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, 2005 or
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(_) 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
incorporation or organization) Identification 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 March 23, 2006, the aggregate market value of the voting stock held by
non-affiliates of the registrant was $ 5,338,208
As of March 23, 2006, 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, 2006 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, bullion products and rare coins 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. which operates three
locations in New Mexico.
In July 2004 the Company sold the goodwill and trade name of Silverman
Consultants, Inc. for $ 150,000 in cash and a non-interest bearing 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 and rare coin 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 and rare coin 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 30.0% of total revenues for 2005, 26.4% in 2004 and 25.4% in 2003 (For
further details, see Item 6 below).
2
Products and Services (continued...)
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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 three
Mono-line payday loan stores in New Mexico.
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 2005, 2004 or 2003.
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
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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 and rare coin 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 or rare coin 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, 2005, 2004 or 2003.
Company backlogs for fabricated jewelry products were also not significant as of
December 31, 2005, 2004 and 2003.
Seasonality
- -----------
The retail and wholesale jewelry business is seasonal. The Company realized
42.5%, 32.5% and 36.4% of its annual sales in the fourth quarters of 2005, 2004
and 2003, respectively.
While the Company's bullion and rare coin 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 and rare coin industry in which the Company competes is dominated by
substantially larger enterprises which wholesale bullion, rare coin 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, 2005, the Company employed 54 individuals, all of whom were
full time employees.
4
Available Information
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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 and wholesale jewelry, consumer lending, bullion and rare coin 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 $ 427,756 as of December 31, 2005. 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 on November 30, 2008 and requires monthly lease
payments in the amount of $ 2,707.
The Company leases a 3,600 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 $ 3,290.
CGDE operates in a leased 22,000 square foot facility in Mt. Pleasant, South
Carolina. The lease expires in June 2010 and requires monthly lease payments in
the amount of $4,575.
American Pay Day Centers operates in three leased facilities averaging 800
square feet in Albuquerque, New Mexico. The leases expire on February 28, 2007,
September 28, 2008 and October 31, 2007 and requires monthly lease payments in
the amount of $ 1,300, $ 1,400 and $ 1,000, respectively.
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.
5
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
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:
2005 2004
---- ----
High Low High Low
---- --- ---- ---
First Quarter 3.050 2.210 4.190 2.200
Second Quarter 3.150 2.080 3.250 2.520
Third Quarter 2.750 2.180 3.400 2.290
Fourth Quarter 3.380 1.990 3.490 2.270
On March 23, 2006, the closing sales price for the Company's common stock was
$1.960 and there were 1,006 shareholders of record.
6
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, 2005:
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 1,435,634 $ 2.10 264,336
Equity
Compensation
Plans Not
Approved By
Security
Holders None None
------------------- ----------------- -------------------------
Total 1,420,634 $ 2.10 264,336
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7
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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2001 2002 2003 2004 2005
------ ------ ------ ------ ------
(Amounts in thousands, except per share figures)
Operating Data:
Sales 19,134 21,083 25,244 28,386 35,319
Pawn and pay day service fees 120 156 182 256 320
------ ------ ------ ------ ------
Total revenues 19,254 21,239 25,426 28,642 35,639
Cost of goods sold 14,743 16,239 20,050 22,743 29,118
------ ------ ------ ------ ------
Gross profit 4,511 5,000 5,376 5,899 6,521
Selling, general & administrative
Expenses 3,601 3,948 4,054 4,724 5,349
Depreciation & amortization 235 158 160 123 145
------ ------ ------ ------ ------
3,836 4,106 4,214 4,847 5,494
Operating Income 675 894 1,162 1,052 1,027
Other income (expense):
Unrealized loss on investments -1,635
Other income 3 402 24 18
Interest expense -298 -263 -268 -248 -291
------ ------ ------ ------ ------
Total other income (expense) -295 139 -1,903 -224 -273
Income (loss) before income taxes 380 1,033 -741 828 754
Income tax expense (benefit) 119 327 -334 228 269
------ ------ ------ ------ ------
Income (loss) from continuing
Operations 260 706 -407 600 485
Loss from discontinued operations,
Net of income taxes -586 -277 -117 -249 --
------ ------ ------ ------ ------
Net income (loss) -325 429 -524 351 485
Earnings (loss) per common share
Basic
From continuing operating .05 .14 -.09 .12 .10
From discontinued operations -.12 -.05 -.02 -.05 --
------ ------ ------ ------ ------
-.07 .09 -.11 .07 .10
Diluted
From continuing operating .05 .14 -.09 .12 .10
From discontinued operations -.12 -.05 -.02 -.05 --
------ ------ ------ ------ ------
-.07 .09 -.11 .07 .10
Weighted average number of common shares:
Basic 4,925 4,914 4,913 4,913 4,913
Diluted 4,925 4,917 4,913 5,135 5,037
(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.
8
Years Ended December 31,
------------------------------------------
2001 2002 2003 2004 2005
------ ------ ------ ------ ------
(Amounts in thousands, except per share figures)
BALANCE SHEET DATA:
Inventory 6,297 6,336 6,674 6,791 7,570
Working Capital 1,968 5,055 5,570 6,234 7,073
Long-term debt 764 3,067 2,719 2,749 3,315
Shareholders' equity 4,469 4,752 5,362 5,591 6,071
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.
9
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, pay day lending and pawn
operations. The Company's operations by segment were as follows:
(Amounts in thousands)
Retail Wholesale Rare Discontinued Corporate
Jewelry Jewelry Bullion Coins Operations and Other Consolidated
------------ ------------ ------------ ------------ ------------ ------------ ------------
Revenues
2005 $ 14,917 $ 4,781 $ 10,688 $ 4,575 -- $ 679 $ 35,640
2004 14,601 4,451 7,482 1,574 -- 534 28,642
2003 13,179 4,218 6,648 1,014 -- 367 25,426
Net income
(loss)
2005 195 250 79 267 -- (306) 485
2004 267 266 63 92 (249) (88) 351
2003 162 200 46 34 (117) (849) (524)
Identifiable
Assets
2005 9,015 1,733 209 203 -- 670 11,830
2004 7,519 1,679 117 158 7 802 10,282
2003 7,988 1,737 129 100 588 530 11,072
Capital
Expenditures
2005 202 -- -- -- -- 83 285
2004 85 -- -- -- -- 7 92
2003 33 -- -- -- 1 -- 34
Depreciation and
Amortization
2005 107 10 -- -- -- 25 142
2004 92 22 -- -- 25 9 148
2003 130 22 -- -- 27 8 187
Results of Operations
- ---------------------
2005 vs 2004
- ------------
Revenues increased by $6,998,000 (24.4%) in 2005. This increase was primarily
the result of a $3,206,000 (42.8%) increase in the sale of precious metals
products, a $316,000 (2.1%) increase in retail jewelry sales, a $330,000 (7.4%)
increase in wholesale jewelry sales and a $3,001,000 (190.6%) increase in the
sale of rare coin products. These increases were the result of a nation-wide
improvement in the retail environment, a 20.0% price increase in gold products
and a 5% price increase in diamonds and other jewelry products. Pawn and pay day
loan service fees increased by $64,000 in 2005 due to the opening of three pay
day loan stores during the year. Cost of goods as a percentage of sales
increased from 80.1% in 2004 to 82.4% in 2005 and gross margins decreased from
19.9% in 2004 to 17.6% in 2005. These changes were due to the increase in the
precious metals sales volume as a percentage of total sales and the increase in
the cost of gold products.
10
Selling, general and administrative expenses increased by $652,000 or 13.9%.
This increase was primarily due to an increase in staff ($373,000), higher
advertising cost ($85,000)and the opening of three pay day loan stores
($194,000). The increase in staff was necessary to maintain a high level of
customer service as sales increased. The increase in advertising was necessary
in order to attract new customers in our local markets. Interest expense
increased $43,000 due to a an increase in debt outstanding during the year and
higher interest rates.
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.
Marketable equity securities are comprised of investments in three small
companies with thinly traded securities and low market prices. These investments
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
of its investments in these securities was other than temporary, and as a result
these investments 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
tax benefits. This determination was based on the length of time during which
the trading range of these securities was below their cost. During 2005 these
securities traded at prices which were both higher and lower than the closing
market prices at December 31, 2005. As a result, management determined that the
decline in value as of December 31, 2005 was temporary. This determination was
based on the conclusion that the quoted market prices for these investments
provides the most reliable measure of their respective values.
During 2004 the Company sold the goodwill ($314,003), and trade name of
Silverman Consultants, Inc. The sale of this goodwill resulted in a gain on the
disposal of this reporting unit in the amount of $39,098. This gain is included
in the caption (Other income) in the consolidated statements of operations for
the year ended December 31, 2004.
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.
11
2004 vs 2003
- ------------
Revenues increased by $ 3,216,670 (12.7%) in 2004. This increase was primarily
the result of a $834,293 (12.6%) increase in the sale of precious metals
products, a $1,422,537 (10.8%) increase in retail jewelry sales, a $ 233,410
(5.5%) increase in wholesale jewelry sales and a $ 559,268 (55.1%) increase in
the sale of rare coin products. These increases were the result of a nation-wide
improvement in the retail environment, a 4.8% price increase in gold products
and a 5% price increase in diamonds and other jewelry products. Pawn service
fees increased by $ 74,619 in 2004 due to an increase in pawn loans outstanding
during the year. Cost of goods as a percentage of sales increased from 79.4% in
2003 to 80.1% in 2004 and gross margins decreased from 20.6% in 2003 to 19.9% in
2004. These changes were due to the increase in the precious metals sales volume
as a percentage of total sales and the increase in the cost of gold products.
Selling, general and administrative expenses increased by $671,000 or 15.9%.
This increase was primarily due to an increase in staff ($301,000), higher
advertising cost ($97,000), higher property taxes ($50,000) and higher legal and
professional costs ($24,000). The increase in staff was necessary to maintain a
high level of customer service as sales increased. The increase in advertising
was necessary in order to attract new customers in our local markets. The
property tax increase was due to higher local tax rates and an increase in
taxable assets. The increase in legal and professional costs was due to new
regulatory requirements. Depreciation and amortization decreased by $37,000
during 2004 due to certain assets becoming fully depreciated. Interest expense
declined $21,000 due to a reduction in debt outstanding during the year.
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.
Marketable equity securities are comprised of investments in three small
companies with thinly traded securities and low market prices. These investments
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
of its investments in these securities was other than temporary, and as a result
these investments 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
tax benefits. This determination was based on the length of time during which
the trading range of these securities was below their cost. During 2004 these
securities traded at prices which were both higher and lower than the closing
market prices at December 31, 2004. As a result, management determined that the
decline in value as of December 31, 2004 was temporary. This determination was
based on the conclusion that the quoted market prices for these investments
provides the most reliable measure of their respective values.
12
During 2004 the Company sold the goodwill ($314,003), and trade name of
Silverman Consultants, Inc. The sale of this goodwill resulted in a gain on the
disposal of this reporting unit in the amount of $39,098. This gain is included
in the caption (Other income) in the consolidated statements of operations for
the year ended December 31, 2004.
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.
Liquidity and Capital Resources
- -------------------------------
The Company's short-term debt, including current maturities of long-term debt
totaled $ 853,335 as of December 31, 2005. During December 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 December 23,2007.
Management of the Company expects capital expenditures to total approximately
$150,000 during 2006. It is anticipated that these expenditures will be funded
from working capital and its new credit facility. As of December 31, 2005 there
were no commitments outstanding for capital expenditures.
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.
13
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.
The Company assesses the impairment of investments and long-lived assets, which
includes goodwill and property, plant and equipment, whenever events or changes
in circumstances indicate that the carrying value may not be recoverable.
Factors considered important which could trigger an impairment review include:
(i) underperformance relative to expected historical or projected future
operating results (ii) changes in the manner of use of the assets or the
strategy for our overall business and (iii) negative industry or economic
trends.
14
When the Company determines that the carrying value of goodwill and long-lived
assets may not be recoverable, an impairment charge is recorded. Impairment is
generally measured based on a projected discounted cash flow method using a
discount rate determined by our management to be commensurate with the risk
inherent in our current business model or prevailing market rates of investment
securities, if available.
The Company performs a goodwill impairment test at the reporting unit level
annually or more frequently if events occur which indicate a potential reduction
in the fair value of a reporting unit's net assets below its carrying value. To
perform the impairment test the Company estimated the fair value of the
reporting unit using the expected present value of corresponding future cash
flows. Impairment is deemed to exist if the net book value of a reporting unit
exceeds its estimated fair value. As of December 31, 2004, the Company performed
its annual review for impairment of goodwill related to its Fairchild
acquisition. The Company concluded that there was no evidence of impairment
related to the Goodwill for this reporting unit.
Goodwill consists of the following:
Wholesale
Segment
-------
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,
---------------------------------------
2005 2004 2003
----------- ----------- -----------
Net income (loss), as reported $ 485,192 $ 350,829 $ (524,140)
Deduct: Total stock-based employee
compensation expense determined under
fair value based method for all awards,
net of related tax effects (4,554) -- --
----------- ----------- -----------
Pro forma net income (loss) $ 480,638 $ 350,829 $ (524,140)
=========== =========== ===========
15
Earnings per share:
Basic - as reported .10 .07 (11)
Basic - pro forma .10 .07 (.11)
Diluted - as reported .10 .07 (.11)
Diluted - pro forma .10 .07 (.11)
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%, risk-free
rate of 4.2%, no dividend yield and expected life of 3 years.
In December 2004, the Financial Accounting Standard Board (FASB) issued SFAS No.
123R. SFAS No. 123R is a revision of SFAS No. 123 and supersedes APB No. 25.
Among other items, SFAS No. 123R eliminates the use of APB No. 25 and the
intrinsic value method of accounting for stock-based compensation, and requires
companies to recognize the cost of employee services received in exchange for
awards of equity instruments, based on the grant date fair value of those
awards, in the financial statements. The effective date of SFAS No. 123R is the
beginning of the first quarter of 2006.
SFAS No. 123R permits companies to adopt its requirements using either s
"modified prospective" method, or a "modified retrospective" method. Under the
"modified prospective" method, compensation cost is recognized in the financial
statements beginning with the effective date, based on the requirements of SFAS
No. 123R for all share-based payments granted after that date, and based on the
requirements of SFAS No. 123 for all unvested awards granted prior to the
effective date of SFAS No. 123R. Under the "modified retrospective" method, the
requirements are the same as under the "modified prospective" method, but also
permits entities to restate financial statements of previous periods based on
pro forma disclosures made in accordance with SFAS No. 123. We expect to adopt
SFAS No. 123R using the "modified prospective" method.
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 $65,444 as of December 31, 2005.
Gross unrealized losses were $162,071 at December 31, 2005.
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.
16
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.
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.
17
- - 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. 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.
18
- - 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 27 - 42 of this report).
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE None
ITEM 9A. 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 year that has materially affected, or is
reasonably likely to materially affect, the Company's internal control over
financial reporting.
19
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.
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.
20
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.
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.
21
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.
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
22
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: March 31, 2006
---------------------------
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: March 31, 2006
-------------------------
L.S Smith
Chairman of the Board,
Chief Executive Officer and
Secretary
By: /s/ W. H. Oyster Dated: March 31, 2006
--------------------------------
W. H. Oyster
Director, President and
Chief Operating Officer
By: /s/ John Benson Dated: March 31, 2006
--------------------------------
John Benson
Chief Financial Officer
(Principal Accounting Officer)
By /s/ William P. Cordeiro Dated: March 31, 2006
--------------------------------
Director
By: /s/ Craig Allan-Lee Dated: March 31, 2006
--------------------------------
Director
By: /s/ Paul Hagen Dated: March 31, 2006
--------------------------------
Director
23
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and
Shareholders of DGSE Companies, Inc.
We have audited the accompanying consolidated balance sheets of DSGE Companies,
Inc. and its subsidiaries as of December 31, 2005 and 2004, and the related
consolidated statements of operations, shareholders' equity and comprehensive
income, and cash flows for the years 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 audits.
We conducted our audits 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 audits provide 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, 2005 and 2004, and the consolidated
results of operations and its cash flows for the years then ended in conformity
with accounting principles generally accepted in the United States of America.
/s/ BKR Cornwell Jackson
Plano, Texas
March 31, 2006
DGSE Companies, Inc. and Subsidiaries
Consolidated Balance Sheets
December 31,
ASSETS
2005 2004
------------ ------------
CURRENT ASSETS
Cash and cash equivalents $ 1,042,834 314,897
Trade receivables 688,810 907,238
Inventories 7,570,120 6,791,383
Prepaid expenses 215,560 161,985
------------ ------------
Total current assets 9,517,324 8,175,503
MARKETABLE SECURITIES - AVAILABLE FOR SALE 65,444 77,062
PROPERTY AND EQUIPMENT - AT COST, NET 1,121,662 885,301
DEFERRED INCOME TAXES 779 15,994
GOODWILL 837,117 837,117
OTHER ASSETS 287,790 290,722
------------ ------------
$ 11,830,116 $ 10,281,699
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Notes payable $ 594,183 $ 548,093
Current maturities of long-term debt 259,152 76,172
Accounts payable - trade 789,724 590,412
Accrued expenses 580,823 513,775
Customer deposits 206,320 67,173
Federal income taxes payable 13,920 146,210
------------ ------------
Total current liabilities 2,444,122 1,941,835
Long-term debt, less current maturities (Note8) 3,314,886 2,749,278
------------ ------------
Total liabilities 5,759,008 4,691,113
SHAREHOLDERS' EQUITY
Common stock, $.01 par value; authorized 10,000,000
shares; issued and outstanding 4,913,290 shares at
December 31, 2005 and 2004 49,133 49,133
Additional paid-in capital 5,708,760 5,708,760
Accumulated other comprehensive (loss) (127,252) (122,582)
Retained earnings (deficit) 444,467 (44,725)
------------ ------------
Total shareholders' equity 6,071,128 5,590,586
$ 11,830,116 $ 10,281,699
============ ============
The accompanying notes are an integral part of these consolidated financial
statements
24
DGSE Companies, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF OPERATIONS
Years ended December 31,
2005 2004 2003
------------ ------------ ------------
Revenue
Sales $ 35,319,133 $ 28,385,770 $ 25,243,719
Pawn services charges 320,438 256,447 181,828
------------ ------------ ------------
35,639,571 28,642,217 25,425,547
Costs and expenses
Cost of goods sold 29,117,784 22,743,073 20,049,583
Selling, general and administrative expenses 5,349,010 4,699,107 4,054,048
Depreciation and amortization 145,337 148,327 160,131
------------ ------------ ------------
34,612,131 27,590,507 24,263,762
------------ ------------ ------------
Operating income 1,027,440 1,051,710 1,161,785
------------ ------------ ------------
Other income (expense):
Unrealized loss on investments -- -- (1,634,845)
Other income 18,038 23,500 --
Interest expense (290,744) (247,694) (268,344)
------------ ------------ ------------
Total other income (expense) (272,706) (224,194) (1,903,189)
Income before income taxes 754,734 827,516 (741,404)
Income tax expense (benefit) 269,542 227,797 (334,361)
------------ ------------ ------------
Net income from continuing operations 485,192 599,719 (407,043)
Loss from discontinued operations,
net of income taxes -- (248,890) (117,097)
------------ ------------ ------------
Net income $ 485,192 $ 350,829 $ (524,140)
============ ============ ============
Earnings per common share
Basic
From continuing operations $ .10 $ .12 $ (.08)
From discontinued operations -- (.05) (.03)
------------ ------------ ------------
$ .10 $ .07 $ (.11)
============ ============ ============
Diluted
From continuing operations $ .10 $ .12 $ (.08)
From discontinued operations -- (.05) (.03)
------------ ------------ ------------
$ .10 $ .07 $ (.11)
============ ============ ============
Weighted average number of common shares:
Basic 4,913,290 4,913,290 4,913,290
Diluted 5,037,073 5,135,457 4,913,290
The accompanying notes are an integral part of these consolidated financial
statements
25
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, 2003 4,913,290 $ 49,133 $ 5,708,760 $ 128,586 (1,134,950) $ 4,751,529
Net Income (524,140) (524,140)
Other comprehensive
Income (loss):
Gain 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 (loss) 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
Net income 485,192 485,192
Unrealized losses on marketable
Securities, net of tax (4,670) (4,670)
----------- ----------- ----------- ----------- ----------- -----------
Balance at December
31, 2005 4,913,290 $ 49,133 $ 5,708,760 $ 440,467 $ (127,252) $ 6,071,108
=========== =========== =========== =========== =========== ===========
The accompanying notes are an integral part of these consolidated financial
statements.
26
DGSE Companies, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year ended December 31,
2005 2004 2003
----------- ----------- -----------
Cash Flows From Operations
Reconciliation of net loss to net cash
used in operating activities
Net income (loss) $ 485,192 $ 350,829 $ (524,140)
Depreciation and amortization 145,337 148,327 187,558
Deferred taxes 21,832 (10,535) (451,081)
Loss on disposal of assets in discontinued operations -- -- 31,072
Loss on sale of marketable securities -- 15,600 26,998
Unrealized loss on marketable securities -- -- 1,634,845
Gain on sale of assets -- (39,098) --
Gain on sale of marketable securities (3,895) -- --
(Increase) decrease in operating assets and liabilities
Trade receivables 183,578 42,251 49,896
Other receivables -- 204,730 (204,430)
Inventories (778,735) (117,518) (338,123)
Prepaid expenses and other current assets (53,577) 10,840 3,577
Decrease in other long term assets 182 -- --
Accounts payable and accrued expenses 266,360 (460,838) 340,216
Change in customer deposits 139,147 (82,915) (6,344)
Federal income taxes payable (132,290) (366,781) 27,538
----------- ----------- -----------
Total net cash used in operating activities 273,131 (305,108) 777,582
Cash flows from investing activities
Pawn loans made (602,987) (633,873) (521,975)
Pawn loans repaid 454,707 406,524 428,835
Recovery of pawn loan principal through
Sale of forfeited collateral 248,695 90,523 61,248
Pay day loans made (177,775) -- --
Pay day loans repaid 112,210 -- --
Proceeds from sale of marketable securities 4,226 -- 46,988
Purchase of property and equipment (285,456) (43,662) (34,464)
Purchase of investments -- -- (48,989)
Proceeds from sale of assets -- 150,000 --
----------- ----------- -----------
Net cash (used) provided by investing activities (246,380) (30,488) (68,357)
Cash flows from financing activities
Proceeds from notes issued 8,371,525 1,132,849 737,590
Payments on notes payable (7,670,339) (1,217,649) (1,209,930)
----------- ----------- -----------
Net cash provided by financing activities 701,186 (84,800) (472,340)
----------- ----------- -----------
Net increase (decrease) in cash and cash equivalents 727,937 (420,396) 236,885
Cash and cash equivalents at beginning of year 314,897 735,293 498,408
----------- ----------- -----------
Cash and cash equivalents at end of period $ 1,042,834 $ 314,897 $ 735,293
=========== =========== ===========
The accompanying notes are an integral part of these consolidated financial
statements.
27
Supplemental disclosures:
Cash paid during the year for:
Interest $300,866 $242,697 $249,088
Income taxes $385,000 $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.
Non-cash Investing and Financing Activities:
Pawn loans forfeited and transferred to inventory $248,695 $114,069 $ 74,949
Equipment financed through
capital lease obligations $ 93,492 $ -- $ --
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).
28
DGSE COMPANIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2005, 2004 and 2003
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 $719,080,
$633,873 and $589,689 for 2005, 2004 and 2003, respectively.
29
DGSE COMPANIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2005, 2004 and 2003
Note 1 - Summary of Significant Accounting Policies, continued
-------------------------------------------
Accounts Receivable
The Company records trade receivables when revenue is recognized. Some
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.
Pawn loans receivable in the amount of $ 110,782 and $ 229,071 as of
December 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 $ 30,451 and $ 86,671
as of December 31 2005 and 2004, respectively, are also included in
the Consolidated Balance Sheets caption trade receivables. Pay day
loan receivables at December 31, 2005 in the amount of $ 50,842 are
included in the Consolidated Balance Sheets caption trade receivables.
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.
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.
Direct cost of Pawn Loan Service Charge Revenue
The direct cost of pawn loan service charge revenue is included in the
Consolidated Statements of Operations caption "Selling, general and
administrative expenses".
30
DGSE COMPANIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2005, 2004 and 2003
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 $155,876, $112,777 and
$84,445 for 2005, 2004 and 2003, 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.
Year Ended December 31,
---------------------------------------
2005 2004 2003
----------- ----------- -----------
Net income (loss), as reported $ 485,192 $ 350,829 $ (524,140)
Deduct: Total stock-based employee
compensation expense determined under
fair value based method for all awards,
net of related tax effects (4,554) -- --
----------- ----------- -----------
Pro forma net income (loss) $ 480,638 $ 350,829 $ (524,140)
=========== =========== ===========
Earnings per share:
Basic - as reported .10 .07 (11)
Basic - pro forma .10 .07 (.11)
Diluted - as reported .10 .07 (.11)
Diluted - pro forma .10 .07 (.11)
31
DGSE COMPANIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2005, 2004 and 2003
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%, risk-free rate of 4.2, no dividend yield and
expected life of 3 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.
32
DGSE COMPANIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2005, 2004 and 2003
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:
2005 2004
---------- ----------
Jewelry $6,730,931 $6,121,955
Scrap gold 353,288 305,801
Bullion 209,167 117,973
Rare coins 202,872 158,000
Other 73,862 87,654
---------- ----------
$7,570,120 $6,791,383
========== ==========
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,
2005 and 2004 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 2005 $1,864,441 $(1,634,845) $(164,152) $65,444
========== =========== ========= =======
Equity securities 2004 $1,864,441 $(1,634,845) $(152,534) $77,062
========== =========== ========= =======
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 declined 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.
During 2004, the Company deemed certain marketable securities
worthless and recognized $ 15,600 as a realized loss. No realized
losses were needed during 2005.
33
DGSE COMPANIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2005, 2004 and 2003
Note 5 - Property and Equipment
A summary of property and equipment at December 31, 2005 and 2004, is
as follows:
2005 2004
---------- ----------
Buildings and improvements $ 951,416 $ 732,488
Machinery and equipment 848,420 727,942
Furniture and fixtures 272,137 226,318
---------- ----------
2,072,973 1,686,748
Less accumulated depreciation and
Amortization (1,502,611) (1,352,747)
---------- ----------
570,362 334,001
Land 551,300 551,300
---------- ----------
$1,121,662 $ 885,301
========== ==========
Property and equipment acquired under capital leases was $ 295,942
and$202,450, respectively, as of December 31, 2005 and 2004.
Accumulated depreciation for these assets was $ 120,401 and $188,385
as of December 31, 2005 and 2004, respectively.
Note 6 - Goodwill
--------
At December 31, goodwill was reflected for the following reporting
units:
2005 2004
---------- ----------
Wholesale watch sales $ 837,117 $ 837,117
========== ==========
No impairment losses were recognized during 2005, 2004 or 2003 and no
goodwill was acquired during 2005, 2004, or 2003.
During 2004 the Company sold the goodwill ($314,003) and trade name of
Silverman Consultants, Inc. The sales of this goodwill resulted in a
gain on the disposal of this reporting unit in the amount of $39,098.
this gain is included in the caption ("Other income) in the
consolidated statements of operations for the year ended December 31,
2004.
Note 7 - Notes Payable
-------------
At December 31, 2005, the Company was obligated to various individuals
under unsecured, demand notes bearing annual interest rates of 8% to
12% totaling $594,183.
At December 31, 2004, the Company was obligated to various individuals
under unsecured, demand notes bearing annual interest rates of 8% to
14% totaling $548,093.
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.
34
DGSE COMPANIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2005, 2004 and 2003
2005 2004
----------- -----------
A summary of long-term debt and short-term debt expected to be
refinanced at December 31,follows:
Revolving promissory notes payable to bank, a note of $1,744,500
and $1,600,000 at December 31, 2005 and 2004, respectively,
which bears interest at prime plus 1-1/2% (6.75% and 6.75% at
December 31, 2005 and 2004, respectively, and is due December 22,
2007 and a note of $1,000,000 and 408,333, respectively, which
bears interest at prime plus 1-3/4% (7.0% and 7.0% at December
31, 2005 and 2004), respectively, is due in equal monthly
installments of $16,667 through December 2010. The defined
borrowing base requirement is based on eligible trade
receivables and inventory. As of December 31, 2005, available
but unused borrowing capacity on the revolver was $755,500.
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. $ 2,744,500 $ 2,008,333
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, 2005 and 2004);
respectively, balance due in January 2014 427,756 465,724
Note payable, due March 2, 2005. Interest is payable quarterly at
a rate of 8% -- 18,298
Note payable, due January 2, 2008. Interest is payable monthly at
a rate of 8% 310,555 310,556
Capital lease obligations 91,227 22,539
----------- -----------
3,574,038 2,825,450
Less current maturities (259,152) (76,172)
----------- -----------
$ 3,314,886 $ 2,749,278
=========== ===========
35
DGSE COMPANIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2005, 2004 and 2003
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
------------ ------------ ------------
2006 $ 240,844 $ 26,484 $ 267,328
2007 2,588,436 23,837 2,612,273
2008 357,817 23,837 381,654
2009 50,840 23,837 74,677
2010 54,689 15,891 70,580
Thereafter 190,185 -- 190,185
------------ ------------ ------------
3,482,811 113,886 3,596,697
Amounts representing interest
interest rates at approximately 10% -- (22,659) (22,659)
------------ ------------ ------------
3,482,811 91,227 3,574,038
Less current portion (240,844) (18,308) (259,152)
------------ ------------ ------------
$ 3,241,967 $ 72,919 $ 3,314,886
============ ============ ============
36
DGSE COMPANIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2005, 2004 and 2003
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, 2005, 2004 and 2003 is as follows:
December 31, 2005
----------------------------------
Per-Share
Income Shares Amount
---------- --------- ---------
Basic earnings per common share
Income from operations allocable
to common shareholders $ 485,192 4,913,920 $ .10
Effect of dilutive securities
Stock options (4,554) 123,783 --
---------- --------- ---------
Diluted earnings per common share
Income from operations available
to common shareholders plus
assumed conversions $ 480,638 5,037,073 $ .10
========= ========= =========
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)
========= ========= =========
37
DGSE COMPANIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2005, 2004 and 2003
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, 2005, 2004 and 2003:
December 31, 2004 and 2003 December 31, 2005
--------------------------------------------------------- ---------------------------
Weighted Weighted
Average Average
Options Exercise Price Options Exercise Price
---------- -------------- ---------- --------------
Outstanding at beginning
of year 1,420,634 $2.09 1,420,634 $2.09
Granted -- -- 15,000 2.82
Forfeited -- -- -- --
---------- ----- ---------- -----
Outstanding at end of year 1,420,634 $2.09 1,435,634 $2.10
========== ===== ========== =====
Exercisable at end of year 1,420,634 $2.09 1,435,634 $2.10
========== ===== ========== =====
Weighted average fair value
of options granted
during year
$1.38
=====
Stock options outstanding at December 31, 2005:
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 7 Years $1.12 267,857 $1.12
$1.63 to $2.25 1,127,777 7 Years $2.21 1,127,777 $2.21
$3.63 to $4.19 20,000 7 Years $3.81 20,000 $3.83
$4.88 35,000 4 Years $4.88 35,000 $4.88
--------- ---------
1,435,634 1,420,634
========= =========
38
DGSE COMPANIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2005, 2004 and 2003
Note 11 - Comprehensive Income
--------------------
Comprehensive income at December 31, 2005, 2004 and 2003 is as
follows:
Before-Tax Tax Net-of-Tax
Amount Benefit Amount
----------- ----------- -----------
Accumulated comprehensive
income (loss) at January 1, 2003 $(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)
Unrealized holding losses
arising during 2005 (11,287) 6,617 (4,670)
----------- ----------- -----------
Accumulated comprehensive
income (loss) at December 31, 2005 $ (162,071) $ 34,819 $ (127,252)
=========== =========== ===========
39
DGSE COMPANIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2005, 2004 and 2003
Note 12 - Income Taxes
------------
The income tax provision reconciled to the tax computed at the
statutory Federal rate follows:
2005 2004 2003
--------- --------- ---------
Tax (benefit) expense at statutory rate $ 256,609 $ 162,502 $(294,124)
Other 12,933 24,616 16,484
Benefit (expense) of discontinued operations -- 100,679 33,279
Change in valuation allowance -- (60,000) (90,000)
--------- --------- ---------
Tax expense (benefit) $ 269,542 $ 227,797 $(334,361)
========= ========= =========
Current $ 247,710 $ 238,332 $ 62,191
Deferred 21,832 (10,535) (396,552)
--------- --------- ---------
$ 269,542 $ 227,797 $(334,361)
========= ========= =========
Deferred income taxes are comprised of the following at December 31,
2005 and 2004:
2005 2004
-------- --------
Deferred tax assets (liabilities)
Inventory 30,657 $ 25,903
Unrealized loss on available for sale securities 34,819 28,202
Property and equipment 4,607 10,952
Capital loss carryover 9,142 --
Goodwill (78,446) (49,064)
-------- --------
779 $ 15,994
======== ========
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.
40
DGSE COMPANIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2005, 2004 and 2003
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
December 31, Obligations
------------ -----------
2006 $ 162,847
2007 137,418
2008 100,994
2009 54,899
Thereafter 18,300
------------
$ 474,458
============
Rent expense for the years ended December 31, 2005, 2004 and 2003 was
approximately $174,988, $198,050 and $223,046, respectively. was
decreased by sublease income of approximately $45,300, $75,300 and
$104,000, 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.
41
DGSE COMPANIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2005, 2004 and 2003
Note 15 - 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, pay day lending and pawn operations. The Company's
operations by segment were as follows:
(Amounts in thousands)
Retail Wholesale Rare Discontinued Corporate
Jewelry Jewelry Bullion Coins Operations and Other Consolidated
------------ ------------ ------------ ------------ ------------ ------------ ------------
Revenues
2005 $ 14,917 $ 4,781 $ 10,688 $ 4,575 -- $ 679 $ 35,640
2004 14,601 4,451 7,482 1,574 -- 534 28,642
2003 13,179 4,218 6,648 1,014 -- 367 25,426
Net income
(loss)
2005 195 250 79 267 -- (306) 485
2004 267 266 63 92 (249) (88) 351
2003 162 200 46 34 (117) (849) (524)
Identifiable
Assets
2005 9,015 1,733 209 203 -- 670 11,830
2004 7,519 1,679 117 158 7 802 10,282
2003 7,988 1,737 129 100 588 530 11,072
Capital
Expenditures
2005 202 -- -- -- -- 83 285
2004 85 -- -- -- -- 7 92
2003 33 -- -- -- 1 -- 34
Depreciation and
Amortization
2005 107 10 -- -- -- 25 142
2004 92 22 -- -- 25 9 148
2003 130 22 -- -- 27 8 187
42
DGSE COMPANIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2005, 2004 and 2003
Note 16 - Quarterly Results of Operations (Unaudited) Amounts in thousands
except per share data.
Income (loss) per
Net Common Shares
Operating Income ----------------------
Sales Income (Loss) Basic Diluted
-------- -------- -------- --------- ---------
Year ended
December 31,
2005:
First Quarter 6,718 299 151 .03 .03
Second Quarter 6,800 192 79 .02 .02
Third Quarter 7.215 206 92 .02 .02
Fourth Quarter 14,906 330 164 .03 .03
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) --
43
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