UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q/A
AMENDMENT TO FORM 10-Q
FILED ON MAY 13, 2005
(Mark One)
( X ) Quarterly Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended March 31, 2005
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( ) Transition Report under Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the transition period from to
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Commission File Number 1-11048
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DGSE Companies, Inc.
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(Exact name of registrant as specified in its charter)
Nevada 88-0097334
- --------------------------------- -------------------------------
(State or other jurisdiction (I.R.S. Employer Identification
of 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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Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
--- ---
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes No X
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at May 6, 2005
- ---------------------------- --------------------------
Common Stock, $.01 per value 4,913,290
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets
(Unaudited)
ASSETS Mar. 31, Dec. 31,
2004 2005
------------ ------------
CURRENT ASSETS
Cash and cash equivalents $ 127,741 314,897
Trade receivables 735,119 907,238
Other receivables -- --
Inventories 7,235,112 6,791,383
Prepaid expenses 203,488 161,985
------------ ------------
Total current assets 8,301,460 8,175,503
MARKETABLE SECURITIES - AVAILABLE FOR SALE 77,062 77,062
PROPERTY AND EQUIPMENT - AT COST, NET 860,316 885,301
DEFERRED INCOME TAXES 15,994 15,994
GOODWILL 837,117 837,117
OTHER ASSETS 300,236 290,722
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$ 10,392,185 $ 10,281,699
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Notes payable $ 2,566,758 548,093
Current maturities of long-term debt 160,903 76,172
Accounts payable - trade 366,530 590,412
Accrued expenses 163,724 513,775
Customer deposits 195,492 67,173
Federal income taxes payable 148,773 146,210
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Total current liabilities 3,602,180 1,941,835
Long-term debt, less current maturities 1,048,855 2,749,278
Deferred income taxes -- --
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Total liabilities 4,651,035 4,691,113
SHAREHOLDERS' EQUITY
Common stock, $.01 par value; authorized 10,000,000
shares; issued and outstanding 4,913,290 shares at
The end of each period 49,133 49,133
Additional paid-in capital 5,708,760 5,708,760
Accumulated other comprehensive (loss) (122,582) (122,582)
Retained earnings (deficit) 105,839 (44,725)
------------ ------------
Total shareholders' equity 5,741,150 5,590,586
$ 10,392,185 $ 10,281,699
============ ============
The accompanying notes are an integral part of these consolidated financial
statements
2
DGSE Companies, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF OPERATIONS
Three months ended
(Unaudited)
March 31, 2005 March 31, 2004
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Revenue
Sales $ 6,637,914 $ 6,751,452
Pawn services charges 79,898 47,630
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6,717,812 6,799,082
Costs and expenses
Cost of goods sold 5,316,873 5,452,922
Selling, general and administrative expenses 1,058,884 908,982
Depreciation and amortization 42,803 35,285
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6,418,560 5,397,189
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Operating income 299,252 401,893
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Other income (expense)
Interest expense (71,124) (72,053)
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Total other income (expense) (71,124) (72,053)
Income before income taxes 228,128 329,840
Income tax expense 77,563 112,146
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Net income from continuing operations 150,565 217,694
Loss from discontinued operations, net of income taxes -- (31,995)
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Net income (loss) $ 150,565 $ 185,699
============== ==============
Earnings per common share
Basic and diluted
From continuing operations $ .03 $ .04
From discontinued operations -- --
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$ .03 $ .04
============== ==============
Weighted average number of common shares:
Basic 4,913,290 4,913,290
Diluted 5,089,162 5,137,431
The accompanying notes are an integral part of these consolidated financial
statements
3
DGSE COMPANIES, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months Ended
March 31,
2005 2004
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Cash Flows From Operations
Reconciliation of net income to net cash
used in operating activities
Net income $ 150,565 $ 185,699
Depreciation and amortization 42,803 35,285
(Increase) decrease in operating assets and liabilities
Trade receivables 177,381 50,411
Inventories (443,729) (213,794)
Prepaid expenses and other current assets (41,503) 6,204
Accounts payable and accrued expenses (573,933) (837,959)
Change in customer deposits 128,319 (58,589)
Federal income taxes payable 2,563 (204,337)
Other assets (9,565) (951)
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Total net cash used in operating activities (567,099) (1,038,031)
Cash flows from investing activities
Pawn loans made (184,359) (135,910)
Pawn loans repaid 122,699 124,695
Recovery of pawn loan principal through
Sale of forfeited collateral 64,253 20,135
Pay day loans made (12,970) --
Pay day loans repaid 5,115 --
Purchase of property and equipment (17,768) (4,164)
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Net cash (used) provided by investing activities (23,030) 4,756
Cash flows from financing activities
Proceeds from notes issued 700,000 625,000
Payments on notes payable (297,027) (272,580)
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Net cash provided by financing activities 402,973 352,420
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Net decrease in cash and cash equivalents (187,156) (680,855)
Cash and cash equivalents at beginning of year 314,897 735,293
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Cash and cash equivalents at end of period $ 127,741 $ 54,438
=========== ===========
Supplemental schedule of non-cash, investing and financing activities:
Interest paid for the three months ended March 31, 2005 and 2004 was $ 77,563
and $ 72,053, respectively.
Income taxes paid for the three months ended March 31, 2005 and 2004 was $75,000
and $300,000, respectively. Pawn loans forfeited and transferred to inventory
amounted to $ 119,808 and $ 23,895, respectively, for the three months ended
March 31, 2005 and 2004.
The accompanying notes are an integral part of these consolidated financial
statements.
4
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) Basis of Presentation:
The accompanying unaudited condensed consolidated financial statements of DGSE
Companies, Inc. and Subsidiaries include the financial statements of DGSE
Companies, Inc. and its wholly-owned subsidiaries, DGSE Corporation, National
Jewelry Exchange, Inc., Charleston Gold and Diamond Exchange, Inc. and American
Pay Day Centers, Inc. In July 2004 the Company sold the goodwill and trade name
of Silverman Consultants, Inc. and discontinued the operations of this
subsidiary. As a result, operating results for this subsidiary have been
reclassified to discontinued operations for all periods presented. In the
opinion of management, all adjustments (consisting of normal recurring accruals)
considered necessary for a fair presentation have been included.
The Company's operating results for the period ended March 31, 2005, are not
necessarily indicative of the results that may be expected for the year ended
December 31, 2005. For further information, refer to the consolidated financial
statements and footnotes thereto included in the Company's annual report on Form
10-K for the year ended December 31, 2004. Certain reclassifications were made
to the prior year's consolidated financial statements to conform to the current
year presentation.
Pawn loans receivable in the amount of $ 152,722 and $ 103,111 as of March 31,
2005 and 2004, respectively, are included in the Consolidated Balance Sheets
caption trade receivables. The related pawn service charges receivable in the
amount of $ 63,511 and $ 42,638 as of March 31, 2005 and 2004, respectively, are
also included in the Consolidated Balance Sheets caption trade receivables. Pay
day loans receivable in the amount of $ 6,805 as of March 31, 2005 are also
included in the Consolidated Balance Sheets caption trade receivables. There
were no pay day loans receivable as of March 31, 2004.
The 10-K for the year ended December 31, 2004 will be amended to include
expanded footnote disclosures.
(2) - Earnings per share
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 three months ended March 31, 2005,
and 2004 is as follows:
March 31, 2005
---------------------------------
Per-Share
Income Shares Amount
--------- --------- ---------
Basic earnings per common share
Income from operations allocable
to common shareholders $ 150,565 4,913,920 $ .03
=========
Effect of dilutive securities
Stock options -- 175,872
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Diluted earnings per common share
Income from operations available
to common shareholders plus
assumed conversions $ 150,565 5,089,162 $ .03
========= ========= =========
March 31, 2004
---------------------------------
Per-Share
Income Shares Amount
--------- --------- ---------
Basic earnings per common share
Income from operations allocable
to common shareholders $ 185,699 4,913,920 $ .04
=========
Effect of dilutive securities
Stock options -- 224,141
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Diluted earnings per common share
Income from operations available
to common shareholders plus
assumed conversions $ 185,699 5,137,431 $ .04
========= ========= =========
5
(3) - Business segment information
Management identifies reportable segments by product or service offered. Each
segment is managed separately. Corporate and other includes certain general and
administrative expenses not allocated to segments and pawn and pay day loan
operations. The Company's operations by segment were as follows:
(Amounts in thousands)
Retail Wholesale Rare Corporate
Jewelry Jewelry Bullion Coins and Other Consolidated
------------ ------------ ------------ ------------ ------------ ------------
Revenues
2005 $ 3,020 $ 940 $ 1,993 $ 549 $ 216 $ 6,718
2004 3,109 894 2,397 296 103 6,799
Net income
(loss)
2005 86 55 11 47 (48) 151
2004 104 47 43 16 (24) 186
Identifiable
Assets
2005 7,633 1,721 134 166 738 10,392
2004 7,553 1,620 134 104 1,203 10,614
Capital
Expenditures
2005 8 -- -- -- 10 18
2004 3 -- -- -- 1 4
Depreciation and
Amortization
2005 28 5 -- -- 10 43
2004 28 5 -- -- 2 35
(4) Other Comprehensive income:
Other comprehensive income is as follows: Tax
Before Tax (Expense) Net-of-Tax
Amount Benefit Amount
-----------------------------------
Other comprehensive income at
December 31, 2003 $ -- $ -- $ --
Unrealized holding gains arising during the
Three months ended March 31, 2004 106,373 (36,167) 70,206
--------- --------- ---------
Other comprehensive income at
March 31, 2004 $ 106,373 $ (36,167) $ 70,206
========= ========= =========
Other comprehensive loss at
December 31, 2004 and March 31,2005 $(150,784) $ 28,202 $(122,582)
========= ========= =========
6
(5) Stock-based Compensation:
The Company accounts for stock-based compensation to employees using the
intrinsic value method. Accordingly, compensation cost for stock options to
employees is measured as the excess, if any , of the quoted market price of the
Company's common stock at the date of the grant over the amount an employee must
pay to acquire the stock.
The following table illustrates the effect on net income and earnings per share
if the Company had applied the fair value recognition provisions of FASB
Statement No. 123, Accounting for Stock-Based Compensation, to stock-based
employee compensation.
Three Months Ended March 31,
----------------------------
2005 2004
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Net income as reported $ 150,565 $ 185,699
Deduct: Total stock-based employee compensation
Expense determined under fair value based method
For all awards, net of related tax effects -- --
----------- -----------
Pro forma net loss $ 150,565 $ 185,699
Earnings per share:
Basic - as reported $.03 $.04
Basic - pro forma $.03 $.04
Diluted - as reported $.03 $.04
Diluted pro forma $.03 $.04
(6) Financing
The Company entered into a financing agreement on March 31, 2005 with a
commercial bank that allows 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. 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. This new credit
facility provided the Company with an additional $ 700,000 of unused liquidity.
7
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Results of Operations
- ---------------------
Quarter ended March 31, 2005 vs 2004:
- -------------------------------------
Sales decreased by $ 113,538 (1.7%) in 2005. This decrease was primarily the
result of a $89,000 (2.9%) decrease in retail jewelry sales, a $ 89,000 (5.1%)
increase in wholesale jewelry sales and a $ 253,000 (85.5%) increase in the sale
of rare coin products. The increase in rare coin sales were the result of
increased concentration in the local markets through increased advertising.
Bullion sales decreased $ 404,000 (16.9%) due to reduced volatility in the
bullion market. Pawn service fees increased by $32,268 in 2005 due to an
increase in pawn loans outstanding during the year. Cost of goods as a
percentage of sales was stable during the periods at 80.1% in 2005 and 80.8% in
2004,
Selling, general and administrative expenses increased by $149,902 or 16.5%.
This increase was primarily due to an increase in staff and payroll related cost
($104,000), higher advertising cost ($21,000) and $ 24,456 in cost related to
the new pay day loan stores. The increase in staff was necessary to maintain a
high level of customer service as sales increase and the opening of three pay
day loan stores. The increase in advertising was necessary in order to attract
new customers in our local markets. Depreciation and amortization increased by
$7,000 during 2005 due to capital assets acquired for the pay day loan stores.
Historically, changes in the market prices of precious metals have had a
significant impact on both revenues and cost of sales in the rare coin and
precious metals segments in which the Company operates. It is expected that due
to the commodity nature of these products, future price changes for precious
metals will continue to be indicative of the Company's performance in these
business segments. Changes in sales and cost of sales in the retail and
wholesale jewelry segments are primarily influenced by the national economic
environment. It is expected that this trend will continue in the future due to
the nature of these product.
Income taxes are provided at the corporate rate of 34% for both 2005 and 2004.
Loss from discontinued operations during 2004 in the amount of $ 31,995 net of
income taxes is the operating results of Silverman Consultants, Inc. which was
sold during 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 an additional $700,000 of unused liquidity.
Management of the Company expects capital expenditures to total approximately
$100,000 during the next twelve months. It is anticipated that these
expenditures will be funded from working capital and its new credit facility. As
of June 30, 2004 there were no commitments outstanding for capital expenditures.
The Company incurred $ 105,215 of prepaid construction costs in the six months
ended June 30, 2005 related to its new facility in Charleston, South Carolina.
In the event of significant growth in retail and or wholesale jewelry sales, the
demand for additional working capital will expand due to a related need to stock
additional jewelry inventory and increases in wholesale accounts receivable.
Historically, vendors have offered the Company extended payment terms to finance
the need for jewelry inventory growth and management of the Company believes
that they will continue to do so in the future. Any significant increase in
wholesale accounts receivable will be financed under the Company's bank 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
8
Contractual Cash Obligations Payments due by year end
- ---------------------------- --------------------------------------------------------------
Total 2005 2006 2007 2008 2009 Thereafter
---------- ---------- ---------- ---------- ---------- ---------- ----------
Notes payable $2,566,758 $ 266,758 $2,300,000 -- -- -- --
Long-term debt and capital leases 1,209,758 120,667 183,281 $ 143,936 $ 147,262 $ 369,728 $ 244,884
Federal income taxes 148,773 148,773 -- -- -- -- --
Operating leases 558,649 170,591 118,447 108,018 88,394 73,199 --
---------- ---------- ---------- ---------- ---------- ---------- ----------
$4,483,938 $ 706,789 $2,601,728 $ 251,954 $ 235,656 $ 442,927 $ 244,884
========== ========== ========== ========== ========== ========== ==========
In addition, the Company estimates that it will pay approximately $ 275,000 in
interest during the next twelve months.
This report contains forward-looking statements which reflect the view of
Company's management with respect to future events. Although management believes
that the expectations reflected in such forward-looking statements are
reasonable, it can give no assurance that such expectations will prove to have
been correct. Important factors that could cause actual results to differ
materially from such expectations are a down turn in the current strong retail
climate and the potential for fluctuations in precious metals prices. The
forward-looking statements contained herein reflect the current views of the
Company's management and the Company assumes no obligation to update the
forward-looking statements or to update the reasons actual results could differ
from those contemplated by such forward-looking statements.
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk.
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 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 4. Controls and Procedures.
Controls and Procedures Under the supervision and with the participation of the
Company's management, including its Chief Executive Officer and Chief Financial
Officer, the Company has evaluated the effectiveness of its disclosure controls
and procedures, as of the end of the period covered by this report. Based on
that evaluation, the Chief Executive Officer and Chief Financial Officer have
concluded that these disclosure controls and procedures are effective in
enabling the Company to record, process, summarize and report information
required to be included in its periodic SEC filings within the required time
period. There has been no change in the Company's internal control over
financial reporting that occurred during the Company's most recent fiscal
quarter that has materially affected, or is reasonably likely to materially
affect, the Company's internal control over financial reporting.
PART II. OTHER INFORMATION
- ----------------------------
ITEM 6. Exhibits
31.1 Certificate of L.S. Smith pursuant to Section 3026 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 .
32.1 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.
9
SIGNATURES
Pursuant to the requirements 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: November 16, 2005
-------------------------
L. S. Smith
Chairman of the Board,
Chief Executive Officer and
Secretary
By: /s/ W. H. Oyster Dated: November 16, 2005
-------------------------
W. H. Oyster
Director, President and
Chief Operating Officer
By: /s/ John Benson Dated: November 16, 2005
-------------------------
John Benson
Chief Financial Officer
(Principal Accounting Officer)