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 September 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.
(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
--------------
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 October 26, 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 September 30, December 31,
2004 2003
------------- -------------
CURRENT ASSETS
Cash and cash equivalents $ 244,913 $ 735,293
Trade receivables 796,019 774,586
Other receivables -- 204,430
Inventories 7,074,398 6,673,865
Prepaid expenses 200,379 149,277
------------- -------------
Total current assets 8,315,709 8,537,451
MARKETABLE SECURITIES - AVAILABLE FOR SALE 140,002 243,446
PROPERTY AND EQUIPMENT - AT COST, NET 977,577 989,966
DEFERRED INCOME TAX BENEFIT 12,428 --
GOODWILL 837,117 1,151,120
OTHER ASSETS 299,297 149,546
------------- -------------
$ 10,582,130 $ 11,071,529
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Notes payable $ 2,591,758 $ 541,546
Current maturities of long-term debt 190,845 197,315
Accounts payable - trade 317,745 859,269
Accrued expenses 130,408 705,756
Customer deposits 110,624 150,088
Federal income taxes payable 412,672 512,991
Total current liabilities 3,754,052 2,966,965
Long-term debt, less current maturities 1,137,796 2,719,482
Deferred income taxes -- 22,743
------------- -------------
Total liabilities 4,891,848 5,709,190
SHAREHOLDERS' EQUITY
Common stock, $.01 par value; authorized 10,000,000
shares; issued and outstanding 4,913,290 shares at
eptember 30, 2004 and December 31, 2003 49,133 49,133
Additional paid-in capital 5,708,760 5,708,760
Accumulated other comprehensive (loss) (68,273) --
Retained earnings (deficit) 662 (395,554)
------------- -------------
Total shareholders' equity 5,690,282 5,362,339
$ 10,582,130 $ 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 September 30,
(Unaudited)
2004 2003
----------- -----------
Revenue
Sales $ 6,239,150 $ 5,449,372
Pawn services charges 68,463 46,846
----------- -----------
6,307,613 5,496,218
Costs and expenses
Cost of goods sold 4,973,392 4,285,006
Selling, general and administrative expenses 987,094 884,931
Depreciation and amortization 35,031 21,390
----------- -----------
5,995,517 5,191,327
Operating income 312,096 304,891
----------- -----------
Other income (expense)
Gain on sale of assets 39,098 --
Interest expense (73,005) (73,005)
----------- -----------
Total other income (expense) (33,907) (73,005)
Income before income taxes 278,189 231,886
Income tax expense 94,584 78,841
----------- -----------
Net income from continuing operations 183,605 153,045
Loss from discontinued operations, net of income taxes (73,864) (58,239)
----------- -----------
Net income $ 109,741 $ 94,806
=========== ===========
Earnings per common share
Basic and diluted
From continuing operations $ .04 $ .03
From discontinued operations (.02) (.01)
----------- -----------
$ .02 $ .02
=========== ===========
Weighted average number of common shares:
Basic 4,913,290 4,913,290
Diluted 5,155,141 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
Nine months ended September 30,
(Unaudited)
2004 2003
------------ ------------
Revenue
Sales $ 19,160,794 $ 16,221,338
Pawn services charges 163,177 130,358
------------ ------------
19,323,971 16,351,696
Costs and expenses
Cost of goods sold 15,414,425 13,029,294
Selling, general and administrative expenses 2,792,576 2,623,105
Depreciation and amortization 107,428 106,488
------------ ------------
18,314,429 15,758,887
------------ ------------
Operating income 1,009,542 592,809
------------ ------------
Other income (expense)
Gain on sale of assets 39,098 --
Interest expense (218,063) (214,040)
------------ ------------
Total other income (expense) (178,965) (214,040)
Income before income taxes 830,577 378,769
Income tax expense 282,396 128,781
------------ ------------
Net income from continuing operations 548,181 249,988
Loss from discontinued operations, net of income taxes (151,965) (117,042)
------------ ------------
Net income $ 396,216 $ 132,946
============ ============
Earnings per common share
Basic and diluted
From continuing operations $ .11 $ .05
From discontinued operations (.03) (.02)
------------ ------------
$ .08 $ .03
============ ============
Weighted average number of common shares:
Basic 4,913,290 4,913,290
Diluted 5,159,458 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
Nine months ended September 30,
(Unaudited)
2004 2003
----------- -----------
Cash Flows From Operations
Reconciliation of net loss to net cash
used in operating activities
Net income (loss) $ 396,216 $ 132,946
Depreciation and amortization 107,428 128,178
Gain on sale of assets (32,529) --
Deferred taxes -- 156,495
Other 8,704 (8,013)
(Increase) decrease in operating assets and liabilities
Trade receivables 221,074 187,552
Inventories (400,533) (731,923)
Prepaid expenses and other current assets (51,102) (91,764)
Accounts payable and accrued expenses (1,116,872) (537,741)
Change in customer deposits (39,464) 128,079
Federal income taxes payable (100,319) (258,274)
----------- -----------
Total net cash used in operating activities (1,007,397) (894,465)
Cash flows from investing activities
Purchase of property and equipment (95,039) (16,583)
Proceeds from sale of assets 150,000 --
----------- -----------
Net cash (used) provided by investing activities 54,961 (16,583)
Cash flows from financing activities
Proceeds from notes issued 1,068,660 759,054
Payments on notes payable (606,604) (302,282)
----------- -----------
Net cash provided by financing activities 462,056 456,772
----------- -----------
Net decrease in cash and cash equivalents (490,380) (454,276)
Cash and cash equivalents at beginning of year 735,293 498,408
----------- -----------
Cash and cash equivalents at end of period $ 244,913 $ 44,132
=========== ===========
Supplemental disclosures:
Interest paid for the nine months ended September 30, 2004 and 2003 was $218,063
and $ 214,040, respectively.
Income taxes paid for the nine months ended September 30, 2004 and 2003 were
$304,430 and $174,683, respectively.
In July 2004 the Company sold the goodwill and trade name of Silverman
Consultants, Inc. for $ 150,000 in cash and a note with a discounted value of $
197,162.
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 nine months ended September 30, 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 September 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
September 30, were as follows:
Discontinued Corporate
Jewelry Operations & Other Consolidated
------------ ------------ ------------ ------------
Revenues
2004 $ 6,307,613 -- -- $ 6,307,613
2003 $ 5,496,218 -- -- $ 5,496,218
Net income (loss)
2004 $ 179,594 $ (73,864) $ 4,011 $ 109,741
2003 $ 159,799 $ (58,239) $ (6,754) $ 94,806
Identifiable assets
2004 $ 10,172,811 $ 10,932 $398 387 $ 10,582,130
2003 $ 9,858,205 $ 422,910 $ 230,730 $ 10,511,845
Capital expenditures
2004 $ 26,392 $ -- $ -- $ 26,392
2003 $ 6,483 $ -- $ -- $ 6,483
Depreciation and
amortization
2004 $ 33,156 $ -- $ 1,875 $ 35,031
2003 $ 21,390 $ -- $ -- $ 21,390
6
The Company's operations by business segment for the nine months ended September
30, were as follows:
Discontinued Corporate
Jewelry Operations & Other Consolidated
------------ ------------ ------------ ------------
Revenues
2004 $ 19,323,971 $ -- $ -- $ 19,323,971
2003 $ 16,351,696 $ -- $ -- $ 16,351,696
Net income (loss)
2004 $ 586,673 $ (151,965) $ (38,492) $ 396,216
2003 $ 264,254 $ (117,042) $ (14,266) $ 132,946
Identifiable assets
2004 $ 10,172,811 $ 10,932 $398 387 $ 10,582,130
2003 $ 9,858,205 $ 422,910 $ 230,730 $ 10,511,845
Capital expenditures
2004 $ 95,039 $ -- $ -- $ 95,039
2003 $ 16,583 $ -- $ -- $ 16,583
Depreciation and
amortization
2004 $ 101,803 $ -- $ 5,625 $ 107,428
2003 $ 106,488 $ -- $ -- $ 106,488
(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
Unrealized holding losses during the
Three months ended September 30, 2004 (123,796) 42,090 (81,706)
----------- ----------- -----------
Other comprehensive loss at
September 30, 2004 $ (103,443) $ 35,170 $ (68,273)
=========== =========== ===========
7
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 arising during the
Three months ended June 30, 2003 (46,260) 15,728 (30,532)
----------- ----------- -----------
Other comprehensive income (loss) at
June 30, 2003 $(1,699,112) $ 583,314 $(1,115,798)
Unrealized holding (loss) arising during the
Three months ended September 30, 2003 (15,970) 5,430 (10,540)
----------- ----------- -----------
Other comprehensive income (loss) at
September 30, 2003 $(1,715,082) $ 588,744 $(1,126,338)
=========== =========== ===========
(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.
Nine Months Ended
September 30,
-------------------------
2004 2003
----------- -----------
Net income(loss) as reported $ 396,216 $ 132,946
Deduct: Total stock-based employee compensation
Expense determined under fair value based method
For all awards, net of related tax effects -- --
----------- -----------
Pro forma net loss $ 396,216 $ 132,946
=========== ===========
Earnings per share:
Basic - as reported $.08 $.03
Basic - pro forma $.08 $.03
Diluted - as reported $.08 $.03
Diluted pro forma $.08 $.03
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.
8
Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
Results of Operations
---------------------
Quarter ended September 30, 2004 vs 2003:
-----------------------------------------
Sales for the third quarter of 2004 increased by $ 789,778 or 14.5% when
compared to the corresponding quarter of 2003. This was the result of a $
209,447 increase in jewelry sales and a $ 580,331 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. Pawn service fees
increased by 46.1% due to an increase in loan volume. Cost of sales increased
primarily due to the increase in sales. Gross margins decreased from 21.4% in
2003 to 20.32% in 2004 due to the increase in sales of precious metal products.
Selling, general and administrative expenses increased $ 102,163 or 11.5% during
the 2004 quarter due primarily to higher payroll and related cost.
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 $ 73,864
and $ 58,239 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.
Nine months ended September 30, 2004 vs 2003:
---------------------------------------------
Sales for the nine months ended September 30, 2004 increased by $ 2,939,456 or
18.1% when compared to the corresponding period of 2003. This was the result of
a $ 1,573,869 increase in jewelry sales and a $ 1,365,587 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.. Pawn service fees
increased by 25.2% due to an increase in loan volume. Cost of sales increased
primarily due to the increase in sales. Gross margins were 19.7% in 2003
compared to 19.6% in 2004. Selling, general and administrative expenses
increased $ 169,471 or 6.5% for the first nine months of 2004 due primarily to
higher payroll and related costs.
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 $
151,965 and $ 117,042 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 $2,782,603 as of September 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.
9
Contractual Cash Obligations Payments due by year end
---------------------------- ---------------------------------------------------------------------------
Total 2004 2005 2006 2007 2008 Thereafter
---------- ---------- ---------- ---------- ---------- ---------- ----------
Notes payable $2,591,758 $ 266,758 $2,325,000 -- -- -- --
Long-term debt and capital leases 1,328,641 47,711 $ 544,138 $ 137,906 $ 135,330 $ 135,606 $ 327,950
Federal income taxes 412,672 412,672 -- -- -- -- --
Operating leases 236,980 58,523 148,205 18,886 11,366 -- --
---------- ---------- ---------- ---------- ---------- ---------- ----------
$4,570,051 $ 785,664 $3,017,343 $ 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.
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 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.
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.
10
Reports on Form 8-K: Form 8-K dated July 30, 2004 - Item reported -
Acquisition or Disposition of Assets
Form 8-K dated October 14, 2004 - Item reported Change in Certifying
Accountants
Form 8-K/A-1 dated October 22. 2004 - Item reported Change in
Certifying Accountants
Form 8-K/A-2 dated November 1, 2004 - Item reported Change in
Certifying Accountants
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: November 12, 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: November 12, 2004
-------------------------
L. S. Smith
Chairman of the Board,
Chief Executive Officer and
Secretary
By: /s/ W. H. Oyster Dated: November 12, 2004
-------------------------
W. H. Oyster
Director, President and
Chief Operating Officer
By: /s/ John Benson Dated: November 12, 2004
-------------------------
John Benson
Chief Financial Officer
(Principal Accounting Officer)
11