10KSB 1 k-07.txt FORM 10-KSB FOR YEAR ENDED 9/30/2007 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-KSB (Mark One) [x] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended September 30, 2007 [ ] 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. (Name of small business issuer 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 Securities registered under Section 12(b) of the Act: Title of each class Name of Exchange on which registered ___________________________ ____________________________________ Securities registered under Section 12(g) of the Act: Common Stock, par value $.0005 ______________________________________________________________________________ (Title of class) Check whether the issuer is not required to file reports pursuant to Section 13 or 15(d) of the Exchange Act. [ ] Check whether the issuer (1) filed all reports 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 Check if there is no disclosure of delinquent filers in response to Item 405 of Regulation S-B contained in this form, and no disclosure will be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-KSB or any amendment to this Form 10-KSB. [x] Indicate by check mark whether the registrant is a shell company (as defined in rule 12b-2 of the Exchange Act). [ ]Yes [x]No State issuer's revenues for the most recent fiscal year: $632,293 The aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant (1,282,951 shares) as of November 30, 2007 was approximately $1,831,986 based upon $1.35, the price at which the stock was sold on such date. 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 outstanding as of November 30, 2007. DOCUMENTS INCORPORATED BY REFERENCE The following documents are incorporated by reference to Item 13 - Exhibits and Reports on Form 8-K; Form 10-QSB for the fiscal quarter ended June 30, 2005; and Form 10-KSB for the fiscal year ended September 30, 2004. Transitional Small Business Disclosure Format (Check one): Yes [ ] No [x] PART I Item 1. Business ________ Business Development ____________________ The Gallery of History, Inc. (hereinafter the "Company") was incorporated in the State of Nevada on November 10, 1981. The Company is engaged in the business of marketing historical documents such as letters, documents and signatures of presidents and other governmental and political figures, significant physicians, inventors, Nobel Prize winners, explorers, aviators, scientists, entertainers, authors, artists, musicians, composers, clergymen, judges, lawyers, military figures, and well-known persons in sports, among others. Most of the documents were written or executed by persons now deceased, but a significant number were written or executed by persons still living, particularly in the entertainment, sports and political areas. The Company's inventory of documents currently consists of approximately 182,000 different documents. Retail sales of documents are made from a gallery located at our headquarters in Las Vegas, Nevada. However, documents are largely sold through sales conducted over the internet including the Company's websites. Our marketing efforts principally target individuals who have appreciated or collected antiques, paintings, lithographs, and other works of art or other collectibles, but not necessarily historical documents, and who may lack awareness of the availability of historical documents for purchase. All of the documents are preserved by utilizing museum quality encapsulation materials, mattings and protective coverings that are characteristically acid-free, and by other steps taken to ensure the longevity of the documents. The Company also sells a book entitled The Handbook of Historical Documents - A Guide to Owning History authored by Todd M. Axelrod, the Company's President, Chairman of the Board, and majority shareholder. Inventory of Documents Owned ____________________________ The Company purchases documents principally at auctions and from private collectors, dealers in historical documents, estates and various individuals who are not collectors but are in possession of documents. During the current fiscal year, the Company's principal officer and majority shareholder, Mr. Todd Axelrod, purchased documents from outside sources for his own account with personal funds. The Company may have been interested in acquiring some or all of the items; however, management believed that the Company lacked sufficient liquidity to assume the related finance and marketability risks. As a result, the Company and Mr. Axelrod entered into a revenue-sharing arrangement whereby the Company physically safeguards and catalogs the documents, and markets certain of the items on its website for a fee consisting of 80% of the gross profit from any sale (defined as the sales price to a third party buyer less Mr. Axelrod's cost of acquiring the item). The Company believes this fee arrangement is considerably more favorable to the Company than the Company could obtain from an independent third party. These avenues of supply are likely to continue to be the Company's main sources of inventory. We catalogue the diverse inventory using internally developed software and a computer server network. The system allows the Company's sales staff to identify inventory held in the Company's central repository, obtain descriptions of the documents, and even obtain images of the documents to exhibit to customers. Certificates of Authenticity ____________________________ Documents purchased by the Company frequently are acquired by the Company with guarantees from the sellers. Whether or not the Company receives such a guarantee, it purchases documents subject to its own verification of authenticity. To ascertain authenticity, we may utilize information provided by the seller as to the transfer of ownership of documents; subject the documents to our own examination; employ outside experts available to examine the documents; or we may use other means. The Company makes available to its customers a ten-year Certificate of Authenticity, which obligates the Company to refund to the customer the purchase price paid if any document is proven non- authentic. Should our determination of authenticity of documents be erroneous, the Company would likely incur a loss unless there was recourse against the seller. The Company does not carry any insurance and is currently not aware of any entity that underwrites such insurance at commercially reasonable rates to protect against a loss arising from either the purchase of documents lacking authenticity or claims by our customers for recovery against our authenticity warranty. Claims made against the Company pursuant to its Certificates of Authenticity have been immaterial, and accordingly, the Company has not established a reserve against the risk of forgery or against any exposure under the Certificates of Authenticity. Competition ___________ There are a great number of dealers of historical documents, of which many are only part-time operators. The Company competes primarily with art galleries, antique stores and sellers of other collectible items, as well as dealers in historical documents. In the past several years, many autograph dealers have closed their retail gallery operations and are attempting to sell their inventories through auctions and the internet. In addition, many upscale malls are remerchandising for middle-market masses as the consumer looks for warehouse shopping. Since closing the Company's retail galleries several years ago, the majority of the Company's sales have been through its websites and various auction efforts. When acquiring documents, the Company competes with persons who acquire documents for resale, as well as private collectors. The principal sources for documents are auctions held in the United States and abroad, private collectors, dealers in historical documents, estate sales, and the recipients of documents and/or their families. In the event prices for historical documents increase materially, the Company's ability to acquire documents, and, in turn, its ability to market such newly acquired documents to the general public, may be adversely affected. However, if prices for historical documents significantly increase, the resale/wholesale value of the Company's approximate 182,000 document inventory may be positively affected. To the extent the Company is successful in attracting consignments, it may be positively impacted by this higher price scenario because the Company receives a commission from both the buyer and consignor which is based upon a percent of the "hammer" or selling price. There is no assurance that the Company will be able to realize profit margins for its merchandise. Moreover, existing dealers may choose to compete with the Company in the same manner or in a more favorable format than that of the Company. Seasonal Business _________________ The Company's business, which is currently focused on sales through the internet, is not seasonal. Employees _________ As of December 1, 2007, the Company had seven full-time and one part-time employee, in addition to its two executive officers. Item 2. Properties __________ The Company owns a building located at 3601 West Sahara Avenue, Las Vegas, Nevada where its executive offices and framing operations are located. The building contains approximately 33,187 square feet of net leasable space of which the Company currently occupies 18,913 square feet and leases or is offering to lease the remaining space to others. As of December 1, 2007, 9,361 square feet was being leased to five tenants for an aggregate monthly rental of $14,772 under leases expiring at varying times from December 2008 though October 2012. The Company believes that its headquarters' building is adequate for its purposes for the foreseeable future and that the building is adequately covered by insurance. The property is collateral for a loan instrument - see Note 5 to Consolidated Financial Statements. Item 3. Legal Proceedings _________________ We are involved in legal proceedings in the ordinary course of business. Management cannot presently predict the outcome of these matters, although management believes that the ultimate resolution of these matters will not have a materially adverse effect on our financial position, operations or cash flows. Item 4. Submission of Matters to a Vote of Security Holders ___________________________________________________ On September 28, 2007, the Company held its annual meeting of stockholders for the following purposes: (1) to elect five Directors to serve until the next annual meeting of shareholders; and (2) to ratify the appointment of Piercy, Bowler, Taylor & Kern, as the Company's independent public accountants for the fiscal year ending September 30, 2007. At the Meeting the following Directors were elected: VOTES CAST WITHHELD FOR AUTHORITY/NON NOMINEES ELECTION VOTES ________ ________ _____ Todd M. Axelrod 5,513,421 50,215/0 Rod Lynam 5,512,962 50,674/0 Michael Rosenman 5,513,421 50,215/0 Roger Schneier 5,513,421 50,215/0 Peter Kuhr 5,513,421 50,215/0 With respect to the ratification of the appointment of Piercy, Bowler, Taylor & Kern as the Company's independent accountants, 5,563,634 shares were in favor, 2 shares were voted against, and there were no abstentions and no broker non-votes. PART II Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Small Business Issuer Purchases of Equity Securities. _________________________________________________________________ The Company's Common Stock, par value $.0005, is quoted on the National Association of Securities Dealers Automated Quotation System ("NASDAQ") Capital Market under the symbol HIST. According to the records of our transfer agent and ADP Investor Communications Services, as of October 10, 2007, there were approximately 497 holders of record of the Company's Common Stock. The following table sets forth the high and low sale price for the Company's Common Stock for the periods indicated as reported on NASDAQ. Low Sale High Sale Price Price _____ _____ Fiscal 2006 October 1, 2005 - December 31, 2005 $1.00 $1.78 January 1, 2006 - March 31, 2006 1.06 1.77 April 1, 2006 - June 30, 2006 1.05 3.15 July 1, 2006 - September 30, 2006 1.16 3.50 Fiscal 2007 October 1, 2006 - December 31, 2006 $1.40 $2.16 January 1, 2007 - March 31, 2007 1.57 2.38 April 1, 2007 - June 30, 2007 1.83 2.45 July 1, 2007 - September 30, 2007 1.21 1.96 Since its inception in November 1981, the Company has not paid any cash dividends to the holders of its Common Stock. The Company presently intends to retain any earnings for its internal cash flow use and possible repurchase of its own common stock. EQUITY COMPENSATION PLAN INFORMATION The following table sets forth information as of September 30, 2007, with respect to our compensation plans under which our equity securities are authorized for issuance.. Apart from the information provided below with respect to the grant of options to one person as an employment inducement, the Company does not have any option or other equity compensation plans. Number of Number of securities securities remaining for to be issued Weighted-avg. future issuance upon exercise exercise price uder equity of outstanding of outstanding compensation options, options, plans warrants and warrants and (excluding rights rights securities reflected in column (a)) -------------- -------------- ------------- Plan Category: (a) (b) (c) Equity compensation plans approved by stockholders . -0- $ -- - 0- Equity compensation plans not approved by stockholders 50,000(1) $2.19 50,000 -------------- -------------- ------------- Total 50,000 $2.19 50,000 As an employment inducement, the Company's vice-president of sales was granted options to acquire 50,000 shares of the Company's common stock at $2.19 per share, the stock price on the grant date (April 16, 2007). Using the Black-Scholes pricing model and an estimated expiration factor of 3.25 years, a volatility factor of one based on daily trading history, and a risk-free interest rate of 4.5%, the options were valued at approximately $72,000, to be charged to expense ratably over the 24-month vesting period. Item 6. Management's Discussion and Analysis or Plan Operations _______________________________________________________ Forward Looking Statements __________________________ This report contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, as amended, 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. Liquidity and Capital Resources _______________________________ With the exception of 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. 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 the Company's documents held in inventory may cause those documents to become rarer with time with their then 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 has a bank line of credit in the amount of $100,000 through August 2008. Loans under the line of credit are secured by the Company's inventory of documents owned and bear interest at the prime rate plus 1.5%. As of September 30, 2007, there was $6,000 available against this line of credit. The Company's term mortgage note was renewed in July 2007 in the amount of $1,087,251 and has an 8.25% interest rate and a maturity date of July 15, 2012. The note is collateralized by the Company's building. Prior to 2006, the Company borrowed $1,000,000 from its majority stockholder/president, Todd M. Axelrod. The amount is due on demand but not earlier than October 31, 2008, with monthly interest payments payable at a rate of 6% per annum (reduced from 8% as of September 1, 2005). Interest expense on the related party advance was $60,835 and $60,833 for the fiscal years 2007 and 2006, respectively. The Company has also borrowed other amounts, from Mr. Axelrod, from time to time during the fiscal years 2007 and 2006. The funds borrowed had an interest rate of 3% per annum (reduced from 7.75% as of September 1, 2005). The principal balance of the funds borrowed, in addition to the foregoing $1,000,000, total $895,226 and $582,556 as of September 30, 2007 and September 30, 2006, respectively. Interest expense on these related party borrowings was $21,066 and $43,918 during fiscal years 2007 and 2006, respectively. The funds were used to supplement cash flows from operating activities. On January 20, 2006, the Company held a special meeting of stockholders and approved converting $3,231,722 of the advances into 1,615,861 non-voting shares of Series A Convertible Preferred Stock. The Series A Convertible Preferred Stock earns dividends at the annual rate of 3% applied to the liquidation value, and payable semi-annually so long as resources are legally available for that purpose (unless waived by the holder). Unpaid dividends are cumulative, are added to the liquidation value (upon which the annual dividend rate is applied), and are preferential in the event of liquidation and with respect to any dividends or other distributions to common stockholders. The Preferred Stock is non- voting (except as may be required by law) and convertible at any time at the option of the holder at a fixed rate of one common share for every $2 in liquidation value, as adjusted, per share of Preferred Stock at the time of conversion, subject to adjustment in the event of future increases or decreases in the number of outstanding shares of Common Stock for a price other than the then conversion price of the Preferred Stock or in the event of issuance of certain other securities. As of September 30, 2007 and September 30, 2006, a total of 1,689,671 and 1,640,099 shares of Common Stock were issuable upon conversion of the Preferred Stock. The Company believes that its current cash requirements will be met by generating revenues from operations, appropriately managing the timing and volume of new document acquisitions, drawing amounts then available, if any, under its existing line of credit facility, seeking additional borrowings or advances against its documents inventory, and borrowing amounts from Mr. Axelrod as required. Mr. Axelrod intends but is not obligated to continue funding or guarantee additional debt, should it be 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 31, 2008. Historically, cash flow deficiencies have been funded with borrowing from Mr. Axelrod. Management believes that the need for such borrowing should not diminish until profitability and cash flows from operations improve. To improve profitability and cash flows, sales will need to increase. To increase sales, management may have to reevaluate its product pricing strategy and decrease the offering prices of its merchandise. To date, management has been reluctant to cut prices and, instead, to achieve its strategic objectives, continues to increase inventory available on the internet. With a market potential that is world-wide, and unlimited in terms of inventory exposure, the Company continues to employ this channel to improve revenue levels. Currently, our website had been materially enlarged to include approximately 47,500 document choices spread over an expanded list of categories and historical genres. Further, owing to the size and diversity of its inventory, management feels the Company is positioned to favorably compete with any firms offering similar products. Equally important is the fact that with no limitations, or added costs for the development of this outlet, the Company could, in time, still significantly increase its available inventory to this outlet without negatively impacting the rarity of our documents, thus providing a global audience with a diversity of choice. The Company also continues its investigation of productive links with other organizations, with the possibility of expanding its market through cooperative alliances with firms and/or institutions whose audiences are understood to possess potential as document buyers. The Company anticipates no material commitments for capital expenditures in the near term, as the Company is not currently contemplating additional expansion. Management is not aware of any trend in the Company's capital resources, which may have an impact on its income, revenue or income from continuing operations. 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 distribution channels consist of its direct purchase websites and other internet avenues including eBay. Shipping and handling costs and related customer charges are not significant. 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 to sell in a year or even aggressively market. 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 $6.4 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. 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 exceeds an amount considered by management as more likely than not to be utilized as a result of any gain on the Company's appreciated document inventory, if partially sold in bulk, and/or real estate, that may be realized as needed to protect the carryforwards and, therefore, considered effective tax planning strategies as defined in FASB Statement No. 109. The potential gain and related tax effect of a partial bulk sale of inventory 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. The appreciated value of real estate is based primarily on appraisals and/or related advice from brokers. Recently issued accounting pronouncements ----------------------------------------- In December 2007, the Financial Accounting Standards Board (FASB) issued Statement of Accounting Standards (SFAS) No. 160, Noncontrolling Interests in Consolidated Financial Statements. It clarifies that a noncontrolling (minority) interest in a subsidiary is an ownership interest in the consolidated entity that should be reported as equity in the consolidated financial statements. SFAS 160 will not likely have any effect on the Company's consolidated financial statements since we are not presently contemplating investing in, establishing or acquiring a subsidiary or a variable interest entity requiring consolidation. SFAS 160 will be effective for the Company's fiscal year beginning October 1, 2009. In December 2007, the FASB issued SFAS 141R, Business Combinations, which replaces SFAS 141, Business Combinations. The Statement retains the fundamental requirements in SFAS 141 that the acquisition method of accounting (which Statement 141 called the purchase method) be used for all business combinations and for an acquirer to be identified for each business combination. We have not yet evaluated SFAS 141R for the impact, if any, that SFAS 141R might have on our financial statements, in the event we make any business combination or other covered acquisitions after September 30, 2009, which is not presently contemplated. In September 2006, the FASB issued SFAS 157, Fair Value Measurements. This standard defines fair value, establishes a framework for measuring fair value in accounting principles generally accepted in the United States, and expands disclosure about fair value measurements. In February 2007, the FASB issued SFAS 159, The Fair Value Option for Financial Assets and Financial Liabilities - Including an Amendment of FASB Statement 115, which will permit the option of choosing to measure certain eligible items at fair value at specified election dates and report unrealized gains and losses in earnings. SFAS 157 and 159 was scheduled to become effective for us for fiscal year 2009, and interim periods within those fiscal years; however, the effective date for adjusting certain assets and liabilities to fair value under SFAS 157 has been delayed one year. We are currently evaluating the requirements of SFAS 157 and 159, and have not yet determined the likely, if any, impact on our future financial statements. In July 2006, the FASB issued Interpretation No. 48 (FIN 48) Accounting for Uncertainty in Income Taxes, an Interpretation of FASB Statement No. 109. FIN 48 clarifies the accounting for income taxes by prescribing the minimum recognition threshold a tax position is required to meet before being recognized in the financial statements. FIN 48 will be effective for our fiscal year 2008. We do not expect that the adoption of FIN 48 will have a significant impact on our operating deficit or future financial position, results of operations, and cash flows. However, we are evaluating the impact that FIN 48 will have on the amount, reporting, and disclosures relating to our deferred tax assets resulting primarily from tax loss carryforwards. Results of Operations _____________________ Fiscal 2007 Compared to Fiscal 2006 ----------------------------------- Total revenues decreased 7% comparing fiscal year ended September 30, 2007 to the fiscal year ended September 30, 2006. The Company's direct purchase web site increased 11% year-over-year and amounted to 80% of the current year's total revenues compared to 67% of total revenues for fiscal 2006. However, the Company's eBay auctions and eBay store revenues decreased 48% to 13% of total revenues for fiscal 2007 compared to 23% of total revenues for fiscal 2006. The decrease in eBay auction and eBay store revenues was primarily the result of internet competition. In October 2006, the Company entered into a revenue-sharing arrangement with our majority stockholder/president, Mr. Todd M. Axelrod, whereby the Company physically safeguards, catalogs, and markets certain historical documents, that Mr. Axelrod owns personally, for a fee consisting of 80% of the gross profit from any sale (defined as the sales price to a third-party buyer less Mr. Axelrod's cost of acquiring the item). The Company independently verifies the cost of any item sold pursuant to this arrangement. The Company believes this fee arrangement is considerably more favorable to the Company than the Company could obtain from an independent third party. The Company receives the same guarantee as Mr. Axelrod would receive as to the authenticity warranty obtained from the vendors. The Company has also independently verified Mr. Axelrod's cost of the consigned inventory. During the 2007 fiscal year, 34 documents subject to the revenue-sharing arrangement were sold for $113,004. The Company's revenue share for the fiscal period was $78,473 and is included in revenues. Cost of revenues decreased 22%, comparing fiscal 2007 to fiscal 2006, to 8.5% of net revenues in fiscal 2007 compared to 10% of net revenues for fiscal 2006. Excluding the effects of the revenue-sharing arrangement discussed in the previous paragraph, the Company's cost of revenues would have been 9.7% for the current fiscal year. Total operating expenses decreased 8% comparing fiscal 2007 to fiscal 2006. Advertising on the internet decreased 33% comparing fiscal 2007 to fiscal 2006 to 8% of net revenues for 2007 compared to 11% for 2006. Professional fees decreased 68% in fiscal 2007 due to legal fees incurred in fiscal 2006 pertaining to Nasdaq compliance issues, part of which were written off in fiscal 2007. Depreciation expense decreased 11% in fiscal 2007 compared to 2006 largely resulting from assets becoming fully depreciated. Also included in selling, general and administrative expenses is 50% of the operating cost to maintain the headquarters building. This percentage is the ratio that the square footage occupied by the Company's headquarters operation bears to the total leasable space of the building. The remaining building operating expenses plus the rental revenues realized are included net in other income and expense ($102,254 fiscal 2007 as compared to $105,936 for fiscal 2006). Item 7. Financial Statements. TABLE OF CONTENTS _________________ PAGE ____ Report of Independent Registered Public Accounting Firm 12 Consolidated Balance Sheets - September 30, 2007 and 2006 13 Consolidated Statements of Operations for the years ended September 30, 2007 and 2006 14 Consolidated Statements of Stockholders' Equity for the years ended September 30, 2007 and 2006 15 Consolidated Statements of Cash Flows for the years ended September 30, 2007 and 2006 16 Notes to Consolidated Financial Statements 17 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Directors and Stockholders of Gallery of History, Inc.: We have audited the accompanying consolidated balance sheets of Gallery of History, Inc. (a Nevada Corporation) and subsidiaries (the "Company") as of September 30, 2007 and 2006, and the related consolidated statements of operations, changes in stockholders' equity and cash flows for the years then ended. The financial statements are the responsibility of the Company's management. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Gallery of History, Inc. and subsidiaries as of September 30, 2007 and 2006, and the results of their operations and their cash flows for the years then ended in conformity with accounting principles generally accepted in the United States. /s/ PIERCY BOWLER TAYLOR & KERN Certified Public Accountants and Business Advisors, a Professional Corporation Las Vegas, Nevada December 13, 2007 GALLERY OF HISTORY, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS AS OF SEPTEMBER 30, 2007 AND 2006 ___________________________________________________________________________ 2007 2006 ____ ____ ASSETS Cash $ 1,517 $ 1,738 Inventory of documents owned 6,423,831 6,504,288 Deferred tax assets 1,339,842 1,339,842 Property and equipment, net 1,047,455 1,100,381 Other assets 61,394 53,996 ---------- --------- $ 8,874,039 $9,000,245 ========== ========= LIABILITIES Accounts payable $ 39,339 $ 100,093 Advances and notes payable: Majority shareholder 1,895,226 1,582,556 Other 1,168,781 1,186,815 Preferred stock dividend payable 147,620 48,476 Other liabilities and accruals 79,374 97,446 ---------- --------- 3,330,340 3,015,386 ---------- --------- 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 (liquidation value at September 30, 2007 and September 30, 2006, $3,379,342 and $3,280,198 including cumulative unpaid dividends in arrears of $147,620 and $48,476) 808 808 Additional paid-in capital 14,291,362 14,243,315 Accumulated deficit (5,745,768) (5,256,561) Common stock in treasury, 6,309,324 shares, at cost (3,008,671) (3,008,671) ---------- --------- 5,543,699 5,984,859 ---------- --------- $ 8,874,039 $9,000,245 ========== ========= See notes to consolidated financial statements. ___________________________________________________________________________ GALLERY OF HISTORY, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE YEARS ENDED SEPTEMBER 30, 2007 AND 2006 ___________________________________________________________________________ 2007 2006 REVENUES $ 632,293 $ 679,461 COST OF REVENUES 53,590 68,685 --------- --------- GROSS PROFIT 578,703 610,776 --------- --------- OPERATING EXPENSES Selling, general and administrative 844,073 915,895 Depreciation 40,091 45,113 884,164 961,008 --------- --------- OPERATING LOSS (305,461) (350,232) --------- --------- OTHER INCOME (EXPENSE) Interest expense: Majority shareholder (81,902) (104,751) Other (105,122) (117,699) Rental income, net 102,254 105,936 Impairment provision of other assets -- (75,377) Other 168 7,781 --------- --------- (84,602) (184,110) --------- --------- NET LOSS $( 390,063) $( 534,342) Preferred stock dividend (99,144) (48,476) --------- --------- NET LOSS APPLICABLE TO COMMON SHARES $( 489,207) $( 582,818) ========= ========= BASIC AND DILUTED LOSS PER SHARE $(.09) $(.10) ==== ==== WEIGHTED AVERAGE SHARES OUTSTANDING 5,625,984 5,625,984 ========= ========= See notes to consolidated financial statements. ___________________________________________________________________________ GALLERY OF HISTORY, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY FOR THE YEARS ENDED SEPTEMBER 30, 2007 AND 2006 Additional Common Common Stock Preferred Paid-in Accumulated Stock in Shares Par Shares Par Capital Deficit Treasury Total -------- ----- ------- ---- --------- --------- --------- -------- Balance at October 1, 2005 11935308 $5968 -- $-- $10555655 $(4673743) $(3008671) $2879209 Contributed services by Majority shareholders -- -- -- -- 456696 -- -- 456696 Issue preferred stock -- -- 1615861 808 3230964 -- -- 3231772 Preferred dividend -- -- -- -- -- (48476) -- (48476) Net loss -- -- -- -- -- (534342) -- (534342) -------- ---- ------- --- -------- -------- -------- ------- BALANCE AT SEPTEMBER 30, 2006 11935308 $5968 1615861 $808 $14243315 $(5256561) $(3008671) $5984859 Contributed services by Majority shareholders -- -- -- -- 33012 -- -- 33012 Stock based compensation -- -- -- -- 15035 -- -- 15035 Preferred dividend -- -- -- -- -- (99144) -- (99144) Net loss -- -- -- -- -- (390063) -- (390063) -------- ---- ------- --- -------- -------- -------- ------- BALANCE AT SEPTEMBER 30, 2007 11935308 $5,968 1615861 $808 $14291362 $(5745768) $(3008671) $5543699 ======== ==== ======= === ======== ======== ======== ======= See notes to consolidated financial statements. ___________________________________________________________________________ GALLERY OF HISTORY, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED SEPTEMBER 30, 2007 AND 2006 ___________________________________________________________________________ 2007 2006 ____ ____ OPERATING ACTIVITIES Net loss $(390,063) $(534,342) Depreciation and amortization 67,531 73,157 Contributed services of majority shareholders 33,012 33,012 Stock based compensation 15,035 -- (Increase) decrease in: Inventory of documents owned 80,457 (52,978) Other assets (7,398) 85,568 Increase (decrease) in: Accounts payable (60,754) 48,720 Accrued and other liabilities (18,072) 6,038 -------- -------- Net cash used in operating activities (280,252) (340,825) -------- -------- INVESTING ACTIVITIES Purchase of property and equipment (14,605) -- -------- -------- FINANCING ACTIVITIES Proceeds from borrowings: Majority shareholder 332,870 541,820 Other 304,000 217,000 Repayments of borrowings: Majority shareholder (20,200) (7,555) Other (322,034) (410,818) -------- -------- Net cash provided by financing activities 294,636 340,447 -------- -------- NET DECREASE IN CASH (221) (378) CASH, BEGINNING OF YEAR 1,738 2,116 -------- -------- CASH, END OF YEAR $ 1,517 $ 1,738 ======== ======== SUPPLEMENTAL CASH FLOW INFORMATION: Cash paid during the year for interest $ 185,265 $ 223,450 ======== ======== Noncash investing and financing activities: Capitalization of contributed services, majority shareholder -- $ 423,684 ======== ======== Issuance of preferred stock in partial settlement of note payable, majority shareholder -- $3,231,772 ======== ======== Dividend accrued on preferred stock $ 99,144 $ 48,476 ======== ======== See notes to consolidated financial statements. ___________________________________________________________________________ GALLERY OF HISTORY, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS __________________________________________ 1. SIGNIFICANT ACCOUNTING POLICIES Business Activity - Gallery of History, Inc. and its 100%-owned subsidiaries (collectively the "Company"), acquire documents of historical or social significance and market these documents to the general public. The Company makes available to its customers a certificate of authenticity, valid for ten years from date of purchase, for each document it sells. Under the certificate, the Company is required to refund to the customer the purchase price should any document prove to be a forgery or otherwise lack authenticity. Historically, such refunds have been insignificant. To ascertain authenticity, the Company under certain circumstances may rely upon the reputation of sellers, the history of prior ownership of such documents, and/or opinions of experts. Principles of Consolidation - The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. Significant inter-company accounts and transactions have been eliminated. Use of Estimates - The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates that affect reported amounts and disclosures, some of which may require revision in future periods. Estimated valuation allowances for deferred tax assets (Note 6) are subject to material changes within the next year. Revenues - The Company recognizes revenues from document sales when title passes to the customer upon shipment. Shipping and handling costs and related customer charges are not significant. 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 valuation declines, if any. Because of wide variations in the time between purchase and sale of many of such documents, 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 accounts for changes in the cost of documents owned as an adjustment to arrive at cash flows from operating activities. Property and Equipment - Property and equipment (Note 2) are stated at cost. Depreciation of property and equipment is provided on the straight-line method over their estimated useful lives (30 years for buildings and 3-15 years for other classifications). Depreciation expense and certain other expenses related to the Company's building, are allocated between operating and rental activities generally on a per square foot basis. In addition to land, building and equipment, property and equipment also includes the cost to develop internal-use software and the Company's website. These costs are reviewed for possible impairment at least quarterly. Advertising Costs - Advertising costs, $49,810 in 2007 and $75,716 in 2006, including all sales material and internet selling fees, are generally expensed as incurred and are included in general, selling and administrative expenses. Certificates of Authenticity - The Company makes available to its customers a ten-year Certificate of Authenticity, which obligates the Company to refund to the customer the purchase price paid if any document is proven non-authentic. Claims made against the Company pursuant to its Certificates of Authenticity have been immaterial, accordingly, the Company has not established a reserve against the risk of forgery or against any exposure under the Certificates of Authenticity. 2. PROPERTY AND EQUIPMENT Property and equipment at September 30, 2007 and 2006, consists of the following: 2007 2006 ---- ---- Land $ 580,000 $ 580,000 Equipment and furniture 573,921 576,526 Software 320,218 310,389 Office building and improvements 1,653,729 1,653,729 --------- --------- 3,127,868 3,120,644 Less accumulated depreciation (2,080,413) (2,020,263) --------- --------- $1,047,455 $1,100,381 ========= ========= Approximately 45% of the Company's office building is leased or is available to lease to tenants (Note 7). Property and equipment identifiable with the rental operation and the Company's use is as follows: 2007 2006 ---- ---- Office building $1,495,751 $1,495,751 Less accumulated depreciation (1,046,311) (991,765) --------- --------- $ 449,440 $ 503,986 ========= ========= 3. OTHER ASSETS Other assets at September 30, 2006 and 2005, consist of the following: 2007 2006 ---- ---- Framing materials $ 23,451 $ 25,000 Prepaid expenses 24,017 16,750 Other 13,926 12,246 ------- ------- $ 61,394 $ 53,996 ======= ======= 4. RELATED PARTY TRANSACTIONS Issuance of preferred stock. Prior to 2006, the Company borrowed $1,000,000 from its principal officer/stockholder, Todd Axelrod. The advance is due on demand but not prior to October 31, 2008, with monthly interest payments payable at a rate of 6% per annum (reduced from 8% as of September 1, 2005). Interest expense on the related party advance was $60,835 and $60,833 for fiscal years 2007 and 2006, respectively. The Company has also borrowed other amounts, from Mr. Axelrod, from time to time during the fiscal years 2007 and 2006. The funds borrowed have an interest rate of 3% (reduced from 7.75% as of September 1, 2005). The principal balance of the funds borrowed, in addition to the foregoing $1,000,000, totaled $895,226 and $582,556 as of September 30, 2007 and September 30, 2006, respectively. Interest expense on these related party borrowings was $21,066 and $43,918 during fiscal years 2007 and 2006, respectively. The funds were used to supplement cash flows from operating activities. On January 20, 2006, the Company held a special meeting of stockholders and approved converting $3,231,722 of the advances into 1,615,861 non-voting shares of Series A Convertible Preferred Stock. The Series A Convertible Preferred Stock earns dividends at the annual rate of 3% applied to the liquidation value, and payable semi-annually so long as resources are legally available for that purpose (unless waived by the holder). Unpaid dividends are cumulative, are added to the liquidation value (upon which the annual dividend rate is applied), and are preferential in the event of liquidation and with respect to any dividends or other distributions to Common Stockholders. The Preferred Stock is non- voting (except as may be required by law) and convertible at any time at the option of the holder at a fixed rate of one common share for every $2 in liquidation value, as adjusted, per share of Preferred Stock at the time of conversion, subject to adjustment in the event of future increases or decreases in the number of outstanding shares of Common Stock for a price other than the then conversion price of the Preferred Stock or in the event of issuance of certain other securities. As of September 30, 2007 and September 30, 2006, a total of 1,689,671 and 1,640,099 shares of Common Stock were issuable upon conversion of the Preferred Stock. Mr. Axelrod intends but is not obligated to continue funding or guarantee additional debt, should it be required. Mr. Axelrod has agreed not to demand payment on any amounts the Company has borrowed and, if necessary, defer his right to receive interest payments and/or dividend payments through at least October 31, 2008 (Note 5). Mr. Axelrod is not currently being paid a salary in cash, and the Company is now recording compensation at the estimated fair-value of his reduced services. Revenue-sharing arrangement. During the current fiscal year, Mr. Todd Axelrod, purchased documents from outside sources for his own account with personal funds. The Company may have been interested in acquiring some or all of the items; however, management believed that the Company lacked sufficient liquidity to assume the related finance and marketability risks. As a result, the Company and Mr. Axelrod entered into a revenue-sharing arrangement whereby the Company physically safeguards and catalogs the documents, and markets certain of the items on its web site for a fee consisting of 80% of the gross profit from any sale (defined as the sales price to a third party buyer less Mr. Axelrod's cost of acquiring the item). The Company believes this fee arrangement is considerably more favorable to the Company than the Company could obtain from an independent third party. The Company receives the same guarantee as Mr. Axelrod would receive as to the authenticity warranty obtained from the vendors. The Company has also independently verified Mr. Axelrod's cost of the consigned inventory. During the fiscal year, 34 documents subject to the revenue-sharing arrangement were sold for $113,004. The Company's revenue share for the fiscal period was $78,473 and is included in revenues. Contributed Services. The Company's president and majority shareholder does not receive a salary. Accordingly, the estimated value of such services (approximately $30,000 per year) is recorded as expense and additional paid-in capital. 5. ADVANCES AND NOTES PAYABLE Advances and notes payable consist of the following at September 30: Advances payable, Majority Shareholder debt (demand rights waived through October 31, 2008): 2007 2006 ---- ---- 6% advance $1,000,000 $1,000,000 Other advances, interest rate 3% 895,226 582,556 --------- --------- $1,895,226 $1,582,556 ========= ========= Notes payable, other: 8.5% Mortgage note payable July 15, 2012, collateralized by a building $1,074,199 $1,170,588 6.5% auto loan payable in 60 monthly installments 582 4,227 Prime plus 1.5% revolving line of credit (up to $100,000) renewing August 2008, (9.25% at September 30, 2007), collateralized by documents and equipment 94,000 12,000 --------- --------- $1,168,781 $1,186,815 ========= ========= The estimated fair value of the Company's debt at September 30, 2007 and 2006, respectively, was approximately $3,064,007 and $2,769,371, which approximated its book value. The estimated fair value amounts are based on discounted cash flow valuations, because none of the Company's debt has quoted market prices. Discount rates were estimated based on current rates offered to the Company for debt having similar amounts and maturities. Maturities of notes payable are as follows for fiscal years ending September 30: 2008 $ 120,304 2009 1,931,251 2010 47,249 2011 59,475 2012 905,728 --------- Total $3,064,007 ========= 6. INCOME TAXES The Company provides a valuation allowance against deferred tax assets (primarily associated with net tax loss carryforwards), to the extent that such tax assets are considered by management as not likely to be utilized, after consideration of tax planning strategies. Such valuation allowance is the reason for the variation in the customary relationship between income tax benefit and the pretax accounting loss. Additional details of the components of deferred income taxes at September 30, 2007 and 2006 follows: 2007 2006 Deferred tax assets ---- ---- Net operating losses, net of reserves of $814,200 and $716,100 $1,421,822 $1,411,708 Other 5,773 32,666 --------- --------- 1,427,595 1,444,374 Deferred tax liabilities Depreciation (87,753) (104,532) --------- --------- Net deferred tax assets $1,339,842 $1,339,842 ========= ========= The differences between the normal federal statutory rate of 34% applied to loss before income taxes and the Company's effective rate are: Tax Tax 2007 rate 2006 rate ---- ---- ---- ---- Benefit at statutory rate (132,600) (34.0%) $(181,700) (34.0%) Reserve against tax benefit 98,100 25.2% 176,900 33.1% Other 34,500 8.8% 4,800 .9% -------- ---- -------- ---- Income tax benefit $ -- -- % $ -- -- % ======== ==== ======== ==== The entire tax benefit attributable to fiscal years 2007 and 2006 of $98,100 and $176,900 are recognized net of 100% reserves because future realization is estimated to be less likely than not. As of September 30, 2007, the Company had federal income tax loss carryforwards of $6,560,000 available to reduce future tax payment obligations. The carryforwards expire from 2009 to 2026. 7. Stock-based compensation As an employment inducement, the then recently hired vice-president of sales was granted options to acquire 50,000 shares of the Company's common stock at $2.19 per share, the stock price on the grant date (April 16, 2007). Using the Black-Scholes pricing model and an estimated expiration factor of 3.25 years, a volatility factor of one based on daily trading history, and a risk-free interest rate of 4.5%, the options were valued at approximately $72,000, to be charged to expense ratably over the 24-month vesting period. The financial statements for the three months ended June 30, 2007 includes share- based compensation expense of approximately $6,000 associated with these options. The outstanding options were not given effect to compute diluted loss per share for the period since to do so would have been anti-dilutive. 8. RENTAL INCOME, NET The Company leases office space in its office building to tenants under non-cancelable operating leases. Such leases provide for payment of minimum rentals plus escalation charges determined by certain expenses incurred in the operation of the building. Lease periods expire from 2007 to 2012 with various renewal options. Gross rental income for the periods ended September 30, 2007 and 2006 was $185,327 and $189,073, respectively. Building operating costs, including primarily depreciation, repairs and maintenance, janitorial, utilities and property taxes, totaled $83,073 and $83,137 in 2007 and 2006, respectively. Future minimum lease payments receivable under non-cancelable operating leases as of September 30, 2007, excluding contingent amounts applicable to reimbursable expenses, are as follows: 2008 $ 150,027 2009 124,346 2010 97,753 2011 99,479 2012 99,636 Thereafter 8,334 -------- $ 579,575 ======== Item 8. Changes In and Disagreements With Accountants on Accounting and Financial Disclosure None. Item 8a. Controls and Procedures The Company maintains disclosure controls and procedures designed to ensure that it is able to timely collect the information it is required to disclose in the reports it files with the Securities and Exchange Commission. As of September 30, 2007, the Company carried out an evaluation of the effectiveness of the design and operation of the Company's disclosure controls and procedures pursuant to Exchange Act Rule 13a-15. The evaluation was conducted under the supervision of, and with the participation of the Company's management including the Company's Chief Executive Officer and Chief Financial Officer. Based on their evaluation, as of September 30, 2007, 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 fiscal year ended September 30, 2007, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. Item 8b. Other Information - None. PART III Item 9. Directors, Executive Officers, Promoters and Control Persons; Compliance with Section 16(a) of the Exchange Act Directors, Executive Officers and Significant Employees ------------------------------------------------------- Set forth below are the present directors, executive officers and any significant employees, if any, of the Company. Directors are elected until the next annual meeting of stockholders and until their successors are duly elected and qualified. Officers are elected for terms of one year, or until their successors are duly elected and qualified or until terminated by the action of the Board of Directors. Has Served as Director Position(s) with Continuously Name Age the Company Since --------------- --- ------------------------- ------------ Todd M. Axelrod 58 President and Chairman 1981 of the Board of Directors Rod R. Lynam 59 Treasurer/Assistant 1984 Secretary and Director Dr. Michael Rosenman 46 Director 2002 Roger Schneier 64 Director 2006 Peter Kuhr 59 Director 2007 Todd M. Axelrod has been Chairman of the Board of Directors and President of the Company since its inception in November 1981. Mr. Axelrod has been a private collector of valuable historical documents since 1968. Mr. Axelrod authored a book entitled The Handbook of Historical Documents - A Guide to Owning History. Rod Lynam has been Treasurer and Chief Financial Officer of the Company since September 1984. Michael Rosenman, M.D., Ph.D., has been a member of our Board of Directors since 2002. Dr. Rosenman is a practicing physician specializing in the field of Pediatrics since 1988. Prior to establishing private practice offices in Las Vegas in 1996, Dr. Rosenman was associated with UCLA's Department of Medicine, Division of Hematology/Oncology, and with Children's Hospital in Orange County, California. His practice employs multiple offices and physicians. Roger Schneier was appointed to the Board of Directors on May 22, 2006. Mr. Schnier has been retired since January 2005. Prior to his retirement he was President for twenty-five years of Ben's Auto Parts and Be-Mack Warehouse, both located in Bronx, New York. Peter Kuhr was elected to the Board of Directors on March 13, 2007. Mr. Kuhr is currently the president of, and a partner in, Capital Iron 1997 Ltd., a specialty retail operation servicing the Victoria, British Columbia market. Prior to this position, in 1996, he was general merchandise manager of the textiles division of Eaton's of Canada, then a major department store with over 100 stores across Canada. Mr. Kuhr is a member of the Board of Directors for the Downtown Victoria Business Association and is an active fund raiser and volunteer with a number of community organizations including the United Way and the Prostate Centre. Section 16(a) Beneficial Ownership Reporting Compliance ------------------------------------------------------- Section 16(a) of the Securities Exchange Act of 1934 requires the Company's directors and executive officers, and persons who own more than ten percent of the Company's Common Stock, to file with the SEC initial reports of ownership and reports of changes of ownership of Common Stock of the Company. Officers, directors and greater than ten percent stockholders are required by SEC regulation to furnish the Company with copies of all Section 16(a) forms they file. To the Company's knowledge, during the fiscal year ended September 30, 2007, all Section 16(a) filing requirements applicable to its officers, directors and greater than ten percent beneficial owners were complied with. In making these disclosures, the Company has relied solely on a review of the copies of such reports furnished to the Company and written representations of its directors, executive officers and its greater than ten percent stockholders. Audit Committee Matters ----------------------- The Company's Audit Committee currently is composed of Mr. Kuhr, Chairman, Dr. Rosenman and Mr. Schneier. Mr. Berezan resigned as a director of the Company and as audit committee chairman March 12, 2007. The Board of Directors, in a meeting held March 13, 2007, elected Mr. Peter Kuhr to the Board. The Board also appointed Mr. Kuhr as chairman of the Audit Committee. The Company's Board of Directors has determined that each member of the Audit Committee is able to read and understand fundamental financial statements, including the Company's consolidated balance sheet, income statement and cash flow statement. In addition, the Board of Directors has determined that Peter Kuhr is an "audit committee financial expert" as that term is defined by the rules and regulations of the Securities and Exchange Commission. Also, the Board of Directors has determined that each of these individuals is an "independent director," as defined under the applicable rules and listing standards of the NASDAQ Stock Market LLC and the rules and regulations of the Securities and Exchange Commission. Code of Ethics -------------- Effective September 27, 2004, our Company's Board of Directors adopted a Code of Business Conduct and Ethics that applies to, among other persons, our Company's directors, President (being our Principal Executive Officer) and Treasurer (being our Principal Financial Officer), as well as our Company's other executive officers and persons performing similar functions. As adopted, our Code of Business Conduct and Ethics sets forth written standards that are designed to deter wrongdoing and to promote: (1) honest and ethical conduct, including the ethical handling of actual or apparent conflicts of interest between personal and professional relationships; (2) full, fair, accurate, timely and understandable disclosure in reports and documents that we file with, or submit to, the Securities and Exchange Commission and in other public communications made by us; (3) compliance with applicable governmental laws, rules and regulations; (4) the prompt internal reporting of violations of the Code of Business Conduct and Ethics to an appropriate person or persons identified in the Code of Business Conduct and Ethics; and (5) accountability for adherence to the Code of Business Conduct and Ethics. Our Code of Business Conduct and Ethics requires, among other things, that all of our Company's personnel shall be accorded full access to our President with respect to any matter which may arise relating to the Code of Business Conduct and Ethics. Further, all of our Company's personnel are to be accorded full access to our Company's Board of Directors if any such matter involves an alleged breach of the Code of Business Conduct and Ethics by our President. In addition, our Code of Business Conduct and Ethics emphasizes that all employees, and particularly managers and/or supervisors, have a responsibility for maintaining financial integrity within our Company, consistent with generally accepted accounting principles, and federal, provincial and state securities laws. Any employee who becomes aware of any incidents involving financial or accounting manipulation or other irregularities, whether by witnessing the incident or being told of it, must report it to his or her immediate supervisor or to our Company's President. If the incident involves an alleged breach of the Code of Business Conduct and Ethics by the President, the incident must be reported to any member of our Board of Directors. Any failure to report such inappropriate or irregular conduct of others is to be treated as a severe disciplinary matter. It is against our Company policy to retaliate against any individual who reports in good faith the violation of potential violation of our Company's Code of Business Conduct and Ethics by another. We will provide a copy of the Code of Business Conduct and Ethics to any person without charge, upon request. Requests can be sent to 3601 West Sahara Avenue, Promenade Suite, Las Vegas, Nevada 89102. Item 10. Executive Compensation ---------------------- The following table sets forth all compensation awarded to, earned by, or paid by the Company during our fiscal year ended September 30, 2007 to our Chief Executive Officer, and to any executive officer who received compensation in excess of $100,000 for the last completed fiscal year (each a "Named Executive Officer"). SUMMARY COMPENSATION TABLE -------------------------- Non- Non- Equity qualified Name and Incentive Deferred All Principal Stock Option Plan Comp Other Position Year Salary Bonus Awards Awards Comp Earnings Comp Total --------- ---- ------ ----- ------ ---- -------- --------- ------ ------- Todd M. 2007 $0(1) $0 $0 $0 $0 $0 $8310(2) $8310(2) Axelrod, 2006 $0(1) $0 $0 $0 $0 $0 $7644(2) $7644(2) President and Chief Executive Officer (1) Mr. Axelrod does not receive compensation for services rendered. (2) Represents employee benefits in the form of health and life insurance. During the fiscal year ended September 30, 2007, the Company did not grant any stock options or stock appreciation rights to any of the named executive officers of the Company. In addition, none of the named executive officers held any stock options. DIRECTOR COMPENSATION --------------------- The following table sets forth certain information concerning compensation paid to our outside directors during fiscal 2007: Fees Non-Equity Non-qualified Earned or Incentive Deferred All Paid in Stock Option Plan Compensation Other Name Cash Awards Awards Comp Earnings Comp Total ---------------- ---- ------ ------ ------ ---------- ---- ----- Michael Rosenman $0 $0 $0 $0 $0 $0 $0 Roger Schneier $0 $0 $0 $0 $0 $0 $0 Peter Kuhr $0 $0 $0 $0 $0 $0 $0 We do not compensate any of our directors for serving on the Board or on any committee of the Board. If requested, we may reimburse our outside directors for their reasonable travel expenses incurred in attending Board or committee meetings. We are not a party to any employment agreement with any of our executive officers. On April 16, 2007, we entered into a letter agreement with Don A Prince, pursuant to which Mr. Prince was employed on a full-time basis in a non-executive officer capacity, as the Company's Vice President of Sales. Mr. Prince's employment is on an at-will basis, and may be terminated at any time by either Mr. Prince or the Company for any or no reason at all. Mr. Prince is being compensated at the per annum rate of $100,000, and, as an inducement to accept employment with the Company, the Company awarded Mr. Prince an aggregate 50,000 options to purchase a like number of shares of the Company's common stock at an exercise price of $2.19 per share (the closing price on April 16, 2007). The options are subject to a vesting schedule and expire upon the earlier of five years from the date of grant or the termination of Mr. Prince's employment with the Company, irrespective of the reasons for any such termination. Item 11. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters --------------------------------------------------- The following table sets forth certain information, as of December 1, 2007, regarding those persons known to the Company to be the beneficial owners of more than five percent of the Common Stock of the Company, by each Director of the Company, by each of the named Executive Officers and by all Officers and Directors of the Company as a group. Title of Name and Address of Amount and Nature of Percent Class Beneficial Holder(1) Beneficial Ownership(2) of Class -------- -------------------- ----------------------- -------- Common Todd M. Axelrod 6,001,785(3) 82.0% Stock Common Rod R. Lynam 210 (4) Stock Common Dr. Michael Rosenman -0- -- Stock Common Roger Schneier 30,707 1.3% Stock Common Peter Kuhr -0- -- Stock Common Gerald Newman 493,000 8.8% Stock 17161 Coral Cove Way Boca Raton, FL 33496 Common All Executive Officers 6,032,702(3) 82.5% Stock and Directors as a group (5 persons)(3) (1) Address is the same as the Company's address. (2) The individuals referred to above have sole voting and investment power in regard to their Common Stock, subject to applicable community property laws. (3) Includes 1,689,671 shares of Common Stock issuable upon conversion of 1,689,671 shares of Series A Preferred Stock owned of record by Mr. Axelrod. (4) Less than 1%. There are no arrangements known to the Company, the operation of which may at a subsequent date result in a change of control of the Registrant. Item 12. Certain Relationships and Related Transactions ---------------------------------------------- Prior to 2006, the Company borrowed $1,000,000 from its majority stockholder/president, Todd M. Axelrod. The advance is due on demand but not prior to October 31, 2008, with monthly interest payments payable at a rate of 6% per annum (reduced from 8% as of September 1, 2005). Interest expense on the related party advance was $60,835 and $60,833 for fiscal years 2007 and 2006, respectively. The Company has also borrowed other amounts, from Mr. Axelrod, from time to time during the fiscal years 2007 and 2006. The funds borrowed have an interest rate of 3% (reduced from 7.75% as of September 1, 2005). The principal balance of the funds borrowed, in addition to the foregoing $1,000,000, totaled $895,226 and $582,556 as of September 30, 2007 and September 30, 2006, respectively. Interest expense on these related party borrowings was $21,066 and $43,918 during fiscal years 2007 and 2006, respectively. The funds were used to supplement cash flows from operating activities. On January 20, 2006, the Company held a special meeting of stockholders and approved converting $3,231,722 of the advances into 1,615,861 non-voting shares of Series A Convertible Preferred Stock. The Series A Convertible Preferred Stock earns dividends at the annual rate of 3% applied to the liquidation value, and payable semi-annually so long as resources are legally available for that purpose (unless waived by the holder). Unpaid dividends are cumulative, are added to the liquidation value (upon which the annual dividend rate is applied), and are preferential in the event of liquidation and with respect to any dividends or other distributions to common stockholders. The Preferred Stock is non-voting (except as may be required by law) and convertible at any time at the option of the holder at a fixed rate of one common share for every $2 in liquidation value, as adjusted, per share of Preferred Stock at the time of conversion, subject to adjustment in the event of future increases or decreases in the number of outstanding shares of Common Stock for a price other than the then conversion price of the Preferred Stock or in the event of issuance of certain other securities. As of September 30, 2007 and September 30, 2006, a total of 1,689,671 and 1,640,099 shares of Common Stock were issuable upon conversion of the Preferred Stock. Mr. Axelrod intends but is not obligated to continue funding or guarantee additional debt, should it be required. Mr. Axelrod has agreed not to demand payment on any amounts the Company has borrowed and, if necessary, defer his right to receive interest payments and/or dividend payments through at least October 31, 2008. Mr. Axelrod is not currently being paid a salary in cash, and the Company is now recording compensation at the estimated fair-value of his reduced services. During the current fiscal year, Mr. Todd Axelrod, purchased documents from outside sources for his own account with personal funds. The Company may have been interested in acquiring some or all of the items; however, management believed that the Company lacked sufficient liquidity to assume the related finance and marketability risks. As a result, the Company and Mr. Axelrod entered into a revenue-sharing arrangement whereby the Company physically safeguards and catalogs the documents, and markets certain of the items on its web site for a fee consisting of 80% of the gross profit from any sale (defined as the sales price to a third party buyer less Mr. Axelrod's cost of acquiring the item). The Company believes this fee arrangement is considerably more favorable to the Company than the Company could obtain from an independent third party. The Company receives the same guarantee as Mr. Axelrod would receive as to the authenticity warranty obtained from the vendors. The Company has also independently verified Mr. Axelrod's cost of the consigned inventory. During the fiscal year, 34 documents subject to the revenue-sharing arrangement were sold for $113,004. The Company's revenue share for the fiscal period was $78,473 and is included in revenues. Item 13. Exhibits and Reports on Form 8-K Exhibits 3.1 Articles of Incorporation.* 3.2 Amendment to Articles of Incorporation filed July 9, 1984.* 3.3 Amendment to Articles of Incorporation filed May 29, 1990.* 3.4 Bylaws.** 14.1 Code of Business Conduct and Ethics*** 21 List of Subsidiaries. 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) *Incorporated by reference to Exhibit 3.1 to the Registrant's Form 10-QSB for its fiscal quarter ended June 30, 2005 (the "Form 10-QSB"). ** Incorporated by reference to Exhibit 3.2 to the Form 10-QSB. *** Incorporated by reference to Exhibit 14.1 to the Registrant's Form 10-KSB for its fiscal year ended September 30, 2004. Item 14. Principal Accountant Fees and Services The following table lists the aggregate fees billed for professional services rendered for the audit of the Company's annual financial statements for the years ended September 30, 2007 and 2006 including the reviews of the unaudited interim financial statements of the Company's Form 10-QSB. 2007(1) 2006 ------- ---- Audit Fees (2) $41,886 $33,006 Audit-Related Fees 0 0 Tax Fees (3) 3,000 3,311 All other fees(4) 20,349 0 (1) Total audit and tax fees for fiscal 2007 have not yet been billed to the Company. The amounts entered are estimated. (2) Audit fees consist of services rendered to the Company for the audit of the Company's annual financial statements, reviews of the Company's quarterly financial statements and related services. (3) Tax fees consist of tax compliance and related tax services. (4) All other fees included fees charged mainly for fees pertaining to the Securities and Exchange Commission comment letters received during fiscal 2007. The audit committee pre-approves all services provided by our independent auditors, Piercy, Bowler, Taylor & Kern. All of the above services and fees were reviewed and approved by the audit committee. SIGNATURES In accordance with Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Dated: December 26, 2007 GALLERY OF HISTORY, INC. By: /s/ Todd M. Axelrod ------------------- Todd M. Axelrod, Chairman and President In accordance with the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated: Signature Title Date --------- ----- ---- /s/ Todd M. Axelrod President and December 26, 2007 ------------------- Chairman of the Todd M. Axelrod Board of Directors (Principal Executive Officer) /s/ Rod Lynam Treasurer/Assistant December 26, 2007 ------------- Secretary and Director Rod Lynam (Principal Financial and Accounting Officer) /s/ Michael Rosenman Director December 26, 2007 -------------------- Michael Rosenman /s/ Roger Schneier Director December 26, 2007 ------------------ Roger Schneier /s/ Peter Kuhr Director December 26, 2007 ------------- Peter Kuhr