SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
(X) Quarterly Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended June 30, 2004
-----------------------------
( ) Transition Report under Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the transition period from to
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Commission File Number 1-11048
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DGSE Companies, Inc.
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(Name of small business issuer)
Nevada 88-0097334
--------------------------------- -------------------------------
(State or other jurisdiction (I.R.S. Employer Identification
of incorporation or organization) Number)
2817 Forest Lane, Dallas, Texas 75234
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(Address of principal executive offices) (Zip Code)
(Issuer's telephone number, including area code) (972) 484-3662
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Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 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. Yes X No
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at July 30, 2004
---------------------------- ----------------------------
Common Stock, $.01 per value 4,913,290
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
DGSE Companies, Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEETS
(Unaudited)
ASSETS June 30, December 31,
2004 2003
------------ ------------
CURRENT ASSETS
Cash and cash equivalents $ 319,157 735,293
Trade receivables 671,002 774,586
Other receivables 204,430 204,430
Inventories 6,982,645 6,673,865
Prepaid expenses 179,049 149,277
------------ ------------
Total current assets 8,356,283 8,537,451
MARKETABLE SECURITIES - AVAILABLE FOR SALE 263,799 243,446
PROPERTY AND EQUIPMENT - AT COST, NET 999,088 989,966
GOODWILL 1,151,120 1,151,120
OTHER ASSETS 149,809 149,546
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$ 10,920,099 $ 11,071,529
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Notes payable $ 2,741,758 $ 541,546
Current maturities of long-term debt 197,315 197,315
Accounts payable - trade 323,678 859,269
Accrued expenses 304,429 705,756
Customer deposits 78,105 150,088
Federal income taxes payable 360,568 512,991
------------ ------------
Total current liabilities 4,005,853 2,966,965
Long-term debt, less current maturities 1,222,336 2,719,482
Deferred income taxes 29,663 22,743
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Total liabilities 5,257,852 5,709,190
SHAREHOLDERS' EQUITY
Common stock, $.01 par value; authorized 10,000,000
shares; issued and outstanding 4,913,290 shares at
June 30, 2004 and December 31, 2003 49,133 49,133
Additional paid-in capital 5,708,760 5,708,760
Accumulated other comprehensive income 13,433 --
Retained earnings (deficit) (109,079) (395,554)
------------ ------------
Total shareholders' equity 5,662,247 5,362,339
============ ============
$ 10,920,099 $ 11,071,529
============ ============
The accompanying notes are an integral part of these consolidated financial
statements
2
DGSE Companies, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF OPERATIONS
Three months ended
(Unaudited)
June 30, 2004 June 30, 2003
Revenue
Sales $ 6,170,192 $ 5,671,014
Pawn services charges 47,084 41,630
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6,217,276 5,712,644
Costs and expenses
Cost of goods sold 4,988,111 4,594,741
Selling, general and administrative expenses 896,500 877,788
Depreciation and amortization 37,112 39,330
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5,921,723 5,511,859
Operating income 295,553 200,785
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Other income (expense)
Interest expense (73,005) (73,005)
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Total other income (expense) (73,005) (73,005)
Income (loss) before income taxes 222,548 127,780
Income tax expense 75,666 43,753
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Net income (loss) from continuing operations 146,882 84,027
Loss from discontinued operations, net of income taxes (46,106) (24,444)
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Net income (loss) $ 100,776 $ 59,583
============= =============
Earnings per common share
Basic and diluted
From continuing operations $ .03 $ .02
From discontinued operations (.01) (.01)
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$ .02 $ .01
============= =============
Weighted average number of common shares:
Basic 4,913,290 4,913,290
Diluted 5,161,616 4,913,290
The accompanying notes are an integral part of these consolidated financial
statements
3
DGSE Companies, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF OPERATIONS
Six months ended
(Unaudited)
June 30, 2004 June 30, 2003
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Revenue
Sales $ 12,921,644 $ 10,771,966
Pawn services charges 94,714 83,512
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13,016,358 10,855,478
Costs and expenses
Cost of goods sold 10,441,033 8,744,288
Selling, general and administrative expenses 1,805,482 1,738,174
Depreciation and amortization 72,397 85,098
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12,318,912 10,567,560
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Operating income 697,446 287,918
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Other income (expense)
Interest expense (145,058) (141,035)
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Total other income (expense) (145,058) (141,035)
Income before income taxes 552,388 146,883
Income tax expense 187,812 49,940
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Net income from continuing operations 364,576 96,943
Loss from discontinued operations, net of income taxes (78,101) (58,803)
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Net income $ 286,475 $ 38,140
============= =============
Earnings per common share
Basic and diluted
From continuing operations $ .07 $ .02
From discontinued operations (.01) (.01)
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$ .06 $ .01
============= =============
Weighted average number of common shares:
Basic 4,913,290 4,913,290
Diluted 5,161,616 4,913,290
The accompanying notes are an integral part of these consolidated financial
statements
4
DGSE COMPANIES, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Six Months Ended
June 30,
2004 2003
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Cash Flows From Operations
Reconciliation of net loss to net cash
used in operating activities
Net income (loss) $ 286,475 $ 38,140
Depreciation and amortization 72,397 85,098
(Increase) decrease in operating assets and liabilities
Trade receivables 103,584 161,093
Inventories (308,780) (283,493)
Prepaid expenses and other current assets (29,772) (60,920)
Accounts payable and accrued expenses (936,918) (606,567)
Federal income taxes payable (152,423) (130,352)
Other assets (263) (5,267)
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Total net cash used in operating activities (965,700) (802,268)
Cash flows from investing activities
Purchase of property and equipment (81,519) (10,100)
Change in customer deposits (71,983) (8,570)
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Net cash (used) provided by investing activities (153,502) (18,670)
Cash flows from financing activities
Proceeds from notes issued 825,000 725,000
Payments on notes payable (121,934) (266,325)
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Net cash provided by financing activities 703,066 458,675
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Net decrease in cash and cash equivalents (416,136) (362,263)
Cash and cash equivalents at beginning of year 735,293 498,408
--------- ---------
Cash and cash equivalents at end of period $ 319,157 $ 136,145
========= =========
Supplemental disclosures:
Interest paid for the six months ended June 30, 2004 and 2003 was $ 145,058 and
$ 141,035, respectively.
Income taxes paid for the six months ended June 30, 2004 and 2003 was $300,000
and $150,000, respectively.
The accompanying notes are an integral part of these consolidated financial
statements.
5
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
(1) Basis of Presentation:
The accompanying unaudited condensed consolidated financial statements of DGSE
Companies, Inc. and Subsidiaries include the financial statements of DGSE
Companies, Inc. and its wholly-owned subsidiaries, DGSE Corporation, National
Jewelry Exchange, Inc., Silverman Consultants, Inc. and Charleston Gold and
Diamond Exchange, Inc. In July 2004 the Company sold the goodwill and trade name
of Silverman Consultants, Inc. and discontinued the operations of this
subsidiary. As a result, operating results for this subsidiary have been
reclassified to discontinued operations for all periods presented. In the
opinion of management, all adjustments (consisting of normal recurring accruals)
considered necessary for a fair presentation have been included.
The Company's operating results for the three months ended March 31, 2004, are
not necessarily indicative of the results that may be expected for the year
ended December 31, 2004. For further information, refer to the consolidated
financial statements and footnotes thereto included in the Company's annual
report on Form 10-KSB for the year ended December 31, 2003. Certain
reclassifications were made to the prior year's consolidated financial
statements to conform to the current year presentation.
(2) - Earnings per share
No schedule provided for the periods ended June 30, 2004 and 2003 because the
effect on earnings per share is not dilutive.
(3) - Business segment information
The Company's operations by business segment for the three months ended June 30,
were as follows:
Discontinued Corporate
Jewelry Operations & Other Consolidated
------------ ------------ ------------ ------------
Revenues
2004 $ 6,217,276 $ -- $ -- $ 6,217,276
2003 $ 5,712,644 $ -- $ -- $ 5,712,644
Net income (loss)
2004 $ 169,351 $ (46,106) $ (22,469) $ 100,776
2003 $ 95,790 $ (24,444) $ (11,763) $ 59,583
Identifiable assets
2004 $ 9,991,161 $ 414,694 $ 514 244 $ 10,920,099
2003 $ 9,498,916 $ 485,942 $ 220,442 $ 10,205,300
Capital expenditures
2004 $ 77,355 $ -- $ -- $ 77,355
2003 $ 7,707 $ -- $ -- $ 7,707
Depreciation and
amortization
2004 $ 35,237 $ -- $ 1,875 $ 37,112
2003 $ 37,455 $ -- $ 1,875 $ 39,330
6
The Company's operations by business segment for the six months ended June 30,
were as follows:
Discontinued Corporate
Jewelry Operations & Other Consolidated
------------ ------------ ------------ ------------
Revenues
2004 $ 13,016,358 $ -- $ -- $ 13,016,358
2003 $ 10,855,478 $ -- $ -- $ 10,855,478
Net income (loss)
2004 $ 407,080 $ (78,101) $ (42,504) $ 286,475
2003 $ 104,455 $ (58,803) $ (35,301) $ 38,140
Identifiable assets
2004 $ 9,991,161 $ 414,694 $ 514,244 $ 10,920,099
2003 $ 9,498,916 $ 485,942 $ 220,442 $ 10,205,300
Capital expenditures
2004 $ 81,519 $ -- $ -- $ 81,519
2003 $ 10,100 $ -- $ -- $ 10,100
Depreciation and
amortization
2004 $ 68,647 $ -- $ 3,750 $ 72,397
2003 $ 81,348 $ -- $ 3,750 $ 85,098
(4) Other Comprehensive income:
Other comprehensive income is as follows:
Tax
Before Tax (Expense) Net-of-Tax
Amount Benefit Amount
----------- ----------- -----------
Other comprehensive income at
December 31, 2003 $ -- $ -- $ --
Unrealized holding gains arising during the
Three months ended March 31, 2004 106,373 (36,167) 70,206
----------- ----------- -----------
Other comprehensive income at
March 31, 2004 106,373 (36,167) 70,206
Unrealized holding losses during the
Three months ended June 30, 2004 (86,020) 29,247 (56,773)
----------- ----------- -----------
Other comprehensive income at
June 30, 2004 $ 20,353 $ (6,920) $ 13,433
=========== =========== ===========
Other comprehensive income loss at
December 31, 2002 $(1,728,130) $ 593,180 $(1,134,950)
Unrealized holding gains arising during the
Three months ended March 31, 2003 75,278 (25,594) 49,684
----------- ----------- -----------
Other comprehensive income (loss) at
March 31, 2003 (1,652,852) 567,586 (1,085,266)
Unrealized holding losses during the
Three months ended June 30, 2003 (46,260) 15,728 (30,532)
----------- ----------- -----------
Other comprehensive loss at
June 30, 2003 $(1,699,112) $ 583,314 $(1,115,798)
=========== =========== ===========
7
(5) Stock-based Compensation:
The Company accounts for stock-based compensation to employees using the
intrinsic value method. Accordingly, compensation cost for stock options to
employees is measured as the excess, if any , of the quoted market price of the
Company's common stock at the date of the grant over the amount an employee must
pay to acquire the stock.
The following table illustrates the effect on net income and earnings per share
if the Company had applied the fair value recognition provisions of FASB
Statement No. 123, Accounting for Stock-Based Compensation, to stock-based
employee compensation.
Six Months Ended June 30,
-------------------------
2004 2003
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Net income(loss) as reported $ 286,475 $ 38,140
Deduct: Total stock-based employee compensation
Expense determined under fair value based method
For all awards, net of related tax effects -- (2,025)
----------- ----------
Pro forma net loss $ 286,475 $ 21,443
=========== ==========
Earnings per share:
Basic - as reported $ .06 $ .01
Basic - pro forma $ .06 $ .01
Diluted - as reported $ .06 $ .01
Diluted pro forma $ .06 $ .01
The fair value of these options was estimated at the date of grant using the
Black-Scholes option-pricing model with the following weighted average
assumptions used for grants after 1998, expected volatility of 70% to 96%,
risk-free rate of 3.9% to 6.6%, no dividend yield and expected life of 5 to 8
years.
Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
Results of Operations
---------------------
Quarter ended June 30, 2004 vs 2003:
------------------------------------
Sales for the second quarter of 2004 increased by $ 499,178 or 8.8% when
compared to the corresponding quarter of 2003. This was the result of a $
531,101 increase in jewelry sales and a $ 31, 923 decrease in precious metals
sales. These changes were due to a nation-wide improvement in the retail
environment and price decreases in precious metal products. Pawn service fees
increased by 13.1% due to an increase in loan volume. Cost of sales increased
primarily due to the increase in sales. Gross margins increased from 19.0% in
2003 to 19.2% in 2004 due to the increase in sales of jewelry products.
Income taxes are provided at the corporate rate of 34% for both 2004 and 2003
Loss from discontinued operations during 2004 and 2003 in the amount of $ 46,106
and $ 24, 444 net of income taxes is the combined results of three subsidiaries
of the Company, DLS Financial Services, Inc., eye media, inc. and Silverman
Consultants, Inc. The operations of these companies have been discontinued.
8
Six months ended June 30, 2004 vs 2003:
Sales for the six months ended June 30, 2004 increased by $ 2,150,585 or 20.0%
when compared to the corresponding period of 2003. This was the result of a $
1,552,294 increase in jewelry sales and a $ 598,291 increase in precious metals
sales. These changes were due to a nation-wide improvement in the retail
environment and price increases in precious metal products during the first
quarter of 2004. Pawn service fees increased by 13.4% due to an increase in loan
volume. Cost of sales increased primarily due to the increase in sales. Gross
margins increased from 18.8% in 2003 to 19.2% in 2004 due to the increase in
sales of jewelry products.
Income taxes are provided at the corporate rate of 34% for both 2004 and 2003
Loss from discontinued operations during 2004 and 2003 in the amount of $ 78,101
and $ 58,803 net of income taxes is the combined results of three subsidiaries
of the Company, DLS Financial Services, Inc., eye media, inc. and Silverman
Consultants, Inc. The operations of these companies have been discontinued.
Liquidity and Capital Resources
-------------------------------
The Company's short-term debt totaled $2,741,758 as of June 30, 2004. The
ability of the Company to finance its operations and working capital needs are
dependent upon management's ability to negotiate extended terms or refinance its
short-term debt. The Company has historically renewed, extended or replaced
short-term debt as it matures and management believes that it will be able to do
so in the future as short-term debt matures.
Management of the Company expects capital expenditures to total approximately
$50,000 during the balance of 2004. It is anticipated that these expenditures
will be funded from working capital.
From time to time, management has adjusted the Company's inventory levels to
meet seasonal demand or in order to meet working capital requirements.
Management is of the opinion that if additional working capital is required,
additional loans can be obtained from individuals or from commercial banks. If
necessary, inventory levels may be adjusted or a portion of the Company's
investments in marketable securities may be liquidated in order to meet working
capital requirements.
Contractual Cash Obligations Payments due by year end
---------------------------- ---------------------------------------------------------------------------
Total 2004 2005 2006 2007 2008 Thereafter
---------- ---------- ---------- ---------- ---------- ---------- ----------
Notes payable $2,741,758 $ 266,758 $2,475,000 -- -- -- --
Long-term debt and capital leases 1,419,651 198,122 $ 484,737 $ 137,906 $ 135,330 $ 135,606 $ 327,950
Federal income taxes 360,568 360,568 -- -- -- -- --
Operating leases 295,504 117,047 148,205 18,886 11,366 -- --
---------- ---------- ---------- ---------- ---------- ---------- ----------
$4,817,481 $ 947,507 $2,757,942 $ 156,792 $ 146,696 $ 135,606 $ 327,950
========== ========== ========== ========== ========== ========== ==========
This report contains forward-looking statements which reflect the view of
Company's management with respect to future events. Although management believes
that the expectations reflected in such forward-looking statements are
reasonable, it can give no assurance that such expectations will prove to have
been correct. Important factors that could cause actual results to differ
materially from such expectations are a down turn in the current strong retail
climate and the potential for fluctuations in precious metals prices. The
forward-looking statements contained herein reflect the current views of the
Company's management and the Company assumes no obligation to update the
forward-looking statements or to update the reasons actual results could differ
from those contemplated by such forward-looking statements.
9
ITEM 3. Controls and Procedures
Under the supervision and with the participation of our management, including
our principal executive officer and principal financial officer, we have
evaluated the effectiveness of the design and operation of our disclosure
controls and procedures within 90 days of the filing date of this quarterly
report, and, based on their evaluation, our principal executive officer and
principal financial officer have concluded that these controls and procedures
are effective. There are no significant changes in our internal controls or
other factors that could significantly affect these controls subsequent to the
date of their evaluation. Disclosure controls and procedures are our controls
and other procedures that are designed to ensure that information required to be
disclosed by us in the reports that we file or submit under the Exchange Act is
recorded, processed, summarized and reported, within the time period specified
in the Securities and Exchange Commission's rules and forms. Disclosure controls
and procedures include, without limitation, controls and procedures designed to
ensure that information required to be disclosed by us in the reports that we
file under the Exchange Act is accumulated and communicated to our management,
including our principal executive officer and principal financial officer, as
appropriate to allow timely decisions regarding required disclosure.
PART II. OTHER INFORMATION
----------------------------
Item 4. Submission of Matters to a Vote of Security Holders.
The annual meeting of shareholders of the Company was held on June 21,
2004. Shareholders were asked to vote upon the election of directors and the
approval of the Company's Stock option plan. The following is a tabulation of
votes cast at the meeting:
For Against Abstain
--------- --------- ---------
Election of Directors
L.S. Smith 4,675,119 2,299
W.H. Oyster 4,599,698 2,299
John Benson 4,599,698 537
James Walsh 4,599,698 537
William Cordeiro 4,599,698 537
Approval of Stock Option Plan 4,641,198 40,650 532
-----------------------------
As a result of the vote, all persons named above were elected as
directors and the Company's Stock option plan was approved.
Item 6. Exhibits and Reports on Form 8-K.
Exhibits:
31.1 Certificate of L.S. Smith pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002, Chief Executive Officer.
10
31.2 Certificate of John Benson pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002, Chief Financial Officer .
32.2 Certificate of L.S. Smith pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002, Chief Executive Officer.
32.2 Certificate of John Benson pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, Chief Financial Officer.
Reports on Form 8-K :
8-K dated July 30, 2004
Item reported:
Acquisition or Disposition of Assets:
On July 28, 2004 DGSE COMPANIES, INC. ("the Company") sold the goodwill, trade
name and other non-financial assets of the Company's wholly owned subsidiary
Silverman Consultants, Inc. involved in the business of conducting in-store
liquidation for others. These assets were purchased by Silverman Group, LLC
("the Buyer"). The Buyer is unrelated to the Company or to any officer or
director of the Company. The Company's cost basis in the assets sold was
$314,000. The purchase price for these assets is based on a percentage of
Silverman's revenues over the next five years to a maximum of $ 600,000 and a
minimum of $ 400,000 with $ 150,000 paid at closing and a note for the remaining
balance.
11
SIGNATURES
In accordance with Section 13 and 15(d) of the Exchange Act, the
Registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
DGSE Companies, Inc.
By: /s/ L. S. Smith Dated: August 6, 2004
-------------------------
L. S. Smith
Chairman of the Board,
Chief Executive Officer and
Secretary
In accordance with the Exchange Act, this report has been signed below
by the following persons on behalf of the Registrant and in the capacities and
on the date indicated.
By: /s/ L. S. Smith Dated: August 6, 2004
-------------------------
L. S. Smith
Chairman of the Board,
Chief Executive Officer and
Secretary
By: /s/ W. H. Oyster Dated: August 6, 2004
-------------------------
W. H. Oyster
Director, President and
Chief Operating Officer
By: /s/ John Benson Dated: August 6, 2004
-------------------------
John Benson
Chief Financial Officer
(Principal Accounting Officer)