10QSB 1 q1204.txt FORM 10-QSB FOR QUARTER ENDED 12/31/2004 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 December 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 February 1, 2005. Part 1 - FINANCIAL INFORMATION GALLERY OF HISTORY, INC. and SUBSIDIARIES CONSOLIDATED BALANCE SHEETS ______________________________________________________________________ DECEMBER 31, SEPTEMBER 30, 2004 2004 (Unaudited) --------- ---------- ASSETS Cash $ 1,020 $ 59,868 Inventory of documents 6,536,288 6,562,002 Deferred tax assets 1,339,842 1,339,842 Property and equipment, net 1,250,132 1,288,830 Other assets 151,181 140,687 ---------- ---------- TOTAL ASSETS $ 9,278,463 $ 9,391,229 ========== ========== LIABILITIES Accounts payable $ 59,056 $ 95,500 Notes payable: Majority stockholder 3,969,785 3,904,791 Other 1,453,896 1,457,343 Accrued salaries due to majority shareholder 906,382 802,101 Other liabilities and accruals 101,496 137,479 ---------- ---------- TOTAL LIABILITIES 6,490,615 6,397,214 ---------- ---------- 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 (4,061,104) (3,854,937) Common stock in treasury, 6,309,324 shares, at cost (3,008,671) (3,008,671) ---------- ---------- TOTAL STOCKHOLDERS' EQUITY 2,787,848 2,994,015 ---------- ---------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 9,278,463 $ 9,391,229 ========== ========== See the accompanying notes to consolidated financial statements. GALLERY OF HISTORY, INC. and SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS - UNAUDITED __________________________________________________________________________ THREE MONTHS ENDED DECEMBER 31, 2004 2003 -------- -------- REVENUES $ 313,365 $ 272,764 COST OF REVENUES 37,670 44,000 --------- --------- GROSS PROFIT 275,695 228,764 --------- --------- OPERATING EXPENSES: Selling, general and administrative 371,284 358,290 Depreciation 31,374 41,683 --------- --------- TOTAL OPERATING EXPENSES 402,658 399,973 --------- --------- OPERATING LOSS (126,963) (171,209) --------- --------- OTHER INCOME (EXPENSE): Interest expense: Majority shareholder (64,204) (48,137) Other (32,561) (34,447) Rental income, net 17,561 22,650 Other -- 197 --------- --------- TOTAL OTHER INCOME (EXPENSE) (79,204) (59,737) --------- --------- NET LOSS BEFORE INCOME TAX BENEFIT (206,167) (230,946) INCOME TAX BENEFIT -- 77,023 --------- --------- NET LOSS $ (206,167) $ (153,923) ========= ========= BASIC AND DILUTED LOSS PER SHARE $(.04) $(.03) ========= ========= WEIGHTED AVERAGE SHARES OUTSTANDING 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 __________________________________________________________________________ THREE MONTHS ENDED DECEMBER 31, 2004 2003 -------- -------- CASH FLOWS FROM OPERATING ACTIVITIES: Net Loss $(206,167) $(153,923) Adjustments to reconcile net loss to net cash used for operating activities: Depreciation and amortization 38,698 49,022 (Increase) decrease in: Deferred tax assets -- (77,023) Inventory of documents 25,714 (9,069) Other assets (10,494) (12,856) (Decrease) increase in: Accounts payable (36,444) 54,995 Accrued expenses and other 68,298 82,294 -------- -------- Net cash used in operating activities (120,395) (66,560) -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of property and equipment -- -- . CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from borrowings: Majority stockholder 66,000 94,000 Other 115,000 35,000 Repayments of borrowings: Majority stockholder (1,006) (1,392) Other (118,447) (56,444) -------- -------- Net cash provided by financing activities 61,547 71,164 -------- -------- NET INCREASE (DECREASE) IN CASH (58,848) 4,604 CASH, BEGINNING OF PERIOD 59,868 2,034 -------- -------- CASH, END OF PERIOD $ 1,020 $ 6,638 ======== ======== SUPPLEMENTAL CASH FLOW INFORMATION: Cash paid during period for interest $ 96,765 $ 82,584 ======== ======== 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 December 31, 2004, and for the three month period ended December 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 note 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 2004 Annual Report on Form 10-KSB, from which the September 30, 2004, 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 volume of 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. 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. Liquidity and Capital Resources ------------------------------- Negative cash flows from operations incurred in the first quarter resulted primarily from the net operating loss and a decrease in accounts payable. 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, which are likely to continue indefinitely. The Company is making an effort to improve operating results by taking steps to increase sales through its direct purchase website, its highest margin distribution channel. Because of the size and diversity of its inventory, management feels the Company is uniquely positioned to favorably compete with any firm 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 November 2005. 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 in relation to selling prices. 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, which is determined on a specific- identification method, not to exceed estimated market value. Management reviews the recorded cost and estimated value of the documents owned individually 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 aggressively market or even sell in a year. 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 $6.5 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 effect is estimated based on management's perception of market activity and value and historical profit margins and trends. Such estimates are revised quarterly. Results of Operations --------------------- Total revenues increased 15% comparing the first quarter of fiscal 2005 to fiscal 2004. The increase in revenues resulted from several sales generated from the headquarters office, primarily presidential documents. Revenues from the headquarters office increased 111% year-over-year to 32% of total revenues in the current quarter compared to 17% of total revenues in the prior year first quarter. Revenues decreased 37% in the Company's catalog auction operation comparing the two fiscal year first quarters. The catalog auction revenues generated in the first quarter of 2005 amounted to 15% of total revenues compared to 27% of total revenues for the first quarter of 2004. The decrease continues to be attributed to increased competition in similar type auctions. Unfortunately, revenues generated from the Company's websites fell short of expectations mainly due to a poor December 2004. Revenues decreased 9% comparing the two quarter periods to 44% of total revenues for the current quarter compared to 55% of total revenues generated in the previous year first quarter. Comparing the October and November months of the two quarters, the current fiscal year was up by 12%; however comparing the two December months, revenues generated in December 2004 decreased by 34% compared to December 2003. The Company continues to realize improved margins as a result of increasing internet revenues compared to revenues generated from its other sources. Total cost of revenues as a percentage of total sales decreased 14% to 12% of net sales for the quarter ended December 31, 2004, compared to 16% of net sales for the quarter ended December 31, 2003. Total operating expenses increased 1% comparing the first quarter periods. Selling, general, and administrative expenses increased 4% comparing the quarter periods. The company realized an increase in legal fees resulting from renewing its trademarks and an increase in its advertising expense with an increase in internet advertisement. Depreciation costs decreased 25% comparing the quarters due to assets becoming 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-15(e) and 15d-15(e) 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 February 14, 2005 /s/ Todd M. Axelrod _________________ _______________________________ Todd M. Axelrod President and Chairman of the Board (Principal Executive Officer) Date February 14, 2005 /s/ Rod Lynam _________________ _______________________________ Rod Lynam Treasurer and Director (Principal Financial and Accounting Officer)