10QSB 1 r10q304.txt FORM 10-QSB FOR PERIOD ENDED MARCH 31, 2004 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-QSB [x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 2004 [ ] 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, 2004. Part 1 - FINANCIAL INFORMATION -------------------------------- GALLERY OF HISTORY, INC. and SUBSIDIARIES CONSOLIDATED BALANCE SHEETS ________________________________________________________________________ MARCH 31, SEPTEMBER 30, 2004 2003 (Unaudited) ASSETS Cash $ 2,087 $ 2,034 Inventory of documents 6,361,559 6,303,706 Deferred tax assets 1,339,842 1,262,819 Property and equipment, net 1,369,182 1,465,499 Other assets 177,007 156,290 ---------- ---------- TOTAL ASSETS $ 9,249,677 $ 9,190,348 ========== ========== LIABILITIES Accounts payable $ 98,777 $ 40,124 Notes payable: Majority stockholder 3,396,334 3,158,355 Other 1,522,008 1,545,373 Accrued salaries due to majority shareholder 636,725 486,962 Other liabilities and accruals 124,847 98,073 ---------- ---------- TOTAL LIABILITIES 5,778,691 5,328,887 ---------- ---------- STOCKHOLDERS' EQUITY Common stock: $.0005 par value; 20,000,000 shares authorized; 11,935,308 shares issued 5,968 5,968 Additional paid-in-capital 9,851,655 9,851,655 Accumulated deficit (3,377,966) (2,987,491) Common stock in treasury, 6,309,324 shares, at cost (3,008,671) (3,008,671) ---------- ---------- TOTAL STOCKHOLDERS' EQUITY 3,470,986 3,861,461 ---------- ---------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 9,249,677 $ 9,190,348 ========== ========== 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, 2004 2003 2004 2003 -------- -------- --------- --------- REVENUES $ 314,858 $ 376,547 $ 587,622 $ 744,662 COST OF GOODS SOLD 44,328 87,082 88,328 219,362 -------- -------- --------- --------- GROSS PROFIT 270,530 289,465 499,294 525,300 -------- -------- --------- --------- OPERATING EXPENSES: Selling, general and administrative 399,195 394,313 757,485 740,376 Depreciation 39,957 42,463 81,640 84,573 -------- -------- --------- --------- TOTAL OPERATING EXPENSES 439,152 436,776 839,125 824,949 -------- -------- --------- --------- OPERATING LOSS (168,622) (147,311) (339,831) (299,649) -------- -------- --------- --------- OTHER INCOME (EXPENSE) Interest expense Majority stockholder (49,504) (44,338) (97,641) (90,068) Other (33,751) (34,443) (68,198) (70,690) Rental income, net 15,319 24,282 37,969 38,738 Other 6 7 203 1,759 -------- -------- --------- --------- TOTAL OTHER EXPENSE (67,930) (54,492) (127,667) (120,261) -------- -------- --------- --------- LOSS BEFORE INCOME TAX BENEFIT (236,552) (201,803) (467,498) (419,910) INCOME TAX BENEFIT -- 68,613 77,023 142,769 -------- -------- --------- --------- NET LOSS $(236,552) $(133,190) $ (390,475) $ (277,141) ======== ======== ========= ========= BASIC AND DILUTED LOSS PER SHARE: $(.04) $(.02) $(.07) $(.05) ==== ==== ==== ==== 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, 2004 2003 -------- -------- CASH FLOWS FROM OPERATING ACTIVITIES: Net Loss $(390,475) $(277,141) Adjustments to reconcile net loss to net cash used for operating activities: Depreciation and amortization 96,318 98,692 Loss on disposal of property, net -- 1,750 (Increase) decrease in: Deferred tax assets (77,023) (142,769) Inventory of documents (57,853) 147,720 Other assets (20,717) (12,417) (Decrease) increase in: Accounts payable 58,653 89,252 Accrued expenses and other 176,536 177,262 -------- -------- Net cash provided by (used in) operating activities (214,561) 82,349 -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of property and equipment -- (88,101) -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from borrowings: Majority stockholder 241,000 104,400 Other 137,000 236,214 Repayments of borrowings: Majority stockholder (3,021) (39,321) Other (160,365) (293,587) -------- -------- Net cash provided by financing activities 214,614 7,706 -------- -------- NET INCREASE IN CASH 53 1,954 CASH, BEGINNING OF PERIOD 2,034 12,494 -------- -------- CASH, END OF PERIOD $ 2,087 $ 14,448 ======== ======== SUPPLEMENTAL CASH FLOW INFORMATION: Cash paid during period for interest $ 165,839 $ 160,758 ======== ======== 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, 2004, and for the periods ended March 31, 2004 and 2003, 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 accounting principles generally accepted in the United States have been condensed or omitted pursuant to such rules and regulations. It is suggested that these consolidated financial statements be read in conjunction with the audited financial statements and the notes thereto included in the Company's 2003 Annual Report on Form 10-KSB, from which the September 30, 2003, balance sheet information is derived. Contingency ----------- The Company has incurred significant operating losses for the past several years. Its ability to satisfy its obligations when due has been largely dependent upon debt financing, including loans from its majority stockholder. While management believes the Company's inventory of historical documents has appreciated significantly, until sales of such documents in the ordinary course of business can be increased to a level that sustains profitable operations, additional borrowings will be needed to enable the Company to continue its business of selling historical documents to the general public. Part 1 - Item 2 Financial Information MANAGEMENT'S DISCUSSION AND ANALYSIS FINANCIAL CONDITION AND RESULTS OF OPERATIONS Forward Looking Statements -------------------------- This report contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 relating to the Company's future operations and prospects, including statements that are based on current projections and expectations about the markets in which the Company operates, and management's beliefs concerning future performance and capital requirements based upon current available information. Such statements are based on management's beliefs as well as assumptions made by and information currently available to management. When used in this document, words like "may", "might", "will", "expect", "anticipate", "believe", and similar expressions are intended to identify forward looking statements. Actual results could differ materially from management's current expectations. For example, there can be no assurance that additional capital will not be required or that additional capital, if required, will be available on reasonable terms, if at all, at such times and in such amounts as may be needed by the Company. Overview -------- Gallery of History, Inc. and its 100%-owned subsidiaries (collectively the Company), acquires documents of historical or social significance and markets these documents to the general public as discussed later herein. Except for the cost of documents that are sold and certain selling expenses, most of the Company's other costs and expenses are relatively fixed. While management believes that the Company's inventory of documents has substantially appreciated, the Company has been unable to produce sufficient sales to the general public and has incurred significant operating losses for the past several years. (See also discussion of the Company's operating cycle under "Critical Accounting Estimates, Policies, and Practices" below.) As a result, the Company has been (and will continue to be) dependent upon debt financing, including loans from its majority stockholder, to satisfy its obligations when due. To increase sales and gross profit and decrease selling expenses, the Company is in the process of reorganizing its methods of distribution to emphasize internet catalog sales. The following discussion highlights the significant progress that has been made in this regard. The Company believes, but there is no assurance, that, as sales increase through these and other efforts, profitable operations can be achieved, decreasing and eventually eliminating the Company's dependence on borrowings to finance its cash flow requirements. Liquidity and Capital Resources ------------------------------- The unique characteristic of some documents owned may become rarer with their current market value rising significantly over time. In many instances the Company has a supply of similar documents that, if marketed simultaneously, 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. Negative cash flows from operations incurred in the first six months of fiscal 2004 resulted primarily from the net operating loss and purchases of additional document inventory. The document purchases were offset by an increase in accounts payable and accrued liabilities. Accounts payable increased due to outstanding document purchases unpaid and accrued liabilities increased primarily as a result of unpaid officer salaries. Historically, the cash flow deficiencies have been funded primarily from borrowings from the Company's bank line of credit and from the Company's majority stockholder and president, Todd Axelrod. The Company plans to improve operating results by taking steps to increase sales through its direct purchase website, its highest margin distribution channel. The Company has seen steady increases in the revenue produced through this outlet. Because of the size and diversity of its inventory, management feels the Company is uniquely positioned to favorably compete with any, and all, firms offering similar products. The Company continues to add much more of its available inventory to the website. The Company believes that its current and long-term cash requirements will likely be met by appropriately managing the timing and volume of new document acquisitions, generating revenues from its operations, drawing amounts under its existing line of credit, seeking additional borrowings collateralized by its documents inventory (although there can be no assurance that such financing will be obtainable on favorable terms or at all) and borrowing 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 2004. Critical Accounting Estimates, Policies and Practices ----------------------------------------------------- Revenues. The Company recognizes revenues from document sales when title passes to the customer upon shipment. Typically, shipment does not occur until payment has been received. Shipping and handling costs and related customer charges are not significant. The Company's primary distribution channel over the past few years has been internally promoted and managed auctions to sell its documents. For each item sold through the Company's auctions, a 15% premium is charged. Recently, the Company has greatly increased its use of its website distribution channel to profitably increase sales. The balance of the Company's sales is from repeat customers through its corporate office. Inventory of documents and operating cycle. Documents in inventory are stated at cost 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 any future changes in such allowance are not likely to have any material effect on the Company. Management believes that the Company's inventory of documents is generally appreciating, not depreciating, in value. As a result, 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. Based on an aggregate historical cost, (not number of documents), only about one-third of the Company's documents are listed on one or more of the various distribution channels or displayed for sale. As the Company's distribution channels have changed over the years and are expected to continue to change in the future, the volume of documents marketed in any one year, or succession of years, changes significantly. For these reasons, it has been impractical for the Company to define its operating cycle and, as a result, the Company presents its balance sheet on an unclassified basis. The Company believes that this presentation better reflects the nature of the Company's business and its principal asset. Over the past several years the cost of the Company's inventory has ranged from its present level of approximately $6.3 million, which management believes is a sufficient supply of documents to provide for managing rarity and its other purposes, to roughly $7.2 million. Management has no current intention of significantly changing the composition of its inventory. Deferred tax assets. The Company provides a valuation allowance against deferred tax assets (primarily associated with tax loss carryforwards) to the extent that such tax assets are not likely to be utilized as a result of any gain on the Company's appreciated document inventory, if sold in bulk. The hypothetical gain and related tax affect is estimated based on management perception of market activity and value and historical profit margins and trends. Such estimates are revised quarterly. Results of Operations --------------------- Total revenues decreased 16% for the three month period and 21% for the six month period ended March 31, 2004 compared to the previous year numbers. The Company's catalog auction revenues as a percentage of total sales decreased 29% to 46% for the current quarter compared to 65% in the previous year quarter. Comparing the six month period, catalog auction revenues as a percentage of total sales decreased 24% to 37% in the current six month period from 49% in the previous year six month period. The major reason for the decrease is attributed to the competition and frequency of other similar auctions currently being conducted. The Company has not consigned document inventory to other organizations to participate in their auctions in the current year as it did in the previous year. Consigned external auctions amounted to 20% of total revenues generated in the previous year period. The competitive nature of the document auction market, and the resulting decline in document values, has rendered it difficult for the Company to produce acceptable margins and, therefore, the Company has discontinued its involvement with external auctions. Revenues generated from the Company's website as a percentage of total sales increased 67% comparing the quarter periods to 45% for the current quarter compared to 27% for the previous year quarter. Comparing the six month period, internet revenues as a percentage of total sales increased 127% to 50% of total revenues in the current six month period from 22% in the previous year six month period. The Company has enhanced its websites and made available a larger selection of documents that are aggressively priced to compete with the price-driven collector. Total cost of revenues as a percentage of total sales decreased 39% to 14% for the quarter ended March 31, 2004 compared to 23% for the quarter ended March 31, 2003. Total cost of revenues as a percentage of total sales decreased 48% to 15% for the six month period ended March 31, 2004 compared to 29% for the previous year six month period. The decrease in document costs resulted from the improved margins the Company can realize from its increasing internet related revenues compared to revenues generated from externally conducted auctions. Selling, general, and administrative expenses, to a large extent, do not fluctuate with sales volume and increased slightly comparing the quarters and six month periods. The increase is primarily attributable to increased advertising of 6% of net revenues for the current year period compared to 3% of net revenues for the previous year period. The increase was the result of advertising world wide through the internet. Depreciation costs decreased slightly due to certain assets that became fully depreciated. 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 31.1 Certification of Chief Executive Officer pursuant to Rule 13a-14(a). Exhibit 31.2 Certification of Chief Financial Officer pursuant to Rule 13a-14(a). Exhibit 32.1 Certification of Chief Executive Officer pursuant to Rule 13a-14(b). Exhibit 32.2 Certification of Chief Financial Officer pursuant to Rule 13a-14(b). (b) Reports on Form 8-K. None. SIGNATURES In accordance with the requirements of the Securities Exchange Act of 1934, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Gallery of History, Inc. _______________________________ (Registrant) Date May 14, 2004 /s/ Todd M. Axelrod _________________ _______________________________ Todd M. Axelrod President and Chairman of the Board (Principal Executive Officer) Date May 14, 2004 /s/ Rod Lynam _________________ _______________________________ Rod Lynam Treasurer and Director (Principal Financial and Accounting Officer)