UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-K
(Mark One)
(X) Annual Report pursuant to Section 13 or 15 (d) of the Securities Exchange
Act of 1934
For the Fiscal year ended December 31, 2004 or
----------------------------------
( ) Transition Report under Section 13 or 15 (d) of the Securities Exchange Act
of 1934 (No Fee Required)
For the transition period from to
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Commission file number 1-11048
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DGSE Companies, Inc.
(formerly Dallas Gold & Silver Exchange, Inc.)
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(Exact Name of registrant as specified in its charter)
NEVADA 88-0097334
- ------------------------------ ------------------------------
State or other jurisdiction of (I.R.S.Employer Identification
incorporation or organization) Number)
2817 Forest Lane, Dallas, Texas 75234
- ---------------------------------------- ----------
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code (972) 484-3662
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Securities registered under Section 12(b) of the Exchange Act:
Title of each class Name of each exchange on which registered
------------------- -----------------------------------------
None None
Securities registered pursuant to Section 12 (g) of the Act:
Common Stock, $ .01 par value
- ------------- ---------------
(Title of Class)
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 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
requirement for the past 90 days. Yes (X) No ( )
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not 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-K or any amendment to this
Form 10-K. [X]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes ( ) N0 (X)
As of June 30, 2004, the aggregate market value of the voting stock held by
non-affiliates of the registrant was $ 9,265,900
As of March 3, 2005, 4,913,290 shares of Common Stock were outstanding.
Documents incorporated by reference: Portions of the proxy statement for the
annual shareholders' meeting to be held June 16, 2005 are incorporated by
reference into Part III.
PART I
ITEM 1. BUSINESS.
DGSE Companies, Inc (formerly Dallas Gold and Silver Exchange, Inc.) (the
"Company") sells jewelry and bullion products to both retail and wholesale
customers throughout the United States and makes collateralized loans to
individuals. The Company's products are marketed through its facilities in
Dallas and Carrollton, Texas and Mt. Pleasant South Carolina and through its
internet web sites dgse.com; USBullionExchange.com; and, FairchildWatches.com.
The Company operates three internet sites on the World Wide Web. Through
dgse.com the Company operates a virtual store and a real-time auction of its
jewelry products. Customers and the Company buy and sell items of jewelry and
are free to set their own prices in an interactive market. The Company also
offers customers the key unlimited trading power to buy and sell precious metal
assets. Customers have access to the Company's competitive two-way markets in
all of the most popularly traded precious metal products as well as current
quotations for precious metals prices on its internet site
USBullionExchange.com. FairchildWatches.com provides wholesale customers a
virtual catalog of the Company's fine watch inventory. Over 7,500 items are
available for sale on the Company's internet sites including $ 10,000,000 in
diamonds.
The Company's wholly-owned subsidiary, National Jewelry Exchange, Inc. ("NJE")
operates a pawn shop in Carrollton, Texas. The Company has focused the
operations of NJE on sales and pawn loans of jewelry products.
In January 2005 the Company began offering unsecured payday loans through its
wholly owned subsidiary American Pay Day Centers, Inc.
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
$203,100.
Products and Services
- ---------------------
The Company's jewelry operations include sales to both wholesale and retail
customers. The Company sells finished jewelry, gem stones, and findings (gold
jewelry components) and makes custom jewelry to order. Jewelry inventory is
readily available from wholesalers throughout the United States. In addition,
the Company purchases inventory from pawn shops and individuals.
The Company's bullion trading operations buy and sell all forms of precious
metals products including United States and other government coins, medallions,
art bars and trade unit bars.
Bullion products are purchased and sold based on current market price. The
availability of precious metal products is a function of price as virtually all
bullion items are actively traded. Precious metals sales amounted to 26.4% of
total revenues for 2004, 25.4% in 2003 and 18.5% in 2002 (For further details,
see Item 6 below).
2
Products and Services (continued...)
- ---------------------
During December 2000 the Company opened a new jewelry super store located in Mt.
Pleasant, South Carolina. The store operates through a wholly owned subsidiary,
Charleston Gold and Diamond Exchange, Inc. ("CGDE"). CGDE operates in a leased
facility located in Mt. Pleasant, South Carolina.
The Company makes pawn loans through its headquarter facility and through its
National Jewelry Exchange, Inc. subsidiary. Pawn loans ("loans") are made on the
pledge of tangible personal property, primarily jewelry, for one month with an
automatic sixty-day extension period ("loan term"). Pawn service charges are
recorded on a constant yield basis over the loan term. If the loan is not
repaid, the principal amount loaned plus accrued pawn service charges become the
carrying value of the forfeited collateral and are transferred to inventory.
Revenues from the Company's pawn loans have grown at each location and
management believes this activity to be a good source of jewelry inventory and
provides an excellent return on investment.
In January 2005 the Company began offering unsecured payday loans through its
wholly-owned subsidiary, American Pay Day Centers, Inc. Payday loans are made
based on a limited review of several factors, including a customer's employment
and check-writing history, and generally are made for periods of less than 30
days, averaging about 14 days. The services charge for these loans ranges
between $ 15 and $ 25 per $ 100 loaned. The Company currently operates one
Mono-line payday loan store in New Mexico and plans to add between 3 and 8 new
payday stores within the next year.
The Company's primary presence on the Internet is through its website dgse.com.
This web site serves as a Corporate information site, a retail store where the
Company sells its products and an auction site for jewelry and other products.
The Internet store functions as a CyberCashTM authorized site which allows
customers to purchase products automatically and securely on line. Auctions
close at least five times per week.
The Company's internet activities also includes a web site,
USBullionExchange.com, which allows customers unlimited access to current
quotations for prices on approximately 200 precious metals, coins and other
bullion related products. In March 2005 this web site was significantly expanded
to allow customers to enter immediate real-time buy and sell orders in dozens of
precious metal products. This newly redesigned functionality allows our
customers to fix prices in real time and to manage their precious metals
portfolios in a comprehensive way.
The Company also offers wholesale customers a virtual catalog of the Company's
fine watch inventory through its web site Fairchildwatches.com.
The Company did not have any customer or supplier that accounted for more than
10% of total sales or purchases during 2004, 2003 or 2002.
During 2003 the Company discontinued the operations of its internet software
company eye media, inc. and its financial consulting company DLS Financial
Services, Inc. These two companies had not solicited or received any new clients
during the past two years and do not anticipate doing so in the future.
Silverman Consultants, Inc. which offered consulting liquidation services was
sold in July 2004.
3
Sales and Marketing
- -------------------
All Company activities rely heavily on local television, radio and print media
advertising. Marketing activities emphasize the Company's broad and unusual
array of products and services and the attractiveness of its pricing and
service.
The Company markets its bullion trading services through a combination of
advertising in national coin publications, local print media, coin and bullion
wire services and its internet web site. Trades are primarily with coin and
bullion dealers on a "cash on confirmation" basis which is prevalent in the
industry. Cash on confirmation means that once credit is approved the buyer
remits funds by mail or wire concurrently with the mailing of the precious
metals. Customer orders for bullion trades are customarily delivered within
three days of the order or upon clearance of funds depending on the customer's
credit standing. Consequently, there was no significant backlog for bullion
orders as of December 31, 2004, 2003 or 2002. Company backlogs for fabricated
jewelry products were also not significant as of December 31, 2004, 2003 and
2004.
Seasonality
- -----------
The retail and wholesale jewelry business are seasonal. The Company realized
32.5%, 36.4% and 33.2% of its annual sales in the fourth quarters of 2004, 2003
and 2002, respectively.
While the Company's bullion business is not seasonal, management believes it is
directly impacted by the perception of inflation trends. Historically,
anticipation of increases in the rate of inflation have resulted in higher
levels of interest in precious metals as well as higher prices for such metals.
Other Company business activities are not seasonal.
Competition
- -----------
The Company operates in a highly competitive industry where competition is based
on a combination of price, service and product quality. The jewelry and consumer
loan activities of the Company compete with numerous other retail jewelers and
consumer lenders in Dallas, Texas and Mt. Pleasant, South Carolina and the
surrounding areas.
The bullion industry in which the Company competes is dominated by substantially
larger enterprises which wholesale bullion and other precious metal products.
The Company attempts to compete in all of its activities by offering high
quality products and services at prices below that of its competitors and by
maintaining a staff of highly qualified employees.
Employees
- ---------
As of December 31, 2004, the Company employed 50 individuals, all of whom were
full time employees.
4
Available Information
- ---------------------
The Company's website is located at www.dgse.com. Through this website, the
Company makes available free of charge all of its Securities and Exchange
Commission filings. In addition, a complete copy of the Company's Code of Ethics
is available through this website.
ITEM 2. PROPERTIES
The Company owns a 6,000 square foot building in Dallas, Texas which houses
retail jewelry, consumer lending and bullion trading operations and its
principal executive offices. The land and building are subject to a mortgage
maturing in January 2014, with a balance outstanding of approximately $ 465,724
as of December 31, 2004. The Company also leases 2,000 square feet of space in
an office complex next door to its headquarters in Dallas, Texas. The lease
expires in November 30, 2008 and requires monthly lease payments in the amount
of $2,707.
The Company leases a 3,300 square foot facility in Carrollton, Texas which
houses National Jewelry Exchange. The lease expires on July 31, 2007 and
requires monthly lease payments in the amount of $ 2,645.
CGDE operates in a leased 11,000 square foot facility in Mt. Pleasant, South
Carolina. The lease expires in August 2005 and requires monthly lease payments
in the amount of $ 16,263.
American Pay Day Centers operates in a leased 600 square foot in Albuquerque,
New Mexico. The lease expires on August 15, 2005 and requires monthly lease
payments in the amount of $ 750.
The Company also maintains a resident agent office in Nevada at the office of
its Nevada counsel, McDonald, Carano, Wilson, McClure, Bergin, Frankovitch and
Hicks, 241 Ridge Street, Reno, Nevada 89505.
ITEM 3. LEGAL PROCEEDINGS
The Company is not a party to any material pending legal proceedings which are
expected to have a material adverse effect on the Company and none of its
property is the subject of any material pending legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
On June 29, 1999 the Company's Common Stock began trading on the NASDAQ Small
CAP Market under the symbol "DGSE". Previously, the Company's Common Stock was
traded on the American Stock Exchange ("ASE") pursuant to its "Emerging
Companies" listing program under the symbol "DLS.EC". The following table sets
5
forth for the period indicated, the per share high and low bid quotations as
reported by NASDAQ for the common stock. During the past two years, the Company
has not declared any dividends with respect to its common stock. The Company
intends to retain all earnings to finance future growth; accordingly, it is not
anticipated that cash dividends will be paid to holders of common stock in the
foreseeable future.
The following quotations reflect inter-dealer prices without retail mark-ups,
mark-downs or commissions and may not reflect actual transactions. High and low
bid quotations for the last two years were:
2004 2003
---- ----
High Low High Low
---- --- ---- ---
First Quarter 4.190 2.200 3.040 1.150
Second Quarter 3.250 2.520 3.040 1.120
Third Quarter 3.400 2.290 1.400 1.150
Fourth Quarter 3.490 2.270 1.210 1.000
On March 3, 2005, the closing sales price for the Company's common stock was $
2.470 and there were 806 shareholders of record.
Securities authorized for issuance under equity compensation plans.
- -------------------------------------------------------------------
The Company has granted options to certain officers, directors and key employees
to purchase shares of the Company's common stock. Each option vests according to
a schedule designed by the board of directors of the Company, not to exceed
three years. Each option expires 180 days from the date of termination of the
employee or director. The exercise price of each option is equal to the market
value of the Company's common stock on the date of grant. These option grants
have been approved by security holders.
The following table summarizes options outstanding as of December 31, 2004:
Plan Number of Weighted average Number of securities
Category securities to be exercise price of remaining available
issued upon outstanding for future issuance
exercise of options options, warrants under equity compensation
warrants & rights & rights plans
- ----------- ------------------- ----------------- -------------------------
Equity
Compensation
Plans Approved
By Security
Holders 1,420,634 $ 2.09 279,336
Equity
Compensation
Plans Not
Approved By
Security
Holders None None
------------------- ----------------- --------------------------
Total 1,420,634 $ 2.09 279,336
=================== ================= ==========================
6
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial information should be read in conjunction with,
and is qualified in its entirety by reference to the financial statements of the
Company and accompanying notes included elsewhere in this Form 10-K.
SELECTED FINANCIAL DATA
Years Ended December 31,
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2000 2001 2002 2003 2004
------ ------ ------ ------ ------
(Amounts in thousands, except per share figures)
Operating Data:
Sales 20,427 19,134 21,083 25,244 28,386
Pawn service fees 96 120 156 182 256
------ ------ ------ ------ ------
Total revenues 20,523 19,254 21,239 25,426 28,642
Cost of goods sold 15,958 14,743 16,239 20,050 22,743
------ ------ ------ ------ ------
Gross profit 4,565 4,511 5,000 5,376 5,899
Selling, general & administrative
Expenses 3,689 3,601 3,948 4,054 4,724
Depreciation & amortization
217 235 158 160 123
------ ------ ------ ------ ------
3,906 3,836 4,106 4,214 4,847
Operating Income 659 675 894 1,162 1,052
Other income (expense):
Unrealized loss on investments -1,635
Other income 4 3 402 24
Interest expense -311 -298 -263 -268 -248
------ ------ ------ ------ ------
Total other income (expense) -307 -295 139 -1,903 -224
Income (loss) before income taxes 352 380 1,033 -741 828
Income tax expense (benefit) 172 119 327 - 334 228
------ ------ ------ ------ ------
Income (loss) from continuing
Operations 180 260 706 -407 600
Loss from discontinued operations,
Net of income taxes 72 -586 -277 -117 -249
------ ------ ------ ------ ------
Net income (loss) 252 -325 429 -524 351
Earnings (loss) per common share
Basic
From continuing operations .04 .05 .14 -.09 .12
From discontinued operations .01 -.12 -.05 -.02 -.05
------ ------ ------ ------ ------
Diluted .05 -.07 .09 -.11 .07
From continuing operating .04 .05 .14 -.09 .12
From discontinued operations .01 -.12 -.05 -.02 -.05
------ ------ ------ ------ ------
Diluted .05 -.07 .09 -.11 .07
Weighted average number of common shares:
Basic 4,682 4,925 4,914 4,913 4,913
Diluted 5,043 4,925 4,917 4,913 5,135
7
(a) Beginning in Fiscal 2002, the Company adopted Statement of Financial
Accounting Standards No. 142, which ceased amortization of certain indefinite
lived intangible assets. Amortization expense for Fiscal 2000 and 2001 are
stated on the historical accounting method, and are not directly comparable to
Fiscal 2002, 2003, 2004 and 2005 amounts.
Years Ended December 31,
------------------------------------------
2000 2001 2002 2003 2004
------ ------ ------ ------ ------
(Amounts in thousands, except per share figures)
BALANCE SHEET DATA:
Inventory 7,087 6,297 6,336 6,674 6,791
Working Capital 2,054 1,968 5,055 5,570 6,234
Long-term debt 950 764 3,067 2,719 2,749
Shareholders' equity 4,992 4,469 4,752 5,362 5,591
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
GENERAL
- -------
The Company's bullion trading operation has the ability to significantly
increase or decrease sales by adjusting the "spread" or gross profit margin
added to bullion products. In addition, economic factors such as inflation and
interest rates as well as political uncertainty are major factors affecting both
bullion sales volume and gross profit margins. Historically, the Company has
earned gross profit margins of from 2.0% to 3.0% on its bullion trading
operations compared to 29.0% to 32.0% on the sale of jewelry products.
Marketable equity securities have been categorized as available-for-sale and are
carried at fair value. Unrealized gains and losses for available-for-sale
securities are included as a component of shareholders' equity net of tax until
realized. Realized gains and losses on the sale of securities are based on the
specific identification method. During 2003 management determined that the
decline in the market value on its investments in marketable equity securities
was other than temporary, and as a result these investment were written-down to
their fair value. This write-down resulted in a charge to 2003 earnings in the
amount of $ 1,134,950, net of income taxes, or $ .23 per share.
During 2004, the Company sold the operations of Silverman Consultants, Inc. and,
during 2003, the Company made the decision to discontinue the operations of its
subsidiaries, DLS Financial Services, Inc. and eye media, inc. As a result,
operating results from these subsidiaries have been reclassified to discontinued
operations for all periods presented. As of December 31, 2004 and 2003, there
were no operating assets to be disposed of or liabilities to be paid in
completing the disposition of these operations.
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 annual report,
8
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.
Results of Operations
- ---------------------
2004 vs 2003 Sales increased by $3,142,000 (12.4%) in 2004. This increase was
the result of a $ 834,293 increase in the sale of precious metals products and a
$2,307,707 increase in sales of jewelry products. These increases were the
result of a nation-wide improvement in the retail environment and significant
price increases in the precious metals market. Pawn service fees increases by $
$75,000 in 2004 due to an increase in pawn loans outstanding during the year.
Cost of goods increased by $ 2,693,000 during 2004 primarily due to the increase
in sales volume. Gross margins decreased from 25.9% in 2003 to 24.8% in 2004 due
to the increase in the precious metals sales volume as a percentage of total
sales.
Selling, general and administrative expenses increased by $ 671,000 due to an
increase in staff, higher advertising cost, higher property taxes and higher
legal and professional cost. Depreciation and amortization decreased by $ 37,000
during 2004 due to certain assets becoming fully depreciated. Interest expense
declined by $ 21,000 due to a reduction in debt outstanding during the year.
During 2003 management determined that the decline in the market value of its
investments in marketable equity securities was other than temporary, and as a
result these investment were written-down to their fair value. This write-down
resulted in a charge to 2003 earnings in the amount of $ 1,134,950, net of
income taxes, or $ .23 per share.
Loss from discontinued operations during 2004, and 2003 in the amounts of $
248,890 and $ 117,097 net of income taxes is the combined results of operations
of three subsidiaries of the Company. DLS Financial Services, Inc. which offered
financial consulting services, and eye media, inc. which offered internet
software have not solicited or received any new clients during the past two
years and do not anticipate doing so in the future. Silverman Consultants, Inc.,
which offered consulting liquidation services was sold in July 2004.
2003 vs 2002
- ------------
Sales increased by $ 4,161,000 (19.7%) in 2003. This increase was the result of
a $ 2,300,000 increase in precious metals sales and a $ 1,861,000 increase in
jewelry sales. These increases were the result of a nation-wide improvement in
the retail environment and significant price increases in the precious metals
9
markets. Pawn service fees increase by $ 25,537 in 2003 due to an increase in
pawn loans outstanding during the year. Cost of goods increased by $ 3,811,000
during 2003 primarily due to the increase in sales volume. Gross margins
decreased from 29.8% in 2002 to 25.9% in 2003 due to the increase in the
precious metals sales volume as a percentage of total sales. Selling, general
and administrative expenses increased by $ 106,000 due to an increase in payroll
and related cost. Other income in the amount of $ 401,849 during 2002 was the
result of retirement of debt at a discount.
During 2003 management determined that the decline in the market value of its
investments in marketable equity securities was other than temporary, and as a
result these investment were written-down to their fair value. This write-down
resulted in a charge to 2003 earnings in the amount of $ 1,134,950, net of
income taxes, or $ .23 per share.
Loss from discontinued operations during 2003, and 2002 in the amounts of $
117,097 and $ 276,992 net of income taxes is the combined results of operations
of three subsidiaries of the Company. DLS Financial Services, Inc. which offered
financial consulting services, and eye media, inc. which offered internet
software have not solicited or received any new clients during the past two
years and do not anticipate doing so in the future. Silverman Consultants, Inc.,
which offered consulting liquidation services was sold in July 2004.
Liquidity and Capital Resources
- -------------------------------
The Company's short-term debt, including current maturities of long-term debt
totaled $624,265 as of December 31, 2004. During March 2005 the Company
re-financed its outstanding bank debt. This new credit facility in the amount of
$3,500,000 extended the maturity of its bank debt to March 31, 2006 and provided
the Company with additional working capital.
Management of the Company expects capital expenditures to total approximately
$100,000 during 2005. It is anticipated that these expenditures will be funded
from working capital and its new credit facility.
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 debt. The Company has historically renewed, extended or replaced short-term
debt as it matures and management believes that it will be able to continue to
do so in the near future.
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
unforeseen working capital requirements.
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
10
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.
Critical Accounting Policies
- ----------------------------
Our reported results are impacted by the application of certain accounting
policies that require us to make subjective estimates or judgments. Changes in
estimates and judgments could significantly affect our results of operations,
financial condition and cash flows in future years. We believe that the
following critical accounting policies are affected by significant judgments and
estimates used in the preparation of its consolidated financial statements:
Goodwill was accounted for in accordance with APB 16 "Business Combinations"
(ABP 16) for acquisitions and SFAS No. 121 "Accounting for the Impairment of
Long-Lived Assets and for Long Lived Assets to be Disposed Of" (SFAS 121) for
the periodic evaluation of goodwill impairment. Purchase accounting required by
APB 16 involved judgment with respect to the valuation of the acquired assets
and liabilities in order to determine the final amount of goodwill. Management
believes that the estimates that it has used to record prior acquisitions were
reasonable and in accordance with APB 16.
Effective January 1, 2002, the Company adopted Statement of Financial Accounting
Standards (SFAS) No. 141, Business Combinations, SFAS No. 142, Goodwill and
Intangible Assets, and SFAS No. 144, Accounting for Impairment or Disposal of
Long-Lived Assets.
SFAS No. 141, SFAS No. 142 and SFAS No. 144
Major provisions of theses statements and their effective dates are as follows:
o intangible assets acquired in a business combination must be recorded
separately from goodwill if they arise from contractual or other legal rights
and are separable from the acquired entity and can be sold, transferred,
licensed, rented or exchanged, either individually or as part of a related
contract, asset or liability;
o effective January 1, 2002, all previously recognized goodwill and
intangible assets with indefinite lives will no longer be subject to
amortization;
o effective January 1, 2002, goodwill and intangible assets with indefinite
lives will be tested for impairment annually or whenever there is an impairment
indicator; and
o all acquired goodwill must be assigned to reporting units for purposes of
impairment testing and segment reporting
The Company amortized goodwill and intangible assets acquired prior to July 1,
2001 until December 31, 2001. Beginning January 1, 2002, quarterly and annual
goodwill amortization is no longer recognized. The Company completed a fair
value based impairment test of goodwill as of December 31, 2003. In the opinion
of management this test indicated that the goodwill and intangibles assets of
the Company are not impaired.
11
The Company performs an annual evaluation for the impairment of Long-Lived
Assets, including goodwill, based on expectations of non-discounted future cash
flows compared to the carrying value of these assets. The Company's cash flow
estimates are based on historical cash flows, as well as future projected cash
flows. Management believes that its procedures for estimating gross future cash
flows are reasonable and consistent with current market conditions.
Goodwill consists of the following:
Jewelry
Goodwill $837,117
========
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. All options are priced at the market value of the
underlying common stock at the date of grant.
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.
Year Ended December 31,
-------------------------------------
2004 2003 2002
---------- ---------- ----------
Net income (loss), as reported $ 350,829 $ (524,140) $ 429,311
Deduct: Total stock-based employee
compensation expense determined under
fair value based method for all awards,
net of related tax effects -- -- (236,611)
---------- ---------- ----------
Pro forma net income (loss) $ 350,829 $ (524,140) $ 192,700
========== ========== ==========
Earnings per share:
Basic - as reported .07 (11) .09
Basic - pro forma .07 (.11) .04
Diluted - as reported .07 (.11) .09
Diluted - pro forma .07 (.11) .04
12
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.
Impairment of Investment Securities results in a charge to operations when a
market decline below cost is other than temporary. Management regularly reviews
each investment security for impairment based on criteria that include the
extent to which cost exceeds market value, the duration of that market decline
and the financial health of and specific prospects for the issuer. The Company's
investment securities amounted to approximately $243,446 as of December 31,
2003. Gross unrealized losses were $1,684,845 at December 31, 2003.
Inventory Obsolescence Accruals may be required based on management's estimation
of obsolescence or unmarketable inventory, in order to write-down inventory to
its estimated net realizable value based upon assumptions about future demand
and market conditions. If actual market conditions are less favorable than those
projected by management, inventory write-downs may be required.
CAUTIONARY STATEMENT REGARDING RISKS AND UNCERTAINTIES THAT MAY AFFECT FUTURE
RESULTS
FORWARD-LOOKING INFORMATION
This Annual Report on Form 10-K, including Management's Discussion and Analysis
of Financial Condition and Results of Operations, includes "forward-looking
statements" within the meaning of Section
27A of the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended. The Company intends that all forward-looking
statements be subject to the safe harbors created by these laws. All statements
other than statements of historical information provided herein are
forward-looking and may contain information about financial results, economic
conditions, trends, and known uncertainties. All forward-looking statements are
based on current expectations regarding important risk factors. Many of these
risks and uncertainties are beyond the ability of the Company to control, and,
in many cases, the Company cannot predict all of the risks and uncertainties
that could cause its actual results to differ materially from those expressed in
the forward-looking statements. Actual results could differ materially from
those expressed in the forward-looking statements, and readers should not regard
those statements as a representation by the Company or any other person that the
results expressed in the statements will be achieved. Important risk factors
that could cause results or events to differ from current expectations are
described below. These factors are not intended to be an all-encompassing list
of risks and uncertainties that may affect the operations, performance,
development and result of the Company's business. Readers are cautioned not to
place undue reliance on these forward-looking statements, which speak only as of
the date hereof. The Company undertakes no obligation to release publicly the
results of any revisions to these forward-looking statements which may be made
to reflect events or circumstances after the date hereon, including without
limitation, changes in the Company's business strategy or planned capital
expenditures, store growth plans, or to reflect the occurrence of unanticipated
events.
13
RISK FACTORS
- - CHANGES IN CUSTOMER DEMAND FOR THE COMPANY'S PRODUCTS AND SERVICES COULD
RESULT IN A SIGNIFICANT DECREASE IN REVENUES. Although the Company's customer
base commonly uses its products and services, the Company's failure to meet
changing demands of its customers could result in a significant decrease in
its revenues.
- - CHANGES IN GOVERNMENTAL RULES AND REGULATIONS APPLICABLE TO THE SPECIALTY
FINANCIAL SERVICES INDUSTRY COULD HAVE A NEGATIVE IMPACT ON THE COMPANY'S
LENDING ACTIVITIES. The Company's lending is subject to extensive regulation,
supervision and licensing requirements under various federal, state and local
laws, ordinances and regulations. New laws and regulations could be enacted
that could have a negative impact on the Company's lending activities.
- - FLUCTUATIONS IN THE COMPANY'S INVENTORY TURNOVER AND SALES
The Company regularly experiences fluctuations in its inventory balances,
inventory turnover and sales margins, yields on loan portfolios and pawn
redemption rates. Changes in any of these factors could materially and adversely
affect the Company's profitability and ability to achieve its planned results.
- - CHANGES IN THE COMPANY'S LIQUIDITY AND CAPITAL REQUIREMENTS COULD LIMIT ITS
ABILITY TO ACHIEVE ITS PLANS. The Company requires continued access to
capital, and a significant reduction in cash flows from operations or the
availability of credit could materially and adversely affect the Company's
ability to achieve its planned growth and operating results. Similarly, if
actual costs to build new stores significantly exceed planned costs, this
could materially restrict the Company's ability to build new stores or to
operate new stores profitably. The Company's credit agreement also limits the
allowable amount of capital expenditures in any given fiscal year, which could
limit the Company's ability to build all planned new stores.
- - CHANGES IN COMPETITION FROM VARIOUS SOURCES COULD HAVE A MATERIAL ADVERSE
IMPACT ON THE COMPANY'S ABILITY TO ACHIEVE ITS PLANS. The Company encounters
significant competition in connection with its retail and lending operations
from other pawnshops, cash advance companies and other forms of financial
institutions and other retailers, many of which have significantly greater
financial resources than the Company. Significant increases in these
competitive influences could adversely affect the Company's operations through
a decrease in the number or quality of payday loans and pawn loans or the
Company's ability to liquidate forfeited collateral at acceptable margins.
- - THE COMPANY'S EARNINGS COULD BE NEGATIVELY IMPACTED BY AN UNFAVORABLE OUTCOME
OF LITIGATION, REGULATORY ACTIONS, OR LABOR AND EMPLOYMENT MATTERS.
- - A FAILURE IN THE COMPANY'S INFORMATION SYSTEMS COULD PREVENT IT FROM
EFFECTIVELY MANAGING AND CONTROLLING ITS BUSINESS OR SERVING ITS CUSTOMERS. We
rely on our information systems to manage and operate our stores and business.
Each store is part of an information network that permits us to maintain
adequate cash inventory, reconcile cash balances daily, report revenues and
expenses timely. Any disruption in the availability of our information systems
could adversely affect our operation, the ability to serve our customers and
our results of operations.
- - A FAILURE OF THE COMPANY'S INTERNAL CONTROLS AND DISCLOSURE CONTROLS AND
PROCEDURES, OR ITS INABILITY TO TIMELY COMPLY WITH THE REQUIREMENTS OF SECTION
404 OF THE SARBANES-OXLEY ACT COULD HAVE A MATERIAL ADVERSE IMPACT ON THE
COMPANY AND ITS INVESTORS' CONFIDENCE IN OUR REPORTED FINANCIAL INFORMATION.
14
Effective internal controls and disclosure controls and processes are
necessary for us to provide reliable financial reports and to detect and
prevent fraud. We are currently performing the system and process evaluation
required to comply with the management certification and auditor attestation
requirements of Section 404 of the Sarbanes-Oxley Act. This evaluation may
conclude that enhancements, modifications or changes to our controls are
necessary. Completing this evaluation, performing testing and implementing any
required remedial changes will require significant expenditures and management
attention. We cannot be certain as to the timing of completion of our
evaluation, testing and remediation actions or the impact of these on our
operations. The Company cannot be certain that significant deficiencies or
material weaknesses will not be identified, or that remediation efforts will
be timely to allow it to comply with the requirements of Section 404 of the
Sarbanes-Oxley Act. If we are unable to comply with the requirements of
Section 404 of the Sarbanes-Oxley Act, investors could lose confidence in our
reported financial information.
- - CHANGES IN GENERAL ECONOMIC CONDITIONS COULD NEGATIVELY AFFECT LOAN
PERFORMANCE AND DEMAND FOR OUR PRODUCTS AND SERVICES. A sustained
deterioration in the economic environment could adversely affect the Company's
operations by reducing consumer demand for previously owned merchandise.
- - INTEREST RATE FLUCTUATIONS COULD INCREASE THE COMPANY'S INTEREST EXPENSE.
Although the weakness in the U.S. economy over the past several quarters has
resulted in relatively low bank interest rates, a significant economic
recovery could result in a substantial rise in interest rates that would, in
turn, increase the Company's cost of borrowing.
- - THE COMPANY FACES OTHER RISKS DISCUSSED UNDER QUALITATIVE AND QUANTITATIVE
DISCLOSURES ABOUT MARKET RISK IN ITEM 7A OF THIS FORM 10-K.
ITEM 7A. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK
MARKET RISK DISCLOSURES
The following discussion about the Company's market risk disclosures involves
forward-looking statements. Actual results could differ materially from those
projected in the forward-looking statements. The Company is exposed to market
risk related to changes in interest rates, foreign currency exchange rates, and
gold values. The Company also is exposed to regulatory risk in relation to its
payday loans. The Company does not use derivative financial instruments.
The Company's earnings and financial position may be affected by changes in gold
values and the resulting impact on pawn lending and jewelry sales. The proceeds
of scrap sales and the Company's ability to liquidate excess jewelry inventory
at an acceptable margin are dependent upon gold values. The impact on the
Company's financial position and results of operations of a hypothetical change
in gold values cannot be reasonably estimated.
ITEM 8. FINANCIAL STATEMENTS
(a) Financial Statements (see pages 21 - 42 of this report).
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
The information contained in the Company's Form 8-K/A-2 filed on November 1,2004
is incorporated by reference in response to this item.
15
ITEM 9A. 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 annual 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 III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
The information contained in the Company's Proxy Statement to be filed pursuant
to Regulation 14A within 120 days after the end of the fiscal year covered by
this Form 10-K with respect to directors and executive officers of the Company,
is incorporated by reference in response to this item.
ITEM 11. EXECUTIVE COMPENSATION
The information contained in the Company's proxy statement to be filed pursuant
to Regulation 14A within 120 days after the end of the fiscal year covered by
this Form 10-K, with respect to executive compensation and transactions, is
incorporated by reference in response to this item.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
The information contained in the Company's Proxy Statement to be filed pursuant
to Regulation 14A within 120 days after the end of the fiscal year covered by
this Form 10-K with respect to security ownership of certain beneficial owners
and management and related stockholder matters, is incorporated by reference in
response to this item.
16
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information contained in the Company's Proxy Statement to be filed pursuant
to Regulation 14A within 120 days after the end of the fiscal year covered by
this Form 10-K with respect to certain relationships and related transactions,
is incorporated by reference in response to this item.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
The information contained in the Company's Proxy Statement to be filed pursuant
to Regulation 14A within 120 days after the end of the fiscal year covered by
this Form 10-K with respect principal accounting fees and services, is
incorporated by reference in response to this item.
PART IV
ITEM 15. EXHIBITS AND REPORTS ON FORM 8-K
(a) 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.
10.1 ASSET PURCHASE AND SALE AGREEMENT dated as of July
28,_,2004 by and between DGSE Companies, Inc., as Seller
and Silverman Group, LLC..
10.2 Lease agreement dated October 5, 2004 by and between
Beltline Denton Road Associates and Dallas Gold & Silver
Exchange.
10.3 Lease agreement dated December 1, 2004 by and between Stone
Lewis Properties and Dallas Gold & Silver Exchange.
10.4 Lease agreement dated November 18, 2004 by and between
Hinkle Income Properties LLC and American Pay Day Centers,
Inc.
17
The following exhibits are incorporated by reference to the Company's
Form 10-KSB dated March 21, 2002:
10.1 Loan and Security Agreement dated November 22, 2002 by and
between First American Bank, SSB and DGSE Companies, Inc.
The following exhibits are incorporated by reference to the Company's
Form 10-KSB dated March 21, 2001:
10.1 EXHIBIT 10.1 - LEASE AGREEMENT dated JUNE 2, 2000 by and
between SND PROPERTIES and CHARLESTON GOLD AND DIAMOND
EXCHAMGE, INC.
The following exhibits are incorporated by reference to the Company's
Form 10-QSB dated May 14, 2000:
10.2 EXHIBIT 10.1 - BILL OF SALE AND ASSET PURCHASE AGREEMENT
dated March 2, 2000 by and among Dallas Gold AND Silver
Exchange, INC., FAIRCHILD INTERNATIONAL, INC. and MACK H.
HOSKINS.
The following exhibits are incorporated by reference to the Company's
Form 8-K dated August 26, 1999:
10.3 EXHIBIT 1.0 AGREEMENT AND PLAN OF MERGER dated AUGUST 13,
1999 by and among Dallas Gold and Silver Exchange Silver
Exchange, Inc., SILVERMAN ACQUISITION, INC., JEWEL CASH,
INC. (the "COMPANY") and the COMPANY'S SHAREHOLDERS.
10.4 EXHIBIT 2.0 ASSIGNMENT AGREEMENT DATED AUGUST 13, 1999
between SILVERMAN JEWELRY CONSULTANTS, INC., FIRST UNION
NATIONAL BANK OF SOUTH CAROLINA, and DALLAS GOLD & SILVER
EXCHANGE, INC.
10.5 EXHIBIT 3.0 PROMISSORY NOTE DATED AUGUST 13, 1999 BY DALLAS
GOLD & SILVER EXCHANGE, INC. PAYABLE TO FIRST UNION
NATIONAL BANK.
10.6 EXHIBIT 4.0 SECURITY AGREEMENT DATED AUGUST 13, 1999 BY
DALLAS GOLD & SILVER EXCHANGE, INC. and FIRST UNION
NATIONAL BANK.
10.7 EXHIBIT 5.0 BILL OF SALE DATED AUGUST 13, 1999 BY AND
BETWEEN FIRST UNION NATIONAL BANK, SILVERMAN RETAIL
CONSULTANTS, SILVERMAN JEWELRY CONSULTANTS AND DALLAS GOLD
& SILVER EXCHANGE, INC.
The following exhibits are incorporated by reference to the Company's
Form 10-KSB for the year ended December 31, 1998:
10.8 EXHIBIT 10.1 Renewal of Shopping Center Lease dated as of
August 1, 1997 by and between Beltline Pawn Shop and Belt
Line - Denton Road Associates.
18
The following exhibits are incorporated by reference to the Company's
Form 10-KSB for the year ended December 31, 1996:
10.9 EXHIBIT 10.1 Agreement For Purchase And Sale Of Stock dated
December 30, 1996 by and among Dallas Gold And Silver
Exchange, Inc. and Henry Hirschman.
The following exhibits are incorporated by reference to the Company's
Form 10-KSB for the year ended December 31, 1994:
10.12 EXHIBIT 10.2 renewal, extension, modification agreement
dated January 28, 1994 by and among DGSE Corporation And
Michael E. Hall and Marion Hall.
(b) Reports on Form 8-K - None
19
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
DGSE Companies, Inc.
By: /s/ L. S. Smith Dated: April 14, 2005
------------------------------
L. S. Smith
Chairman of the Board,
Chief Executive Officer and
Secretary
Pursuant to the requirements of 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.
By: /s/ L. S. Smith Dated: April 14, 2005
------------------------------
L.S Smith
Chairman of the Board,
Chief Executive Officer and
Secretary
By: /s/ W. H. Oyster Dated: April 14, 2005
------------------------------
W. H. Oyster
Director, President and
Chief Operating Officer
By: /s/ John Benson Dated: April 14, 2005
------------------------------
John Benson
Chief Financial Officer
(Principal Accounting Officer)
By /s/ William P. Cordeiro Dated: April 14, 2005
------------------------------
Director
By: /s/ Craig Allan-Lee Dated: April 14, 2005
------------------------------
Director
By: /s/ Paul Hagen Dated: April 14, 2005
------------------------------
Director
20
To the Board of Directors and
Shareholders of DGSE Companies, Inc.
We have audited the accompanying consolidated balance sheet of DSGE Companies,
Inc. and its subsidiaries as of December 31, 2004, and the related consolidated
statements of operations, shareholders' equity and comprehensive income, and
cash flows for the year then ended. These consolidated financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audit. The consolidated
financial statements of DGSE Companies, Inc. and subsidiaries as of December 31,
2003 were audited by other auditors whose report dated March 22, 2004, stated an
unqualified opinion on those financial statements.
We conducted our audit in accordance with standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. We have not been engaged to
perform an audit of the Company's 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 audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of DGSE Companies,
Inc. and subsidiaries as of December 31, 2004, and the consolidated results of
operations and its cash flows for the year then ended in conformity with
accounting principles generally accepted in the United States of America.
\s\ BKR Cornwell Jackson
BKR Cornwell Jackson
Plano, Texas
March 31, 2005
21
Report of Independent Registered Public Accountants
---------------------------------------------------
Board of Directors and Shareholders
DGSE Companies, Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheet of DGSE Companies,
Inc. and Subsidiaries as of December 31, 2003, and the related consolidated
statements of operations, shareholders' equity, and cash flows for the years
ended December 31, 2003 and 2002. These consolidated financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these consolidated financial statements based on our audits.
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
consolidated financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the consolidated 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 consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of DGSE
Companies, Inc. and Subsidiaries as of December 31, 2003, and the consolidated
results of their operations and their cash flows for the years ended December
31, 2003 and 2002, in conformity with accounting principles generally accepted
in the United States of America.
CF & Co., L.L.P.
Dallas, Texas
March 22, 2004
22
DGSE Companies, Inc. and Subsidiaries
Consolidated Balance Sheets
December 31,
ASSETS
2004 2003
------------ ------------
CURRENT ASSETS
Cash and cash equivalents $ 314,897 735,293
Trade receivables 907,238 774,586
Other receivables -- 204,430
Inventories 6,791,383 6,673,865
Prepaid expenses 161,985 149,277
------------ ------------
Total current assets 8,175,503 8,537,451
MARKETABLE SECURITIES - AVAILABLE FOR SALE 77,062 243,446
PROPERTY AND EQUIPMENT - AT COST, NET 885,301 989,966
DEFERRED INCOME TAXES 15,944 --
GOODWILL 837,117 1,151,120
OTHER ASSETS 290,722 149,546
------------ ------------
$ 10,281,699 $ 11,071,529
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Notes payable $ 548,093 $ 541,546
Current maturities of long-term debt 76,172 197,315
Accounts payable -trade 590,412 859,269
Accrued expenses 513,775 705,756
Customer deposits 67,173 150,088
Federal income taxes payable 146,210 512,991
------------ ------------
Total current liabilities 1,941,835 2,966,965
Long-term debt, less current maturities (Note 8) 2,749,278 2,719,482
Deferred income taxes -- 22,743
------------ ------------
Total liabilities 4,691,112 5,709,190
SHAREHOLDERS' EQUITY
Common stock, $.01 par value; authorized 10,000,000
shares; issued and outstanding 4,913,290 shares at
December 31, 2004 and 2003 49,133 49,133
Additional paid-in capital 5,708,760 5,708,760
Accumulated other comprehensive (loss) (122,582) --
Retained earnings (deficit) (44,725) (395,554)
Total shareholders' equity 5,590,586 5,362,339
------------ ------------
$ 10,281,699 $ 11,071,529
============ ============
The accompanying notes are an integral part of these consolidated financial
statements
23
DGSE Companies, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF OPERATIONS
Years ended December 31,
2004 2003 2002
------------ ------------ ------------
Revenue
Sales $ 28,385,770 $ 25,243,719 $ 21,083,170
Pawn services charges 256,447 181,828 156,291
------------ ------------ ------------
28,642,217 25,425,547 21,239,461
Costs and expenses
Cost of goods sold 22,743,073 20,049,583 16,238,552
Selling, general and administrative expenses 4,699,107 4,054,048 3,948,186
Depreciation and amortization 148,327 160,131 158,153
------------ ------------ ------------
27,590,507 24,263,762 20,344,891
------------ ------------ ------------
Operating income 1,051,710 1,161,785 894,570
------------ ------------ ------------
Other income (expense):
Unrealized loss on investments -- (1,634,845) --
Other income 23,500 -- 401,849
Interest expense (247,694) (268,344) (263,230)
------------ ------------ ------------
Total other income (expense) (224,194) (1,903,189) 138,619
Income before income taxes 827,516 (741,404) 1,033,189
Income tax expense (benefit) 227,797 (334,361) 326,886
------------ ------------ ------------
Net income from continuing operations 599,719 (407,043) 706,303
Loss from discontinued operations,
net of income taxes (248,890) (117,097) (276,992)
------------ ------------ ------------
Net income $ 350,829 $ (524,140) $ 429,311
============ ============ ============
Earnings per common share
Basic
From continuing operations $ .12 $ (.08) $ .14
From discontinued operations (.05) (.03) (.05)
------------ ------------ ------------
$ .07 $ (.11) $ .09
============ ============ ============
Diluted
From continuing operations $ .12 $ (.08) $ .14
From discontinued operations (.05) (.03) (.05)
------------ ------------ ------------
$ .07 $ (.11) $ .09
============ ============ ============
Weighted average number of common shares:
Basic 4,913,290 4,913,290 4,913,628
Diluted 5,135,457 4,913,290 4,916,878
The accompanying notes are an integral part of these consolidated financial
statements
24
DGSE Companies, Inc. and Subsidiaries
Consolidated Statements of Shareholders' Equity
For the Years Ended December 31,
Retained
Common Stock Additional Earnings Other Total
------------------------------ Paid-in (Accumulated Comprehensive Shareholders'
Shares Amount Capital Deficit) (Loss) Equity
------------- ------------- ------------- ------------- ------------- -------------
Balance at January
31, 2002 4,913,290 $ 49,133 $ 5,708,301 $ (300,725) $ (987,277) $ 4,469,432
Net Income -- -- -- 429,311 -- 429,311
Other comprehensive
Income (loss):
Loss on marketable securities
Arising during the year, net
of tax -- -- -- -- (161,878) (161,878)
Reclassification adjustment -- -- -- -- 14,205 14,205
Unrealized loss on marketable
Securities, net of tax -- -- -- -- (147,673) (147,673)
Purchase and retirement
Of common stock (500) (5) (606) -- -- (611)
Common stock issued 500 5 1,065 -- -- 1,070
------------- ------------- ------------- ------------- ------------- -------------
Balance at December
31, 2002 4,913,290 49,133 5,708,760 128,586 (1,134,950) 4,751,529
Net income (loss) -- -- -- (524,140) -- (524,140)
Other comprehensive
Income (loss):
Loss on marketable securities
Arising during the year, net
of tax -- -- -- -- 60,413 60,413
Reclassification adjustment -- -- -- -- 1,074,537 1,074,537
Unrealized loss on marketable
Securities, net of tax -- -- -- -- 1,134,950 1,134,950
------------- ------------- ------------- ------------- ------------- -------------
Balance at December
31, 2003 4,913,290 49,133 5,708,760 (395,554) -- 5,362,339
Net income -- -- -- 350,829 -- 350,829
Unrealized loss on marketable
Securities, net of tax -- -- -- -- (122,582) (122,582)
------------- ------------- ------------- ------------- ------------- -------------
Balance at December
31, 2004 4,913,290 $ 49,133 $ 5,708,760 $ (44,725) $ (122,582) $ 5,590,586
============= ============= ============= ============= ============= =============
The accompanying notes are an integral part of these consolidated financial
statements
25
DGSE Companies, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year ended December 31,
2004 2003 2002
----------- ----------- -----------
Cash Flows From Operations
Reconciliation of net loss to net cash
used in operating activities
Net income (loss) $ 350,829 $ (524,140) $ 429,311
Depreciation and amortization 148,327 187,558 202,986
Deferred taxes (10,535) (451,081) 80,815
Accretion of debt discount -- -- 12,132
Loss on disposal of assets in discontinued operations -- 31,072 --
Loss on sale of marketable securities 15,600 26,998 14,205
Unrealized loss on marketable securities -- 1,634,845 --
Gain on sale of assets (39,098) -- --
(Increase) decrease in operating assets and liabilities
Trade receivables (94,575) 18,004 (148,257)
Other receivables 204,730 (204,430) --
Inventories (117,518) (338,123) (38,423)
Prepaid expenses and other current assets 10,840 3,577 (27,456)
Accounts payable and accrued expenses (460,838) 340,216 (359,110)
Change in customer deposits (82,915) 6,344) (15,264)
Federal income taxes payable (366,781) 27,538 164,772
----------- ----------- -----------
Total net cash used in operating activities (441 934 745,690 315,711
Cash flows from investing activities
Proceeds from sale of marketable securities -- 46,988 4,794
Purchase of property and equipment (43,662) (34,464) (25,024)
Purchase of investments -- (48,989) --
Proceeds from sale of assets 150,000 -- --
----------- ----------- -----------
Net cash (used) provided by investing activities 106,338 (36,465) (20,230)
Cash flows from financing activities
Issuance of common stock -- -- 1,070
Proceeds from notes issued 1,132,849 737,590 2,460,555
Payments on notes payable (1,217,649) (1,209,930) (3,321,147)
Purchase and retirement of common stock -- -- (611)
----------- ----------- -----------
Net cash provided by financing activities (84,800) (472,340) (860,133)
----------- ----------- -----------
Net decrease in cash and cash equivalents (420,396) 236,885 (564,652)
Cash and cash equivalents at beginning of year 735,293 498,408 1,063,060
----------- ----------- -----------
Cash and cash equivalents at end of period $ 314,897 $ 735,293 $ 498,408
=========== =========== ===========
Supplemental disclosures:
Cash paid during the year for:
Interest $ 242,697 $ 249,088 $ 328,732
Income taxes $ 504,430 $ 246,212 $ --
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
$203,100.
The accompanying notes are an integral part of these consolidated financial
statements.
26
DGSE COMPANIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2004, 2003 and 2002
Note 1 - Summary of Significant Accounting Policies
------------------------------------------
Nature of Operations
DGSE Companies, Inc. and its subsidiaries (the "Company"), sell jewelry
and bullion products to both retail and wholesale customers throughout
the United States through its facilities in Dallas, Texas, Mt.
Pleasant, South Carolina, and through its internet sites.
Principles of Consolidation
The consolidated financial statements have been prepared in accordance
with accounting principles generally accepted in the United States of
America and include the accounts of the Company and its subsidiaries.
All material intercompany transactions and balances have been
eliminated.
Cash and Cash Equivalents
For purposes of the statements of cash flows, the Company considers all
highly liquid debt instruments purchased with a maturity of three
months or less to be cash equivalents.
Investments in Marketable Equity Securities
Marketable equity securities have been categorized as
available-for-sale and carried at fair value. Unrealized gains and
losses for available-for-sale securities are included as a component of
shareholders' equity net of tax until realized. Realized gains and
losses on the sale of securities are based on the specific
identification method. The Company continually reviews its investments
to determine whether a decline in fair value below the cost basis is
other than temporary. If the decline in the fair values is judged to be
other than temporary, the cost basis of the security is written down to
fair value and the amount of the write-down is included in the
consolidated statements of operations.
Inventory
Jewelry and other inventory is valued at lower-of-cost-or-market
(specific identification). Bullion inventory is valued at
lower-of-cost-or-market (average cost).
27
DGSE COMPANIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2004, 2003 and 2002
Note 1 - Summary of Significant Accounting Policies, continued
-------------------------------------------
Property and Equipment
Property and equipment are stated at cost less accumulated depreciation
and amortization. Depreciation and amortization are being provided on
the straight-line method over periods of five to thirty years.
Machinery and equipment under capital leases are amortized on the
straight-line method over the life of the lease. Expenditures for
repairs and maintenance are charged to expense as incurred.
Goodwill
Effective January 1, 2002, the Company adopted Statement of Financial
Accounting Standards No. 142, Goodwill and Other Intangible Assets.
Under that pronouncement, goodwill is not being amortized but is
subject to periodic tests to determine the amount of impairment, if
any, to be reflected during the period.
Impairment of Long-Lived Assets
The Company assesses the recoverability of its long-lived assets
(including intangible assets) based on their current and anticipated
future undiscounted cash flows. An impairment occurs when the
discounted cash flows (excluding interest) do not exceed the carrying
amount of the asset. The amount of the impairment loss is the
difference between the carrying amount of the asset and its estimated
fair value.
Financial Instruments
The carrying amounts reported in the consolidated balance sheets for
cash and cash equivalents, accounts receivable, marketable securities,
short-term debt, accounts payable and accrued expenses approximate fair
value because of the immediate or short-term maturity of these
consolidated financial instruments. The carrying amount reported for
long-term debt approximates fair value because substantially all of the
underlying instruments have variable interest rates which reprice
frequently or the interest rates approximate current market rates.
Advertising Costs
Advertising costs are expensed as incurred and amounted to $633,873,
$589,689 and $541,079 for 2004, 2003 and 2002, respectively.
28
DGSE COMPANIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2004, 2003 and 2002
Note 1 - Summary of Significant Accounting Policies, continued
------------------------------------------
Accounts Receivable
The Company records trade receivables when revenue is recognized. No
product has been consigned to customers. The Company's allowance for
doubtful accounts is primarily determined by review of specific trade
receivables. Those accounts that are doubtful of collection are
included in the allowance. These provisions are reviewed to determine
the adequacy of the allowance for doubtful accounts. Trade receivables
are charged off when there is certainty as to their being
uncollectible. Trade receivables are considered delinquent when payment
has not been made within contract terms.
Income Taxes
Deferred tax liabilities and assets are recognized for the expected
future tax consequences of events that have been included in the
consolidated financial statements or tax returns. Under this method,
deferred tax liabilities and assets are determined based on the
difference between the consolidated financial statements and tax basis
of assets and liabilities.
Revenue Recognition
Sales revenue consists of direct sales to customers for jewelry. Sales
are recognized when title and risk of loss have passed to the customer,
which is at point-of-sale for jewelry. Provisions for discounts and
rebates to customers and returns, bad debts, and other adjustments are
provided in the period the related sales are recorded. Liquidation
service revenue is also included in sales and is recognized as
inventory is sold during the respective liquidation sale. Consulting
service revenue is recognized when the services are performed.
Pawn loans ("loans") are made with the collateral of tangible personal
property for one month with an automatic 60-day extension period. Pawn
service charges are recorded at the time of redemption at the greater
of $15 or the actual interest accrued to date. If the loan is not
repaid, the principal amount loaned plus accrued interest (or the fair
value of the collateral, if lower) becomes the carrying value of the
forfeited collateral ("inventories") which is recovered through sales
to customers.
As of December 31, 2004, based on subsequent collections and operating
history, management estimated no allowance for discounts, returns, bad
debts and other adjustments.
29
DGSE COMPANIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2004, 2003 and 2002
Note 1 - Summary of Significant Accounting Policies, continued
-------------------------------------------
Shipping and Handling Costs
Shipping and handling costs are included in selling general and
administrative expenses, and amounted to $112,777, $84,445 and $100,194
for 2004, 2003 and 2002, respectively.
Earnings (Loss) Per Share
Basic earnings per common share is based upon the weighted average
number of shares of common stock outstanding. Diluted earnings per
share is based upon the weighted average number of common stock
outstanding and, when dilutive, common shares issuable for stock
options. During 2003, stock options were not included in computing
diluted earnings per share because their effect was antidilutive.
Comprehensive Income
The Company reports all changes in comprehensive income in the
consolidated statements of changes in shareholders' equity, in
accordance with the provisions of Statement of Financial Accounting
Standards No. 130, Reporting Comprehensive Income.
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.
Years ended December 31,
2004 2003 2002
--------- --------- ---------
Net income (loss) as reported $ 350,829 $(524,140) $ 429,331
Deduct: Total stock-based employee
Compensation expense determined
Under fair value based method for
All awards, net of related tax effects -- -- 236,611)
--------- --------- ---------
Proforma net income (loss) $ 350,829 $(524,140) $ 192,700
Proforma net income (loss)
Earnings per share:
Basic-as reported .07 (.11) .09
Basic-proforma .07 (.11) .04
Diluted-as reported .07 (.11) .09
Diluted-proforma .07 (.11) .04
30
DGSE COMPANIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2004, 2003 and 2002
Note 1 - Summary of Significant Accounting Policies, continued
------------------------------------------
Stock-based Compensation, continued
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.
Use of Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the
reported amounts of revenues, and expenses during the reporting period.
Actual results could differ from those estimates.
Reclassifications
Certain reclassifications were made to the prior years' consolidated
financial statements to conform to the current year presentation.
New Accounting Pronouncements
FAS 123(R), Share-Based Payment
This Statement establishes standards for the accounting for
transactions in which an entity exchanges its equity
instruments for goods or services. It also addresses
transactions in which an entity incurs liabilities in exchange
for goods or services that are based on the fair value of the
entity's equity instruments or that may be settled by the
issuance of those equity instruments. Management is in the
process of assessing the impact to the Company, however, it
does not expect the impact, if any, to be material to the
financial statements.
FAS 153, Exchange of Nonmonetary Assets
The guidance in APB Opinion No. 29, Accounting for Nonmonetary
Transactions, is based on the principle that exchanges of
nonmonetary assets should be measured based on the fair value
of the assets exchanged. The guidance in that Opinion,
however, included certain exceptions to that principle. This
Statement amends Opinion 29 to eliminate the exception for
nonmonetary exchanges of similar productive assets and
replaces it with a general exception for exchanges of
nonmonetary assets that do not have commercial substance. A
nonmonetary exchange has commercial substance if the future
cash flows of the entity are expected to change significantly
as a result of the exchange. Management is in the process of
assessing the impact to the Company, however, it does not
expect the impact, if any, to be material to the financial
statements.
31
DGSE COMPANIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2004, 2003 and 2002
Note 2 - Concentration of Credit Risk
----------------------------
The Company maintains cash balances in financial institutions in excess
of federally insured limits.
Note 3 - Inventories
-----------
A summary of inventories at December 31, is as follows:
2004 2003
---------- ----------
Jewelry $6,149,955 $6,033,044
Scrap gold 305,801 439,083
Bullion 247,973 115,654
Other 87,654 86,084
---------- ----------
$6,791,383 $6,673,865
========== ==========
Note 4 - Investments in Marketable Equity Securities
-------------------------------------------
Marketable equity securities have been classified in the consolidated
balance sheet according to management's intent. The carrying amount of
available-for-sale securities and their fair values at December 31,
2004 and 2003 are as follows:
Gross
Unrealized Fair
Cost Losses Value
----------- ---------------------------- -----------
Classified as Classified as
Operating losses Unrealized
Due to long-term Losses in other
Impairment Comprehensive
Income
Equity securities 2004 $ 1,864,441 $(1,634,845) $ 152,534 $ 77,062
=========== =========== =========== ===========
Equity securities 2003 $ 1,878,291 $(1,634,845) -- $ 152,534
=========== =========== =========== ===========
During 2003, management determined that the decline in fair values
below cost basis to be other than temporary and that such loss should
be included in the consolidated statements of operations. At December
31, 2004, management believes the equity shares owned in the publicly
traded stocks have 0eclined on a temporary basis as these stocks are
thinly traded which results in volatile price flections that
temporarily changes the fair value of the stocks.
Proforma earnings per share information for 2003 is as follows computed
in accordance with accounting principles disclosed in Note 1.
Basic and diluted:
Net income from operations $ 0.14
Loss from write-down of marketable securities
Net of income tax benefits (0.23)
---------
Net loss from continuing operations (0.09)
Net loss from discontinued operations (0.02)
---------
$ (0.11)
=========
During 2004, the Company deemed certain marketable securities worthless
and recognized $ 15,600 as a realized loss.
32
DGSE COMPANIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2004, 2003 and 2002
Note 5 - Property and Equipment
----------------------
A summary of property and equipment at December 31, 2004 and 2003, is
as follows:
2004 2003
---------- ----------
Buildings and improvements $ 732,488 $ 721,315
Machinery and equipment 727,942 716,280
Furniture and fixtures 226,318 215,272
---------- ----------
1,686,748 1,652,867
Less accumulated depreciation and
Amortization 1,352,747 1,214,201
---------- ----------
334,001 438,666
Land 551,300 551,300
---------- ----------
$ 885,301 $ 989,966
========== ==========
Property and equipment acquired under capital leases is $202,450 as of
December 31, 2004 and 2003. Accumulated depreciation for these assets
was $ 188,385 and $148,195 as of December 31, 2004 and 2003,
respectively.
Note 6 - Goodwill
--------
At December 31, goodwill was reflected for the following reporting
units:
2004 2003
---------- ----------
Wholesale watch sales $ 837,117 $ 837,117
Consulting and liquidation -- 314,003
---------- ----------
$ 837,117 $1,151,120
========== ==========
No impairment was reflected during 2004, 2003 or 2002.
Note 7 - Notes Payable
-------------
At December 31, 2004, the Company was obligated to various individuals
under unsecured, demand notes bearing annual interest rates of 8% to
12% totaling $548,093.
At December 31, 2003, the Company was obligated to various individuals
under unsecured, demand notes bearing annual interest rates of 8% to
14% totaling $541,546.
At December 31, 2003, one of the notes in the amount of $135,000 was
payable to a shareholder. During January 2004, the principal amount of
this note was paid in full, and the note holder forgave $24,226 of
accrued interest. As a result, no interest was paid or expensed on this
note during 2003. At December 31, 2003, one of the notes in the amount
of $16,301 was payable to a relative of an officer of the Company.
During 2004, the principal amount of this note was paid in full.
33
DGSE COMPANIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2004, 2003 and 2002
Note 8 -Long-Term Debt and Short-term Debt Expected to be Refinanced
------------------------------------------------------------
2004 2003
---------- ----------
A summary of long-term debt and short-term debt expected to be
refinanced at December 31,follows:
Notes payable to bank, a note of $1,600,000 and $1,500,000 at
December 31, 2004 and 2003, respectively, which bears interest
at prime plus 1-1/2% (6.75% and 5.75% at December 31, 2004 and
2003, respectively, and is due March 31, 2005 and a note of
$408,333 and $500,000, respectively, which bears interest at
prime plus 1-3/4% (7.0% and 5.75% at December 31, 2004 and
2003), respectively, is due in equal monthly installments of
$8,333 through January 2009. These notes are secured by all
accounts receivable, inventory, property and equipment and
intangible assets. The notes contain certain covenants,
restricting payment of dividends, and requiring the Company to
maintain certain financial ratios. $2,008,333 $2,000,000
Mortgage payable, due in monthly installments of $5,977,
including interest based on 30 year U.S. Treasury note rate
plus 2-1/2% (7.64% and 7.41% at December 31, 2004 and 2003);
respectively, balance due in January 2014 465,724 503,219
Note payable, due March 2, 2005. Interest is payable quarterly
at a rate of 8% 18,298 51,649
Note payable, due January 2, 2008. Interest is payable monthly
at a rate of 8% 310,556 310,556
Capital lease obligations 22,539 51,372
---------- ----------
2,825,450 2,916,796
Less current maturities (76,172) (197,315)
---------- ----------
$2,749,278 $2,719,481
========== ==========
34
DGSE COMPANIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2004, 2003 and 2002
Note 8 - Long-Term Debt and Short-term Debt Expected to be Refinanced, continued
-----------------------------------------------------------------------
The Company entered into a financing agreement subsequent to year end
with a commercial bank that
the Company to borrow at any time through March 31, 2006 up to $
3,500,000 at the bank's prime Rate of interest plus 1/4%. Borrowings
under the financing agreement mature on March 31, 2006. In March 2005,
the Company borrowed $ 2,699,699 under this new credit facility in
order to liquidate its previous bank debt. The remaining portion of the
new financing agreement is available to the Company for working capital
requirements.
The following table summarizes the aggregate maturities of long-term
debt and payments on the capital lease obligations and reflects the
revised maturities from refinancing of certain long-term debt
subsequent to year-end:
Obligations
Under
Long-term Capital
December 31, Debt Leases Totals
----------- ----------- -----------
2005 $ 56,258 $ 21,706 $ 77,964
2006 1,840,844 2,852 1,843,696
2007 143,936 -- 143,936
2008 147,262 -- 147,262
2009 369,728 -- 369,728
Thereafter 244,884 -- 244,883
----------- ----------- -----------
2,802,912 24,558 2,827,469
Amounts representing interest
interest rates at approximately 9%) -- (2,020) (2020)
----------- ----------- -----------
2,802,912 22,538 2,825,450
Less current portion (56,258) (19,914) (76,172)
----------- ----------- -----------
$ 2,746,654 $ 2,625 $ 2,749,278
=========== =========== ===========
35
DGSE COMPANIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2004, 2003 and 2002
Note 9 - Earnings Per Common Share
-------------------------
A reconciliation of the income and shares of the basic earnings per
common share and diluted earnings per common share for the years ended
December 31, 2004, 2003 and 2002 is as follows:
December 31, 2004
----------------------------------
Per-Share
Income Shares Amount
---------- --------- ---------
Basic earnings per common share
Income from operations allocable
to common shareholders $ 350,829 4,913,920 $ .07
Effect of dilutive securities
Stock options -- 221,537 --
---------- --------- ---------
Diluted earnings per common share
Income from operations available
to common shareholders plus
assumed conversions $ 350,8291 5,135,457 $ .07
========== ========= =========
December 31, 2003
----------------------------------
Per-Share
Income Shares Amount
---------- --------- ---------
Basic earnings per common share
Income from operations allocable
to common shareholders $(524,140) 4,913,920 $ (.11)
Effect of dilutive securities
Stock options -- -- --
--------- --------- ---------
Diluted earnings per common share
Income from operations available
to common shareholders plus
assumed conversions $(524,140) 4,913,920 $ (.11)
========= ========= =========
December 31, 2002
----------------------------------
Per-Share
Income Shares Amount
---------- --------- ---------
Basic earnings per common share
Income from operations allocable
to common shareholders $ 429,311 4,913,628 $ .09
Effect of dilutive securities
Stock options -- 3,250 --
--------- --------- ---------
Diluted earnings per common share
Income from operations available
to common shareholders plus
assumed conversions $ 429,311 4,916,878 $ .09
========= ========= =========
36
DGSE COMPANIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2004, 2003 and 2002
Note 10 - Stock Options
-------------
The Company has granted stock options to key employees to purchase
shares of the Company's common stock. Each option issued vests
according to schedules designated by the Board of Directors, not to
exceed three years. The exercise price is based upon the estimated fair
market value of the Company's common stock at the date of grant, and is
payable when the option is exercised.
The Company has adopted only the disclosure provisions of Financial
Accounting Standard No. 123, Accounting for Stock-Based Compensation
(FAS 123). It applies APB Opinion No. 25, Accounting for Stock Issued
to Employees, and related interpretations in accounting for its plans
and does not recognize compensation expense for its stock-based
compensation as all options granted under those plans had an exercise
price equal to the market value of the underlying common stock on the
date of grant.
The following table summarizes the activity in common shares subject to
options for the years ended December 31, 2004, 2003 and 2002:
December 31, 2004 and 2003 December 31, 2002
------------------------------- --------------------------------
Weighted Weighted
Average Average
Options Exercise Price Options Exercise Price
-------------- -------------- -------------- --------------
Outstanding at beginning
of year 1,420,634 $ 2.09 1,164,777 $ 2.33
Granted -- -- 267,857 1.12
Forfeited -- -- (12,000) 3.63
-------------- -------------- -------------- --------------
Outstanding at end of year 1,420,634 $ 2.09 1,420,634 $ 2.09
============== ============== ============== ==============
Exercisable at end of year 1,420,634 $ 2.09 1,420,634 $ 2.09
============== ============== ============== ==============
Weighted average fair value
of options granted
during year $ -- $ 0.85
============== ==============
Stock options outstanding at December 31, 2004:
Options Outstanding Options Exercisable
------------------------------------------------------------------------
Range of Weighted Weighted Weighted
Exercise Average Average Average
Price Options Expected Life Exercise Price Options Exercise Price
----- ------- ------------- -------------- ------- --------------
$1.12 267,857 8 Years $ 1.12 267,857 $1.12
$1.63 to $2.25 1,097,777 8 Years $2.21 1,097,777 $2.21
$3.63 to $4.19 20,000 8 Years $3.81 20,000 $3.83
$4.88 35,000 5 Years $4.88 35,000 $4.88
--------- ---------
1,420,634 1,420,634
========= =========
37
DGSE COMPANIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2004, 2003 and 2002
Note 11 - Comprehensive Income
--------------------
Comprehensive income at December 31, 2004, 2003 and 2002 is as follows:
Before-Tax Tax Net-of-Tax
Amount Benefit Amount
----------- ----------- -----------
Accumulated comprehensive
income (loss) at January 1, 2002 $(1,495,874) $ 508,597 $ (987,277)
Unrealized holding losses
arising during 2002 (232,256) 84,583 (147,673)
----------- ----------- -----------
Accumulated comprehensive
income (loss) at December 31, 2002 (1,728,130) 593,180 (1,134,950)
Unrealized holding gains
arising during 2003 93,285 (32,872) 60,413
Reclassification to statement
of operations 1,634,845 (560,308) 1,074,537
----------- ----------- -----------
Accumulated comprehensive
income (loss) at December 31, 2003 -- -- --
Unrealized holding losses
Arising during 2004 (150,784) 28,202 (122,582)
----------- ----------- -----------
Accumulated comprehensive
income (loss) at December 31, 2004 $ (150,784) $ 28,202 $ (122,582)
=========== =========== ===========
38
DGSE COMPANIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2004, 2003 and 2002
Note 12 - Income Taxes
------------
The income tax provision reconciled to the tax computed at the
statutory Federal rate follows:
2004 2003 2002
--------- --------- ---------
Tax (benefit) expense at statutory rate $ 162,502 $(294,124) $ 223,504
Other 24,616 16,484 5,076
Benefit (expense) of discontinued operations 100,679 33,279 98,306
Change in valuation allowance (60,000) (90,000) --
Tax expense (benefit) $ 227,797 $(334,361) $ 326,886
--------- --------- ---------
Current $ 238,332 $ 62,191 $ 153,365
Deferred (10,535) (396,552) 173,521
--------- --------- ---------
$ 227,797 $(334,361) $ 326,886
========= ========= =========
Deferred income taxes are comprised of the following at December 31,
2004 and 2003:
Deferred tax assets (liabilities) 2004 2003
-------- --------
Inventory $ 25,903 $ 25,197
Unrealized loss on available for sale securities 28,202 28,202
Property and equipment 10,952 9,804
Valuation reserve -- (60,000)
Goodwill (49,064) (25,946)
-------- --------
$ 15,994 $(22,743)
======== ========
Based upon a review of the remaining temporary differences in marketable
securities between book and tax basis amounts at December 31, 2003, the Company
determined the deferred tax asset related to marketable securities was limited
to approximately $28,000. In 2003, management of the Company determined that the
loss on marketable securities was other than temporary and eliminated the
balance related to marketable securities in accumulated other comprehensive
income. The resulting adjustment eliminated the remaining deferred tax balances
in other comprehensive income. In addition, the Company recognized a deferred
tax benefit in 2003 of $351,000 related to the reversal of a valuation allowance
established primarily for marketable securities due to a change in management's
estimate of the required remaining valuation reserve as of December 31, 2003.
39
DGSE COMPANIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2004, 2003 and 2002
Note 13 - Operating Leases
The Company leases certain of its facilities under operating
leases. The minimum rental commitments under noncancellable
operating leases are as follows:
Year Ending Lease Sub-Lease
December 31, Obligations Receivables Total
------------ ----------- ----------- -----------
2005 $ 227,455 $ (36,000) $ 191,455
2006 118,447 -- 118,447
2007 108,018 -- 108,018
2008 88,394 -- 88,394
Thereafter 73,199 -- 73,199
----------- ----------- -----------
$ 615,513 $ (36,000) $ 579,513
=========== =========== ===========
Rent expense for the years ended December 31, 2004, 2003 and 2002 was
approximately $198,050, $223,046 and $291,878, respectively, and was
decreased by sublease income of approximately $75,300, $104,000 and
$90,000, respectively.
Note 14 - Discontinued Operations
-----------------------
During 2004, the Company sold the operations of Silverman Consultants,
Inc. and, during 2003, the Company made the decision to discontinue the
operations of its subsidiaries, DLS Financial Services, Inc. and eye media, inc.
As a result, operating results from these subsidiaries have been reclassified to
discontinued operations for all periods presented. As of December 31, 2004 and
2003, there were no operating assets to be disposed of or liabilities to be paid
in completing the disposition of these operations.
40
DGSE COMPANIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2004, 2003 and 2002
Note 15 - Segment Information
--------------------
Management identifies reportable segments by product or service
offered. Each segment is managed separately. The jewelry segment
consists of sales to both wholesale and retail customers. This segment
also includes pawn operations and bullion sales. Corporate and other
includes certain general and administrative expenses not allocated to
segments. The Company's operations by segment were as follows:
(Amounts in thousands)
Discontinued Corporate
Jewelry Operations and Other Consolidated
------------ ------------ ------------ ------------
Revenues
2004 $ 28,642 -- -- $ 28,642
2003 25,426 -- -- 25,426
2002 21,239 -- -- 21.239
Net income
(loss)
2004 734 (249) (134) 351
2003 (306) (117) (101) (524)
2002 746 (277) (40) 429
Identifiable
Assets
2004 9,972 7 354 10,282
2003 10,783 274 15 11,072
2002 9,778 764 3 10,545
Capital
Expenditures
2004 92 -- -- 92
2003 33 1 -- 34
2002 25 -- -- 25
Depreciation and
Amortization
2004 117 25 6 148
2003 160 27 -- 187
2002 169 33 -- 203
41
DGSE COMPANIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2004, 2003 and 2002
Note 16 - Quarterly Results of Operations (Unaudited)
-------------------------------
Amounts in thousands except per share data.
Income (loss) per
Net Common Share
Operating Income ----------------------
Sales Income (Loss) Basic Diluted
--------- --------- --------- --------- ---------
Year ended
December 31,
2004:
First Quarter 6,799 402 186 .04 .04
Second Quarter 6,217 296 100 .02 .01
Third Quarter 6,308 312 110 .02 .02
Fourth Quarter 9,318 42 (45) (.01) --
Year ended
December 31,
2003:
First quarter 5,142 104 (21) -- --
Second Quarter 5,714 184 60 .01 .01
Third Quarter 5,496 305 94 .02 .02
Fourth Quarter 9,074 569 (657) (.13) (.13)
42