SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1998
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 0-13757
GALLERY OF HISTORY, INC.
(Exact Name of Small Business Issuer as Specified in Its Charter)
Nevada 88-0176525
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3601 West Sahara Avenue, Las Vegas, Nevada 89102-5822
(Address of principal executive offices) (Zip Code)
Issuer's telephone number: (702) 364-1000
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Securities Exchange Act of 1934 during the past 12 months
(or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past
90 days. [X] Yes [ ] No
The Registrant had 3,195,934 shares of Common Stock, par value $.001,
outstanding as of July 15, 1998.
<PAGE>
<TABLE>
Part 1 - FINANCIAL INFORMATION
GALLERY OF HISTORY, INC. and SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS - UNAUDITED
______________________________________________________________________
<CAPTION>
JUNE 30, SEPTEMBER 30,
1998 1997
----------- ------------
<S> <C> <C>
ASSETS
Cash $ 51,820 $ 20,095
Accounts receivable 47,810 59,650
Prepaid expenses 72,916 50,928
Documents owned 6,719,713 6,980,816
Land and building-net 1,442,628 1,454,805
Property and equipment-net 246,375 258,536
Other assets 170,119 168,636
---------- ----------
TOTAL ASSETS $ 8,751,381 $ 8,993,466
========== ==========
LIABILITIES
Accounts payable $ 34,049 $ 74,409
Notes payable 53,263 62,600
Mortgage notes payable 1,200,327 1,376,239
Deposits 28,310 49,570
Deferred tax 145,885 144,043
Accrued and other liabilities 96,567 93,633
---------- ----------
TOTAL LIABILITIES 1,558,401 1,800,494
---------- ----------
STOCKHOLDERS' EQUITY
Common stock: $.001 par value;
10,000,000 shares authorized;
5,917,654 shares issued 5,918 5,918
Additional paid-in-capital 9,392,363 9,392,363
Accumulated deficit (64,307) (157,828)
Treasury stock (2,709,220 and
2,676,720 shares), at cost (2,140,994) (2,047,481)
---------- ----------
TOTAL STOCKHOLDERS' EQUITY 7,192,980 7,192,972
---------- ----------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 8,751,381 $ 8,993,466
========== ==========
See the accompanying notes to consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
GALLERY OF HISTORY, INC. and SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS - UNAUDITED
______________________________________________________________________
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
JUNE 30, JUNE 30,
1998 1997 1998 1997
-------- --------- --------- ---------
<S> <C> <C> <C> <C>
REVENUES $ 692,288 $ 670,944 $2,097,409 $2,442,715
COST OF GOODS SOLD 277,059 193,740 812,398 653,320
--------- --------- --------- ---------
GROSS PROFIT 415,229 477,204 1,285,011 1,789,395
--------- --------- --------- ---------
OPERATING EXPENSES:
Selling, general and
administrative 356,397 343,809 1,081,789 1,124,544
Depreciation 17,010 17,632 55,857 63,115
Advertising 15,504 33,476 67,106 74,451
Maintenance & repairs 2,060 8,386 8,103 23,192
Loss on gallery closure -- -- -- 941
Restructuring charge -- 217,438 -- 217,438
--------- --------- --------- ---------
TOTAL OPERATING EXPENSES 390,971 620,741 1,212,855 1,503,681
--------- --------- --------- ---------
OPERATING INCOME (LOSS) 24,258 (143,537) 72,156 285,714
--------- --------- --------- ---------
OTHER INCOME (EXPENSE)
Gain on repurchase of
common stock -- -- -- 356,553
Interest expense (32,373) (50,252) (100,584) (149,749)
Other 41,207 51,946 122,436 162,501
--------- --------- --------- ---------
TOTAL OTHER INCOME 8,834 1,694 21,852 369,305
--------- --------- --------- ---------
INCOME (LOSS) BEFORE
INCOME TAXES 33,092 (141,843) 94,008 655,019
(PROVISION) CREDIT FOR
INCOME TAXES 2,923 92,356 (487) (7,444)
--------- --------- --------- ---------
NET INCOME (LOSS) $ 36,015 $ (49,487) $ 93,521 $ 647,575
========= ========= ========= =========
EARNINGS (LOSS) PER SHARE:
Basic $ .01 $(.02) $ .03 $ .19
==== ==== ==== ====
Diluted $ .01 $(.02) $ .03 $ .19
==== ==== ==== ====
See the accompanying notes to consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
GALLERY OF HISTORY, INC. and SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS - UNAUDITED
______________________________________________________________________________
<CAPTION>
NINE MONTHS ENDED JUNE 30,
1998 1997
-------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 93,521 $ 647,575
Adjustments to reconcile net income
to net cash provided by (used in)
operating activities:
Depreciation and amortization 105,068 109,979
Gain on exchange of inventory for
purchase of treasury stock -- (356,553)
Gain on disposal of property -- (1,096)
(Increase) decrease in:
Prepaid expenses (21,988) 3,799
Accounts receivable 11,840 67,841
Documents owned 261,103 187,954
Other assets (1,483) 239,144
(Decrease) increase in:
Accounts payable (40,360) (10,992)
Customer deposits (21,260) 17,219
Deferred tax 1,842 --
Accrued and other liabilities 2,934 8,372
--------- --------
Net cash provided by operating activities 391,217 913,242
--------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of equipment -- 2,000
Purchase of property and equipment (80,730) (73,798)
--------- --------
Net cash used in investing activities (80,730) (71,798)
--------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from bank line of credit -- 137,500
Repayments of bank line of credit -- (137,500)
Proceeds from mortgage and notes payable 825,026 55,000
Repayments of mortgage and notes payable (1,010,275) (334,635)
Repurchase of common stock (93,513) (211,436)
--------- --------
Net cash used in financing activities (278,762) (491,071)
--------- --------
NET INCREASE IN CASH 31,725 350,373
CASH, BEGINNING OF PERIOD 20,095 115,800
--------- --------
CASH, END OF PERIOD $ 51,820 $ 466,173
========= ========
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
For the nine month period ended June 30, 1997:
(1) Documents with a cost of $1,446,492 were exchanged for shares
of the Company's common stock valued at $1,803,045.
See the accompanying notes to consolidated financial statements.
</TABLE>
<PAGE>
GALLERY OF HISTORY, INC. and SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Nine Month Period Ended June 30, 1998 and 1997
_____________________________________________________________________________
1) Summary of Significant Accounting Policies
The consolidated financial statements included herein have been prepared
by Gallery of History, Inc. (the Company), without audit, pursuant to
the rules and regulations of the Securities and Exchange Commission. In
the opinion of management, all adjustments, consisting of normal
recurring items, necessary for a fair presentation of the results for
the interim periods have been made. Certain information and footnote
disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been
condensed or omitted pursuant to such rules and regulations. It is
suggested that these consolidated financial statements are read in
conjunction with the financial statements and the notes thereto included
in the Company's 1997 Annual Report on Form 10-KSB.
2) Unclassified Balance Sheet
The Company includes in its financial statements an unclassified balance
sheet because it believes that such presentation is more meaningful as a
consequence of the Company's historical policy of acquiring documents in
excess of its current needs, when feasible, and it is not practicable to
determine what portion of the documents owned will be sold within the
next twelve months.
3) Repurchase of Common Stock
In October 1996, the Company repurchased 2,659,720 shares of its common
stock, representing the entire interest of the Company's largest
shareholder for total consideration of $2,000,000, consisting of 460
documents valued at $1,803,045 and $196,955 in cash. The parties
negotiated the value of the inventory based on an independent expert's
appraisal. The book value of the inventory was $1,446,492, resulting in
a gain on disposition of $356,553.
In May 1997, the Company purchased 5,000 shares of its common stock at a
price of $2.875. In September 1997, it purchased 12,000 shares at
$2.75; in October 1997, it purchased 30,000 at $2.865; in December 1997,
it purchased 2,500 shares at $2.563 and July 2, 1998, the Company
purchased 12,500 shares at $3.25.
<PAGE>
4) Earnings per Share
The computation of earnings or loss per share is based on the weighted
average number of shares of common stock outstanding and stock options
granted that are outstanding, if applicable.
In December 1997, the Company adopted SFAS No. 128, "Earnings per
Share," effective December 15, 1997. As a result the Company's reported
earnings per share for 1997 were restated.
<TABLE>
<CAPTION>
For the periods ended
June 30, 1997 June 30, 1998
___________________________ ________________________
Income Shares Per-Share Income Shares Per-Share
Amount Amount
___________________________ ________________________
<S> <C> <C> <C> <C> <C> <C>
Basic EPS
Income available to
common shareholders $647,575 3,354,499 $0.19 $93,521 3,210,036 $0.03
Effect of dilutive
securities
Options -- -- -- 24,853
___________________ _________________
Diluted EPS
Income available to
common shareholders
including assumed
conversion $647,575 3,354,499 $0.19 $93,521 3,234,889 $0.03
========================== ========================
</TABLE>
5) Restructuring Charge
The restructuring charge appearing in the period ended June 30, 1997,
represents the write down of certain assets, principally the Company's
book inventory.
<PAGE>
Part 1 - Item 2 Financial Information
MANAGEMENT'S DISCUSSION AND ANALYSIS
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Liquidity and Capital Resources
- -------------------------------
Due to the nature of the Company's inventory of documents owned, the
Company has presented an unclassified balance sheet (see Note 2 to the
consolidated financial statements). Accordingly, the traditional measures
of liquidity in terms of changes in working capital are not applicable.
The increase in net cash provided by operating activities for the
nine months ended June 30, 1998 was largely due to the decrease in the
Company's document inventory. Purchases of documents during the nine
month period ended June 1998 were approximately $225,000 compared to
approximately $270,000 for the nine month period ended June 1997. An
increase in prepaid expenses is attributed to the prepayment for catalogs in
process for an upcoming auction. The Company utilizes the cash provided
from operations to pay down its mortgage revolving line of credit rather
than maintaining larger cash balances. In addition, the Company has
also utilized cash generated from operations to purchase shares of its
Common Stock in the open market or privately negotiated transactions.
The Company has available a line of credit from its bank in the
amount of $100,000 at an interest rate of 1.5% over the prime rate with
a maturity date of July 15, 1999. Loans under the line are secured by
the Company's inventory. As of June 30, 1998, there was no outstanding
balance on this line of credit. In addition, the Company has a reducing
principal line of credit in the amount of approximately $35,000 as of
June 30, 1998, with a maturity of March 1999. The principal is reduced
by $4,667 a month. As of June 30, 1998, there were no funds drawn
against this line of credit. Any funds drawn bear interest at the
bank's prime rate plus 1.5%. In July 1997, the Company's term mortgage
note was converted to a reducing revolving line of credit in the amount
of $1,839,523. The line of credit has a 59 month amortization of
principal at a 9% interest rate and a balloon payment due at maturity in
July 2002 in the amount of $1,565,106. This line of credit is
collateralized by the Company's headquarters building. As of June 30,
1998, there was $592,775 available under this line of credit with a
mortgage balance of $1,200,327. As stated above, all excess cash is
applied against this loan rather than maintaining excessive cash balances.
The Company believes its current cash and working capital requirements will
be satisfied for the near term by revenue generated from operations and
amounts available under the existing lines of credit. In the event the
Company does not generate sufficient working capital from operations, the
Company will seek alternative equity and/or debt financing, the availability
and terms of which cannot be assured.
<PAGE>
Results of Operations
- ---------------------
Document revenues increased 3% comparing the quarter period ended
June 1998 to June 1997. Revenues decreased 14% for the nine month
period ended June 30, 1998 compared to the nine month period ended June
30, 1997. This nine month period decrease is the result of the closure
of the Fashion Show Mall gallery in March 1997. Retail sales decreased
65% comparing the nine month periods, of which the closure amounted to
74% of the decrease. Retail sales amounted to 14% of total sales for
the nine month period ended June 30, 1998 as compared to 33% of total
sales for the nine month period ended June 30, 1997. Auction sales
increased 14% comparing the quarter periods and 11% comparing the two
nine month periods. Both quarter periods had two auctions included; six
auctions were held in the nine month period ended June 30, 1998 compared
to five auctions held in the previous year period.
Cost of goods sold increased to 40% of revenues for the three month
period ended June 30, 1998 compared to 29% of revenues for the three
month period ended June 30, 1997. Costs of goods sold were 39% of
revenues for the nine month period ended June 30, 1998 compared to 27%
of revenues for June 30, 1997. The increase is related to the cost of
printing and mailing the catalogs for the auction sales which amount to
18% of revenues for the three month period ended June 30, 1998 compared
to 13% for the three month period ended June 30, 1997. Catalog costs
amounted to 16% of revenues for the nine month period ended June 30,
1998 as compared to 8% for the nine month period ended June 30, 1997.
The Company is testing new markets in an effort to expand its bidder
base. As a result, the Company is printing and mailing a substantial
number of its catalogs in excess of its proven bidder population. The
Company is averaging approximately $30,000 for catalogs and $18,000 in
mailing cost for each auction held in the current nine month period
compared to an average catalog cost of approximately $25,000 and mailing
cost of $10,500 per auction in the previous year nine month period. The
document inventory cost portion of total cost of goods sold increased
slightly due to the greater share of sales at wholesale/auction pricing
compared to retail pricing.
In the quarter ended June 1997, the Company incurred a $217,438
restructuring charge due to the change in the nature of its business by
shifting from retail sales to wholesale/auction sales. The major
portion of this charge was a write down in the Company's book inventory,
that was previously sold through its retail galleries. Total operating
expenses, without including the restructuring charge in the comparison,
decreased 3% to 56% of revenues for the quarter ended June 30, 1998 from 60%
of revenues for the quarter ended June 30, 1997. Total operating expenses
decreased 6% to 58% of revenues for the nine month period ended June 30,
1998 compared to 53% of revenues for the nine months ended June 30,
1997. The decrease is a result of a decrease in advertising cost and
repair charges. Advertising decreased to 2% of revenues for the quarter
period ended June 30, 1998 compared to 5% for the quarter ended June 30,
1997. Advertising costs amount to 3% of revenues for both the nine
months ended June 1998 and 1997. Maintenance and repair expenses
decreased 75% comparing the two quarters and decreased 65% comparing the
nine month periods largely due to the decreased cost of maintaining its
mainframe computer, which was replaced with a PC client/server network.
Selling, general and administrative expenses increased 4% and were 51%
of revenues for the quarter ended June 30, 1998 compared to the quarter
<PAGE>
ended June 30, 1997. This increase was largely due to an 11% increase
in salaries comparing the quarters reflecting retroactive pay increases.
Comparing the nine month periods, selling, general and administrative
expenses decreased 4% largely due to the closure of the Fashion Show
Mall gallery in the previous year period. Rent expense decreased 40%,
utilities and telephone expenses decreased 32% and property taxes
decreased 12% comparing the two periods. In addition, in the previous
year nine month period, abnormal fees were incurred for professional
services relating to the stock repurchase transaction. Depreciation
expense decreased 4% comparing the three month period ended June 30,
1998 to June 30, 1997 and 11% comparing the two nine month periods. The
decrease was due to the closure of the Las Vegas gallery and equipment
and leasehold improvements becoming fully depreciated.
Interest expense decreased 36% to 5% of revenues for the three
month period ended June 30, 1998 from 7% of revenues for the quarter
ended June 30, 1997. Interest decreased 33% to 5% of revenues for the
nine month period ended June 30, 1998 compared to 6% of revenues for the
nine months ended June 30, 1997. The decrease is attributed to lower
average outstanding loan balances in the current period including paying
down on the term mortgage note that was converted to a revolving line of
credit. Included in other income and expense in the previous year
period was the gain on repurchase of common stock as discussed in Note 3
to the consolidated financial statements.
Part II - Other Information
Item 1-3. None.
Item 4. Submission of Matters to a Vote of Security Holders.
On June 5, 1998, the Company held its annual meeting of shareholders
for the following purposes: (1) to elect five Directors to serve until
the next annual meeting of shareholders; and (2) to approve the appointment
of Arthur Andersen LLP, as the Company's independent auditors for the fiscal
year ending September 30, 1998.
At the Meeting the following Directors were elected by a vote of
1,160,648 for and 101 withholding authority: Todd M. Axelrod, Rod Lynam,
Pamela Axelrod, Roger Croteau and Bernard Duke. Voting for the appointment
of Arthur Andersen LLP, as the Company's independent auditors, 1,160,680
shares were in favor and 69 shares abstain.
Item 5. None.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits. None.
(b) Reports on Form 8-K. None.
<PAGE>
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 July 31, 1998 /s Todd M. Axelrod
______________________ ________________________________
Todd M. Axelrod
President and
Chairman of the Board
(Principal Executive Officer)
Date July 31, 1998 /s Rod Lynam
______________________ _______________________________
Rod Lynam
Treasurer and Director
(Principal Accounting Officer)
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Company's Consolidated Balance Sheet dated June 30, 1998 and its
Consolidated Statement of Operations covering the period from October 1,
1997 to June 30, 1998 and is qualified in its entirety by reference
to such financial statement and notes thereof.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-END> JUN-30-1998
<CASH> 51820
<SECURITIES> 0
<RECEIVABLES> 47810
<ALLOWANCES> 0
<INVENTORY> 6719713
<CURRENT-ASSETS> 0
<PP&E> 2748583
<DEPRECIATION> 1639580
<TOTAL-ASSETS> 8751381
<CURRENT-LIABILITIES> 0
<BONDS> 1200327
0
0
<COMMON> 5918
<OTHER-SE> 7187062
<TOTAL-LIABILITY-AND-EQUITY> 8751381
<SALES> 2097409
<TOTAL-REVENUES> 2097409
<CGS> 812398
<TOTAL-COSTS> 812398
<OTHER-EXPENSES> 1212855
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 100584
<INCOME-PRETAX> 94008
<INCOME-TAX> 487
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<CHANGES> 0
<NET-INCOME> 93521
<EPS-PRIMARY> .03
<EPS-DILUTED> .03
