10QSB 1 q-0306.txt FORM 10-QSB FOR QUARTER ENDED MARCH 31, 2006 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 March 31, 2006 [ ] 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 May 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 ______________________________________________________________________ MARCH 31, SEPTEMBER 30, 2006 2005 (Unaudited) --------- ---------- ASSETS Cash $ 1,810 $ 2,116 Inventory of documents 6,481,192 6,451,310 Deferred tax assets 1,339,842 1,339,842 Property and equipment, net 1,134,486 1,173,538 Other assets 168,274 139,564 ---------- ---------- TOTAL ASSETS $ 9,125,604 $ 9,106,370 ========== ========== LIABILITIES Accounts payable $ 132,271 $ 51,373 Notes payable: Majority stockholder 1,361,022 4,280,063 Other 1,288,469 1,380,633 Accrued salaries due to majority shareholder -- 423,684 Other liabilities and accruals 92,785 91,408 ---------- ---------- TOTAL LIABILITIES 2,874,547 6,227,161 ---------- ---------- STOCKHOLDERS' EQUITY Common stock: $.0005 par value; 20,000,000 shares authorized; 11,935,308 shares issued 5,968 5,968 Preferred stock: $.0005 par value; 4,000,000 shares authorized; 1,615,861 shares issued 808 -- Additional paid-in-capital 14,226,809 10,555,655 Deficit (4,973,857) (4,673,743) Common stock in treasury, 6,309,324 shares, at cost (3,008,671) (3,008,671) ---------- ---------- TOTAL STOCKHOLDERS' EQUITY 6,251,057 2,879,209 ---------- ---------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 9,125,604 $ 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 SIX MONTHS ENDED MARCH 31, MARCH 31, 2006 2005 2006 2005 -------- -------- --------- --------- REVENUES $ 140,689 $ 300,887 $ 349,032 $ 614,252 COST OF REVENUES 14,316 38,334 37,696 76,004 -------- -------- --------- --------- GROSS PROFIT 126,373 262,553 311,336 538,248 -------- -------- --------- --------- OPERATING EXPENSES: Selling, general and administrative 228,649 382,540 520,980 753,824 Depreciation 12,266 26,377 24,930 57,751 -------- -------- --------- --------- TOTAL OPERATING EXPENSES 240,915 408,917 545,910 811,575 -------- -------- --------- --------- OPERATING LOSS (114,542) (146,364) (234,574) (273,327) -------- -------- --------- --------- OTHER INCOME (EXPENSE) Interest expense Majority stockholder (26,684) (68,521) (67,143) (132,726) Other (29,254) (31,736) (59,997) (64,296) Rental income, net 29,440 27,635 54,048 45,196 Other -- -- 7,552 -- -------- -------- --------- --------- TOTAL OTHER EXPENSE (26,498) (72,622) (65,540) (151,826) -------- -------- --------- --------- NET LOSS $(141,040) $(218,986) $ (300,114) $ (425,153) ======== ======== ========= ========= BASIC LOSS PER SHARE: $(.03) $(.04) $(.05) $(.08) ==== ==== ==== ==== 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, 2006 2005 -------- -------- CASH FLOWS FROM OPERATING ACTIVITIES: Net loss $(300,114) $(425,153) Adjustments to reconcile net loss to net cash used for operating activities: Depreciation and amortization 39,052 72,136 Contributed services 16,506 -- (Increase) decrease in: Inventory of documents (29,882) 49,965 Other assets (28,710) (17,125) (Decrease) increase in: Accounts payable 80,898 (40,367) Accrued expenses and other liabilities 1,378 149,479 -------- -------- Net cash used in operating activities (220,872) (211,065) -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of property and equipment -- (2,200) -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from borrowings: Majority stockholder 319,354 224,782 Other 90,000 160,000 Repayments of borrowings: Majority stockholder (6,624) (4,619) Other (182,164) (222,751) -------- -------- Net cash provided by financing activities 220,566 157,412 -------- -------- NET DECREASE IN CASH (306) (55,853) CASH, BEGINNING OF PERIOD 2,116 59,868 -------- -------- CASH, END OF PERIOD $ 1,810 $ 4,015 ======== ======== SUPPLEMENTAL CASH FLOW INFORMATION: Cash paid during period for interest $ 54,274 $ 197,022 ======== ======== Issuance of preferred stock in settlement of 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 March 31, 2006, and for the three and six month periods ended March 31, 2006 and 2005, 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. Preferred Stock --------------- 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, constituting 100% of the outstanding shares, of Series A Preferred Stock, par value $0.0005, with an aggregate liquidation preference of $3,231,772, to Todd M. Axelrod, at an agreed value of $2 per share, 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. Those forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause the Company's actual results, performance or achievements of those of the Company's industry to be materially different from any future results, performance or achievements expressed or implied by those forward-looking statements. Among the factors that could cause actual results, performance or achievement to differ materially from those described or implied in the forward-looking statements are the Company's ability to obtain additional capital, on reasonable terms, if at all, at such times and in such amounts as may be needed by the Company; competition by entities which may have greater resources than the Company; the Company's ability to market and sell its inventory of historical documents; the Company's ability to correctly value its inventory of documents; and other factors included in the Company's filings with the Securities and Exchange Commission (the "SEC"). Copies of the Company's SEC filings are available from the SEC or may be obtained upon request from the Company. The Company does not undertake any obligation to update the information contained herein, which speaks only as of this date. 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 ------------------------------- Net cash flows used by operating activities remained basically unchanged comparing the six month periods ended March 31, 2006 and 2005. Cash used in operating activities, largely resulting from the net loss was offset somewhat by an increase in accounts payable as a result primarily from increased professional fees. In addition, document inventory increased in the period. Purchases of new documents amount to approximately $68,000 in the first six month period ended March 31, 2006. Contributed services of $16,506 from two officers were recognized in the six month period ended March 31, 2006, and salaries of $423,864 accrued in previous years have been credited to paid-in capital. 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. 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 is not being paid a salary in cash, and the Company is now recording compensation at the estimated fair-value of his reduced services and doing likewise with respect to another officer. 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 is to be paid at the reduced interest rate of 3%. The Preferred Stock is 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 ($40,000 balance at March 31, 2006), 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 April 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 53% comparing the quarterly periods and 43% comparing the six month periods ended March 31, 2006 to March 31, 2005. The majority of the decrease was the absence of the Company's catalog operation in the current fiscal year. During the current quarter the Company did not conduct any auctions. In the previous year quarter period, auction revenues comprised 43% of the Company's total revenues. For the current six month period, the Company conducted one auction which totaled 2% of the Company total revenues which is a decrease of 95% compared to the previous year six month period that amounted to 29% of total revenues. 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. The one auction conducted in the current six month period netted the Company $5,852 after cost of revenues and catalog costs. In the previous year six month period, the Company conducted three auctions that netted an average of $29,050 per auction after cost of revenues and catalog costs. Headquarters generated revenues were lower because of a couple larger sales that occurred in the previous year period. Revenues generated through the Company's web site decreased 28% comparing the three month period ended March 31, 2006 to the previous year quarter. These revenues did amount to 61% of the total Company's 2006 quarter revenues compared to 40% of total revenues for the 2005 quarter. Comparing the six month periods, the web site revenues decrease 11% and amounted to 65% of total revenues for 2006 compared to 42% of total revenues for 2005. The decreases can be attributed to the increased availability of similar documents from competitors on the internet. To offset these decreases, the Company's Ebay involvement increased 79% comparing the two quarter periods and increased 58% comparing the two six month periods. For the quarter, Ebay revenues comprised 31% of total revenues generated compared to 8% in the previous year quarter. For the six month period, Ebay revenues amounted to 24% of total revenues compared to 9% in the previous year. Through its higher pricing, the Company has continued to maintain its higher gross profit margins. Cost of revenues decrease to 10% of net revenues for the quarter period ended March 31, 2006 compared to 13% of net revenues for the quarter ended March 31, 2005. For the six month period ended March 31, 2006, cost of revenues amounted to 11% of net revenues compared to 12% of net revenues for the previous year six month period. Total operating expenses decreased 41% for the quarter period and 33% for the six month period. Selling, general and administrative expenses decreased 40% comparing the quarter ended March 31, 2006 to March 31, 2005 and they decreased 31% comparing the six month periods. For the most part, the Company did not incur any catalog printing and mailing costs in fiscal 2006. Catalog costs amounted to 13% of total revenues for the quarter ended March 31, 2005 and these costs amounted to 10% of total revenues for the six month period ended March 31, 2005. Salary expense decreased 55% comparing the quarter periods and decrease 50% comparing the two six month periods because of the reduction in officer salaries. These decreases were partially offset in the current fiscal period by a 194% increase in professional fees as a result of the Company's issues relating to the continued listing of common stock on NASDAQ, as previously reported on Form 8-K, incurred in the first quarter of fiscal 2006. Depreciation costs decreased 63% comparing the quarters periods and decreased 57% comparing the six month periods due to assets becoming fully depreciated, primarily the Company's archive and inventory software programs. Item 3. Controls and Procedures. ------------------------ Based on their evaluation, as of March 31, 2006, 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 changes in our internal control over financial reporting during the quarter ended March 31, 2006 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. Part 2 - Other Information Item 1-5. None. Item 6. Exhibits and Reports on Form 8-K. (a) Exhibits. 3. Amendment to Articles of Incorporation 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 May 12, 2006 /s/ Todd M. Axelrod _________________ _______________________________ Todd M. Axelrod President and Chairman of the Board (Principal Executive Officer) Date May 12, 2006 /s/ Rod Lynam _________________ _______________________________ Rod Lynam Treasurer and Director (Principal Financial and Accounting Officer)