acid-free, and by other steps taken to ensure the longevity of the documents. The Company sells a book entitled "The Handbook of Historical Documents - A Guide to Owning History" authored by Todd M. Axelrod, the Company's President and Chairman of the Board. Inventory of Documents Owned ---------------------------- The Company purchases documents principally at auctions and from private collectors, dealers in historical documents, estates and various individuals who are not collectors but are in possession of documents. These avenues of supply are likely to continue to be the Company's main sources of inventory. In order to catalogue its diverse inventory, the Company has a personal computer client server network. The computer system allows the Company's sales staff to identify inventory held in the Company's central repository. The staff can obtain descriptions of the documents and even obtain images of the documents to exhibit to customers. Clientele --------- The Company has two primary marketing strategies. The first is its direct sales approach via auctions and a catalog program. Originating from its Corporate Headquarters, the Company developed a wholesale sales program directed at autograph dealers, auction houses, major customers and corporations. Its catalog program will distribute seven or eight different catalogs per year to its own retail customers, collectors and dealers of historical documents and a pre-qualified test market. The Company's other marketing strategy, to a lesser degree, is its retail operation conducted through its headquarters location in Las Vegas, Nevada and a retail site on the internet. The marketing effort is to attract persons who have not necessarily had an awareness of the existence of historical documents available for private sale. For the year ended September 30, 2001, the Company sold approximately 1,550 documents with an average single document sales price of approximately $800. Certificates of Authenticity ---------------------------- Documents purchased by the Company frequently are acquired by the Company with guarantees from the sellers. Whether or not the Company receives such a guarantee, it purchases documents subject to its own verification of authenticity. To ascertain authenticity, the Company may utilize information provided by the seller as to the transfer of ownership of documents; it may subject the documents to its own expert examination; it may employ outside experts available to it to examine the documents; or it may use other means. The Company makes available to its customers a ten-year Certificate of Authenticity, which obligates the Company to refund to the customer the purchase price paid if any document is proven non-authentic. Should the Company's determination of authenticity of documents be erroneous, it would be likely to suffer a loss as a consequence thereof unless redress by the Company against the seller of the documents could be obtained. The Company does not carry any insurance and is currently not aware of any entity which would offer or underwrite such insurance at commercially reasonable rates to protect it against a loss arising from either the purchase of documents lacking authenticity or claims by customers for recovery against the Certificates of Authenticity it issues. Claims made against the Company pursuant to its Certificates of Authenticity have been immaterial, accordingly, the Company has not established a reserve against the risk of forgery or against any exposure under the Certificates of Authenticity. Competition ----------- The Company does not regard the business of marketing historical documents as a definable industry. There are a great number of dealers of historical documents, of which many are only part-time operators, many are located in homes without any established commercial location and many are located in commercial office buildings or have retail space in metropolitan areas. The Company competes primarily with art galleries, antique stores and sellers of other collectible items, as well as dealers in historical documents. In the past several years, many autograph dealers have closed their retail gallery operations and are attempting to sell their inventories through an auction format. In addition, many of the upscale malls are remerchandising for middle-market masses as the consumer looks for warehouse shopping. Since closing the Company's galleries, the majority of the Company's sales have been through its auction-wholesale efforts at the Company's headquarters location. Thus, the Company has strategically moved towards marketing through a mail/phone/fax/internet auction format. When acquiring documents, the Company competes with persons who acquire documents for resale, as well as private collectors. The principal sources for documents are auctions held in the United States and abroad, private collectors, dealers in historical documents, estate sales, and the recipients of documents and/or their families. In the event prices for historical documents increase materially, the Company's ability to acquire documents, and, in turn, its ability to market such newly acquired documents to the general public, may be adversely affected. However, if prices for historical documents significantly increase, the resale/wholesale value of the Company's 183,000 document inventory would be positively affected. The Company does accept consignments for its auctions. To the extent the Company is successful in attracting consignments, it would be positively impacted by this higher price scenario because the Company receives a commission from both the buyer and consignor which is based upon a percent of the hammer price. There is no assurance that the Company will be able to continue to realize significant profits for its merchandise. Moreover, existing dealers may choose to compete with the Company in the same manner or in a more favorable format than that of the Company. Seasonal Business ----------------- The nature of the business in which the Company engages is not seasonal. However, the Company has experienced in the past a surge in November and December retail sales relating to the traditional holiday shopping season. Because the Company expects to receive less than 15% of its revenues from its gallery-retail source, the benefit from a spike in holiday shopping is expected to diminish. Employees --------- As of December 1, 2001, the Company had nine full-time employees, in addition to its four executive officers. Item 2. Properties ---------- The Company owns a building located at 3601 West Sahara Avenue, Las Vegas, Nevada where its executive offices and framing operations are located. The building contains approximately 33,187 square feet of net leasable space of which the Company currently occupies 15,580 square feet and leases or is offering to lease the remaining space to others. As of December 1, 2001, 6,799 square feet was being leased to three tenants for an aggregate monthly rental of $9,853 under leases expiring at varying times from March 2003 through October 2012. The Company believes that its headquarters' building is adequate for its purposes for the foreseeable future and that the building is adequately covered by insurance. The property is collateral for a loan instrument - see footnote 5 of Notes to Consolidated Financial Statements. The Company owns a Hewlett Packard Netserver LS2, a Dell PowerEdge 4200 Server, two Dell PowerEdge 6300 Servers and twenty-five micro-computers. The computer system is used to catalog and develop cost and other statistical information relating to the Company's inventory, develop graphic presentations, and handle the Company's internal accounting functions. The Company also owns leasehold improvements, fixtures and furniture at its headquarters location. Item 3. Legal Proceedings ----------------- None. Item 4. Submission of Matters to a Vote of Security Holders --------------------------------------------------- On September 28, 2001, the Company held its annual meeting of shareholders for the following purposes: (1) to elect five Directors to serve until the next annual meeting of shareholders; and (2) to approve the appointment of Arthur Andersen LLP, as the Company's independent auditors for the fiscal year ending September 30, 2001. At the Meeting the following Directors were elected: VOTES CAST FOR WITHHELD NOMINEES ELECTION AUTHORITY ---------------- ----------- --------- Todd M. Axelrod 5,490,306 202 Rod Lynam 5,489,623 885 Pamela Axelrod 5,489,823 685 Bernard Duke 5,490,306 202 Barry Fink 5,490,106 402 Voting for the appointment of Arthur Andersen LLP, as the Company's independent auditors, 5,490,368 shares were in favor, 2 against and 138 shares abstain. PART II Item 5. Market for Registrant's Common Stock and Related Stockholder Matters -------------------------------------------------------------------- (a) The Company's Common Stock, par value $.0005, is quoted on the National Association of Securities Dealers Automated Quotation System ("NASDAQ") Small-Cap Market under the symbol HIST. The following table sets forth the high and low sale price for the Company's Common Stock for the periods indicated as reported on NASDAQ. The quotations set forth below represent prices between dealers and do not include retail markups, markdowns or commissions, nor do they represent actual transactions. Low Sale High Sale Price Price ------- ------- Fiscal 2000 ----------- October 1, 1999 - December 31, 1999 $2.75 $4.50 January 1, 2000 - March 31, 2000 3.00 3.56 April 1, 2000 - June 30, 2000 2.88 4.00 July 1, 2000 - September 30, 2000 3.25 4.50 Fiscal 2001 ----------- October 1, 2000 - December 31, 2000 $3.00 $4.00 January 1, 2001 - March 31, 2001 3.00 3.13 April 1, 2001 - June 30, 2001 2.75 8.11 July 1, 2001 - September 30, 2001 3.00 4.95 (b) As of October 31, 2001 there were approximately 134 holders of record of the Company's Common Stock before calculating individual participants in security position listings pursuant to Rule 17Ad-8 under the Securities Exchange Act of 1934. The Company's transfer agent reported approximately 213 beneficial owners of the Company's common stock as of August 2001. (c) Since its inception in November 1981, the Company has not paid any cash dividends to the holders of its Common Stock. The Company presently intends to retain any earnings for its internal cash flow use and possible repurchase of its own common stock. Item 6. Management's Discussion and Analysis of Financial Condition and Results of Operations --------------------------------------------------------------- Liquidity and Capital Resources ------------------------------- The Company has in the past acquired documents in excess of current needs to accommodate future growth and appreciation. Because of this, the Company believes it is not practicable to determine what portion of the documents owned will be sold within the next operating cycle. Therefore, the Company presents in its financial statements an unclassified balance sheet. Accordingly, the traditional measures of liquidity in terms of changes in working capital are not applicable. The Company has a bank line of credit in the amount of $100,000 through August 2002. Loans under the line are secured by the Company's inventory of documents owned and bear interest at the prime rate plus 1.5%. As of September 30, 2001, there was $25,000 drawn against this line of credit. The Company's term mortgage note that was converted to a reducing revolving line of credit in 1997 in the amount of $1,839,523 has a 9% interest rate and a maturity date of July 15, 2002. As of September 30, 2001, there was an outstanding balance due of $1,594,992. The note is collateralized by the Company's building. In September 1998, the Company borrowed $1,000,000 from Nanna Corp., a company owned 100% by Todd Axelrod, the primary stockholder and President of the Company, and his wife, Pamela. Nanna Corp. has since dissolved; as a result, the note was transferred to Mr. Axelrod in March 1999. The 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 funds from Mr. Axelrod, from time to time during the fiscal years 2001 and 2000. The funds borrowed bear interest at the same rate as Mr. Axelrod pays on his personal line of credit, which was 7% as of September 30, 2001. The balance of the funds borrowed was $1,385,240 as of September 30, 2001. The funds were used to supplement operating activities. The Company will not be showing substantial cash balances because it is to the Company's advantage to reduce its outstanding line of credit balance. 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, the primary stockholder and president of the Company, 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. The Company experienced a decline in net cash from operating activities primarily due to the net operating loss for the fiscal year ended September 30, 2001. Cash outlays for the purchase of documents in fiscal 2001 decreased approximately $690,000 compared to purchases in fiscal 2000. Accounts receivable decreased comparing the two fiscal years due to the sales decrease. Accounts payable increased comparing the fiscal years due to an outstanding document purchase as of September 30, 2001. Equipment purchases increased during the last two fiscal years to augment the Company's software computer system capabilities. Software expenditures in fiscal 2001 amounted to approximately $58,000 and expenditures in fiscal 2000, amounted to approximately $260,000. However, the Company is at a point where the majority of its development has been concluded. Funds to finance the document and equipment purchases were mainly drawn from the Company's credit facilities. Perpetual inventory records kept by the Company contain inventory descriptions and the purchase costs of such inventory. Although each inventory item is unique, the majority of the Company's inventory consists of major similar categories of documents. With respect to the similar categories of documents, current retail sales information provides the Company with ratios of its sales to cost of sales; the Company uses such information to assist it in substantiating that its inventory value does not exceed market value. The records for inventory categories are also periodically reviewed by management to determine if there has been any known auction or interdealer sales of similar documents at reduced prices and to determine if a reduction in the inventory carrying value is needed. The Company's review of its inventory of documents has not shown any significant decline in market value below cost on an individual level or by major category. Retail and wholesale sales by the Company have, to date, been in excess of carrying costs of the documents sold. The Company has engaged an expert to help evaluate and authenticate its inventory on a regular basis. During the past two fiscal years, the Company has not experienced any adverse impact arising from inflation. However, in the event prices for historical documents increase materially, the Company's ability to acquire documents, and, in turn, its ability to market such newly acquired documents to its market, may be adversely affected. Thus, although the retail and wholesale values of the Company's existing inventory might be favorably affected by increasing prices, passing along such increases to customers could have an inhibiting effect on the Company's overall business. Management of the Company actually believes that tangible collectibles move inversely with financial assets over the long term. As a result, during times of greater inflationary expectations, tangible collectibles may actually be the beneficiary of greater interest. The Company anticipates no material commitments for capital expenditures at the present time, as the Company is not currently contemplating additional expansion. Management is not aware of any trend in the Company's capital resources, which may have an impact on its income, revenue or income from continuing operations. Results of Operations --------------------- Fiscal 2001 Compared to Fiscal 2000 Total document revenues decreased 32% comparing the fiscal year ended September 30, 2001 to the fiscal year ended September 30, 2000. Auction revenues decreased 37% comparing the two fiscal years. Consigned documents sold in the auction decreased 59% comparing the two fiscal years. In addition to the economy slowdown in general, the Company has experienced increased competition in the auction market. The number of winning bidders decreased 4% and the number of units sold decreased 18% comparing fiscal 2001 to fiscal 2000. The average sales price per item sold in the auctions in fiscal 2001 was $825 compared to an average sales price of $1,076 in fiscal 2000. Retail revenues increased 26% comparing the two fiscal years. Retail revenues amounted to 14% of total revenues in fiscal 2001 compared to 8% of total revenues in fiscal 2000. Total cost of revenues decreased 9% due to less revenues generated. Total cost of revenues increased to 59% of revenues for fiscal 2001 compared to 44% of revenues for fiscal 2000 because of the increase in catalog costs resulting from the reduction in auction revenues. In addition, the Company wrote off approximately $91,000 of its document inventory that was charged to cost of revenues. Any documents that could not be scanned into the physical inventory, documents with an emuslsified appearance or documents with a questionable signature were written off during fiscal 2001. The cost of documents amounted to 31% of revenues for the 2001 fiscal year compared to 23% for fiscal 2000. Without the inventory write off, cost of documents amount to 24% of revenues or fiscal 2001. The cost of catalogs increased to 27% of revenues for fiscal 2001 compared to 21% of revenues for fiscal 2000 due to the decrease in auction revenues. Total operating expenses decreased 1% from 90% of net revenues for fiscal 2000 to 132% of net revenues for fiscal 2001. Selling, general and administrative expenses decreased 4% from the prior year. Comparing the fiscal years, charges for processing credit cards decreased 22% due to the decrease in revenues. Salary expenses decreased 6% due to a reduction in executive salaries. A reduction in travel resulted in a decrease in travel and entertainment expenses of 46% comparing the fiscal years. Depreciation increased 26% to 13% of revenues for fiscal 2001 compared to 7% of revenues for fiscal 2000. The increase is largely due to the completion of the Company's rewrite of its inventory system software and the creation of auction software that is currently being amortized. Advertising expense decreased 17% comparing the fiscal years. This decrease is a result of a new contract with a major advertiser of the Company. Maintenance and repair costs increased 47% from the prior year due to the expenditure for maintenance of the Company's computer software programs. Interest expense increased 21% from the prior year as a result of higher outstanding loan balances used for the Company's operations. Included in selling, general and administrative expenses is 50% of the operating cost to maintain the headquarters building. This percentage is the approximate square footage occupied by the Company's headquarters operation to the total leasable space of the building. The remaining building operating expenses plus the rental revenues realized are offset and included in other income and expense. This amounted to approximately $42,000 operating profit for fiscal 2001 as compared to approximately $75,000 operating profit for fiscal 2000. The decrease is a result of a reduction in leased square footage. Item 7. Financial Statements TABLE OF CONTENTS PAGE ---- Report of Independent Public Accountants 9 Consolidated Balance Sheets - September 30, 2001 and 2000 10 Consolidated Statements of Operations for the years ended September 30, 2001 and 2000 11 Consolidated Statements of Changes in Stock-holders' Equity for the years ended September 30, 2001 and 2000 12 Consolidated Statements of Cash Flows for the years ended September 30, 2001 and 2000 13 Notes to Consolidated Financial Statements 15 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Board of Directors and Stockholders of Gallery of History, Inc.: We have audited the accompanying consolidated balance sheets of Gallery of History, Inc. (a Nevada Corporation) and subsidiaries (the "Company") as of September 30, 2001 and 2000, and the related consolidated statements of operations, changes in stockholders' equity and cash flows for the years then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Gallery of History, Inc. and subsidiaries as of September 30, 2001 and 2000, and the results of their operations and their cash flows for the years then ended in conformity with accounting principles generally accepted in the United States. /s/ ARTHUR ANDERSEN LLP ----------------------- ARTHUR ANDERSEN LLP Las Vegas, Nevada October 29, 2001 GALLERY OF HISTORY, INC. and SUBSIDIARIES --------------------------------------------- CONSOLIDATED BALANCE SHEETS AS OF SEPTEMBER 30, 2001 AND 2000 __________________________________________________________________ Notes 2001 2000 ----- ---- ---- ASSETS Cash $ 7,957 $ 30,138 Accounts receivable 1 32,260 60,388 Prepaid expenses 46,792 39,210 Documents owned 1 6,773,133 7,176,068 Land and building-net 2,5,8 1,278,485 1,328,990 Property and equipment-net 1,2,5 473,161 584,260 Other assets 3 123,792 131,329 --------- --------- TOTAL ASSETS $8,735,580 $9,350,383 ========= ========= LIABILITIES Accounts payable $ 58,398 $ 41,386 Notes payable 5 1,619,991 1,732,190 Indebtedness to related parties 4,5 2,385,239 1,801,890 Deposits 10,253 11,448 Accrued and other liabilities 164,193 125,899 --------- --------- TOTAL LIABILITIES 4,238,074 3,712,813 --------- --------- COMMITMENTS AND CONTINGENCIES 8 STOCKHOLDERS' EQUITY Common stock: $.0005 par value; authorized, 20,000,000 shares; 11,935,308 shares issued and outstanding 1,6,10,11 5,968 5,968 Additional paid-in-capital 9,813,072 9,715,750 Deferred compensation 11 (85,830) (183,992) Accumulated deficit (2,227,033) (891,485) Common stock in treasury (6,309,324 shares), at cost 10 (3,008,671) (3,008,671) --------- --------- TOTAL STOCKHOLDERS' EQUITY 4,497,506 5,637,570 --------- --------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $8,735,580 $9,350,383 ========= ========= See the accompanying notes to consolidated financial statements. ________________________________________________________________ GALLERY OF HISTORY, INC. and SUBSIDIARIES --------------------------------------------- CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE YEARS ENDED SEPTEMBER 30, 2001 AND 2000 _________________________________________________________________ Notes 2001 2000 ----- ---- ---- REVENUES 1 $1,219,892 $1,805,187 COST OF REVENUES 713,666 788,362 --------- --------- GROSS PROFIT 506,226 1,016,825 --------- --------- OPERATING EXPENSES: Selling, general and administrative 1,365,870 1,423,677 Depreciation and amortization 1,2 158,980 126,089 Advertising 30,851 37,074 Maintenance and repairs 1 49,047 33,346 --------- --------- TOTAL OPERATING EXPENSES 1,604,748 1,620,186 --------- --------- OPERATING LOSS (1,098,522) (603,361) --------- --------- OTHER INCOME (EXPENSE): Interest expense (326,912) (269,219) Other, net 8 89,886 75,598 --------- --------- TOTAL OTHER INCOME (EXPENSE) (237,026) (193,621) --------- --------- LOSS BEFORE INCOME TAXES (1,335,548) (796,982) BENEFIT FOR INCOME TAXES 1,7 -- 171,011 --------- --------- NET LOSS $(1,335,548) $ (625,971) ========= ========= LOSS PER SHARE: 9 Basic $(.24) $(.11) ==== ==== Diluted $(.24) $(.11) ==== ==== See the accompanying notes to consolidated financial statements. ________________________________________________________________ GALLERY OF HISTORY, INC. and SUBSIDIARIES --------------------------------------------- CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY FOR THE YEARS ENDED SEPTEMBER 30, 2001 AND 2000 ______________________________________________________________________________ Additional Common Common Stock Paid-in Deferred Accumulated Stock in Shares Par Value Capital Compensation Deficit Treasury Total ------ --------- ------- ------------ ------- -------- ----- BALANCE AT 9/30/1999 11,835,308 $5,918 $9,392,363 $ -- $(265,514) $(2,927,553) $6,205,214 Repurchase Common Stock, at cost (22,500 shares) -- -- -- -- -- (81,118) (81,118) Issue common stock for services 100,000 50 323,387 -- -- -- 323,437 Deferred compensation -- -- -- (183,992) -- -- (183,992) Net Loss -- -- -- -- (625,971) -- (625,971) ---------- ----- --------- -------- ---------- ---------- --------- BALANCE AT 9/30/2000 11,935,308 $5,968 $9,715,750 $(183,992) $ (891,485) $(3,008,671) $5,637,570 Gain on sale of inventory to principal stockholder -- -- 15,447 -- -- -- 15,447 Vesting of restricted stock -- -- 81,875 -- -- -- 81,875 Deferred compensation adjustment -- -- -- 98,162 -- -- 98,162 Net Loss -- -- -- -- (1,335,548) -- (1,335,548) ---------- ----- --------- -------- ---------- ---------- --------- BALANCE AT 9/30/2001 11,935,308 $5,968 $9,813,072 $ (85,830) $(2,227,033) $(3,008,671) $4,497,506 ========== ===== ========= ======== ========== ========== ========= See the accompanying notes to consolidated financial statements. ________________________________________________________________ GALLERY OF HISTORY, INC. and SUBSIDIARIES ------------------------------------------- CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED SEPTEMBER 30, 2001 AND 2000 _______________________________________________________________________ 2001 2000 ---- ---- CASH FLOWS FROM OPERATING ACTIVITIES: Net loss $(1,335,548) $ (625,971) Adjustments to reconcile net loss to net cash used for operating activities: Depreciation and amortization 211,109 192,125 Common stock issued for services 180,037 139,445 Net gain on disposal of property (20,773) -- (Increase) decrease in: Accounts receivable 28,128 144,104 Prepaid expenses (7,582) (3,402) Documents owned (a) 274,804 (407,495) Other assets 7,537 5,467 Increase (decrease) in: Accounts payable 17,012 (136,481) Deposits (1,195) (9,706) Deferred tax -- (171,011) Accrued and other liabilities 38,294 46,504 --------- --------- Net cash used for operating activities (608,177) (826,421) --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of property, equipment and building improvements (69,733) (258,045) Proceeds from sale of property 23,094 -- Purchase of documents (a) -- -- --------- --------- Net cash used for investing activities (46,639) (258,045) (a) Historically, the Company has normally acquired documents in excess of current needs when purchasing opportunities are favorable to accommodate future growth and appreciation. Purchases of $110,476 and $798,037 in fiscal 2001 and 2000 included in the net change in documents owned are shown as an operating activity above, without an allocation to investing activities, because it is not practicable to determine what portion of the documents owned will be sold within the next operating cycle. (Continued) GALLERY OF HISTORY, INC. and SUBSIDIARIES ------------------------------------------- CONSOLIDATED STATEMENTS OF CASH FLOWS - (Continued) FOR THE YEARS ENDED SEPTEMBER 30, 2001 AND 2000 ______________________________________________________________________ 2001 2000 ---- ---- CASH FLOWS FROM FINANCING ACTIVITIES: Net borrowings from credit facilities and related parties $ 632,635 $ 937,459 Repurchase of common stock -- (81,118) --------- --------- Net cash provided by financing activities 632,635 856,341 NET INCREASE (DECREASE) IN CASH (22,181) (228,125) CASH, BEGINNING OF YEAR 30,138 258,263 --------- --------- CASH, END OF YEAR $ 7,957 $ 30,138 ========= ========= SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash paid during the year for interest $ 327,157 $ 267,819 ========= ========= SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES: For the fiscal year ended September 30, 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 ______________________________________________________________________ 1. SIGNIFICANT ACCOUNTING POLICIES Business Activity - Gallery of History, Inc. and subsidiaries (the "Company"), a Nevada corporation, acquire documents of historical or social significance and market these documents to the general public. The Company's subsidiaries are as follows: 3601 West Sahara Corp., Gallery of History Auctions Inc., and International Stolen Art & Documents Clearinghouse Corp. The Company makes available to its customers a certificate of authenticity, valid for ten years from date of purchase, for each document it sells. Under the certificate, the Company is required to refund to the customer the purchase price should any document prove to be a forgery or otherwise lack authenticity. To ascertain authenticity, the Company relies upon the reputation of sellers, opinions of experts under certain circumstances, the history of prior ownership of such documents and other means. Management's Use of Estimates - The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Principles of Consolidation - The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. Significant intercompany accounts and transactions have been eliminated. Unclassified Balance Sheets - The Company includes in its financial statements unclassified balance sheets because it believes that such presentation is more meaningful as a consequence of the Company's policy of acquiring documents in excess of its current needs, and it is not practicable to determine what portion of the documents owned will be sold within the next twelve months. Accounts Receivable - Management reviews the collectibility of accounts receivable and establishes an allowance if collection is deemed unlikely. As of September 30, 2001 and 2000, no allowances were deemed necessary. Documents Owned - Documents are stated at cost on a specific-identification method, not in excess of estimated market value. Management reviews the value of the documents owned on a regular basis to determine potential impairments and to ensure that documents owned are not reflected at amounts in excess of estimated market value. Property and Equipment - Property and equipment are carried at cost. Depreciation and amortization of property and equipment are provided on the straight line method over their estimated useful lives. Maintenance, repairs and renewals which neither materially add to the value of the property nor appreciably prolong its life are charged to expense as incurred. Gains or losses on dispositions of property and equipment are included in other income. Revenues - Revenues are recognized when a sale is consummated. Income Taxes - Income taxes, where applicable, are provided at statutory rates. Deferred income taxes are recognized for income and expense items which are reported for tax purposes in different years than for financial accounting purposes. This year's loss increased the net operating losses for tax purposes, which resulted in a deferred tax asset for financial accounting purposes. SFAS No. 109, "Accounting for Income Taxes," requires recognition of a future tax benefit of net operating loss carryforwards and certain other temporary differences to the extent that realization of such benefit is more likely than not; otherwise, a valuation allowance is applied. Accordingly, the Company has applied a valuation allowance against its deferred tax assets (see Note 7). Equity Instruments Issued to Consultants and Vendors - The Company's accounting policy for equity instruments issued to consultants and vendors in exchange for goods and services follows the provisions of Emerging Issues Task Force ("EITF") 96-18 "Accounting for Equity Instruments That are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or Services" and EITF 00-18 "Accounting Recognition for Certain Transactions Involving Equity Instruments Granted to Other Than Employees". The measurement date for the fair value of the equity instruments issued is determined at the earlier of (i) the date at which a commitment for performance by the consultant or vendor is reached or (ii) the date at which the consultant or vendor's performance is complete. In the case of equity instruments issued to consultants, the fair value of the equity instrument is recognized as a charge to the statement of operations over the term of the consulting agreement. Results of Operations, Liquidity and Capital Resources - The Company incurred net losses of $1,335,548 and $625,971, used net cash in operations of $608,177 and $826,421, and reported accumulated deficits of $2,227,033 and $891,485 for the years ended September 30, 2001 and 2000, respectively. 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, the primary stockholder and president of the Company, 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. 2. LAND, BUILDING, PROPERTY AND EQUIPMENT Land, building, property and equipment at September 30, 2001 and 2000 consist of the following: Estimated Service Lives 2001 2000 ----- ---- ---- Land $ 580,000 $ 580,000 Building 30 years 1,428,751 1,428,751 --------- --------- Total cost 2,008,751 2,008,751 Less accumulated depreciation 730,266 679,761 --------- --------- Land and building - net $1,278,485 $1,328,990 ========= ========= Equipment and furniture 5 years $1,155,268 $1,144,653 Leasehold improvements 5-15 years 278,756 278,756 --------- --------- Total cost 1,434,024 1,423,409 Less accumulated depreciation and amortization 960,863 866,719 --------- --------- Subtotal 473,161 556,690 Construction in process -- 27,570 --------- --------- Property and equipment - net $ 473,161 $ 584,260 ========= ========= 3. OTHER ASSETS Other assets at September 30, 2001 and 2000 consist of the following: 2001 2000 ---- ---- Book inventory $ 13,427 $ 13,766 Framing raw materials inventory 115,343 123,190 Less reserve for obsolete materials (6,010) (9,338) Other 1,032 3,711 ------- ------- Total $123,792 $131,329 ======= ======= 4. RELATED PARTIES In September 1998, the Company borrowed $1,000,000 from Nanna Corp., a company owned 100% by Todd Axelrod, the primary stockholder and President of the Company, and his wife, Pamela. Nanna Corp. has since dissolved; as a result, the note was transferred to Mr. Axelrod in March 1999. The note is due April 30, 2002, with monthly interest payments at a rate of 8%. The proceeds of this loan were used to pay down the Company's mortgage on its building which was at a higher interest rate. Interest expense on the note was $81,333 and $80,923 during fiscal year 2001 and 2000, respectively. The Company has also borrowed funds from Mr. Axelrod, from time to time during the fiscal years 2001 and 2000. The funds borrowed bear interest at the same rate as Mr. Axelrod pays on his personal line of credit, which was 7% as of September 30, 2001. The balance of the funds borrowed was $1,385,239 and $801,890 as of September 30, 2001 and 2000, respectively. The Company had paid $87,272 and $27,083 in interest during fiscal 2001 and 2000, respectively. The funds were used to supplement operating activities. In November 2000, Todd Axelrod acquired 157 documents from the Company for his personal use. The Company's cost of the documents when acquired by the Company was $140,131. The Company obtained an outside specialist to perform an independent appraisal of the documents involved. The appraised value of $152,500 was used to reduce debt owed to Mr. Axelrod by the Company, and the Company recorded a gain on the inventory sold as a capital contribution to 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. The majority of the Company's sales in its auction operation are unframed documents. 5. NOTES PAYABLE AND INDEBTEDNESS TO RELATED PARTIES Debt consists of the following at September 30: 2001 2000 ---- ---- Reducing revolving line of credit in the amount of $1,839,523. The line has a 59 month amortization of principal at a 9% interest rate, a balloon payment due at maturity of July 15, 2002 in the amount of $1,565,106 or the outstanding balance if paid down and is collateralized by a building. As of September 30, 2001, the Company had utilized most of this line of credit. $1,594,991 $1,660,508 Related party note payable at 8% interest. The note has monthly interest payments with principal due April 30, 2002. 1,000,000 1,000,000 Related party note payable at 7% interest The note has monthly interest payments and the note is payable on demand. 1,385,239 801,890 Revolving line of credit in the amount of $100,000 renewing August 2002 with an interest rate of prime plus 1.5% (7.5% at September 30, 2001). The line is collateralized by the Company's inventory and equipment. 25,000 50,000 Term note payable at 7.99% with 60 monthly payments of principal and interest with the unpaid balance due March 5, 2002, collateralized by a truck. -- 21,682 --------- --------- Total $4,005,230 $3,534,080 ========= ========= The estimated fair value of the Company's debt at September 30, 2001 and 2000, respectively, was approximately $4,005,000 and $3,534,000, which approximates its book value. The estimated fair value amounts were based on discounted cash flow valuations, because none of the Company's debt has quoted market prices. Discount rates were estimated based on current rates offered to the Company for debt having similar amounts and maturities. 6. COMMON STOCK AND STOCK OPTIONS A maximum of 1,100,650 shares of common stock have been reserved for issuance of stock options. Options are granted at the current market price at the date of grant and vest immediately upon issuance. Summarized information for the options is as follows: 2001 2000 ---------------- ---------------- Weighted Weighted Average Average Exercise Exercise Options Price Options Price ------- ----- ------- ----- Outstanding at Beginning of Year 20,000 $4.50 20,000 $4.50 Granted -- $ -- -- $ -- Exercised -- $ -- -- $ -- Canceled/Expired -- $ -- -- $ -- -------- ---- -------- ---- Outstanding at End of Year 20,000 $4.50 20,000 $4.50 ======== ==== ======== ==== Exercisable at End of Year 20,000 20,000 Options Available for Grant 1,080,650 1,080,650 The following table summarizes information about the options outstanding at September 30, 2001: Options Outstanding Options Exercisable ------------------------------------------ ------------------------ Weighted Average Weighted Number Weighted Range of Number Remaining Average Exercisable Average Exercise Outstanding Contractual Exercise at Exercise Prices at 9/30/01 Life Price 9/30/01 Price ------ ---------- ---- ----- ------- ----- $4.50 20,000 3 $4.50 20,000 $4.50 The Company applies APB Opinion 25 and related interpretations in accounting for the options. Accordingly, compensation expense recognized was different than what would have been otherwise recognized under the fair value based method defined in SFAS No. 123, "Accounting for Stock-Based Compensation." Had compensation expense for the plans been determined in accordance with SFAS No. 123, the effect on the Company's net loss applicable to common stock and basic loss per common share would have been as follows: Year Ending September 30, 2001 2000 ---- ---- Net loss applicable to common stock: As reported $(1,335,548) $(625,971) Pro forma $(1,352,956) $(643,740) Basic and diluted loss per common share: As reported $ (.24) $ (.11) Pro forma $ (.24) $ (.11) The fair value of the options granted are estimated on the date of grant, which was August 6, 1999, using the Black-Scholes option pricing method with the following assumptions: Expected dividend yield 0% Expected stock price volatility 186.18% Risk-free interest rate 5.12% Expected average life of options (years) 5 Expected fair value of options granted 4.35 7. INCOME TAXES The benefit for income taxes for the years ended September 30, 2001 and 2000 are as follows: 2001 2000 ---- ---- Current Federal $ -- $ -- Deferred -- (171,011) -------- -------- Total $ -- $(171,011) ======== ======== Components of deferred tax assets (liabilities) for the years ended September 30, 2001 and 2000 are as follows: 2001 2000 ---- ---- Depreciation $(251,447) $(230,043) -------- -------- Gross deferred tax liabilities (251,447) (230,043) -------- -------- Net operating loss carryforward 768,801 286,281 Other 79,552 52,402 -------- -------- Gross deferred tax assets 848,353 338,683 Less valuation allowance (596,906) (108,640) -------- -------- Subtotal 251,447 230,043 -------- -------- Net deferred tax liabilities $ -- $ -- ======== ======== Statement of Financial Accounting Standards No. 109 requires recognition of the future tax benefit of these assets to the extent realization of such benefits is more likely than not, otherwise, a valuation allowance is applied. During fiscal year 2001, the Company estimated that its deferred tax assets will not be fully realizable and provided a valuation allowance to offset the unusable amount. The benefit for income taxes differs from the amount of income tax determined by applying the applicable U.S. statutory federal income tax rate (34%) to the loss before income taxes as a result of the following differences: 2001 2000 ---- ---- Expected provision/(benefit) $(454,086) $(270,974) Increase (decrease) from rate: Change in valuation allowance 488,266 44,102 Other (34,180) 55,861 -------- -------- At effective tax rate $ -- $(171,011) ======== ======== As of September 30, 2001, the Company had the following income tax loss carryforwards available for income tax purposes: Expiration Dates Amount Federal regular tax operating loss carryforwards 2009 to 2021 $2,261,179 8. COMMITMENTS AND CONTINGENCIES The Company leases office space in its headquarters building to tenants under non-cancellable operating leases. Such leases provide for payment of minimum rentals plus escalation charges determined by certain expenses incurred in the operation of the building. Lease periods range from two to twenty years with various renewal options. Rental income for the periods ended September 30, 2001 and 2000 was $113,299 and $155,405, respectively. Included in Selling, General and Administrative Expenses is 50% of the building's operating costs representing area occupied by the Company's headquarters operation. Included in Other Income (Expense) is the net rental income realized by the building operation less the remaining operation expenses. This resulted in other income of $29,050 and $75,423 for the periods ended September 30, 2001 and 2000, respectively. Specific net assets identifiable with rental real estate totaled $683,827 and $711,649 at September 30, 2001 and 2000, respectively. These amounts included $730,266 and $679,761 of accumulated depreciation for the years presented. Future minimum lease payments receivable from non-cancellable operating leases as of September 30, 2001, excluding amounts applicable to reimbursable expenses, are as follows: 2002 $ 119,158 2003 117,425 2004 97,604 2005 94,088 2006 94,242 Thereafter 596,227 --------- Total $1,118,744 ========= 9. EARNINGS PER SHARE The computation of earnings per share is based on the weighted average number of shares of common stock outstanding, 5,546,140 and 5,534,563 for the years ended September 30, 2001 and 2000, respectively. The following table discloses the Company's loss per share for the years ended September 30, 2001 and 2000, as determined in accordance with SFAS 128. Basic earnings per share are computed by dividing reported earnings by the weighted-average number of common shares outstanding during the period. Diluted earnings per share reflect the additional dilution for all potentially dilutive securities such as stock options. 2001 2000 ---- ---- Net loss per share Basic $(.24) $(.11) Diluted $(.24) $(.11) At September 30, 2001 and 2000, all of the 20,000 exercisable stock options outstanding were excluded from the computation of diluted earnings per share. In accordance with SFAS 128, when an entity has a loss from continuing operations, no potential common shares shall be included in the computation of any diluted per share amounts. As such, potential dilution has not been considered in the calculations for the periods ending September 30, 2001 and 2000. Also in accordance with SFAS 128, when options have an exercise price greater than the average market price, no potential common shares shall be included in the computation of any diluted per share amounts. As such, potential dilution has not been considered in the calculations for the periods ending September 30, 2001 and 2000. 10. REPURCHASE OF COMMON STOCK In October 1999, the Company purchased 22,500 shares of its common stock at an average price of $3.605. 11. 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 to be rendered, the Company has issued 100,000 restricted shares of its common stock which vest over the three year term of the agreement. As of September 30, 2001, 50,000 shares have vested and the remaining 50,000 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, $85,830 of deferred compensation was recorded to reflect the unvested balance of the shares as of September 30, 2001. Item 8. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure None. PART III Item 9. Directors, Executive Officers, Promoters and Control Persons; Compliance with Section 16(a) of the Exchange Act ------------------------------------------------------------- Directors, Executive Officers and Significant Employees Set forth below are the present directors, executive officers and any significant employees of the Company. Note that there are no other persons who have been nominated or chosen to become directors nor are there any other persons who have been chosen to become executive officers. Directors are elected until the next annual meeting of shareholders and until their successors are duly elected and qualified. Officers are elected for terms of one year, or until their successors are duly elected and qualified or until terminated by the action of the Board of Directors. Has Servered as Director Position(s) with Continuously Name Age the Company Since ---- --- ---------------- ----- Todd M. Axelrod 52 President and Chairman 1981 of the Board of Directors Rod R. Lynam 53 Treasurer/Assistant 1984 Secretary and Director Pamela Axelrod 46 Executive Vice President and 1995 Director Bernard Duke 74 Director 1998 Barry Fink 63 Director 1999 The only relationship by blood, marriage or adoption (not more remote than first cousin) between any Director or executive officer of the Company is that of Todd Axelrod, President and Chairman of the Board of Directors and his wife Pamela Axelrod, Executive Vice-President and Director. Set forth below are brief accounts of the business experience during the past five years of each director and executive officer of the Company. Todd M. Axelrod has been Chairman of the Board of Directors and President of the Company since its inception in November 1981. Mr. Axelrod has been a private collector of valuable historical documents since 1968. Mr. Axelrod authored a book entitled "The Handbook of Historical Documents - A Guide to Owning History". Rod Lynam has been Treasurer and Chief Financial Officer of the Company since September 1984. Pamela Axelrod has been a Vice-President since 1995. She served as the manager of the Las Vegas Fashion Show gallery, the Company's merchandise manager and co-director of sales since 1984. She has served as Editor-in-Chief of the Company's Simple & Direct auction catalog and as co-auction manager since 1996. Bernard Duke was elected to the Company's Board of Directors in February 1998. From 1992 to 1997, Mr. Duke had been a Director, Vice-President and Chief Executive Officer of TFH Publications, Inc., of Neptune City, New Jersey. From 1984 to 1996, Mr. Duke was a Director and member of the Executive Committee of Graphic Arts Mutual Insurance Company. Barry Fink has been a partner of the law firm of Christensen, Miller, Fink, Jacobs, Glaser, Weil & Shapiro, LLP since May 1988. Christensen, Miller, Fink, Jacobs, Glaser, Weil & Shapiro, LLP has performed legal services for the Company during fiscal 2001 and will perform legal services for the Company in fiscal 2002. Such services have related to compliance with securities laws and other business matters. Section 16(a) Beneficial Ownership Reporting Compliance Section 16(a) of the Securities Exchange Act of 1934 requires the Company's directors and executive officers, and persons who own more than ten percent of the Company's Common Stock, to file with the Securities and Exchange Commission initial reports of ownership and reports of changes of ownership of Common Stock of the Company. Officers, directors and greater than ten percent stockholders are required by SEC regulation to furnish the Company with copies of all Section 16(a) forms they file. To the Company's knowledge, during the fiscal year ended September 30, 2001, all Section 16(a) filing requirements applicable to its officers, directors and greater than ten percent beneficial owners were complied with. In making these disclosures, the Company has relied solely on a review of the copies of such reports furnished to the Company and written representations of its directors, executive officers and its greater than ten percent stockholders. Item 10. Executive Compensation ---------------------- The following summary compensation table sets forth information concerning the annual and long-term compensation for services in all capacities to the Company for the fiscal years ended September 30, 2001, 2000, and 1999, of those persons who were (i) the chief executive officer and (ii) the other most highly compensated executive officers of the Company, whose annual base salary and bonus compensation was in excess of $100,000. SUMMARY COMPENSATION TABLE Name and Principal Fiscal Annual Compensation Position Year Salary Bonus ---------------------- ---- ------ ----- Todd M. Axelrod 2001 $110,241 $19,688(1) President and Chief 2000 139,125 23,600(2) Executive Officer 1999 139,125 26,250 Pamela R. Axelrod 2001 $110,241 $19,688(1) Executive Vice-President 2000 139,125 23,600(2) 1999 139,125 26,250 (1) Accrued bonus earned but not yet paid. (2) Accrued bonus earned but not yet paid amounts to $23,050 During the three year period ended September 30, 2001 the Company did not grant any stock options or stock appreciation rights to any of the named executive officers of the Company. In addition, none of the named executive officers held any stock options. Options have been granted to Bernard Duke and Barry Fink, both members of the board of directors. The options were granted August 1999; 10,000 each with a five year term and $4.50 exercise price. During the fiscal year ended September 30, 2001, no director received any compensation for attending meetings of the Board of Directors and the Company presently intends that the same will be the case for the fiscal year ended September 30, 2002. Directors are reimbursed, however, for reasonable expenses incurred on behalf of the Company. Item 11. Security Ownership of Certain Beneficial Owners and Management -------------------------------------------------------------- The following table sets forth certain information, as of December 3, 2001, regarding those persons known to the Company to be the beneficial owners of more than five percent of the Common Stock of the Company, by all Directors of the Company, by each of the named Executive Officers and by all Officers and Directors of the Company as a group. Title of Name and Address of Amount and Nature of Percent Class Beneficial Holder Beneficial Ownership(1) of Class ------- ------------------- ----------------------- -------- Common Todd M. Axelrod(2) 4,280,824(3)(5) 76.1% Stock Common Rod R. Lynam(2) 210 (4) Stock Common Pamela Axelrod(2) 4,280,824(3)(5) 76.1% Stock Common Gerald Newman 493,000(6) 8.8 Stock 1716 Coral Cove Way Boca Raton, FL 33496 Common Bernard Duke 10,000(7) (4) Stock 2250 Allenwood Road Wall, NJ 07719 Common Barry Fink 10,000(7) (4) Stock Christensen, Miller, Fink, Jacobs, Glaser, Weil & Shapiro, LLP 2121 Avenue of the Stars, 18th Floor Los Angeles, CA 90067 Common All Executive Officers 4,301,034(8) 77.2% Stock and Directors as a group (5 persons) (1) Except as otherwise noted in (5) below, the individuals referred to above have sole voting and investment power in regard to their Common Stock, subject to applicable community property laws. (2) Address is the same as the Company's address. (3) Includes 2,059,022 shares of Common Stock owned of record and beneficially by Pamela Axelrod, Mr. Axelrod's wife, for which Mr. Axelrod has been appointed proxy (as discussed in Note (5) below). Excludes 204 shares of Common Stock owned of record and beneficially by Ruth Canvasser, Mr. Axelrod's mother; as to which Mr. Axelrod disclaims beneficial ownership. (4) Less than 1%. (5) Pamela Axelrod has appointed Todd Axelrod her proxy with full power of substitution, to vote all of her 2,059,022 shares and to give all consents on all matters that Mrs. Axelrod may be entitled to vote or consent to at any meeting of the stockholders of the Company or under any other circumstance where a vote or consent of stockholders is required. Includes 2,221,802 shares held by Todd Axelrod, as to which Pamela Axelrod disclaims beneficial ownership (see Note (3) above). (6) Includes 50,000 shares of common stock that vest quarterly from October 1, 2001 to January 1, 2003. (7) Includes 10,000 shares of common stock issuable upon exercise of options to purchase such shares at an exercise price of $4.50 per share. (8) Includes 20,000 shares of common stock issuable upon exercise of options to purchase such shares at an exercise price of $4.50 per share. (C) Changes in Control There are no arrangements known to the Company, the operation of which may at a subsequent date result in a change of control of the Registrant. Item 12. Certain Relationships and Related Transactions ---------------------------------------------- In September 1998, the Company borrowed $1,000,000 from Nanna Corp., a company owned 100% by Todd Axelrod, the primary stockholder and President of the Company, and his wife, Pamela. Nanna Corp. has since dissolved; as a result, the note was transferred to Mr. Axelrod in March 1999. The note is due April 30, 2002, with monthly interest payments at a rate of 8%. Interest expense on the related party note was $81,333 and $80,923 during fiscal year 2001 and 2000, respectively. The proceeds from this loan were utilized by the Company to reduce its outstanding bank line of credit. The Company has also borrowed funds from Mr. Axelrod, from time to time during the fiscal year 2001 and 2000. The funds borrowed bear interest at the same rate as Mr. Axelrod pays on his personal line of credit which is 7% as of September 30, 2001. The balance of the funds borrowed was $1,385,240 and $801,890 as of September 30, 2001 and September 30, 2000, respectively. 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. Interest expense on this related party note was $87,272 and $27,083 during fiscal year 2001 and 2000, respectively. The funds were used to supplement operating activities. In November 2000, Todd Axelrod acquired 157 documents from the Company for his personal use. The Company's 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, and the Company recorded a gain on the inventory sold as a capital contribution to 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. The majority of the Company's sales in its auction operation are unframed documents. Item 13. Exhibits and Reports on Form 8-K -------------------------------- (a)1 & 2. Financial Statements See Item 7 in Part II of this report. All other financial statement schedules are omitted because the information required to be set forth therein is not applicable or because that information is in the financial statements or notes thereto. (a)3. Exhibits 3.1 Articles of Incorporation and By-Laws.* 3.2 Amendment to Articles of Incorporation filed July 9, 1984.* 3.3 Amendment to Articles of Incorporation filed May 29, 1990.** 10.5 Gallery of History, Inc. 1992 Stock Option Plan.*** 21 List of Subsidiaries. 23 Consent of Independent Auditors. 27 Financial Data Schedule. * Incorporated by reference to the Registrant's Registration Statement on Form S-18, File No. 2-95737-LA. ** Incorporated by reference to the Registrant's Form 10-K for its fiscal year ended September 30, 1990, File No. 0-13757. *** Incorporated by reference to the Registrant's Form 10-KSB, fiscal year ended September 30, 1994, File No. 0-13757. **** Incorporated by reference to the Registrant's Form 10-KSB, fiscal year ended September 30, 1996, File No. 0-13757. (b) Reports on Form 8-K. None. SIGNATURES In accordance with Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Dated: December 21, 2001 GALLERY OF HISTORY, INC. By:/s/ Todd M. Axelrod Todd M. Axelrod, Chairman and President In accordance with the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated: Signature Title Date --------- ----- ---- /s/ Todd M. Axelrod President and December 21, 2001 Todd M. Axelrod Chairman of the Board of Directors (Principal Executive Officer) /s/ Rod Lynam Treasurer/Assistant December 21, 2001 Rod Lynam Secretary and Director (Principal Financial and Accounting Officer) /s/ Pamela Axelrod Executive Vice President December 21, 2001 Pamela Axelrod and Director /s/ Bernard Duke Director December 21, 2001 Bernard Duke /s/ Barry Fink Director December 21, 2001 Barry Fink