10QSB 1 mar03q.txt FORM 10-QSB FOR PERIOD ENDED 3/31/2003 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, 2003 [ ] 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, 2003. Part 1 - FINANCIAL INFORMATION GALLERY OF HISTORY, INC. and SUBSIDIARIES CONSOLIDATED BALANCE SHEETS ______________________________________________________________________ MARCH 31, SEPTEMBER 30, 2003 2002 ----------- ------------ (Unaudited) ASSETS Cash $ 14,448 $ 12,494 Prepaid expenses 61,118 49,181 Inventory of documents owned 6,312,405 6,460,125 Deferred tax assets 1,108,036 965,267 Property and equipment, net 1,556,212 1,568,553 Other assets 122,296 122,107 ---------- ---------- TOTAL ASSETS $ 9,174,515 $ 9,177,727 ========== ========== LIABILITIES Accounts payable $ 114,298 $ 25,046 Notes payable: Majority shareholder 2,874,213 2,809,133 Other 1,522,140 1,579,514 Accrued expenses and other 458,317 281,055 ---------- ---------- TOTAL LIABILITIES 4,968,968 4,694,748 ---------- ---------- STOCKHOLDERS' EQUITY Common stock: $.0005 par value; 20,000,000 shares authorized; 11,935,308 shares issued 5,968 5,968 Additional paid-in-capital 9,851,655 9,870,655 Deferred stock-based compensation -- (18,709) Accumulated deficit (2,643,405) (2,366,264) Common stock in treasury, 6,309,324 shares, at cost (3,008,671) (3,008,671) ---------- ---------- TOTAL STOCKHOLDERS' EQUITY 4,205,547 4,482,979 ---------- ---------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 9,174,515 $ 9,177,727 ========== ========== 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, 2003 2002 2003 2002 -------- -------- --------- --------- (Restated) (Restated) REVENUES $ 376,547 $ 275,798 $ 744,662 $ 568,558 COST OF GOODS SOLD 87,082 73,082 219,362 145,855 -------- -------- --------- --------- GROSS PROFIT 289,465 202,716 525,300 422,703 -------- -------- --------- --------- OPERATING EXPENSES: Selling, general and administrative 394,313 376,649 740,376 774,712 Depreciation 42,463 44,903 84,573 90,680 -------- -------- --------- --------- TOTAL OPERATING EXPENSES 436,776 421,552 824,949 865,392 -------- -------- --------- --------- OPERATING LOSS (147,311) (218,836) (299,649) (442,689) -------- -------- --------- --------- OTHER INCOME (EXPENSE) Interest expense Majority shareholder (44,338) (42,930) (90,068) (85,078) Other (34,443) (37,432) (70,690) (76,002) Rental income, net 24,282 10,019 38,738 20,303 Other 7 (39) 1,759 2,701 -------- -------- --------- --------- TOTAL OTHER EXPENSE (54,492) (70,382) (120,261) (138,076) -------- -------- --------- --------- LOSS BEFORE INCOME TAX BENEFIT (201,803) (289,218) (419,910) (580,765) INCOME TAX BENEFIT 68,613 107,011 142,769 214,883 -------- -------- --------- --------- NET LOSS $(133,190) $(182,207) $ (277,141) $ (365,882) ======== ======== ========= ========= BASIC AND DILUTED LOSS PER SHARE: $(.02) $(.03) $(.05) $(.07) ==== ==== ==== ==== WEIGHTED AVERAGE SHARES OUTSTANDING 5,625,984 5,625,984 5,625,984 5,625,984 ========= ========= ========= ========= See the accompanying notes to consolidated financial statements. GALLERY OF HISTORY, INC. and SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS - UNAUDITED __________________________________________________________________________ SIX MONTHS ENDED MARCH 31, 2003 2002 -------- -------- (Restated) CASH FLOWS FROM OPERATING ACTIVITIES: Net Loss $(277,141) $(365,882) Adjustments to reconcile net loss to net cash used for operating activities: Depreciation and amortization 98,692 103,839 (Gain)Loss on disposal of property, net 1,750 42 Common stock issued for services -- 121,238 (Increase) decrease in: Prepaid expenses (11,937) (37,832) Deferred tax assets (142,769) (214,883) Inventory of documents owned 147,720 48,053 Other assets (480) 33,426 (Decrease) increase in: Accounts payable 89,252 2,568 Accrued expenses and other 177,262 13,926 -------- -------- Net cash provided by (used in) operating activities 82,349 (295,505) -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of property and equipment (88,101) (1,180) -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from borrowings: Majority shareholder 104,400 356,000 Other 236,214 165,000 Repayments of borrowings: Majority shareholder (39,321) (29,748) Other (293,587) (190,634) -------- -------- Net cash provided by financing activities 7,706 300,618 -------- -------- NET INCREASE IN CASH 1,954 3,933 CASH, BEGINNING OF PERIOD 12,494 7,957 -------- -------- CASH, END OF PERIOD $ 14,448 $ 11,890 ======== ======== SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash paid during period for interest $ 160,758 $ 161,080 ======== ======== See the accompanying notes to consolidated financial statements. GALLERY OF HISTORY, INC. and SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ____________________________________________________________________________ Basis of Presentation --------------------- The consolidated financial statements as of March 31, 2003, and for the three and six month periods ended March 31, 2003 and 2002, included herein have been prepared by Gallery of History, Inc. and subsidiaries (the "Company"), without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. In the opinion of management, all adjustments, consisting of normal recurring items, necessary for a fair presentation of the results for the interim periods have been made. Certain information and 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 be read in conjunction with the audited financial statements and the notes thereto included in the Company's 2002 Annual Report on Form 10-KSB, from which the September 30, 2002, balance sheet information is derived. Reclassifications ----------------- Certain prior year amounts have been reclassified to conform with the current period presentation. Prior period restatement ------------------------ In the Company's previously issued March 2002 interim statements of operations, the tax valuation allowance was determined to be overstated as a result of not considering unrecorded appreciation in the inventory of documents owned required by Statement of Financial Accounting Standards No. 109, Accounting for Income Taxes. Therefore, the March 2002 interim statements of operations have been retroactively restated. The effects of the restatement were to increase the income tax benefit and decrease the net loss for the three and six month periods by $107,011 and $214,883, respectively. Part 1 - Item 2 Financial Information MANAGEMENT'S DISCUSSION AND ANALYSIS FINANCIAL CONDITION AND RESULTS OF OPERATIONS Forward Looking Statements -------------------------- This report contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 relating to the Company's future operations and prospects, including statements that are based on current projections and expectations about the markets in which the Company operates, and management's beliefs concerning future performance and capital requirements based upon current available information. Such statements are based on management's beliefs as well as assumptions made by and information currently available to management. When used in this document, words like "may", "might", "will", "expect", "anticipate", "believe", and similar expressions are intended to identify forward looking statements. Actual results could differ materially from management's current expectations. For example, there can be no assurance that additional capital will not be required or that additional capital, if required, will be available on reasonable terms, if at all, at such times and in such amounts as may be needed by the Company. Liquidity and Capital Resources ------------------------------- The unique characteristic of some documents owned may become more rare with their current market value rising significantly over time. In many instances the Company has a supply of similar documents that, if marketed simultaneously, may negatively impact market value. As a result, managing the rarity of certain types or categories of documents through the judicious marketing of only a selection of documents available in the Company's inventory is an important element of the Company's business. This element is one of the reasons that the Company has accumulated and maintains a supply of documents that is significantly greater than it intends to sell in a year or even aggressively market. The Company's monthly debt service requirement on $4,396,353 of borrowings, including $2,874,213 due to the Company's majority shareholder and president, Todd Axelrod, is approximately $18,000. Historically, the Company has experienced cash flow deficiencies which may continue and have been funded primarily with borrowings from Mr. Axelrod. Management believes, but there is no assurance, that the need for such borrowings should diminish and profitability and cash flows should improve with the full implementation of the Company's strategic plans (see Results of Operations). For the six months ended March 31, 2003, the Company had a positive cash flow from operating activities of approximately $82,000. The increase resulted from a reduction in inventory purchases combined with increases in accounts payable and accrued expenses. The Company believes that its current cash requirements will be met by appropriately managing the timing and volume of new document acquisitions and availability for sale, generating revenues from its operations, drawing amounts under its existing line of credit ($84,000 available at March 31, 2003), seeking additional borrowings collateralized by its documents inventory (although there can be no assurance that such financing will be obtainable on favorable terms or at all) and borrowing amounts from Mr. Axelrod as required. Mr. Axelrod has also agreed not to demand payment on amounts the Company has borrowed and, if necessary, defer his right to receive interest payments through at least October 1, 2003. Critical Accounting Policies and Practices ------------------------------------------ Revenues. The Company recognizes revenues from document sales when title passes to the customer upon shipment. Typically, shipment does not occur until payment has been received. The Company's primary distribution channel over the past few years has been internally promoted and managed auctions to sell its documents and certain documents it may hold from time to time on consignment. For each item sold through the Company's internal auctions, a 15% premium (processing fee) is charged plus a commission on consigned sales. Shipping and handling costs and related customer charges are not significant. The Company also sells its documents through externally managed and promoted auctions, which is becoming a large share of its revenues. The outside auction operator shares in the document's selling price (approximately 5%) and the Company records the balance as revenue. The balance of the Company's sales are from repeat customers through its corporate office and web shoppers. Inventory of documents owned and operating cycle. Documents owned are stated at cost on a specific-identification method, not in excess of estimated market value. Management reviews the recorded cost and estimated value of the documents owned on a regular basis (at least quarterly) to determine the adequacy of the allowance for market value declines, if any. Management believes that the Company's inventory of documents is generally appreciating, not depreciating, in value. As a result, managing the rarity of certain types or categories of documents through the judicious marketing of only a selection of documents available in the Company's inventory is an important element of the Company's business. This element is one of the reasons that the Company has accumulated and maintains a supply of documents that is significantly greater than it intends or expects to sell in a year or even aggressively market. On an aggregate historical cost basis (not number of documents), only about one-third of the Company's documents are listed on one or more of the various distribution channels or displayed for sale. By point of reference, the aggregate cost of these actively marketed items is approximately three times the cost of documents sold during the year. As the Company's distribution channels have changed over the years and are expected to continue to change in the future, the volume of documents marketed in any one year, or succession of years, changes significantly. For these reasons, it has been impractical, for the Company to define its operating cycle and, as a result, presents its balance sheet on an unclassified basis. The Company believes that this presentation better reflects the nature of the Company's business and its principal asset. Over the past several years the cost of the Company's inventory as of its fiscal year end has ranged from its present level of approximately $6.3 million to roughly $7.2 million, which management believes is a sufficient supply of documents to provide for managing rarity and its other purposes. Management has no current intention of significantly changing the composition of its inventory and, as a result, the Company accounts for changes in the cost of documents owned as an adjustment to arrive at cash flows from operating activities. Results of Operations --------------------- Total revenues increased 37% for the three month period and 31% for the six month period ended March 31, 2003 compared to the comparable periods of the previous year. The increase is attributed to revenues generated by the Company's participation in external auctions promoted and managed by others and direct-purchase website sales. Of the total revenues generated in the current six month fiscal period, 20% were generated from external auctions and 22% were generated through the Company's websites. Revenues generated from these two sources in the previous year six month period resulted in 3% of total revenues. Revenues generated from the Company's catalog auction operation decreased 17% comparing the two six month periods; however, the Company held only three auctions in the current six month period compared to four auctions in the previous year period. Total cost of revenues increased to 30% of net revenues for the six month period ended March 31, 2003 compared to 26% of net revenues for the six month period ended March 31, 2002. The increase in document costs of revenues can be attributed to the lower profit margins realized from external auctions. The Company did not participate in external auctions during the current quarter ended March 31, 2003; consequently, the cost of revenues decreased to 23% of net revenues for this quarter compared to 27% of net revenues for the quarter ended March 31, 2002. Total operating expenses increased 4% comparing the quarter periods but decreased 5% comparing the six month periods. The increase is the result of accruing officer salaries in the current period which were abated in the previous year period. The decrease comparing the six month periods, was due to a decrease in this years cost of catalogs resulting from one less auction in the current fiscal year. In addition, professional fees decreased in the current period compared to the last year period due to the expiration of a consulting contract. Depreciation costs decreased because certain assets became fully depreciated during the current six month period. Item 3. Controls and Procedures. ----------------------- Based on their evaluation, as of a date within 90 days of the filing date of this form 10-QSB, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures (as defined in Rule 13a-14(c) and 15d-14(c) under the Securities Exchange Act of 1934, as amended) are effective. There have been no significant changes in internal controls or in other factors that could significantly affect these controls subsequent to the date of their evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Part 2 - Other Information Item 1-5. None. Item 6. Exhibits and Reports on Form 8-K. -------------------------------- (a) Exhibits. Exhibit 99.1 Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes- Oxley Act of 2002. Exhibit 99.2 Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes- Oxley Act of 2002. (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 14, 2003 /s/ Todd M. Axelrod _________________ _______________________________ Todd M. Axelrod President and Chairman of the Board (Principal Executive Officer) Date May 14, 2003 /s/ Rod Lynam _________________ _______________________________ Rod Lynam Treasurer and Director (Principal Financial and Accounting Officer) STATEMENT PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 BY PRINCIPAL EXECUTIVE OFFICER REGARDING FACTS AND CIRCUMSTANCES RELATING TO EXCHANGE ACT FILINGS I, Todd Axelrod, certify that: 1. I have reviewed this quarter report on Form 10-QSB of Gallery of History, Inc.; 2. Based on my knowledge, this quarter report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarter report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarter report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarter report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarter report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarter report (the "Evaluation Date"); and c) presented in this quarter report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officer and I have indicated in this quarter report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: May 14, 2003 /s/ TODD AXELROD _______________________ Todd Axelrod Chief Executive Officer STATEMENT PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 BY PRINCIPAL FINANCIAL OFFICER REGARDING FACTS AND CIRCUMSTANCES RELATING TO EXCHANGE ACT FILINGS I, Rod Lynam, certify that: 1. I have reviewed this quarter report on Form 10-KSB of Gallery of History, Inc.; 2. Based on my knowledge, this quarter report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarter report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarter report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarter report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarter report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarter report (the "Evaluation Date"); and c) presented in this quarter report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officer and I have indicated in this quarter report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: May 14, 2003 /s/ ROD LYNAM _______________________ Rod Lynam Chief Financial Officer