Back to GetFilings.com
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
( X ) Quarterly Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended March 31, 2005
------------------------------
( ) Transition Report under Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the transition period from to
--------------- ----------------
Commission File Number 1-11048
-------------------------------------------
DGSE Companies, Inc.
---------------------
(Exact name of registrant as specified in its charter)
Nevada 88-0097334
- --------------------------------- -------------------------------
(State or other jurisdiction (I.R.S. Employer Identification
of incorporation or organization) Number)
2817 Forest Lane, Dallas, Texas 75234
- ---------------------------------------- ----------------
(Address of principal executive offices) (Zip Code)
(Registrant's telephone number, including area code) (972) 484-3662
--------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
--- ---
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes No X
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at May 6, 2005
- ---------------------------- --------------------------
Common Stock, $.01 per value 4,913,290
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets
(Unaudited)
ASSETS Mar. 31, Dec. 31,
2004 2005
------------ ------------
CURRENT ASSETS
Cash and cash equivalents $ 127,741 314,897
Trade receivables 735,119 907,238
Other receivables -- --
Inventories 7,235,112 6,791,383
Prepaid expenses 203,488 161,985
------------ ------------
Total current assets 8,301,460 8,175,503
MARKETABLE SECURITIES - AVAILABLE FOR SALE 77,062 77,062
PROPERTY AND EQUIPMENT - AT COST, NET 860,316 885,301
DEFERRED INCOME TAXES 15,994 15,994
GOODWILL 837,117 837,117
OTHER ASSETS 300,236 290,722
------------ ------------
$ 10,392,185 $ 10,281,699
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Notes payable $ 2,566,758 548,093
Current maturities of long-term debt 160,903 76,172
Accounts payable - trade 366,530 590,412
Accrued expenses 163,724 513,775
Customer deposits 195,492 67,173
Federal income taxes payable 148,773 146,210
------------ ------------
Total current liabilities 3,602,180 1,941,835
Long-term debt, less current maturities 1,048,855 2,749,278
Deferred income taxes -- --
------------ ------------
Total liabilities 4,651,035 4,691,113
SHAREHOLDERS' EQUITY
Common stock, $.01 par value; authorized 10,000,000
shares; issued and outstanding 4,913,290 shares at
The end of each period 49,133 49,133
Additional paid-in capital 5,708,760 5,708,760
Accumulated other comprehensive (loss) (122,582) (122,582)
Retained earnings (deficit) 105,839 (44,725)
------------ ------------
Total shareholders' equity 5,741,150 5,590,586
$ 10,392,185 $ 10,281,699
============ ============
The accompanying notes are an integral part of these consolidated financial
statements
2
DGSE Companies, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF OPERATIONS
Three months ended
(Unaudited)
March 31, 2005 March 31, 2004
-------------- --------------
Revenue
Sales $ 6,637,914 $ 6,751,452
Pawn services charges 79,898 47,630
-------------- --------------
6,717,812 6,799,082
Costs and expenses
Cost of goods sold 5,316,873 5,452,922
Selling, general and administrative expenses 1,058,884 908,982
Depreciation and amortization 42,803 35,285
-------------- --------------
6,418,560 5,397,189
-------------- --------------
Operating income 299,252 401,893
-------------- --------------
Other income (expense)
Interest expense (71,124) (72,053)
-------------- --------------
Total other income (expense) (71,124) (72,053)
Income before income taxes 228,128 329,840
Income tax expense 77,563 112,146
-------------- --------------
Net income from continuing operations 150,565 217,694
Loss from discontinued operations, net of income taxes -- (31,995)
-------------- --------------
Net income (loss) $ 150,565 $ 185,699
============== ==============
Earnings per common share
Basic and diluted
From continuing operations $ .03 $ .04
From discontinued operations -- --
-------------- --------------
$ .03 $ .04
============== ==============
Weighted average number of common shares:
Basic 4,913,290 4,913,290
Diluted 5,089,162 5,137,431
The accompanying notes are an integral part of these consolidated financial
statements
3
DGSE COMPANIES, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months Ended
March 31,
2005 2004
----------- -----------
Cash Flows From Operations
Reconciliation of net income to net cash
used in operating activities
Net income $ 150,565 $ 185,699
Depreciation and amortization 42,803 35,285
(Increase) decrease in operating assets and liabilities
Trade receivables 172,119 59,331
Inventories (443,729) (213,794)
Prepaid expenses and other current assets (41,503) 6,204
Accounts payable and accrued expenses (573,933) (837,959)
Change in customer deposits 128,319 (58,589)
Federal income taxes payable 2,563 (204,337)
Other assets (9,565) (951)
----------- -----------
Total net cash used in operating activities (572,361) (1,029,111)
Cash flows from investing activities
Purchase of property and equipment (17,768) (4,164)
----------- -----------
Net cash (used) provided by investing activities (17,768) (4,164)
Cash flows from financing activities
Proceeds from notes issued 700,000 625,000
Payments on notes payable (297,027) (272,580)
----------- -----------
Net cash provided by financing activities 402,973 352,420
----------- -----------
Net decrease in cash and cash equivalents (187,156) (680,855)
Cash and cash equivalents at beginning of year 314,897 735,293
----------- -----------
Cash and cash equivalents at end of period $ 127,741 $ 54,438
=========== ===========
Supplemental schedule of non-cash, investing and financing activities:
Interest paid for the three months ended March 31, 2005 and 2004 was $ 77,563
and $ 72,053, respectively.
Income taxes paid for the three months ended March 31, 2005 and 2004 was $75,000
and $300,000, respectively.
The accompanying notes are an integral part of these consolidated financial
statements.
4
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) Basis of Presentation:
The accompanying consolidated financial statements for the three month periods
ended March 31, 2005 and 2004 have been prepared in accordance with the
generally accepted accounting principles in the United States of America by DGSE
Companies, Inc. without audit, pursuant to the rules and regulations of the
Securities and Exchange Commission.
The accompanying unaudited condensed consolidated financial statements of DGSE
Companies, Inc. and Subsidiaries include the financial statements of DGSE
Companies, Inc. and its wholly-owned subsidiaries, DGSE Corporation, National
Jewelry Exchange, Inc., American Pay Day Centers, Inc. and Charleston Gold And
Diamond Exchange, Inc. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included.
The Company's operating results for the three months ended March 31, 2005, are
not necessarily indicative of the results that may be expected for the year
ended December 31, 2005. For further information, refer to the consolidated
financial statements and footnotes thereto included in the Company's annual
report on Form 10-K for the year ended December 31, 2004. Certain
reclassifications were made to the prior year's consolidated financial
statements to conform to the current year presentation.
(2) - Earnings per share
Earnings Per Common Share
A reconciliation of the income and shares of the basic earnings per common share
and diluted earnings per common share for the three months ended March 31, 2005,
and 2004 is as follows:
March 31, 2005
---------------------------------
Per-Share
Income Shares Amount
--------- --------- ---------
Basic earnings per common share
Income from operations allocable
to common shareholders $ 150,565 4,913,920 $ .03
=========
Effect of dilutive securities
Stock options -- 175,872
--------- ---------
Diluted earnings per common share
Income from operations available
to common shareholders plus
assumed conversions $ 150,565 5,089,162 $ .03
========= ========= =========
March 31, 2004
---------------------------------
Per-Share
Income Shares Amount
--------- --------- ---------
Basic earnings per common share
Income from operations allocable
to common shareholders $ 185,699 4,913,920 $ .04
=========
Effect of dilutive securities
Stock options -- 224,141
--------- ---------
Diluted earnings per common share
Income from operations available
to common shareholders plus
assumed conversions $ 185,699 5,137,431 $ .04
========= ========= =========
5
(3) - Business segment information
The Company's operations by business segment for the three months ended March
31, were as follows:
Discontinued Corporate
Jewelry Operations & Other Consolidated
------------ ------------ ------------ ------------
Revenues
2005 $ 6,717,914 $ -- $ -- $ 6,717,914
2004 $ 6,799,082 $ -- $ -- $ 6,799,082
Net income (loss)
2005 $ 176,056 $ -- $ (25,491) $ 150,565
2004 $ 237,729 $ (31,995) $ (20,035) $ 185,699
Identifiable assets
2005 $ 10,080,433 $ -- $ 311,752 $ 10,392,185
2004 $ 9,673,272 $ 331,678 $ 609,236 $ 10,164,186
Capital expenditures
2005 $ 17,768 $ -- $ -- $ 17,768
2004 $ 4,393 $ -- $ -- $ 4,393
Depreciation and
amortization
2005 $ 41,536 $ -- $ 1,267 $ 42,803
2004 $ 33,410 $ -- $ 1,875 $ 35,285
(4) Other Comprehensive income:
Other comprehensive income is as follows: Tax
Before Tax (Expense) Net-of-Tax
Amount Benefit Amount
-----------------------------------
Other comprehensive income at
December 31, 2003 $ -- $ -- $ --
Unrealized holding gains arising during the
Three months ended March 31, 2004 106,373 (36,167) 70,206
--------- --------- ---------
Other comprehensive income at
March 31, 2004 $ 106,373 $ (36,167) $ 70,206
========= ========= =========
Other comprehensive loss at
December 31, 2004 and March 31,2005 $(150,784) $ 28,202 $(122,582)
========= ========= =========
6
(5) Stock-based Compensation:
The Company accounts for stock-based compensation to employees using the
intrinsic value method. Accordingly, compensation cost for stock options to
employees is measured as the excess, if any , of the quoted market price of the
Company's common stock at the date of the grant over the amount an employee must
pay to acquire the stock.
The following table illustrates the effect on net income and earnings per share
if the Company had applied the fair value recognition provisions of FASB
Statement No. 123, Accounting for Stock-Based Compensation, to stock-based
employee compensation.
Three Months Ended March 31,
----------------------------
2005 2004
----------- -----------
Net income as reported $ 150,565 $ 185,699
Deduct: Total stock-based employee compensation
Expense determined under fair value based method
For all awards, net of related tax effects -- --
----------- -----------
Pro forma net loss $ 150,565 $ 185,699
Earnings per share:
Basic - as reported $.03 $.04
Basic - pro forma $.03 $.04
Diluted - as reported $.03 $.04
Diluted pro forma $.03 $.04
(6) Financing
The Company entered into a financing agreement on March 31, 2005 with a
commercial bank that allows the Company to borrow at any time through March 31,
2006 up to $ 3,500,000 at the bank's prime Rate of interest plus 1/4%.
Borrowings under the financing agreement mature on March 31, 2006. The Company
borrowed $ 2,699,699 under this new credit facility in order to liquidate its
previous bank debt. The remaining portion of the new financing agreement is
available to the Company for working capital requirements.
7
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations Results of Operations
Quarter ended March 31, 2005 vs 2004:
- -------------------------------------
Revenue for the first quarter of 2005 decreased by $ 81,270 or 1.1% when
compared to the corresponding quarter of 2004. This decrease was due to a $
285,394 decrease in the sale of precious metal products, a $ 32,268 increase in
pawn service charges and a $ 171,856 increase in the sale of jewelry products.
The increase in jewelry sales was due to a nation wide improvement in the retail
environment. The decrease in precious metal sales was due to price stability in
the precious metal markets during the 2005 quarter. Pawn service fees increased
due to an increase in loan volume. Cost of sales decreased primarily due to the
decrease in sales. Gross margins increased from 19.8% in 2004 to 20.9% in 2005
due to the increase in sales of jewelry products.
Selling, general and administration expenses increased by $ 149,902 due an
increase in sales staff. Income taxes are provided at the corporate rate of 34%
for both 2005 and 2004
Loss from discontinued operations during 2004 in the amount of $ 31,995 net of
income taxes is the operating results of Silverman Consultants, Inc., a
wholly-owned subsidiary of the Company which was sold in August 2004.
Liquidity and Capital Resources
- -------------------------------
The Company's short-term debt, including current maturities of long-term debt
totaled $2,727,661 as of March 31, 2005. The ability of the Company to finance
its operations and working capital needs are dependent upon management's ability
to negotiate extended terms or refinance its short-term debt. The Company has
historically renewed, extended or replaced short-term debt as it matures and
management believes that it will be able to do so in the future as short-term
debt matures.
Management of the Company expects capital expenditures to total approximately
$75,000 during the balance of 2005. It is anticipated that these expenditures
will be funded from working capital.
The Company entered into a financing agreement on March 31, 2005 with a
commercial bank that allows the Company to borrow at any time through March 31,
2006 up to $ 3,500,000 at the bank's prime Rate of interest plus 1/4%.
Borrowings under the financing agreement mature on March 31, 2006. The Company
borrowed $ 2,699,699 under this new credit facility in order to liquidate its
previous bank debt. The remaining portion of the new financing agreement is
available to the Company for working capital requirements.
From time to time, management has adjusted the Company's inventory levels to
meet seasonal demand or in order to meet working capital requirements.
Management is of the opinion that if additional working capital is required,
additional loans can be obtained from individuals or from commercial banks. If
necessary, inventory levels may be adjusted or a portion of the Company's
investments in marketable securities may be liquidated in order to meet working
capital requirements.
Contractual Cash Obligations Payments due by year end
- ---------------------------- ------------------------------------
Total 2005 2006 2007 2008 2009 Thereafter
---------- ---------------------------------------------------------------------------
Notes payable $2,566,758 $ 266,758 $2,300,000 -- -- -- --
Long-term debt and capital leases 1,209,758 120,667 183,281 $ 143,936 $ 147,262 $ 369,728 $ 244,884
Federal income taxes 148,773 148,773 -- -- -- -- --
Operating leases 558,649 170,591 118,447 108,018 88,394 73,199 --
---------- ---------- ---------- ---------- ---------- ---------- ----------
$4,483,938 $ 706,789 $2,601,728 $ 251,954 $ 235,656 $ 442,927 $ 244,884
========== ========== ========== ========== ========== ========== ==========
8
This report contains forward-looking statements which reflect the view of
Company's management with respect to future events. Although management believes
that the expectations reflected in such forward-looking statements are
reasonable, it can give no assurance that such expectations will prove to have
been correct. Important factors that could cause actual results to differ
materially from such expectations are a down turn in the current strong retail
climate and the potential for fluctuations in precious metals prices. The
forward-looking statements contained herein reflect the current views of the
Company's management and the Company assumes no obligation to update the
forward-looking statements or to update the reasons actual results could differ
from those contemplated by such forward-looking statements.
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk.
The following discussion about the Company's market risk disclosures involves
forward-looking statements. Actual results could differ materially from those
projected in the forward-looking statements. The Company is exposed to market
risk related to changes in interest rates and gold values. The Company also is
exposed to regulatory risk in relation to its payday loans. The Company does not
use derivative financial instruments.
The Company's earnings and financial position may be affected by changes in gold
values and the resulting impact on pawn lending and jewelry sales. The proceeds
of scrap sales and the Company's ability to liquidate excess jewelry inventory
at an acceptable margin are dependent upon gold values. The impact on the
Company's financial position and results of operations of a hypothetical change
in gold values cannot be reasonably estimated.
ITEM 4. Controls and Procedures.
Under the supervision and with the participation of our management, including
our principal executive officer and principal financial officer, we have
evaluated the effectiveness of the design and operation of our disclosure
controls and procedures within 90 days of the filing date of this quarterly
report, and, based on their evaluation, our principal executive officer and
principal financial officer have concluded that these controls and procedures
are effective. There are no significant changes in our internal controls or
other factors that could significantly affect these controls subsequent to the
date of their evaluation. Disclosure controls and procedures are our controls
and other procedures that are designed to ensure that information required to be
disclosed by us in the reports that we file or submit under the Exchange Act is
recorded, processed, summarized and reported, within the time period specified
in the Securities and Exchange Commission's rules and forms. Disclosure controls
and procedures include, without limitation, controls and procedures designed to
ensure that information required to be disclosed by us in the reports that we
file under the Exchange Act is accumulated and communicated to our management,
including our principal executive officer and principal financial officer, as
appropriate to allow timely decisions regarding required disclosure.
PART II. OTHER INFORMATION
- ----------------------------
ITEM 6. Exhibits
31.1 Certificate of L.S. Smith pursuant to Section 3026 of the
Sarbanes-Oxley Act of 2002, Chief Executive Officer.
31.2 Certificate of John Benson pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002, Chief Financial Officer .
32.1 Certificate of L.S. Smith pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, Chief Executive Officer.
32.2 Certificate of John Benson pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, Chief Financial Officer.
9
SIGNATURES
Pursuant ti the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
DGSE Companies, Inc.
By: /s/ L. S. Smith Dated: May 13, 2005
-------------------------
L. S. Smith
Chairman of the Board,
Chief Executive Officer and
Secretary
By: /s/ W. H. Oyster Dated: May 13, 2005
-------------------------
W. H. Oyster
Director, President and
Chief Operating Officer
By: /s/ John Benson Dated: May 13, 2005
-------------------------
John Benson
Chief Financial Officer
(Principal Accounting Officer)