10QSB 1 q-1205.txt FORM 10-QSB FOR QUARTER 12/31/05 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-QSB [x] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended December 31, 2005 [ ] TRANSITION REPORT UNDER 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) (702) 364-1000 Issuer's telephone number 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 Indicate by check mark whether the registrant is a shell company (as defined in rule 12b-2 of the Exchange Act). [ ] Yes [x] No APPLICABLE ONLY TO CORPORATE ISSUERS State the number of shares outstanding of each of the issuer's classes of common equity, as of the latest practicable date: The Registrant had 5,625,984 shares of Common Stock, par value $.0005 outstanding as of February 1, 2006. Transitional Small Business Disclosure Format (Check one): Yes [ ] No [x] Part 1 - FINANCIAL INFORMATION GALLERY OF HISTORY, INC. and SUBSIDIARIES CONSOLIDATED BALANCE SHEETS ______________________________________________________________________ DECEMBER 31, SEPTEMBER 30, 2005 2005 (Unaudited) --------- ---------- ASSETS Cash $ 4,724 $ 2,116 Inventory of documents 6,466,188 6,451,310 Deferred tax assets 1,339,842 1,339,842 Property and equipment, net 1,153,812 1,173,538 Other assets 152,595 139,564 ---------- ---------- TOTAL ASSETS $ 9,117,161 $ 9,106,370 ========== ========== LIABILITIES Accounts payable $ 112,176 $ 51,373 Notes payable: Majority stockholder 4,434,055 4,280,063 Other 1,317,989 1,380,633 Accrued salaries due to majority shareholder -- 423,684 Other liabilities and accruals 100,869 91,408 ---------- ---------- TOTAL LIABILITIES 5,965,089 6,227,161 ---------- ---------- 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 10,987,592 10,555,655 Deficit (4,832,817) (4,673,743) Common stock in treasury, 6,309,324 shares, at cost (3,008,671) (3,008,671) ---------- ---------- TOTAL STOCKHOLDERS' EQUITY 3,152,072 2,879,209 ---------- ---------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 9,117,161 $ 9,106,370 ========== ========== See the accompanying notes to consolidated financial statements. GALLERY OF HISTORY, INC. and SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS - UNAUDITED __________________________________________________________________________ THREE MONTHS ENDED DECEMBER 31, 2005 2004 ---- ---- REVENUES $ 208,343 $ 313,365 COST OF REVENUES 23,379 37,670 --------- --------- GROSS PROFIT 184,964 275,695 --------- --------- OPERATING EXPENSES: Selling, general and administrative 292,332 371,284 Depreciation 12,664 31,374 --------- --------- TOTAL OPERATING EXPENSES 304,996 402,658 --------- --------- OPERATING LOSS (120,032) (126,963) --------- --------- OTHER INCOME (EXPENSE): Interest expense: Majority shareholder (40,459) (64,204) Other (30,743) (32,561) Rental income, net 24,608 17,561 Other 7,552 -- . --------- --------- TOTAL OTHER INCOME (EXPENSE) (39,042) (79,204) --------- --------- NET LOSS $ (159,074) $ (206,167) ========= ========= BASIC AND DILUTED LOSS PER SHARE $(.03) $(.04) ==== ==== 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, 2005 2004 -------- -------- CASH FLOWS FROM OPERATING ACTIVITIES: Net Loss $(159,074) $(206,167) Adjustments to reconcile net loss to net cash used for operating activities: Depreciation and amortization 19,726 38,698 Contributed services 8,253 -- (Increase) decrease in: Inventory of documents (14,878) 25,714 Other assets (13,031) (10,494) (Decrease) increase in: Accounts payable 60,803 (36,444) Accrued expenses and other liabilities 9,461 68,298 -------- -------- Net cash used in operating activities (88,740) (120,395) -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from borrowings: Majority stockholder 154,357 66,000 Other -- 115,000 Repayments of borrowings: Majority stockholder (365) (1,006) Other (62,644) (118,447) -------- -------- Net cash provided by financing activities 91,348 61,547 -------- -------- NET INCREASE (DECREASE) IN CASH 2,608 (58,848) CASH, BEGINNING OF PERIOD 2,116 59,868 -------- -------- CASH, END OF PERIOD $ 4,724 $ 1,020 ======== ======== SUPPLEMENTAL CASH FLOW INFORMATION: Cash paid during period for interest $ 54,274 $ 96,765 ======== ======== Capitalization of accrued officer salaries $ 423,864 -- ======== ======== 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, 2005, and for the three month period ended December 31, 2005 and 2004, 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 applicable to interim financial information. 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. 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. 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 2005 Annual Report on Form 10-KSB, from which the September 30, 2005 balance sheet information is derived. Subsequent Event ---------------- On January 20, 2006, the Company held a special meeting of shareholders for the following purpose: (1) to approve and authorize the amendment of the Company's Articles of Incorporation to authorize the issuance of up to 4,000,000 shares of Series A Preferred stock, par value $0.0005; and (2) to approve and authorize the issuance of 1,615,861 shares of Series A Preferred Stock, par value $0.0005, with an aggregate liquidation preference of $3,231,772, to Todd M. Axelrod, in consideration for cancellation of $3,231,772 in aggregate principal amount of indebtedness of the Company owed to Mr. Axelrod. The preferred stock will be entitled to a semi-annual dividend based on an annual rate of 3%. The remaining amount of this loan due Mr. Axelrod, $232,271 as of January 20, 2006, will continue with the same terms as previous including an interest rate of 3% annually. 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. 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 may cause them to 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, could 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 ------------------------------- The deficiency in cash flow resulted from cash used in operating activities which were funded with borrowing from the Company's majority stockholder. This was largely due to the net loss the Company incurred. Total document inventory increased slightly in the quarter period, however purchases of new document inventory was curtailed and was about the same amount purchased in the previous year quarter period. Officer salaries accrued in the previous several years have been credited to paid-in capital, $704,000 and $423,684 effective September 30, 2005 and December 31, 2005, respectively. Contributed services of $8,253 from two officers were recognized in the quarter ended December 30, 2005. Historically, the cash flow deficiencies have been funded primarily from borrowings from the Company's bank line of credit and loans from the Company's majority stockholder, which the Company believes will continue although he has no obligation to make them. The Company is taking steps in an effort to improve operating results by increasing sales through its direct purchase website and other internet activity, which, combined, have become the Company's highest margin distribution channel. Because of the size and diversity of its inventory, management believes the Company is well positioned to compete favorably with any firm offering similar products, but continues to be unable to generate sufficient sales to make a profit. To generate sufficient sales, the Company may need (but has not committed) to lower prices in addition to adding much more of its available inventory to the website. In addition, Mr. Axelrod has not been paid a salary in cash. Because of the Company's inability to pay, combined with the Company's desire to improve profitability, Mr. Axelrod and the Company have agreed to reduce his salary from approximately $11,517 per month to $2,417. Ms. Pamela (Axelrod) Ring's involvement with the Company has been substantially reduced and valued at $333 per month. On January 20, 2006, the stockholders of the Company voted to approve and authorize to issue 1,615,861 shares of Series A Preferred Stock to Mr. Axelrod in consideration for cancellation of $3,231,772 in aggregate principal amount of indebtedness of the Company owed to Mr. Axelrod. The remaining outstanding loan to Mr. Axelrod will continue to be paid at the reduced interest rate of 3%. The Preferred Stock will be entitled to an annual dividend rate of 3%. 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 against its available line of credit ($63,000 balance at December 31, 2005), seeking additional borrowings collateralized by its documents inventory (although there can be no assurance that such financing will be obtainable on acceptable terms) and borrowing 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 and dividends on preferred stock through at least January 2007. 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 currently is through its website. In the past year, the Company has seen a continued decrease in its internally promoted auctions to a degree it has considered discontinuing the catalog operation. The balance of the Company's sales is from repeat customers through its corporate office and consigned inventory to other auction establishments. 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 in value. As a result, as stated earlier, 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 (1) accumulated and maintains a supply of documents that is significantly greater than it intends or expects to market aggressively or even sell in a year and (2) has not committed to lowering prices to potentially generate increased sales to attain short-term profitability. Based on an aggregate historical cost (not number of documents), only about one-third of the Company's documents are listed and made available 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 changing significantly 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 estimate of value and historical profit margins and trends. Such estimates are revisited and revised quarterly as necessary. Results of Operations --------------------- Total revenues decreased 34% comparing the quarterly periods ended December 31, 2005 to December 31, 2004. The Company incurred decreases in its catalog operation and its headquarters sales. Revenues generated from the Company's internal auction decreased 82% comparing the quarterly periods. The Company has been considering discontinuing the catalog operation because of the cost of the catalog production and the general lack of success of its auctions. Headquarters generated revenues were lower because of a couple larger sales that occurred in the previous year period. Revenues generated through the internet increased 10% comparing the first three month period of fiscal 2006 to fiscal 2005. Internet related revenues generated in fiscal 2006 amount to 88% of total revenues compared to 53% of total revenues generated in fiscal 2005 Comparing the two periods, the Company's direct purchase web site revenues increased 4% and the Company's eBay generated revenues increased 40%. The Company continues to enhance its marketing strategies for attracting qualified visitors and to increase inventory available on the internet. Cost of revenues for the three month period ended December 31, 2005 decreased slightly to 11% of net revenues for first quarter 2006 compared to 12% of net revenues for the first quarter 2005. Total operating expenses decreased 24% for the three month period ended December 31, 2005 compared to December 31, 2004. The majority of the decrease is the result of a reduction in officer's salaries. In addition, a decrease in the current quarter was realized from not printing and mailing a catalog which was done in the previous year period. Professional fees increased in the current quarter resulting from costs incurred for the Company's special meeting of stockholders. Depreciation costs decreased 60% comparing the quarters due to assets becoming fully depreciated, primarily our archive and inventory software programs. Item 3. Controls and Procedures. ----------------------- Based on their evaluation, as of December 31, 2005, the Company's 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 1-3. None. Item 4. Submission of Matters to a vote of Security Holders. --------------------------------------------------- On January 20, 2006, the Company held a special meeting of shareholders for the following purpose: (1) to approve and authorize the amendment of the Company's Articles of Incorporation to authorize the issuance of up to 4,000,000 shares of preferred stock, par value $0.0005, of the Company, as designated by the Board of Directors from time to time; and (2) to approve and authorize the issuance of 1,615,861 shares of Series A Preferred Stock, par value $0.0005, with an aggregate liquidation preference of $3,231,772, to Todd M. Axelrod, in consideration for cancellation of $3,231,772 in aggregate principal amount of indebtedness of the Company owed to Mr. Axelrod. Voting for the first proposal to amend the Company's Articles of Incorporation, 4,959,807 were in favor and 2,018 against. The second proposal to issue the Preferred Stock for cancellation of debt passed with 4,959,669 for and 2,156 against. Item 5. None. Item 6. Exhibits and Reports on Form 8-K. (a) Exhibits. 31.1 Certification of Chief Executive Officer pursuant to Rule 13a-14(a). 31.2 Certification of Chief Financial Officer pursuant to Rule 13a-14(a). 32.1 Certification of Chief Executive Officer pursuant to Rule 13a-14(b). 32.2 Certification of Chief Financial Officer pursuant to Rule 13a-14(b). 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, 2006 /s/ Todd M. Axelrod _________________ _______________________________ Todd M. Axelrod President and Chairman of the Board (Principal Executive Officer) Date February 14, 2006 /s/ Rod Lynam _________________ _______________________________ Rod Lynam Treasurer and Director (Principal Financial and Accounting Officer)