Attached files
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EX-23.1 - Envela Corp | v178198_ex23-1.htm |
EX-31.2 - Envela Corp | v178198_ex31-2.htm |
EX-32.2 - Envela Corp | v178198_ex32-2.htm |
EX-31.1 - Envela Corp | v178198_ex31-1.htm |
EX-32.1 - Envela Corp | v178198_ex32-1.htm |
UNITED
STATES SECURITIES AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-K/A
(Amendment
number 3)
FOR
ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTIONS 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
x
|
ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
For
the fiscal year ended December 31, 2008
o
|
TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
Commission
File No. 001-11048
DGSE
COMPANIES, INC.
(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
No.)
|
11311
Reeder Road
Dallas,
Texas 75229
972-484-3662
(Address,
including zip code, and telephone
number,
including area code, of registrant's
principal
executive offices)
Securities
registered pursuant to Section 12(b) of the Act: None
Securities
registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.01
per share
(Title
of Class)
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act.
YES
o NO
þ
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Exchange Act.
YES o NO
þ
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 þ NO o
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. þ
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer or smaller reporting
company. See definitions of “larger accelerated filer,” “large
accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule
12b-2 of the Exchange Act.
Large
accelerated filer o
|
Accelerated
filer o
|
Non-accelerated
filer o (Do
not check if a smaller reporting company)
|
Smaller
Reporting Company þ
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).
YES o
NO þ
Aggregate
market value of the 3,774,762 shares of Common Stock held by
non-affiliates of the registrant at the
closing sales price as reported on the NYSE Amex on June 30,
2008
|
$ | 11,022,305 | ||
Number
of shares of Common Stock outstanding as of the close of business on
March
27, 2009:
|
9,833,635 |
Documents
incorporated by reference:
Portions of the definitive proxy
statement relating to the 2009 Annual Meeting of Stockholders of DGSE Companies,
Inc. are incorporated by reference into Part III of this
report.
REASON
FOR AMENDMENT
To add explanatory notes and to
disclose that (i) the goodwill impairment charge and gain on sale of property
were reclassified and (ii) earnings per share data presented reflect such
reclassifications.
TABLE
OF CONTENTS
Page
|
||
PART
I
|
||
Item
1.
|
Business
|
2
|
Item
1A.
|
Risk
Factors
|
8
|
Item
1B.
|
Unresolved
Staff Comments
|
14
|
Item
2.
|
Properties
|
14
|
Item
3.
|
Legal
Proceedings
|
14
|
PART
II
|
||
Item
5.
|
Market
for Registrant's Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities
|
15
|
Item
7.
|
Management's
Discussion and Analysis of Financial Condition and Results of
Operations
|
17
|
Item
7A.
|
Quantitative
and Qualitative Disclosure about Market Risk
|
25
|
Item
8.
|
Financial
Statements and Supplementary Data
|
25
|
Item
9.
|
Changes
in and Disagreements with Accountants on Accounting and Financial
Disclosure
|
25
|
Item
9A.
|
Controls
and Procedures
|
26
|
Item
9B.
|
Other
Information
|
27
|
PART
III
|
||
Item
14.
|
Principal
Accountant Fees and Services
|
40
|
PART
IV
|
||
Item
15.
|
Exhibits
and Financial Statement Schedules
|
41
|
PART
I
ITEM
1. BUSINESS.
Overview
Unless the context indicates otherwise,
references to "we," "us", "our"and”DGSE” refers to the consolidated business
operations of DGSE Companies, Inc., the parent, and all of its direct and
indirect subsidiaries.
We buy
and sell jewelry, bullion products and rare coins. Our customers
include individual consumer, dealers and institutions throughout the United
States. In addition, we make collateralized loans to individuals in
the State of Texas. Our products and services are marketed through
our facilities in Dallas and Euless, Texas; Mt. Pleasant, South Carolina;
Woodland Hills, California and through our internet web sites DGSE.com;
CGDEinc.com; SGBH.com; SuperiorPreciousMetals.com; SuperiorEstateBuyers.com;
USBullionExchange.com; Americangoldandsilverexchange.com; and
FairchildWatches.com.
We
operate eight primary internet sites and over 900 related landing sites on the
World Wide Web. Through the various sites we operate a virtual store,
real-time auction of rare coin and jewelry products, free quotations of current
prices on all commonly traded precious metal and related products, trading in
precious metals, a mechanism for selling unwanted jewelry, rare coins and
precious metals and wholesale prices and information exclusively for dealers on
pre-owned fine watches. Over 7,500 items are available for sale on our internet
sites including $2,000,000 in diamonds.
Our
wholly-owned subsidiary, National Jewelry Exchange, Inc, (dba National Pawn),
operates two pawn shops in Dallas, Texas. We have focused the subsidiary’s
operations on sales and pawn loans of jewelry products.
On May 9,
2007 we purchased all of the tangible assets of Euless Gold and Silver, Inc.,
located in Euless, Texas. We opened a new retail store in the former
Euless Gold & Silver facility and it operates under the name of Dallas Gold
& Silver Exchange.
On May
30, 2007, we completed the acquisition of Superior Galleries, Inc. located in
Beverly Hills, California. In June 2008, we moved Superior Galleries
operations from Beverly Hills to Woodland Hills,
California. Superior’s principal line of business is the sale of rare
coins on a retail and wholesale basis. Superior’s retail and wholesale
operations are conducted in virtually every state in the United
States. Superior also conducted live and internet auctions for
customers seeking to sell their own coins prior to management’s decision to
discontinue the live auction operations. Superior markets its
services nationwide through broadcast and print media and independent sales
agents, as well as on the internet through third party websites, and through its
own website at SGBH.com.
On July
13, 2007, we sold the loan balances from our American Pay Day Center locations
and discontinued operations in those locations.
On August
3, 2007 we announced the launch of Americangoldandsilverexchange.com along with
the simultaneous activation of over 900 proprietary Internet sites related to
the home page of Americangoldandsilverexchange.com. This site, along
with our existing locations in Texas, California and South Carolina, provides
customers from all over the United States with a seamless and secure way to
value and sell gold, silver, rare coins, jewelry, diamonds and
watches.
Late in
2007, Superior Estate Buyers was launched to bring our unique expertise in the
purchase of gold, silver, diamonds, rare coins and other collectibles to local
markets with a team of traveling professionals for short-term buying events.
During 2008 Superior Estate Buyers held approximately 24 such buying
events. It is our expectation that, over time, this activity will be
expanded significantly with the objective of having teams conducting events on a
continuous basis.
Superior
Precious Metals was also launched in late 2007 and it is the retail precious
metals arm of DGSE. Professional account managers provide a convenient way for
individuals and companies to buy and sell precious metals and rare coins. This
activity is supported by the internally developed account management and trading
platform created as part of DGSE’s USBullionExchange.com precious metals
system.
2
Products
and Services
Our
jewelry operations include sales to both wholesale and retail customers. We sell
finished jewelry, gem stones, and findings (gold jewelry components) and make
custom jewelry to order. Jewelry inventory is readily available from
wholesalers throughout the United States. In addition, we purchase
inventory from pawn shops and individuals. Jewelry repair is also
available to our customers in our Dallas and Euless, Texas, Woodland Hills,
California and Mt. Pleasant, South Carolina locations.
Our
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 transactions are
conducted at all of our store locations.
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 43.2% of total revenues for 2008, 33.6% in 2007 and
36.9% in 2006.
During
December 2000 we opened a 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.
We make
pawn loans through our National Pawn locations. 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.
Our
primary presence on the internet is through our websites DGSE.com, CGDEinc.com,
SGBH.com, Superiorpreciousmetals.com, Superiorestatebuyers.com,
USBullionexchange.com, Americangoldandsilvereschange.com, and
Fairchildwatches.com. The DGSE.com web site serves as a corporate
information site, a retail store where we sell our 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
SGBH.com website services as a primary rare coin marketing site and includes a
retail store and conducts regular online auctions.
Americangoldandsilverexchange.com
provides customers from all over the United States with a simple and secure
method to sell unwanted valuables by sending them directly to our corporate
facilities for evaluation. Customers are provided with a firm
purchase price which they can reject or accept for immediate
payment.
Our
internet activity 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. This web
site allows customers to enter immediate real-time buy and sell orders in dozens
of precious metal products. This functionality allows our customers to fix
prices in real time and to manage their precious metals portfolios in a
comprehensive way.
We also
offer wholesale customers a virtual catalog of our fine watch inventory through
our web site Fairchildwatches.com.
During
the first half of 2009 all of the active websites are being redesigned, expanded
and integrated.
We did
not have any customer or supplier that accounted for more than 10% of total
sales or purchases during 2008, 2007 or 2006.
3
Sales
and Marketing
All of
our activities rely heavily on local television, radio and print media
advertising. Marketing activities emphasize our broad and unusual
array of products and services and the attractiveness of its pricing and
service.
We market
our bullion and rare coin trading services through a combination of advertising
in national coin publications, local print media, coin and bullion wire services
and our 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. Our backlogs for
fabricated jewelry products were not significant as of December 31, 2008, 2007
and 2006.
Seasonality
The
retail and wholesale jewelry business is seasonal. We
realized 22.2%, 37.2% and 27.7% of our annual sales in the
fourth quarters of 2008, 2007 and 2006, respectively.
While our
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 has resulted in higher levels of interest in precious metals as well
as higher prices for such metals. Our other business activities are not
seasonal.
Competition
We
operate in a highly competitive industry where competition is based on a
combination of price, service and product quality. Our jewelry and
consumer loan activities compete with numerous other retail jewelers and
consumer lenders in Dallas and Euless, Texas; Woodland Hills, California; and
Mt. Pleasant, South Carolina and the surrounding areas.
The
bullion and rare coin industry in which we compete is dominated by substantially
larger enterprises which wholesale bullion, rare coin and other precious metal
products.
We
attempt to compete in all of our activities by offering high quality products
and services at prices below that of our competitors and by maintaining a staff
of highly qualified employees.
Employees
As of
December 31, 2008, we employed 102 individuals, 96 of whom were full time
employees.
Available
Information
Our
website is located at www.dgse.com. Through
this website, we make available free of charge all of our Securities and
Exchange Commission filings. In addition, a complete copy of our Code
of Ethics is available through this website.
4
Discontinued
Operations and Acquisitions
Discontinued
Operations.
In
December 2008 we decided to discontinue the live auction segment of the
Company’s business activities. This decision was based on the substantial losses
being incurred by this operating segment during 2008 and 2007. As a result, the
operating results of the auction segment have been reclassified to discontinued
operations for both 2008 and 2007. During 2008 the auction segment incurred a
pretax loss of $2,379,151.
On July
13, 2007, we sold the loan balances from our American Pay Day Center locations
for $77,496 and discontinued operations in those locations. The
receivables sold, including interest due, had a balance of $120,573 at the time
of the sale. The sales price was determined based on the age of the
outstanding receivables. As a result of the sale and discontinued
operations, we recognized a pretax loss of $107,838 on the disposal and a pretax
loss on discontinued operations of $51,938 for the year ended December 31,
2007.
As a
result, operating results from these business segments have been reclassified to
discontinued operations for all periods presented. As of December 31,
2008 there were no operating assets to be disposed of or liabilities to be paid
in completing the disposition of these operations.
Acquisitions.
Superior Galleries,
Inc. On May 30, 2007, we completed our acquisition of Superior
Galleries, Inc., which we refer to as Superior, pursuant to an amended and
restated agreement and plan of merger and reorganization dated as of January 6,
2007, which we refer to as the merger agreement, with Superior and Stanford
International Bank Ltd., then Superior’s largest stockholder and its principal
lender, which we refer to as Stanford, as stockholder agent for the Superior
stockholders, whereby Superior became a wholly owned subsidiary of DGSE
Companies, Inc. Superior operated a store in Beverly Hills,
CA. The total purchase price of approximately $13.6 million was
broken down as follows:
Shares
|
Stock Price
|
Extended Price
|
||||||||||
Common
stock
|
3,669,067 | $ | 2.55 | $ | 9,356,121 | |||||||
A
warrants
|
845,634 | 1.27 |
(1)
|
1,073,955 | ||||||||
B
warrants
|
863,000 | 2.55 | 2,220,650 | |||||||||
Exercise
Price B warrants
|
863,000 | $ | .001 | (863 | ) | |||||||
Direct
transaction costs
|
1,176,290 | |||||||||||
Total
purchase price
|
$ | 13,806,153 |
(1)
|
The
$1.27 is the fair value of the warrants calculated under the Black Sholes
method as of the acquisition
date.
|
The total
purchase price has been allocated to the fair value of assets acquired and
liabilities assumed as follows:
Goodwill
|
$ | 8,203,448 | ||
Intangible
assets...
|
2,521,340 | |||
Deferred
tax asset
|
1,860,475 | (1) | ||
Property
and other assets
|
1,068,958 | |||
Inventory
|
3,260,766 | |||
Liabilities
assumed
|
(3,108,834 | ) | ||
Total
purchase price
|
$ | 13,806,153 |
(1)
|
Subsequent
to date of acquisition the Company recorded an adjustment to reduce
goodwill and increase deferred tax assets to reflect the change in
estimated fair value of the net operating loss carryforwards acquired in
the Superior
acquisition.
|
5
In
accordance with SFAS 142, the goodwill will not be amortized but instead
tested for impairment in accordance with the provisions of SFAS 142 at
least annually and more frequently upon the occurrence of certain
events.
During
2008, the Company reflected $8,185,443 of goodwill relating to the acquisition
of Superior Galleries. Inc. in May 2007. Under SFAS No. 142, the Company is
required to undertake an annual impairment test at its year end or when there is
a triggering event. In addition to the annual impairment review, there were a
number of triggering events in the fourth quarter due to the significant
operating losses of Superior and the impact of the economic downturn on
Superior’s operations and the decline in the Company’s share price resulting in
a substantial discount of the market capitalization to tangible net asset value.
An evaluation of the recorded goodwill was undertaken and it was determined that
it was impaired. Accordingly, to reflect the impairment, the Company recorded a
non-cash charge of $8,185,443, which eliminated the value of the goodwill
related to Superior.
The
operating results of Superior have been included in the consolidated financial
statements since the acquisition date of May 30, 2007. The following unaudited
condensed consolidated financial information reflects the pro forma results of
operations for the year ended December 31, 2007 as if the acquisition of
Superior had occurred on January 1 of 2007 after giving effect to purchase
accounting adjustments as compared to actual results of operations for the year
ended December 31, 2008 and the effects of the discontinued operations related
to the live auction segment. The pro forma results have been prepared
for comparative purposes only and do not purport to be indicative of what
operating results would have been had the acquisition actually taken place at
the beginning of the period, and may not be indicative of future operating
results (in thousands, except per share data):
Year
Ended December 31,
|
||||||||
(In
thousands, except per share data)
|
2008
|
2007
|
||||||
(Unaudited)
|
||||||||
Pro
Forma
|
||||||||
Total
revenue
|
$ | 105,219 | $ | 73,565 | ||||
Net
earnings (loss)
|
$ | (7,851 | ) | $ | (2,920 | ) | ||
Net
earnings per share — basic
|
$ | (.80 | ) | $ | (.33 | ) | ||
Net
earnings per share — diluted
|
$ | (.80 | ) | $ | (.33 | ) | ||
Weighted
average shares — basic
|
9,708 | 8,582 | ||||||
Weighted
average shares — diluted
|
9,708 | 10,353 |
In
relation to the acquisition, as of June 29, 2007, Stanford and Dr. L.S.
Smith, our chairman and chief executive officer, collectively had the power to
vote approximately 63% of our voting securities, and beneficially owned
approximately 56.4% of our voting securities on a fully-diluted basis (after
giving effect to the exercise of all options and warrants held by them which are
exercisable within sixty days of December 31, 2007 but not giving effect to the
exercise of any other options or warrants). Consequently, these two
stockholders have sufficient voting power to control the outcome of
virtually all corporate matters submitted to the vote of our common
stockholders. Those matters could include the election of directors, changes in
the size and composition of our board of directors, mergers and other business
combinations involving us, or the liquidation of our company. In addition,
Stanford and Dr. Smith have entered into a corporate governance agreement
with us, which entitles Stanford and Dr. Smith to each nominate two
“independent” directors to our board and entitles Dr. Smith, our chairman
and chief executive officer, and William H. Oyster, our president and chief
operating officer, to be nominated to our board for so long as each remains an
executive officer.
Through
this control of company nominations to our board of directors and through their
voting power, Stanford and Dr. Smith are able to exercise substantial
control over certain decisions, including decisions regarding the qualification
and appointment of officers, dividend policy, access to capital (including
borrowing from third-party lenders and the issuance of additional equity
securities), a merger or consolidation with another company, and our acquisition
or disposition of assets. Also, the concentration of voting power in the hands
of Stanford and Dr. Smith could have the effect of delaying or preventing a
change in control of our company, even if the change in control would benefit
our other stockholders. The significant concentration of stock ownership may
adversely affect the trading price of our common stock due to investors’
perception that conflicts of interest may exist or arise.
6
Euless Gold & Silver,
Inc.
On May 9,
2007 we purchased all of the tangible assets of Euless Gold and Silver, Inc.,
located in Euless, Texas. The purchase price paid for these assets
totaled $1,000,000 including $600,000 in cash and a two year note in the amount
of $400,000. We opened a new retail store in the former Euless Gold
& Silver facility and operate under the name of Dallas Gold & Silver
Exchange. Of the assets received, $990,150 was inventory and the
remainder was fixed assets.
We
entered into these transactions seeing them as opportunistic acquisitions that
would allow us to expand our operations and provide a platform for future
growth.
7
ITEM
1A. RISK FACTORS.
You
should carefully consider the risks described below before making an investment
decision. We believe these are all the material risks currently facing our
business. Our business, financial condition or results of operations
could be materially adversely affected by these risks. The trading
price of our common stock could decline due to any of these risks, and you may
lose all or part of your investment. You should also refer to the
other information included or incorporated by reference in this report,
including our financial statements and related notes.
Changes
in customer demand for our products and services could result in a significant
decrease in revenues.
Although
our customer base commonly uses our products and services, our failure to meet
changing demands of our customers could result in a significant decrease in our
revenues.
Changes
in governmental rules and regulations applicable to the specialty financial
services industry could have a negative impact on our lending
activities.
Our
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 our lending activities.
Fluctuations
in our inventory turnover and sales.
We
regularly experience fluctuations in our 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 our profitability
and ability to achieve our planned results.
Changes
in our liquidity and capital requirements could limit our ability to achieve our
plans.
We
require continued access to capital, and a significant reduction in cash flows
from operations or the availability of credit could materially and adversely
affect our ability to achieve our planned growth and operating results.
Similarly, if actual costs to build new stores significantly exceeds planned
costs, our ability to build new stores or to operate new stores profitably could
be materially restricted. The DGSE credit agreement also limits the allowable
amount of capital expenditures in any given fiscal year, which could limit our
ability to build new stores.
Changes
in competition from various sources could have a material adverse impact on our
ability to achieve our plans.
We
encounter significant competition in connection with our 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 us. Significant increases in these competitive
influences could adversely affect our operations through a decrease in the
number or quality pawn loans or our ability to liquidate forfeited
collateral at acceptable margins.
In the
coins and other collectibles business, we will compete with a number of
comparably sized and smaller firms, as well as a number of larger firms
throughout the United States. Our primary competitors are American Numismatic
Rarities, a comparably-sized coin auctioneer. Many of our competitors have the
ability to attract customers as a result of their reputation and the quality
collectibles they obtain through their industry connections. Additionally, other
reputable companies that sell rare coins and other collectibles may
decide to enter our markets to compete with us. These companies have greater
name recognition and have greater financial and marketing resources than we do.
If these auction companies are successful in entering the specialized market for
premium collectibles in which we participate or if dealers and sellers
participate less in our auctions, we may attract fewer buyers and our revenue
could decrease.
8
Our
earnings could be negatively impacted by an unfavorable outcome of litigation,
regulatory actions, or labor and employment matters.
From time
to time, we are involved in litigation, regulatory actions and labor and
employment matters arising from our normal operations. There can be no assurance
as to the ultimate outcome of any future actions and that they will not have a
material adverse effect on our financial condition, results of operation or
liquidity.
A
failure in our information systems could prevent us from effectively managing
and controlling our business or serving our 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 and 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 our internal controls and disclosure controls and procedures in
accordance with the requirements of section 404 of the Sarbanes-Oxley Act could
have a material adverse impact on us and our 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. Under the
supervision and with the participation of our Chief Executive Officer and Chief
Financial Officer, management assessed the effectiveness of the Company’s
internal control over financial reporting as of December 31, 2008 using the
criteria set forth by the Committee of Sponsoring Organizations of the Treadway
Commission in Internal
Control — Integrated Framework. Based on this assessment, management
has concluded that, as of December 31, 2008, the Company’s internal control
over financial reporting was effective to provide reasonable assurance regarding
the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted
accounting principles based on such criteria.
Our
management, including our Chief Executive Officer and Chief Financial Officer,
does not expect that our disclosure controls or internal controls over financial
reporting will prevent all errors or all instances of fraud. A control system,
no matter how well designed and operated, can provide only reasonable, not
absolute, assurance that the control system’s objectives will be met. Further,
the design of a control system must reflect the fact that there are resource
constraints, and the benefits of controls must be considered relative to their
costs. Because of the inherent limitations in all control systems, no evaluation
of controls can provide absolute assurance that all control issues and instances
of fraud, if any, within our company have been detected. These inherent
limitations include the realities that judgments in decision-making can be
faulty, and that breakdowns can occur because of simple error or mistake.
Controls can also be circumvented by the individual acts of some persons, by
collusion of two or more people, or by management override of the controls. The
design of any system of controls is based in part upon certain assumptions about
the likelihood of future events, and any design may not succeed in achieving its
stated goals under all potential future conditions. Over time, controls may
become inadequate because of changes in conditions or deterioration in the
degree of compliance with policies or procedures. Because of the inherent
limitation of a cost-effective control system, misstatements due to error or
fraud may occur and not be detected.
This
Annual Report on Form 10-K does not include an attestation report of the
Company’s registered public accounting firm regarding internal control over
financial reporting. Management’s report was not subject to attestation by the
Company’s registered public accounting firm pursuant to temporary rules of the
Securities and Exchange Commission that permit the Company to provide only
management’s report in this Annual Report on Form 10-K.
If there
is a failure in any of our controls as required by Section 404 of the
Sarbanes-Oxley Act that leads to a material misstatement of our financial
condition, investors could lose confidence in our reported financial
information.
9
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 our
operations by reducing consumer demand for the products we sell.
Interest
rate fluctuations could increase our interest expense.
Although
the U.S. Federal Reserve halted a sustained period of regular interest rate
hikes in August 2006, interest rates could rise which would, in turn,
increase our cost of borrowing.
Our
success depends on our ability to attract, retain and motivate management and
other skilled employees.
Our
future success and growth depend on the continued services of our key management
and employees. The loss of the services of any of these individuals or any other
key employee or contractor could materially affect our business. Our future
success also depends on our ability to identify, attract and retain additional
qualified personnel. Competition for employees in our industry is intense and we
may not be successful in attracting or retaining them. There are a limited
number of people with knowledge of, and experience in, our industry. We do not
have employment agreements with many of our key employees. We do not maintain
life insurance polices on many of our employees. Our loss of key personnel,
especially without advance notice, or our inability to hire or retain qualified
personnel, could have a material adverse effect on sales and our ability to
maintain our technological edge. We cannot guarantee that we will continue to
retain our key management and skilled personnel, or that we will be able to
attract, assimilate and retain other highly qualified personnel in the
future.
The
voting power in our company is substantially controlled by a small number of
stockholders, which may, among other things, delay or frustrate the removal of
incumbent directors or a takeover attempt, even if such events may be beneficial
to our stockholders.
As of
June 29, 2007, Stanford International Bank Ltd. (SIBL), which we refer to as
Stanford, and Dr. L.S. Smith, our chairman and chief executive officer,
collectively had the power to vote approximately 63% of our voting securities,
and beneficially owned approximately 56.4% of our voting securities on a
fully-diluted basis (after giving effect to the exercise of all options and
warrants held by them which are exercisable within sixty days of December 31,
2007 but not giving effect to the exercise of any other options or warrants).
Consequently, these two stockholders may have sufficient voting power to control
the outcome of virtually all corporate matters submitted to the vote of our
common stockholders. Those matters could include the election of directors,
changes in the size and composition of our board of directors, mergers and other
business combinations involving us, or the liquidation of our company. In
addition, Stanford and Dr. Smith have entered into a corporate governance
agreement with us, which entitles Stanford and Dr. Smith to each nominate
two “independent” directors to our board and entitles Dr. Smith, our
chairman and chief executive officer, and William H. Oyster, our president and
chief operating officer, to be nominated to our board for so long as he remains
an executive officer.
10
Through
this control of company nominations to our board of directors and through their
voting power, Stanford and Dr. Smith are able to exercise substantial
control over certain decisions, including decisions regarding the qualification
and appointment of officers, dividend policy, access to capital (including
borrowing from third-party lenders and the issuance of additional equity
securities), a merger or consolidation with another company, and our acquisition
or disposition of assets. Also, the concentration of voting power in the hands
of Stanford and Dr. Smith could have the effect of delaying or preventing a
change in control of our company, even if the change in control would benefit
our other stockholders. The significant concentration of stock ownership may
adversely affect the trading price of our common stock due to investors’
perception that conflicts of interest may exist or arise.
We
could be subject to sales taxes, interest and penalties on interstate sales for
which we have not collected taxes.
Superior
has not collected California sales tax on mail-order sales to out-of-state
customers, nor has it collected use tax on its interstate mail order sales. We
believe that our sales to interstate customers are generally tax-exempt due to
varying state exemptions relative to the definitions of being engaged in
business in particular states and the lack of current Internet taxation. While
we have not been contacted by any state authorities seeking to enforce sales or
use tax regulations, we cannot assure you that we will not be contacted by
authorities in the future with inquiries concerning our compliance with current
statutes, nor can we assure you that future statutes will not be enacted that
affect the sales and use tax aspects of our business.
We
may incur losses as a result of accumulating inventory.
A
substantial portion of the products that we sell comes from our own inventory.
We purchased these products from dealers and collectors and assume the inventory
and price risks of these items until they are sold. If we are unable to
resell the products that we purchase when we want or need to, or at prices
sufficient to generate a profit from their resale, or if the market value of the
inventory of purchased products were to decline, our revenue would likely
decline.
Our
planned expansion and enhancement of our websites and internet operations may
not result in increased profitability.
The
satisfactory performance, reliability and availability of our website and
network infrastructure are and will be critical to our reputation and our
ability to attract and retain customers and technical personnel and to maintain
adequate customer service levels. Any system interruptions or reduced
performance of our website could materially adversely affect our reputation and
our ability to attract new customers and technical personnel. We are in the
process of development and/or enhancement of several portions of our websites
that will offer content and auctions for rare coins that may have a lower
average selling price than many of the rare coins in the markets we currently
serve, and in the future we plan to integrate various of our websites. Continued
development of our websites will require significant resources and expense. If
the planned expansion of our websites does not result in increased revenue, we
may experience decreased profitability.
11
Our
websites may be vulnerable to security breaches and similar threats which could
result in our liability for damages and harm to our reputation.
Despite
the implementation of network security measures, our websites are vulnerable to
computer viruses, break-ins and similar disruptive problems caused by internet
users. These occurrences could result in our liability for damages, and our
reputation could suffer. The circumvention of our security measures may result
in the misappropriation of customer or other confidential information. Any such
security breach could lead to interruptions and delays and the cessation of
service to our customers and could result in a decline in revenue and
income.
Changes
to financial accounting standards and new exchange rules could make it more
expensive to issue stock options to employees, which would increase compensation
costs and may cause us to change our business practices.
We
prepare our financial statements to conform with generally accepted accounting
principles, or GAAP, in the United States. These accounting principles are
subject to interpretation by the Public Company Accounting Oversight Board, the
SEC and various other bodies. A change in those policies could have a
significant effect on our reported results and may affect our reporting of
transactions completed before a change is announced.
We
are subject to new corporate governance and internal control reporting
requirements, and our costs related to compliance with, or our failure to comply
with existing and future requirements could adversely affect our
business.
We face
new corporate governance requirements under the Sarbanes-Oxley Act of 2002, as
well as new rules and regulations subsequently adopted by the SEC, the Public
Company Accounting Oversight Board and the NYSE Amex. These laws, rules and
regulations continue to evolve and may become increasingly stringent in the
future. In particular, we’re required to include management’s report on
internal controls as part of our annual report for the year ending
December 31, 2007 pursuant to Section 404 of the Sarbanes-Oxley Act.
We are in the process of evaluating our control structure to help ensure that we
will be able to comply with Section 404 of the Sarbanes-Oxley Act. We cannot
assure you that we will be able to fully comply with these laws, rules and
regulations that address corporate governance, internal control reporting and
similar matters. Failure to comply with these laws, rules and regulations could
materially adversely affect our reputation, financial condition and the value
and liquidity of our securities.
12
The
revolving credit facilities with Stanford International Bank Ltd. and Texas
Capital Bank, N.A. is each collateralized by a general security interest in our
assets. If we were to default under the terms of either credit facility, the
lender would have the right to foreclose on our assets.
In
December 2005, we entered into a revolving credit facility with Texas
Capital Bank, N.A., which permits borrowings up to a maximum
principal amount of $4.3 million. Borrowings under the revolving credit
facility are collateralized by a general security interest in substantially all
of our assets (other than the assets of Superior). As of December 31, 2008,
approximately $4.0 million was outstanding under the term loan and
revolving credit facility. If we were to default under the terms and conditions
of the revolving credit facility, Texas Capital Bank would have the right to
accelerate any indebtedness outstanding and foreclose on our assets in order to
satisfy our indebtedness. Such a foreclosure could have a material adverse
effect on our business, liquidity, results of operations and financial
position.
In
October 2003, Superior entered into a revolving credit facility with
Stanford Financial Group Company, which we refer to as SFG, which has assigned
the facility to Stanford. The facility currently permits borrowings up to a
maximum principal amount of $11.5 million, up to $6.5 million of which
Superior may upstream to DGSE. Borrowings under the revolving credit facility
are collateralized by a general security interest in substantially all of
Superior’s assets and, to the extent of money upstreamed to DGSE, substantially
all of DGSE’s assets. As of December 31, 2008, approximately $9.2 million
was outstanding under the revolving credit facility. If Superior were to default
under the terms and conditions of the revolving credit facility, Stanford would
have the right to accelerate any indebtedness outstanding and foreclose on
Superior’s assets, and, subject to intercreditor arrangements with Texas Capital
Bank and other limitations, our assets, in order to satisfy Superior’s
indebtedness. Such a foreclosure could have a material adverse effect on our
business, liquidity, results of operations and financial position.
We have
been informed that on February 19, 2009, a US district court placed SIBL under
the supervision of a receiver and that the court enjoined SIBL's creditors and
other persons from taking certain actions related to SIBL or its assets.
In addition, on the same date, Antiguan Financial Services Regulatory Commission
appointed a Receiver for Stanford International Bank Ltd. This action was
subsequently ratified by the High Court of Justice in Antigua and
Barbuda. As a result of SIBL's current status, we do not believe that
Superior will be able to borrow additional funds under either revolving
loan, including any amounts Superior is obligated to repay to SIBL pursuant to
the repayment provisions applicable to the first revolving
note. We believe that certain terms of agreements entered into
by us, Superior and/or SIBL and its affiliates in connection with our
acquisition of Superior have been breached by SIBL or its affiliates, and we are
evaluating available remedies, including but not limited to damages from
responsible parties. While Superior does not currently require additional funds
under the SIBL credit facility, should the need arise and Superior is unable to
replace this credit facility the operations and performance of Superior could be
materially adversely affected.
We
have not paid dividends on our common stock in the past and do not anticipate
paying dividends on our common stock in the foreseeable future.
We have
not paid common stock dividends since our inception and do not anticipate paying
dividends in the foreseeable future. Our current business plan provides for the
reinvestment of earnings in an effort to complete development of our
technologies and products, with the goal of increasing sales and long-term
profitability and value. In addition, our revolving credit facility with Texas
Capital Bank currently restricts, and any other credit or borrowing arrangements
that we may enter into may in the future restrict or limit, our ability to pay
dividends to our stockholders.
13
ITEM
1B. UNRESOLVED STAFF COMMENTS.
None.
ITEM 2. PROPERTIES.
We own a
20,000 square foot facility at 11311 Reeder Rd, Dallas, Texas which houses
retail and wholesale jewelry, bullion and rare coin trading operations and our
principal executive offices. The land and buildings are subject to a mortgage
maturing in August 2016, with a balance outstanding of approximately $2,332,484
as of December 31, 2008.
Our
Euless, TX location is a 2,158 square foot facility which houses retail jewelry,
bullion and rare coin trading operations. Our monthly lease payments
at December 31, 2008 are $2,608 and the lease is due to expire June 30,
2010.
At
December 31, 2008 we were leasing two facilities in Dallas, Texas which house
our National Pawn operations. The two pawn locations are 7,388 square
feet and 6,800 square feet, respectively. The leases are due to
expire on May 31, 2013 and October 31, 2012 and require monthly lease payments
in the amount of $9,252 and 5,667, respectively.
CGDE
operates in a leased 2,367 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.
Our
Superior Galleries operations are located in an approximately 9,265 square foot
storefront facility located at 20011 Ventura Boulevard, Woodland Hills,
California. This facility includes administrative, customer support, auction,
gallery and retail space. The lease for this facility expires March
31, 2013. The combined monthly rental rate is $30,045 including
parking fees and rent of storage space.
We also
maintain a resident agent office in Nevada at the office of our Nevada counsel,
McDonald, Carano, Wilson, McClure, Bergin, Frankovitch and Hicks, 241 Ridge
Street, Reno, Nevada 89505.
ITEM 3. LEGAL
PROCEEDINGS.
From time
to time, be involved in various claims, lawsuits, disputes with third parties,
actions involving allegations of discrimination, or breach of contract actions
incidental to the operation of its business. Except as set forth
above, we are not currently involved in any such litigation which we believe
could have a material adverse effect on our financial condition or results of
operations, liquidity or cash flows.
14
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS.
On
October 31, 2007, our Common Stock began trading on the NYSE Amex under the
symbol “DGC”. Previously, our Common Stock was traded on the NASDAQ
Small CAP Market under the symbol “DGSE”. The following table sets
forth for the period indicated, the per share high and low bid quotations as
reported by NASDAQ or actual closing sale prices as reported on NYSE Amex for
our common stock. During the past three years, we have not declared
any dividends with respect to our common stock. We intend 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:
2008
|
High
|
Low
|
||||||
Fourth
Quarter
|
$ | 2.600 | $ | 1.000 | ||||
Third
Quarter
|
3.800 | 2.420 | ||||||
Second
Quarter
|
5.040 | 2.920 | ||||||
First
Quarter
|
5.450 | 4.000 | ||||||
2007
|
High
|
Low
|
||||||
Fourth
Quarter
|
$ | 6.110 | $ | 3.470 | ||||
Third
Quarter
|
4.490 | 3.050 | ||||||
Second
Quarter
|
4.100 | 2.080 | ||||||
First
Quarter
|
3.000 | 2.380 |
On March
27, 2009, the closing sales price for our common stock was $0.85 and there were
558 shareholders of record.
Securities
authorized for issuance under equity compensation plans.
We have
granted options to certain officers, directors and key employees to purchase
shares of our common stock. Each option vests according to a schedule
designed by our board of directors, not to exceed four 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 our 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,
2008:
Plan Category
|
Number of securities to
be issued upon exercise of
options, warrants & rights
|
Weighted average exercise
price of outstanding
options, warrants & rights
|
Number of securities
remaining available for
future issuance under
equity compensation plans
|
|||||||||
Equity
compensation plans approved by security holders
|
1,444,134 | $ | 2.34 | 700,000 | ||||||||
Equity
compensation plans not approved by security holders
|
None
|
— |
None
|
|||||||||
Total
|
1,443,134 | $ | 2.34 | 700,000 |
15
Stock
Performance Table
The
following table represents a comparison of the five year total return of our
common stock to the NASDAQ Composite Index, the S&P 600 Small Cap Index and
the S&P Retail Index for the period from January 1, 2003 to December 31,
2008. The comparison assumes $100 was invested on December 31,
2003 and dividends, if any, were reinvested for all years ending
December 31.
Comparison
of Five Year Cumulative Return
|
|||||||||||||||||
Date:
|
DGSE
Common Stock
|
NASDAQ
Composite Index
|
S&P Retail Index
|
S&P 600 Small
Cap Index
|
|||||||||||||
2003
|
100 | 100 | 100 | 100 | |||||||||||||
2004
|
83 | 111 | 136 | 142 | |||||||||||||
2005
|
59 | 113 | 134 | 142 | |||||||||||||
2006
|
75 | 124 | 146 | 172 | |||||||||||||
2007
|
490 | 197 | 143 | 199 | |||||||||||||
2008
|
42 | 78 | 73 | 73 |
On June
27, 2006 stockholders of the Company approved the adoption of the 2006 Equity
Incentive Plan (the “2006 Plan). During the year ended December 31, 2007, there
were 50,000 options granted to our non-employee directors under this plan and,
as a result, there are 700,000 shares available for future grants under the 2006
Plan.
16
ITEM
7.
|
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS.
|
CAUTIONARY
STATEMENT REGARDING RISKS AND UNCERTAINTIES THAT MAY AFFECT FUTURE
RESULTS
Forward-Looking
Statements
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. Forward-looking statements generally can be identified by
the use of forward-looking terminology, such as "may," "will," "would,"
"expect," "intend," "could," "estimate," "should," "anticipate" or
"believe." We intend 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 our ability to control, and, in many cases, we cannot predict all of the
risks and uncertainties that could cause our 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 us 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 under the section “Risk Factors” and elsewhere in
this report. These factors are not intended to be an all-encompassing list of
risks and uncertainties that may affect the operations, performance, development
and results of our business. Readers are cautioned not to place undue reliance
on these forward-looking statements, which speak only as of the date
hereof. We undertake 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 our business strategy or planned capital expenditures, store growth
plans, or to reflect the occurrence of unanticipated events.
Critical
Accounting Policies and Estimates
Our
significant accounting policies are disclosed in Note 1 of our consolidated
financial statements. The following discussion addresses our most critical
accounting policies, which are those that are both important to the portrayal of
our financial condition and results of operations and that require significant
judgment or use of complex estimates.
Inventories.
Jewelry and other inventories are valued at the lower
of cost or market. Bullion is valued at the lower-of-cost-or-market
(average cost). See also “Critical Accounting
Estimates”.
Impairment of
Long-Lived and Amortized Intangible Assets. The Company performs
impairment evaluations of its long-lived assets, including property, plant and
equipment and intangible assets with finite lives, including the customer base
acquired in the Superior acquisition, whenever business conditions or events
indicate that those assets may be impaired. When the estimated future
undiscounted cash flows to be generated by the assets are less than the carrying
value of the long-lived assets, the assets are written down to fair market value
and a charge is recorded to current operations. Based on our
evaluations no impairment was required as of December 31, 2008.
Impairment of
Goodwill and Indefinite-Lived Intangible Assets. Goodwill and
indefinite-lived intangible assets are tested for impairment annually, or more
frequently if events or changes in circumstances indicate that the assets might
be impaired. The Company performs its annual review at the beginning of
the fourth quarter of each fiscal year.
The
Company evaluates the recoverability of goodwill by estimating the future
discounted cash flows of the businesses to which the goodwill relates.
Estimated cash flows and related goodwill are grouped at the reporting unit
level. A reporting unit is an operating segment or, under certain
circumstances, a component of an operating segment that constitutes a
business. When estimated future discounted cash flows are less than the
carrying value of the net assets and related goodwill, an impairment test is
performed to measure and recognize the amount of the impairment loss, if
any. Impairment losses, limited to the carrying value of goodwill,
represent the excess of the carrying amount of a reporting unit’s goodwill over
the implied fair value of that goodwill. In determining the estimated
future cash flows, the Company considers current and projected future levels of
income as well as business trends, prospects and market and economic
conditions.
17
The
Company cannot predict the occurrence of certain events that might adversely
affect the carrying value of goodwill and indefinite-lived intangible assets.
Such events may include, but are not limited to, the impact of the economic
environment, a material negative change in relationships with significant
customers, or strategic decisions made in response to economic and competitive
conditions. See “Critical Accounting Estimates.”
Revenue
Recognition. Revenue is generated from wholesale
and retail sales of rare coins, precious metals, bullion and second-hand
jewelry. The recognition of revenue varies for wholesale and retail transactions
and is, in large part, dependent on the type of payment arrangements made
between the parties. The Company recognizes sales on an F.O.B. shipping point
basis.
The
Company sells rare coins to other wholesalers/dealers within its industry on
credit, generally for terms of 14 to 60 days, but in no event greater than one
year. The Company grants credit to new dealers based on extensive
credit evaluations and for existing dealers based on established business
relationships and payment histories. The Company generally does not obtain
collateral with which to secure its accounts receivable when the sale is made to
a dealer. The Company maintains reserves for potential credit losses
based on an evaluation of specific receivables and its historical experience
related to credit losses. See “Critical Accounting
Estimates”.
Revenues
for monetary transactions (i.e., cash and receivables) with dealers are
recognized when the merchandise is shipped to the related dealer.
The
Company also sells rare coins to retail customers on credit, generally for terms
of 30 to 60 days, but in no event greater than one year. The Company
grants credit to new retail customers based on extensive credit evaluations and
for existing retail customers based on established business relationships and
payment histories. When a retail customer is granted credit, the Company
generally collects a payment of 25% of the sales price, establishes a payment
schedule for the remaining balance and holds the merchandise as collateral as
security against the customer’s receivable until all amounts due under the
credit arrangement are paid in full. If the customer defaults in the
payment of any amount when due, the Company may declare the customer’s
obligation in default, liquidate the collateral in a commercially reasonable
manner using such proceeds to extinguish the remaining balance and disburse any
amount in excess of the remaining balance to the customer.
Under
this retail arrangement, revenues are recognized when the customer agrees to the
terms of the credit and makes the initial payment. We have a
limited-in-duration money back guaranty policy (as discussed
below).
In
limited circumstances, the Company exchanges merchandise for similar merchandise
and/or monetary consideration with both dealers and retail customers, for which
the Company recognizes revenue in accordance with SFAS 153, “ Exchanges of Nonmonetary Assets – An
Amendment of APB Opinion No. 29.” When the Company exchanges merchandise
for similar merchandise and there is no monetary component to the exchange, the
Company does not recognize any revenue. Instead, the basis of the merchandise
relinquished becomes the basis of the merchandise received, less any indicated
impairment of value of the merchandise relinquished. When the Company exchanges
merchandise for similar merchandise and there is a monetary component to the
exchange, the Company recognizes revenue to the extent of monetary assets
received and determine the cost of sale based on the ratio of monetary assets
received to monetary and non-monetary assets received multiplied by the cost of
the assets surrendered.
The
Company has a return policy (money-back guarantee). The policy covers
retail transactions involving graded rare coins only. Customers may return
graded rare coins purchased within 7 days of the receipt of the rare coins for a
full refund as long as the rare coins are returned in exactly the same condition
as they were delivered. In the case of rare coin sales on account, customers may
cancel the sale within 7 days of making a commitment to purchase the rare coins.
The receipt of a deposit and a signed purchase order evidences the commitment.
Any customer may return a coin if they can demonstrate that the coin is not
authentic, or there was an error in the description of a graded coin.
18
Revenues
from the sale of consigned goods are recognized as commission income on such
sale if the Company is acting as an agent for the consignor. If in the process
of selling consigned goods, the Company makes an irrevocable payment to a
consignor for the full amount due on the consignment and the corresponding
receivable from the buyer(s) has not been collected by the Company at that
payment date, the Company records that payment as a purchase and the sale of the
consigned good(s) to the buyer as revenue as the Company has assumed all
collection risk.
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.
Income
Taxes. Income taxes are estimated for each jurisdiction
in which we operate. This involves assessing the current tax exposure together
with temporary differences resulting from differing treatment of items for tax
and financial statement accounting purposes. Any resulting deferred tax assets
are evaluated for recoverability based on estimated future taxable income. To
the extent that recovery is deemed not likely, a valuation allowance is
recorded. See “Critical Accounting Estimates”.
Inventories. The
Company acquires a majority of its retail jewelry inventory from individuals
that is pre-owned. The Company acquires the jewelry based on its own
internal estimate of the fair market value of the items offered for sale
considering factors such as the current spot market prices of precious metals
and current demand for the items offered for sale. Because the
overall market value for precious metals fluctuates, these fluctuations could
have either a positive or negative impact to the profitability of the
Company. The Company monitors these fluctuations to evaluate any
impairment to its retail jewelry inventory.
Allowance
for Doubtful Accounts. The allowance for doubtful accounts requires
management to estimate a customer’s ability to satisfy its obligations.
The estimate of the allowance for doubtful accounts is particularly critical in
the Company’s wholesale coin segment where a significant amount of the Company’s
trade receivables are recorded. The Company evaluates the collectability
of receivables based on a combination of factors. In circumstances where
the Company is aware of a specific customer’s inability to meet its financial
obligations, a specific reserve is recorded against amounts due to reduce the
net recognized receivable to the amount reasonably expected to be
collected. Additional reserves are established based upon the Company’s
perception of the quality of the current receivables, including the length of
time the receivables are past due, past experience of collectability and
underlying economic conditions. If the financial condition of the
Company’s customers were to deteriorate resulting in an impairment of their
ability to make payments, additional reserves would be required.
Impairment of
Goodwill and Indefinite-Lived Intangible Assets. In evaluating
the recoverability of goodwill, it is necessary to estimate the fair value of
the reporting units. The estimate of fair value of intangible assets is
generally determined on the basis of discounted future cash flows. The
estimate of fair value of the reporting units is generally determined on the
basis of discounted future cash flows supplemented by the market approach.
In estimating the fair value, management must make assumptions and projections
regarding such items as future cash flows, future revenues, future earnings and
other factors. The assumptions used in the estimate of fair value are
generally consistent with the past performance of each reporting unit and are
also consistent with the projections and assumptions that are used in current
operating plans. Such assumptions are subject to change as a result of
changing economic and competitive conditions. The rate used to discount
estimated cash flows is a rate corresponding to the Company’s cost of capital,
adjusted for risk where appropriate, and is dependent upon interest rates at a
point in time. There are inherent uncertainties related to these factors
and management’s judgment in applying them to the analysis of goodwill
impairment. It is possible that assumptions underlying the impairment
analysis will change in such a manner to cause further impairment of goodwill,
which could have a material impact on the Company’s results of
operations.
19
During
the 4th quarter
of 2008, given the sustained decline in the price of the Company’s Common Stock
during 2008 when its share price approximated book value, continued operating
losses within the auction segment, as well as further deterioration in credit
markets and the macro-economic environment, the Company determined that the
appropriate triggers had been reached to perform additional impairment testing
on goodwill and its indefinite-lived intangible assets.
To derive
the fair value of its reporting units, the Company performed extensive valuation
analyses, utilizing both income and market approaches. Under the income
approach, the Company determined fair value based on estimated future cash flows
discounted by an estimated weighted-average cost of capital, which reflects the
overall level of inherent risk of a reporting unit and the rate of return an
outside investor would expect to earn. Estimated future cash flows were
based on the Company’s internal projection models, industry projections and
other assumptions deemed reasonable by management. For the impairment
analysis, the Company used a weighted-average cost of capital of 20% and a
terminal growth rate of 3%. Under the market approach, the Company
evaluated the fair value of its reporting units based on the overall actual
market capitalization trend of the Company as compared to the net book value of
the Company. Changes in estimates or the application of alternative
assumptions could produce significantly different results.
As a
result of this analysis, $8,185,443 of goodwill was written off during the
4th
quarter of fiscal 2008 relating to the goodwill resulting from the Superior
Galleries acquisition. The evaluation of other long-lived intangible
assets relating to the Superior Galleries acquisition, including tradenames,
were not written off due to new business generated from the Superior Galleries,
Inc.’s acquired tradenames through the establishment of two new entities,
Superior Estate Buyers and Superior Precious Metals, which attracted
approximately $9.8 million and $1.8 million, respectively, in revenues in their
first full year of operations in 2008. These charges were driven by
current projections and valuation assumptions that reflected the Company’s
belief that the Superior Galleries, Inc. wholesale auction and coin segments
would not sustain adequate growth and profitability to generate cash flow,
especially in the current downtown in the economy.
The
analysis of the wholesale watch sales division resulting from the acquisition of
Fairchild with a carrying value of goodwill of $837,117 resulted in no
impairment as its estimated future discounted cash flows significantly exceeded
the net assets and related goodwill.
Income
Taxes. The Company records deferred income tax assets and liabilities for
differences between the book basis and tax basis of the related net assets. The
Company records a valuation allowance, when appropriate, to adjust deferred tax
asset balances to the amount management expects to realize. Management
considers, as applicable, the amount of taxable income available in carryback
years, future taxable income and potential tax planning strategies in assessing
the need for a valuation allowance. The Company has recorded the net present
value of the future expected benefits of the net operating loss (NOL)
carryforward related to its subsidiary Superior Galleries, Inc. due to IRS loss
limitation rules. The Company will require future taxable income to
fully realize the net deferred tax asset resulting from the NOL.
As of
January 1, 2007, the Company adopted FASB Interpretation No. 48, Accounting for Uncertainty in Income
Taxes, an Interpretation of FASB Statement No. 109, Accounting for Income
Taxes (“FIN 48”). The adoption did not have a material impact on the
Company’s consolidated financial statements or effective tax rate and did not
result in any unrecognized tax benefits.
Interest
costs and penalties related to income taxes are classified as interest expense
and general and administrative costs, respectively, in the Company’s
consolidated financial statements. For the years ended December 31, 2008
and 2007, the Company did not recognize any interest or penalty expense related
to income taxes. It is determined not to be reasonably likely for the amounts of
unrecognized tax benefits to significantly increase or decrease within the next
12 months. The Company is currently subject to a three year statute of
limitations by major tax jurisdictions. The Company and its subsidiaries file
income tax returns in the U.S. federal jurisdiction.
20
Results
of Operations
Comparison
of the Years ended December 31, 2008 and 2007
Revenues
increased by $43,749,984 or 71.2%, in 2008. This increase was
primarily the result of a $24,296,000 or 114.9% increase in the sale of precious
metals products, a $17,254,000, or 89.2% increase in retail jewelry sales and a
$1,992,000, or 14.3% increase in rare coin sales. The increases in precious
metals, rare coin and jewelry sales were due to a price increase in gold
products ($13,435,000), the acquisition of Superior Galleries
($14,500,000) and Euless Gold and Silver ($8,600,000). Consumer loan service
fees increased by $242,440 in 2008 due to increased loans outstanding during the
year. Cost of goods as a percentage of sales increased to 86.7% in
2008 from 84.1% in 2007 and gross margins decreased to 12.8% in 2008 from 15.9%
in 2007. This decrease was due to the significant increase in
precious metal sales which have a much lower margin than jewelry and rare coins
revenues.
Selling,
general and administrative expenses increased $1,520,262 or 18.3% during the
year. This increase was due to the start up of Superior Precious metals
($692,000), Superior Estate Buyers ($396,000), American Gold and Silver Exchange
($160,000) and the opening of our second pawn shop during 2007
($440,000). Depreciation and amortization increased by $236,975, or
95.6%, during 2008 due to additional assets being purchased through our recent
acquisitions and depreciation on our new facility in Dallas, Texas. The increase
in interest expense was due to the additional debt related to the Superior
acquisition. The loss from discontinued operations was the result of the
discontinuing the operations of our live auction segment and closing of our pay
day loan stores.
At
December 31, 2008, management believed the equity shares owned in three publicly
traded stocks had declined on an other than temporary basis as these stocks are
thinly traded and have market values of less than $ .01 per share. As a result,
these investments were written-off in the amount of $115,992. this charge is
included in other expense during 2008 net of interest earned during the year.
Other income during 2007 was the result of the gain on the sale of the land and
building at which our Dallas retail store and corporate headquarters were
previously located.
During
2008, the Company reflected $8,185,443 of goodwill relating to the acquisition
of Superior Galleries. Inc. in May 2007. Under SFAS No. 142, the Company is
required to undertake an annual impairment test at its year end or when there is
a triggering event. In addition to the annual impairment review, there were a
number of triggering events in the fourth quarter due to the significant
operating losses of Superior and the impact of the economic downturn on
Superior’s operations and the decline in the Company’s share price resulting in
a substantial discount of the market capitalization to tangible net asset value.
An evaluation of the recorded goodwill was undertaken, which considered two
methodologies to determine the fair-value of the entity:
|
·
|
A
market capitalization approach, which measure market capitalization at the
measurement date.
|
|
·
|
A
discounted cash flow approach, which entails determining fair value using
a discounted cash flow methodology. This method requires
significant judgment to estimate the future cash flow and to determine the
appropriate discount rates, growth rates, and other
assumptions.
|
Each of
these methodoligies the Company believes has merit, and resulted in the
determination that goodwill was impaired. Accordingly, to reflect the
impairment, the Company recorded a non-cash charge of $8,185,443, which
eliminated the value of the goodwill related to Superior.
In
November 2008 we decided to discontinue the live auction segment of the
Company’s business activities. This decision was based on the substantial losses
being incurred by this operating segment during 2008. As a result, the operating
results of the auction segment have been reclassified to discontinued operations
for both 2008 and 2007. During 2008 the auction segment incurred a pretax loss
of $3,227,151which includes $848,000 related to the impairment of goodwill
associated with the Superior acquisition in May 2007..
As a
result, operating results from this business segment has been reclassified to
discontinued operations for all periods presented
21
Income
tax expense is directly affected by the levels of pretax income and
non-deductible permanent differences related to the goodwill
impairment. The Company’s effective tax rate was 11.4% and 23% for
the year ended December 31, 2008 and 2007, respectively. The
provisions for deferred taxes increased due to the impairment of goodwill in
2008
Comparison
of the Years ended December 31, 2007 and 2006
Revenues
increased by $17,612,328, or 40.1%, in 2007. This increase was
primarily the result of a $4,901,000, or 30.1% increase in the sale of precious
metals products, a $2,819,000, or 17.1% increase in retail jewelry sales, and a
$9,224,000, or 196.4% increase in rare coin sales. The increases in precious
metals, rare coin and jewelry sales were due to a 31.0% price increase in gold
products ($1,145,000) and the acquisition of Superior Galleries ($9,765,000) and
Euless Gold and Silver ($4,034,000). Consumer loan service fees increased by
$118,641 in 2007 due to increased loans outstanding during the year. Management
fees in the amount of $250,000 were derived from a management agreement between
the Company and Superior Galleries prior to the acquisition. Cost of goods as a
percentage of sales increased to 84.9% in 2007 from 84.3% in 2006 and gross
margins decreased to 15.1% in 2007 from 15.7% in 2006. This decrease
was due to the significant increase in precious metal sales which have a much
lower margin than jewelry and rare coins revenues. Selling, general and
administrative expenses increased by $2,814,975, or 50.9%. This increase was
primarily due to the acquisition of Superior Galleries and Euless Gold and
Silver. These acquisitions accounted for $1,807,000 of the increase. In
addition, administrative cost related to the start up of Superior Precious
metals, Superior Estate Buyers, American Gold and Silver Exchange and the
opening of our second pawn shop totaled $408,000. Depreciation and amortization
increased by $110,543, or 99.4%, during 2007 due to additional assets being
purchased through our recent acquisitions. The increase in interest expense was
due to the additional debt related to the Superior acquisition. The loss from
discontinued operations was the result of the closing of our pay day loan
stores.
Historically,
changes in the market prices of precious metals have had a significant impact on
both revenues and cost of sales in the rare coin and precious metals segments in
which we operate. It is expected that due to the commodity nature of
these products, future price changes for precious metals will continue to be
indicative of our 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 products.
Other
income during 2007 and 2006 were the result of interest earned during
the years,.
In
November 2008 we decided to discontinue the live auction segment of the
Company’s business activities. This decision was based on the substantial losses
being incurred by this operating segment during 2008 and 2007. As a result, the
operating results of the auction segment have been reclassified to discontinued
operations for both 2008 and 2007. During 2008 and the auction segment incurred
a pretax loss of $3,227,151 which includes $848,000 related to the impairment of
goodwill associated with the Superior acquisition in May 2007. During 2007 the
auction segment incurred a pretax profit of $54,952.
On July
13, 2007, we sold the loan balances from our American Pay Day Center locations
for $77,496 and discontinued operations in those locations. The
receivables sold, including interest due, had a balance of $120,573 at the time
of the sale. The sales price was determined based on the age of the
outstanding receivables. As a result of the sale and discontinued
operations, we recognized a pretax loss of $107,838 on the disposal and a pretax
loss on discontinued operations of $51,938 for the year ended December 31,
2007.
As a
result, operating results from these business segments have been reclassified to
discontinued operations for all periods presented.
Income
tax expense is directly affected by the levels of pretax income and
non-deductible permanent differences related to the goodwill
impairment. The Company’s effective tax rate was 23% and 34% for the
year ended December 31, 2007 and 2006, respectively.
Liquidity
and Capital Resources
During
the three years ended December 31, 2008 cash flows from operating activities
totaled ($989,143), ($4,342,516), and 247,793, respectively. Cash used in
operating activities during 2008 was primarily the result of an increase in
inventory ($3,077,051), a decrease in accounts payable and accrued expenses
($668,000), and a decrease in federal income taxes payable ($580,031). These
uses of cash were partially offset by a decrease in trade receivables
($1,473,133) and an increase in customer deposits. The increase in inventory and
customer deposits was primarily the result of a 31% price increase in gold
products and a significant increase in the demand for precious metal products.
Cash used in operating activities during 2007 was primarily the result of an
increase in inventory ($928,838) and trade receivables ($3,345,559). These
increases were primarily the re the result of the acquisition of Superior
Galleries, Inc. in May of 2007.
22
During
the three years ended December 31, 2008 cash flows from investing activities
totaled ($1,222,178), ($3,921,535) and ($658,790). These uses of cash were
primarily the result of building improvements ($1,130,602) during 2008, the
purchase of a new facility ($3,780,554) during 2007 and cost related to the
acquisition of Superior Galleries, Inc.($569,782)during 2007.During 2007 the
Company sold it’s former corporate offices and store for cash in the amount of
$924,742.
During
the three years ended December 31, 2008 cash flows from financing activities
totaled $1,919,205, $7,590,314 and $578,445, respectively. These sources of cash
were the result of borrowings against the Stanford International Bank line of
credit ($2,500,000) during 2008, and ($6,991,578) during 2007 and a mortgage
loan on our new corporate office and store($2,441,992). During the three years
ended December 31, 2008 the Company paid off debt in the amount of $580,795,
1,982, and 668,908, respectively.
We expect
capital expenditures to total approximately $250,000 during the next twelve
months. It is anticipated that these expenditures will be funded from
working capital. As of December 31, 2008 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 us extended payment
terms to finance the need for jewelry inventory growth and our management
believes that we will continue to do so in the future. Any
significant increase in wholesale accounts receivable will be financed under a
new bank credit facility or from short-term loans from individuals.
Our
ability to finance our operations and working capital needs are dependent upon
management’s ability to negotiate extended terms or refinance its
debt. We have historically renewed, extended or replaced short-term
debt as it matures and management believes that we will be able to continue to
do so in the near future.
From time
to time, we have adjusted our 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 in order to meet unforeseen working capital
requirements.
In
December 2005, we entered into a revolving credit facility with Texas
Capital Bank, N.A., which currently permits borrowings up to a maximum principal
amount of $4.03 million. Borrowings under the revolving credit facility are
collateralized by a general security interest in substantially all of our assets
(other than the assets of Superior). As of December 31, 2008, approximately
$4.0 million was outstanding under the term loan and revolving credit
facility. If we were to default under the terms and conditions of the revolving
credit facility, Texas Capital Bank would have the right to accelerate any
indebtedness outstanding and foreclose on our assets in order to satisfy our
indebtedness. Such a foreclosure could have a material adverse effect on our
business, liquidity, results of operations and financial position. This credit
facility matures in June 2009.
Upon the
consummation of our acquisition of Superior, and after the exchange by Stanford
of $8.4 million of Superior debt for shares of Superior common stock, Superior
amended and restated its credit facility with Stanford. The amended and restated
commercial loan and security agreement, which we refer to as the loan agreement,
decreased the available credit line from $19.89 million to $11.5 million,
reflecting the $8.4 million debt exchange. Interest on the outstanding principal
balance will continue to accrue at the prime rate, as reported in the Wall
Street Journal or, during an event of default, at a rate 5% greater than the
prime rate as so reported.
23
Loan
proceeds can only be used for customer loans inventory purchases and receivables
consistent with specified loan policies and procedures and for permitted
inter-company transactions. Permitted inter-company transactions are loans or
dividends paid to us or our other subsidiaries. We guaranteed the repayment of
these permitted inter-company transactions pursuant to a secured subordinated
guaranty in favor of Stanford. In connection with the secured
guarantee, Stanford and Texas Capital Bank, N.A., our primary lender, entered
into an intercreditor agreement with us, and we entered into a subordination
agreement with Superior, both of which subordinate Stanford's security interests
and repayment rights to those of Texas Capital Bank. As of December
31, 2008, approximately $9.2 million was outstanding under this credit
facility and there were no intercompany transactions outstanding.
This
credit facility matures on May 1, 2011, provided that in case any of several
customary events of default occurs, Stanford may declare the entire principal
amount of both loans due immediately and take possession and dispose of the
collateral described below. An event of default includes, among others, the
following events: failure to make a payment when due under the loan agreement;
breach of a covenant in the loan agreement or any related agreement; a
representation or warranty made in the loan agreement or related agreements is
materially incorrect; a default in repayment of borrowed money to any person; a
material breach or default under any material contract; certain bankruptcy or
insolvency events; and a default under a third-party loan. Superior
is obligated to repay the first revolving loan from the proceeds of the
inventory or other collateral purchased with the proceeds of the
loan.
The loans
are secured by a first priority security interest in substantially all of
Superior’s assets, including inventory, accounts receivable, promissory notes,
books and records and insurance policies, and the proceeds of the
foregoing. In addition, pursuant to the limited secured guaranty and
intercreditor arrangements described above, Stanford would have a second-order
security interest in all of our accounts and inventory to the extent of
intercompany transactions.
The loan
agreement includes a number of customary covenants applicable to Superior,
including, among others: punctual payments of principal and interest under the
credit facility; prompt payment of taxes, leases and other indebtedness;
maintenance of corporate existence, qualifications, licenses, intellectual
property rights, property and assets; maintenance of satisfactory insurance;
preparation and delivery of financial statements for us and separately for
Superior in accordance with generally accepted accounting principles, tax
returns and other financial information; inspection of offices and collateral;
notice of certain events and changes; use of proceeds; notice of governmental
orders which may have a material adverse effect, SEC filings and stockholder
communications; maintenance of property and collateral; and payment of Stanford
expenses.
In
addition, Superior has agreed to a number of negative covenants in the loan
agreement, including, among others, covenants not to: create or suffer a lien or
other encumbrance on any collateral, subject to customary exceptions; incur,
guarantee or otherwise become liable for any indebtedness, subject to customary
exceptions; acquire indebtedness of another person, subject to customary
exceptions and permitted inter-company transactions; issue or acquire any shares
of its capital stock; pay dividends other than permitted inter-company
transactions or specified quarterly dividends, or directors’ fees; sell or
abandon any collateral except in the ordinary course of business or consolidate
or merge with another entity; enter into affiliate transactions other than in
the ordinary course of business on fair terms or permitted inter-company
transactions; create or participate in any partnership or joint venture; engage
in a new line of business; pay principal or interest on subordinate debt except
as authorized by the credit facility; or make capital expenditures in excess of
$100,000 per fiscal year
24
We have been informed that on February 19, 2009, a US district
court placed SIBL under
the supervision of a receiver and that the court enjoined SIBL's creditors and
other persons from taking certain actions related to SIBL or its
assets. In addition,
on the same date, Antiguan Financial Services Regulatory Commission appointed a
Receiver for Stanford International Bank Ltd. This action was subsequently
ratified by the High Court of Justice in Antigua and Barbuda. As a
result of SIBL's current status, we do not believe that Superior will be able
to borrow additional
funds under either revolving loan, including any amounts Superior is obligated
to repay to SIBL pursuant to the repayment provisions applicable to the first
revolving note. We believe that certain terms
ofagreements entered into by us, Superior and/or
SIBL and its affiliates in connection with our acquisition of
Superiorhave been breached
by SIBL or its affiliates, and we are evaluating available remedies,
including but not limited to damages from responsible parties. While Superior
does not currently require additional funds under the SIBL credit facility,
should the need arise and Superior is unable to replace this credit facility the
operations and performance of Superior could be materially adversely
affected.
On
October 17, 2007, we closed on the purchase of our new headquarters
location. As a result, we assumed a new loan with a remaining
principal balance of $2,323,484 and an interest rate of 6.70%. The
loan has required monthly payments of $20,192 with the final payment due on
August 1, 2016.
|
Payments due by period
|
||||||||||||||||||||
Contractual Cash Obligations
|
Total
|
2009
|
2010 - 2011
|
2012 – 2013
|
Thereafter
|
||||||||||||||||
Notes
payable
|
$ | 191,078 | $ | 191,078 | $ | — | $ | — | $ | — | |||||||||||
Long-term
debt and capital leases
|
15,910,737 | 4,195,025 | 9,403,271 | 469,381 | 1,843,060 | ||||||||||||||||
Operating
Leases
|
2,643,812 | 658,822 | 1,237,026 | 747,964 | — | ||||||||||||||||
Total
|
$ | 18,745,627 | $ | 5,044,925 | $ | 10,640,297 | $ | 1,217,345 | $ | 1,843,060 |
In
addition, we estimate that we will pay approximately $950,000 in interest during
the next twelve months.
Off-Balance
Sheet Arrangements.
We have
no off-balance sheet arrangements that have or are reasonably likely to have a
current or future effect on our financial condition, changes in financial
condition, revenues or expenses, results of operations, liquidity, capital
expenditures or capital resources that is material to stockholders.
ITEM
7A. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK.
Market
Risk
The
following discussion about our market risk disclosures involves forward-looking
statements. Actual results could differ materially from those projected in the
forward-looking statements. We are exposed to market risk related to changes in
interest rates and precious metal values. We also are exposed to
regulatory risk in relation to our pawn loans. We do not use
derivative financial instruments.
Our
earnings and financial position may be affected by changes in precious metal
values and the resulting impact on pawn lending and jewelry sales. The proceeds
of scrap sales and our ability to liquidate excess jewelry inventory at an
acceptable margin are dependent upon gold values. The impact on our
financial position and results of operations of a hypothetical change in
precious metal values cannot be reasonably estimated.
ITEM
8. FINANCIAL STATEMENTS.
|
(a)
|
Financial
Statements (see pages 46 - 72 of
this report).
|
ITEM
9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE.
None.
25
ITEM
9A. CONTROLS AND PROCEDURES.
Disclosure
Controls and procedures
An
evaluation was performed under the supervision and with the participation of our
management, including our Chief Executive Officer and Chief Financial Officer,
of the effectiveness of the design and operation of our disclosure controls and
procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of
1934) as of the end of the period covered by this annual report. Our
disclosure controls and procedures are designed to ensure that information
required to be disclosed by us in the reports we file or submit under the
Securities Exchange Act of 1934, as amended, is (1) recorded, processed,
summarized and reported within the time periods specified in the Securities and
Exchange Commission’s rules and forms and (2) accumulated and communicated to
our management, including our Chief Executive Officer, to allow timely decisions
regarding required disclosure. Based on that evaluation, our
management, including our Chief Executive Officer and our Chief Financial
Officer, concluded that our disclosure controls and procedures were
effective.
No
changes in internal controls over financial reporting occurred during the last
fiscal quarter that has materially affected, or is reasonably likely to
materially affect, our control over financial reporting.
Management’s
Report on Internal Control Over Financial Reporting
Management
is responsible for establishing and maintaining adequate internal control over
financial reporting as such term is defined in Exchange Act Rule 13a-15(f).
The Company’s internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles.
Under the
supervision and with the participation of our Chief Executive Officer and Chief
Financial Officer, management assessed the effectiveness of the Company’s
internal control over financial reporting as of December 31, 2008 using the
criteria set forth by the Committee of Sponsoring Organizations of the Treadway
Commission in Internal
Control — Integrated Framework. Based on this assessment, management
has concluded that, as of December 31, 2008, the Company’s internal control
over financial reporting was effective to provide reasonable assurance regarding
the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted
accounting principles based on such criteria.
This
Annual Report on Form 10-K does not include an attestation report of the
Company’s registered public accounting firm regarding internal control over
financial reporting. Management’s report was not subject to attestation by the
Company’s registered public accounting firm pursuant to temporary rules of the
Securities and Exchange Commission that permit the Company to provide only
management’s report in this Annual Report on Form 10-K
Our
management, including our Chief Executive Officer and Chief Financial Officer,
does not expect that our disclosure controls or internal controls over financial
reporting will prevent all errors or all instances of fraud. A control system,
no matter how well designed and operated, can provide only reasonable, not
absolute, assurance that the control system’s objectives will be met. Further,
the design of a control system must reflect the fact that there are resource
constraints, and the benefits of controls must be considered relative to their
costs. Because of the inherent limitations in all control systems, no evaluation
of controls can provide absolute assurance that all control issues and instances
of fraud, if any, within our company have been detected. These inherent
limitations include the realities that judgments in decision-making can be
faulty, and that breakdowns can occur because of simple error or mistake.
Controls can also be circumvented by the individual acts of some persons, by
collusion of two or more people, or by management override of the controls. The
design of any system of controls is based in part upon certain assumptions about
the likelihood of future events, and any design may not succeed in achieving its
stated goals under all potential future conditions. Over time, controls may
become inadequate because of changes in conditions or deterioration in the
degree of compliance with policies or procedures. Because of the inherent
limitation of a cost-effective control system, misstatements due to error or
fraud may occur and not be detected.
26
Changes
in Internal Control over Financial Reporting
For the
year ended December 31, 2008, we made a number of changes in our internal
control over financial reporting (as defined in Rule 13a-15(f) under the
Securities Exchange Act of 1934) that have materially affected, or are
reasonably likely to materially affect, our internal control over financial
reporting. These changes were made in response to our assessment of
internal control over financial reporting for the year ended December 31,
2007. At that time and in conjunction with our auditors, management
identified five material weaknesses in our internal control over financial
reporting.
We
identified two material weaknesses in our internal controls over cash. The
Controller performed the bank reconciliation. There was no review of the bank
reconciliation to ensure that cash per the bank statement agreed to the general
ledger and that there were no long-term outstanding reconciling
items. The CFO now reviews and approves the bank statements and
reconciliations to remediate the control weakness. The second material weakness
in the cash area related to internal controls around wire transfers. The CFO
initiated and released most wire transfers without prior written or documented
approval. The CEO, CFO, President or a Vice-President is now required
to approve all wire transfers.
We also
identified a material weakness in accounts payable. The quarterly accrual was
not reviewed for accuracy nor was there a documented approval of the accounts
payable accrual. There was a risk that liabilities may have been
understated for the period reported. Management has taken corrective action to
include a review of accrued liabilities by someone other than the person
performing the accrual.
We also
identified a material weakness in the approval process around changes made to
the general ledger structure. During the reporting period there had
been incomplete and undocumented supervisory review of changes and additions
made to the general ledger accounts. Additionally, a material weakness was
detected in the closing process. The review and approval of the major balance
sheet account reconciliations were undocumented during the closing process.
Management has taken corrective action to improve review procedures for changes
made to the general ledger account structure, reconciliations and closing
procedures. Management has also documented supervisory review and approval of
these general ledger account changes, account reconciliations and closing
procedures.
During
the last fiscal quarter of 2008, there have been no changes in our internal
control over financial reporting (as defined in Rule 13a-15(f) under the
Securities Exchange Act of 1934) that have materially affected, or are
reasonably likely to materially affect, our internal control over financial
reporting.
ITEM
9B. OTHER INFORMATION.
None.
27
PART
III
ITEM
10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE
GOVERNANCE.
The names
of our directors and certain information about them are set forth
below:
Name
|
Age
|
Position and Offices
|
Year First Elected
Director or Appointed
Officer of Company
|
|||
Dr.
L.S. Smith, Ph.D.
|
62
|
Chairman
of the board of directors, chief executive officer, secretary and
director
|
1980
|
|||
William
H. Oyster
|
56
|
Director,
president, and chief operating officer
|
1990
|
|||
Dr.
William P. Cordeiro, Ph.D.
|
65
|
Director
|
1999
|
|||
Craig
Alan-Lee
|
52
|
Director
|
2004
|
|||
David
Rector
|
|
62
|
|
Director
|
|
2007
|
Dr. L.S. Smith has served as
chairman of our board of directors, and as our chief executive officer and
secretary, since 1980. Dr. Smith obtained a B.A. in political science
from UCLA in 1967, an M.P.A. in public administration from UCLA in 1969, and an
M.A., E.M.B.A. and Ph.D. in management form the Peter Drucker School of
Management in 1981, 1984 and 1991, respectively.
Mr. William H. Oyster has
served as a director, and as our president and chief operating officer, since
January 1990. Mr. Oyster obtained an A.A.S. in nursing from Grayson
County College in 1976.
Dr. William P. Cordeiro, Ph.D.
has served as a director and an independent member and financial expert
of our audit committee since June 1999. He has served as the director
of the Smith School of Business and Economics, California State University –
Channel Islands since June 1990. He has also been a partner of
Bartik, Cordeiro & Associates, Inc., a management consulting firm, since
January 1990. Dr. Cordeiro obtained a B.S. in biology from the
University of San Francisco in 1966, an M.B.A. in finance from University of
Southern California in 1969, an M.A. in management from Claremont Graduate
School in 1982 and a Ph.D. in executive management from Claremont Graduate
School in 1986.
Mr. Craig Alan-Lee has served
as a director and independent member of our audit committee since December
2004. He has served as a senior loan consultant with Castle Funding,
Inc., a mortgage loan company, since November 1994.
Mr. David Rector has served
as a principal of David Stephen Group, which provides enterprise consulting
services to emerging and developing companies in a variety of industries, since
1985. Prior to that, he served as president, chief executive officer
and chief operating officer of Nanoscience Technologies, Inc., a development
stage company engaged in the development and commercialization of DNA
nanotechnology, from June 2004 to December 2006. He has also served as a
director of Senesco Technologies, Inc., a research and development company
focused on genetic technologies to improve commercial agriculture and to treat
major medical conditions in humans, since 2002, and as a director of Superior
Galleries, Inc. from May 2003 until May 2007. Mr. Rector obtained a
B.S. in business from Murray State University in 1969.
There are
no family relationships among any of our executive officers and
directors.
28
BOARD
AND COMMITTEE MATTERS AND CORPORATE GOVERNANCE MATTERS
Corporate
Governance
We
maintain a corporate governance page on our website which includes our Code of
Business Conduct and Ethics, which includes a whistleblower protection policy
and the charter for our audit committee of our board of
directors. The corporate governance page can be found at www.DGSE.com
by clicking on "About Us" and then on the "DGSE Code of Business Conduct &
Ethics" link.
Our
policies and practices reflect corporate governance initiatives that are
designed to be compliant with the listing requirements of NYSE Amex (formerly
known as the American Stock Exchange) and the corporate governance requirements
of the Sarbanes-Oxley Act of 2002, including:
|
·
|
a
majority of our board members are independent of our company and our
management;
|
|
·
|
all
members of our audit committee are independent (within the meaning of the
NYSE Amex listing standards);
|
|
·
|
the
independent members of our board meet regularly without the presence of
management;
|
|
·
|
we
have a clear code of business conduct and ethics that applies to our
principal executive officers, our directors and all of our employees, and
is monitored by our audit
committee;
|
|
·
|
the
charter of our audit committee clearly establishes its roles and
responsibilities;
|
|
·
|
we
have a specific telephone number available to all employees;
and
|
|
·
|
our
audit committee has procedures in place for the anonymous submission of
employee complaints on accounting, internal accounting controls, or
auditing matters.
|
Board
of Directors
Our board
of directors currently consists of five directors including
Dr. L.S. Smith (chairman), William H. Oyster, Dr. William
P. Cordeiro, Craig Alan-Lee and David Rector. Two directors who were
elected at our 2008 annual meeting, Richard M. Gozia and Mitchell T. Stoltz,
resigned on March 28,2009y. Our board of directors did not appoint
replacements for Mrs. Gozia and Stoltz. During 2008, our board of
directors met four times and acted by unanimous written consent
once. All members of our board were present at each
meeting.
Independence
of the Board of Directors
Our
company is a "controlled company" within the meaning of the NYSE Amex listing
standards because our two largest stockholders, Dr. Smith and Stanford
International Bank, who have entered into a corporate governance agreement with
our company and have filed Schedule 13Ds with the SEC as a group, collectively
hold approximately 64% of the voting power of our
company. Accordingly, we are not obligated to comply with the
independent director requirements of the NYSE Amex listing
standards.
Pursuant
to the corporate governance agreement, four of the directors which Stanford
International Bank and Dr. Smith have the right to nominate must be
"independent" as defined by the corporate governance agreement. The
agreement defines as independent a nominee or director who, amongst other
things, is an individual our board has determined, in the case of a director
standing for re-election, or our board is reasonably likely to determine, in the
case of a new director nominee, to be independent within the meaning of the
applicable listing rules of our principal trading market (currently NYSE Amex)
and the applicable rules under the Exchange Act.
29
After
review of all relevant transactions or relationships between each director, or
any of his or her family members, and us, our senior management and our
independent registered public accounting firm, our board of directors has
affirmatively determined that three of our five directors — Dr. Cordeiro and
Messrs. Alan-Lee and Rector — are "independent" within the meaning of the
applicable NYSE Amex listing standards and our corporate governance
agreement.
Executive
Sessions
As
required under the NYSE Amex listing standards, during the calendar year ended
December 31, 2008, our independent directors met at least once in a regularly
scheduled executive session at which only independent directors were
present.
Stockholder
Communications with the Board of Directors
We have
adopted a formal process by which stockholders may communicate with our board of
directors. Our board recommends that stockholders initiate any
communications with the board in writing and send them in care of the investor
relations department by mail to our principal offices at 11311 Reeder Road,
Dallas, Texas 75229. This centralized process will assist the board
in reviewing and responding to stockholder communications in an appropriate
manner. The name of any specific intended board recipient should be
noted in the communication. The board has instructed the investor
relations department to forward such correspondence only to the intended
recipients; however, the board has also instructed the investor relations
department, prior to forwarding any correspondence, to review such
correspondence and, in its discretion, not to forward certain items if they are
deemed of a personal, illegal, commercial, offensive or frivolous nature or
otherwise inappropriate for the board’s consideration. In such cases,
that correspondence will be forwarded to our corporate secretary for review and
possible response. This information is also contained on our website
at www.DGSE.com.
Information
Regarding the Board of Directors Committees
During
2008, the only standing committee of our board of directors was the audit
committee. Because our company is a "controlled company" under the
NYSE Amex listing standards, our board is not obligated by those listing
standards to have, and our board does not have, a nominating committee or a
compensation committee, or any committees performing similar
functions. The audit committee was established in accordance with
Section 3(a)(58) of the Exchange Act. The charter has been
adopted, and in some cases amended and restated to, among other things, reflect
changes to the NYSE Amex listing standards and SEC rules adopted to implement
provisions of the Sarbanes-Oxley Act of 2002. The charter can be
found on our website at www.DGSE.com. The audit committee oversees
our corporate accounting and financial reporting processes. Among other
functions, the audit committee:
·
|
oversees
our financial reporting process on behalf of the board and reports the
results of their activities to the
board;
|
·
|
sets
the overall corporate "tone" for quality financial reporting, sound
business risk practices, and ethical
behavior;
|
·
|
together
with the board, evaluates and, where appropriate, replaces our independent
registered public accounting firm;
|
·
|
discusses
with our independent registered public accounting firm their independence
from management and our company and the matters included in the written
disclosures required by the Independence Standards
Board;
|
30
·
|
annually
reviews and recommends to the board the selection of our independent
registered public accounting firm;
|
·
|
reviews
the interim financial statements with management prior to the filing of
our quarterly reports on Form 10-Q and discusses the results of the
quarterly review and any other matters required to be communicated to the
audit committee by the independent registered public accounting firm under
generally accepted auditing standards;
and
|
·
|
reviews
with management and the independent registered public accounting firm the
financial statements to be included in our annual report on Form 10-K (or
the annual reports to our stockholders if distributed prior to the filing
of a Form 10-K), including their judgment about the quality, not just
acceptability, of accounting principles, the reasonableness of significant
judgments, and the clarity of the disclosures in the financial statements,
and discusses the results of the annual audit and any other matters
required to be communicated to the audit committee by the independent
registered public accounting firm under generally accepted auditing
standards.
|
The audit
committee has the authority to retain special legal, accounting or other
advisors or consultants as it deems necessary or appropriate to carry out its
duties. The audit committee is currently composed of Dr. William P.
Cordeiro, Ph.D. (chairman), David Rector and Craig Alan-Lee. The
audit committee met four times during
2008.
Our board
of directors annually reviews the NYSE Amex listing standards definition of
independence for audit committee members and has determined that all members of
our audit committee are independent (as independence is currently defined in
Rule 4350(d)(2)(A) of the NYSE Amex listing standards). Our
board of directors has determined that each member of the audit committee is
able to read and understand fundamental financial statements, including our
company’s balance sheet, income statement and cash flow
statement. Our board has also determined that Dr. Cordeiro and Mr.
Rector each qualifies as an "audit committee financial expert," as defined in
applicable SEC rules. In making such determinations, the board made a
qualitative assessment of Dr. Cordeiro’s and Mr. Rector’s level of knowledge and
experience based on a number of factors, including each individual’s formal
education and experience. See "Report of the Audit
Committee."
The audit
committee has discussed with Cornwell Jackson, our independent registered public
accounting firm, the matters required to be discussed by the Statement on
Auditing Standards No. 61 (Communication with Audit Committees). The
audit committee has also received the written disclosures and the letter from
Cornwell Jackson required by Independent Standards Board Standard No. 1
(Independence Discussion with Audit Committees) and the audit committee has
discussed with Cornwell Jackson the independence of Cornwell Jackson as auditors
of the Company. Based on the foregoing, the audit committee
recommended to the board that our audited financial statements be included in
our annual report on Form 10-K for the year ended December 31, 2008 for filing
with the SEC.
Consideration
of Director Nominees
Because
our company is a "controlled company" for purposes of the NYSE Amex listing
standards, our board is not required by those listing standards either to have a
nominating committee or to have director nominees selected, or recommended for
the board’s selection, either by a majority of the independent directors or a
nominating committee composed solely of independent directors. Our
board has not established a standing nominating committee or a charter with
respect to the nominating process. Instead, our entire board is
involved in the director nomination process.
Our board
is of the view that such a committee is unnecessary given that almost all
directors are nominated pursuant to the corporate governance agreement and the
fact that all directors are considered by and recommended to our stockholders by
the full board, which is comprised of a majority of independent
directors. If our board established such a committee, its membership
would consist of the independent directors or a subset of them. To
date, all director nominees recommended to the stockholders have been identified
by stockholders, current directors or management, and we have never engaged a
third party to identify director candidates.
31
Director
Qualifications
Our board
believes that new candidates for director should have certain minimum
qualifications, including having the knowledge, capabilities, experience and
contacts that complement those currently existing within our company; having the
ability to meet contemporary public company board standards with respect to
general governance; stewardship, depth of review, independence, financial
certification, personal integrity and responsibility to stockholders; a genuine
desire and availability to participate actively in the development of our
future; and an orientation toward maximizing stockholder value in realistic time
frames. The board also considers such factors as ability to
contribute strategically through relevant industry background and experience;
independence from our company and current board members; and a recognizable name
that would add credibility and value to our company and its
stockholders. The board may modify these qualifications from time to
time.
Evaluating
Nominees for Director
Most of
our nominees for election as directors are nominated pursuant to the corporate
governance agreement. With respect to these nominees, our board
reviews candidates to ensure they are "independent", as defined in the corporate
governance agreement. Under that agreement, a nominee is
"independent" if he or she (i) is not and has never been an officer or
employee of DGSE or Stanford International Bank or their respective affiliates
or associates, or of any entity that derived 5% or more of its revenues or
earnings in any of its three most recent fiscal years from transactions
involving DGSE or Stanford International Bank or any affiliate or associate of
any of them, (ii) has no affiliation, compensation, consulting or
contracting arrangement with DGSE or Stanford International Bank or their
respective affiliates or associates or any other entity such that a reasonable
person would regard such individual as likely to be unduly influenced by
management of DGSE or Stanford International Bank, respectively, or their
respective affiliates or associates, and (iii) is a director our board has
determined, or a nominee our board is reasonably likely to determine, to be
"independent" within the meaning of the applicable listing rules of our
principal trading market (currently the NYSE Amex market) and Section 10A(m)(3)
of the Exchange Act and Rule 10A-3(b)(1) promulgated there-under.
With
respect to nominees not nominated pursuant to the corporate governance
agreement, our board reviews candidates for director nominees in the context of
the current composition of our board, our operating requirements and the
long-term interests of our stockholders. In conducting this
assessment, our board currently considers, among other factors, diversity, age,
skills, and such other factors as it deems appropriate given the current needs
of our board and our company, to maintain a balance of knowledge, experience and
capability. In the case of incumbent directors whose terms of office
are set to expire, our board reviews the directors’ overall service to our
company during his or her term, including the number of meetings attended, level
of participation, quality of performance, and any other relationships and
transactions that might impair the director’s independence. In the
case of new director candidates, our board also determines whether the nominee
must be independent, which determination is based upon applicable NYSE Amex
listing standards, applicable SEC rules and regulations and the advice of
counsel, if necessary. Our board then uses its network of contacts to
compile a list of potential candidates, but may also engage, if it deems
appropriate, a professional search firm. Our board conducts any
appropriate and necessary inquiries into the backgrounds and qualifications of
possible candidates after considering the function and needs of our
board. Our board meets to discuss and consider such candidates’
qualifications and then selects a nominee for recommendation to our stockholders
by majority vote.
To date,
our board has not paid a fee to any third party to assist in the process of
identifying or evaluating director candidates. To date, our board has
not rejected a timely director nominee from a stockholder or group of
stockholders that beneficially owned, in the aggregate, more than 5% of our
voting stock.
32
Stockholder
Nominations
The board
applies the same guidelines (described above) to stockholder nominees as applied
to nominees from other sources. Any stockholder who wishes to
recommend a prospective director nominee for the board’s consideration may do so
by giving the candidate’s name and qualifications in writing to our chairman of
the board at our principal executive offices at 11311 Reeder Road, Dallas, Texas
75229. The proposing stockholder should also include his or her
contact information and a statement of his or her share ownership, as well as
any other information required by our bylaws.
Code
Of Business Conduct And Ethics
We have
adopted a "Code of Business Conduct and Ethics" that applies to all employees,
including our executive officers. A copy of our Code of Business
Conduct and Ethics is posted on our internet site at www.DGSE.com. In the event
we make any amendments to, or grant any waivers of, a provision of the Code of
Business Conduct and Ethics that applies to the principal executive officer,
principal financial officer, or principal accounting officer that requires
disclosure under applicable SEC rules, we intend to disclose such amendment or
waiver and the reasons therefor on a Form 8-K or on our next periodic
report.
EXECUTIVE
OFFICERS
Set forth
below is information regarding our executive officers. All executive
officers serve at the pleasure of our board of directors.
Name
|
Age
|
Position
|
||
Dr.
L.S. Smith*
|
62
|
Chairman
of the board, chief executive officer and president
|
||
William
H. Oyster*
|
56
|
President
and chief operating officer
|
||
John
Benson
|
63
|
Chief
financial officer
|
||
S.
Scott Williamson
|
|
51
|
|
Executive
vice president – consumer
finance
|
*
Biographical information about Dr. Smith and Mr. Oyster is set forth in the
director information above.
John Benson joined our
company in December 1992 as chief financial officer. Between January and May
2007, Mr. Benson served on the board of directors of Superior Galleries, Inc.
Mr. Benson obtained his BBA from Texas A&M University in 1968 and is a
certified public accountant in the State of Texas.
S. Scott Williamson joined
our company as executive vice president – consumer finance and became president
of our subsidiary, American Pay Day Centers, Inc. in May 2004. Between 2002 and
2004, Mr. Williamson served as president of Texas State Credit Co., a finance
company with 63 locations. From 2001 to 2002, Mr. Williamson served as chief
financial officer for Westgate Fabrics, LLC, a distributor of decorative
fabrics. Before that, Mr. Williamson served as an executive vice president of
operations for First Cash Financial Services, Inc., a national markets finance
company. Mr. Williamson has also served on the board of directors of
Superior Galleries, Inc. from January 2007 to May 2007. Mr.
Williamson obtained his B.B.A. in accounting from the University of Oklahoma in
1980.
33
ITEM
11. EXECUTIVE COMPENSATION.
Executive
Compensation
The
following information is furnished with respect to each of our most highly
compensated executive officers whose cash compensation from us and our
subsidiaries during our last fiscal year exceeded $100,000.
Summary
Compensation Table
Name
and Principal Position
|
Year
|
Salary
($)
|
Bonus
($)
|
All
Other
Compensation
($)
|
Total
($)
|
|||||||||||||
Dr.
L.S. Smith
|
2008
|
425,000 | 191,500 | 30,000 | (1) | 646,500 | ||||||||||||
Chief
executive officer
|
2007
|
331,277 | 312,500 | 30,000 | (1) | 673,777 | ||||||||||||
John
Benson
|
2008
|
175,000 | – | – | 175,000 | |||||||||||||
Chief
financial officer
|
2007
|
150,898 | – | 150,898 | ||||||||||||||
William
H. Oyster
|
2008
|
250,000 | 62,500 | – | 312,500 | |||||||||||||
President
|
2007
|
214,596 | 112,500 | – | 327,096 |
(1)
|
In
fiscal year 2007 and 2008, Dr. Smith was provided a monthly automobile
allowance and a $2,000 per month home office
allowance.
|
Grants
of Plan-Based Awards
We did
not grant any awards under any plan in fiscal year 2008 and 50,000 shares were
granted to our non-employee directors under our 2006 plan during the fiscal year
2007.
Outstanding
Equity Awards at Fiscal Year-End
The
following table summarizes unexercised options to purchase shares of our common
stock and equity plan awards outstanding at December 31, 2008 for each executive
officer identified in the Summary Compensation Table above. All
options were fully vested and exercisable at the time of grant and expire 180
days after termination of service:
Name and Principal Position
|
Number of Securities
Underlying Unexercised
Options
(#)
Exercisable
|
Option Exercise Price
($)
|
||||||
Dr.
L.S. Smith
|
577,777 | 2.25 | ||||||
Chief
executive officer
|
267,857 | 1.12 | ||||||
John
Benson
|
50,000 | 1.625 | ||||||
Chief
financial officer
|
25,000 | 2.25 | ||||||
25,000 | 2.125 | |||||||
50,000 | 2.25 | |||||||
William
H. Oyster
|
100,000 | 2.25 | ||||||
President
|
50,000 | 2.125 | ||||||
100,000 | 2.25 |
Option
Exercises and Stock Vested
No
executive officer identified in the Summary Compensation Table above exercised
an option in fiscal year 2008, and no shares of stock vested with respect to any
of those executive officers.
34
Pension
Benefits
We do not
have any plan which provides for payments or other benefits at, following, or in
connection with retirement.
Nonqualified
Deferred Compensation
We do not
have any defined contribution or other plan which provides for the deferral of
compensation on a basis that is not tax-qualified.
Employment
Agreements
Smith Employment
Agreement. The employment agreement for Dr. Smith sets forth
the terms of his employment with us as chairman and chief executive officer. The
agreement has an initial 3-year term, and will be automatically renewed
thereafter for successive one-year terms unless either party provides at least
120 days notice not to renew. It provides for a base annual salary of at least
$425,000. In addition, it provides for an annual bonus in an amount not less
than one-half of his annual salary, payable on each January 31 in respect of the
prior calendar year, with half of the payment being contingent upon our stock
price having increased at least 10% during that calendar year. For purposes of
the 2007 calendar year, the first day was be deemed to be May 30, 2007, the date
of the closing of the acquisition of Superior, and the 10% increase requirement
will be prorated accordingly. In addition, Dr. Smith will be entitled to life
insurance of $2,000,000, disability insurance equal to half of his base salary,
medical insurance and other benefits.
Oyster Employment
Agreement. The new employment agreement for Mr. Oyster sets
forth the terms of his employment with us as president and chief operating
officer. The agreement has an initial 5-year term, and will be automatically
renewed thereafter for successive one-year terms unless either party provides at
least 120 days notice not to renew. It provides for a base annual salary of at
least $250,000. In addition, it provides for an annual bonus in an
amount not less than one-half of his annual salary, payable on each April 30 in
respect of the prior calendar year, with half of the payment being contingent
upon our EBIT (earnings before interest and taxes) having increased at least 6%
during that calendar year. In addition, Mr. Oyster will be entitled to life
insurance of $1,000,000, disability insurance equal to half of his base salary,
medical insurance and other benefits.
Benson Employment
Agreement. The new employment agreement for Mr. Benson sets
forth the terms of his employment with us as chief financial officer. The
agreement has an initial 2-year term. It provides for a base annual salary of
$175,000 and an annual bonus to be determined by our board of directors. Upon
the termination of his employment, Mr. Benson will be entitled to, among other
things, (1) in case of termination by DGSE during the initial term other
than for cause, base salary for the remainder of the initial term plus six
months; and (2) in case of termination by DGSE after the initial term other
than for cause, three months of annual base salary.
Potential
Payments Upon Termination Or Change-In-Control
Under the
employment agreements of Dr. Smith and Mr. Oyster, if the executive were to be
terminated due to an illness, injury or other incapacity which prevents him from
carrying out or performing fully the essential functions of his duties for a
period of 180 consecutive days, or due to his death, the executive (or his legal
representative) would be entitled to receive his salary for a period of one year
following the date of termination and the pro rata portion of this
bonus for the prior calendar year. If Dr. Smith would have been terminated for
either reason on January 1, 2008 and his new employment agreement had then been
in effect, we would have been obligated to pay him $425,000 in 26 bi-weekly
installments of $16,346 each. If Mr. Oyster would have been terminated for
either reason on January 1, 2008 and his new employment agreement had then been
in effect, we would have been obligated to pay him $250,000 in 26 bi-weekly
installments of $9,615 each.
35
In the
event either executive were to be terminated for “cause”, he would be entitled
to the pro rata share
of the bonus paid to him for the calendar year immediately preceding his
termination. If either executive would have been terminated for “cause” on
January 1, 2008 and his new employment agreement had then been in effect, we
would not have been obligated to pay him any additional severance
pay.
In the
event either executive were to be terminated other than for “cause”, or if
either executive resigns for “good reason”, he would be entitled to receive a
lump sum payment of (i) his base salary for the remainder of the current
year, plus (ii) the maximum bonus he would have been entitled to receive
for the current year, plus (iii) three years salary based on the salary
then in effect. If Dr. Smith would have been terminated other than for “cause”
or resigned for “good reason” on January 1, 2008 and his new employment
agreement had then been in effect, we would have been obligated to pay him a
lump sum payment of $1.91 million. If Mr. Oyster would have been terminated
other than for “cause” or resigned for “good reason” on January 1, 2008 and his
new employment agreement had then been in effect, we would have been obligated
to pay him a lump sum payment of $1.13 million.
In the
event either executive were to resign other than for “good reason”, he would be
entitled to receive a lump sum payment of (i) his base salary for the
remainder of the current year, plus (ii) a pro rata share of the maximum
bonus he would have been entitled to receive for the current year, plus
(iii) one year salary based on the salary then in effect. If Dr. Smith
would have resigned other than for “good reason” on January 1, 2008 and his new
employment agreement had then been in effect, we would have been obligated to
pay him a lump sum payment of $850,000. If Mr. Oyster would have resigned other
than for “good reason” on January 1, 2008 and his new employment agreement had
then been in effect, we would have been obligated to pay him a lump sum payment
of $500,000.
In
addition, in the event of the termination of Dr. Smith’s employment, DGSE would
be required to maintain medical health benefits for Dr. Smith and his wife until
both are covered by a comparable health insurance plan provided by a subsequent
employer or their earlier death. This obligation has an estimated present cost
to us of $32,100 (assuming payment for a 36-month period). In the event of the
termination of Mr. Oyster’s employment, we would be required to maintain medical
health benefits for Mr. Oyster and his wife for a period of 18 months or, if
earlier, until both are covered by a comparable health insurance plan provided
by a subsequent employer. This obligation has an estimated cost to us of
$17,200.
In the
event of the termination of either executive’s employment, other than for
termination by the executive for “good reason”, the executive may not for a
period of two years compete with us in the state in which we conduct business
during the employment term.
For
purposes of the two executives’ new employment agreements:
|
·
|
“cause”
is defined as (i) conviction of the executive for a felony involving
dishonest acts during the term of the agreement, (ii) any “willful”
and material misapplication by the executive of company funds, or any
other material act of dishonesty committed by him, or (iii) the
executive’s “willful” and material breach of the agreement or “willful”
and material failure to substantially perform his duties thereunder (other
than a failure resulting from mental or physical illness) after written
demand for substantial performance is delivered by the our board of
directors which specifically identifies the manner in which the board
believes the executive has not substantially performed his duties and the
executive fails to cure his nonperformance. We are obligated to provide
the executive 30 days written notice setting forth the specific reasons
for its intention to terminate the executive for cause and an opportunity
for the executive to be heard before our board of directors, and to
deliver to the executive a notice of termination from the board of
directors stating that a majority of the board found, in good faith, that
the executive had engaged in the “willful” and material conduct referred
to in the notice;
|
|
·
|
an
act or failure to act is “willful” if done, or omitted to be done, by the
executive in bad faith and without reasonable belief that his action or
omission was in our best
interest;
|
36
|
·
|
“good
reason” is defined as (i) a change in the executive’s status or positions
with us that, in his reasonable judgment, represents a demotion, (ii) the
assignment to the executive of any duties or responsibilities that, in the
executive’s reasonable judgment, are inconsistent with his existing status
or position, (iii) layoff or involuntary termination of the executive’s
employment, except in connection with the termination of the executive’s
employment for “cause” or as a result of his retirement, disability or
death, (iv) a reduction by us in the executive’s base salary, (v) any
“change in control” occurring more than one year after the effective date
of the agreement, (vi) the failure by us to continue in effect any
employee benefit plan in which the executive is participating at the
effective date of the agreement, other than as a result of the normal
expiration of the plan in accordance with its terms, except to the extent
that we provide the executive without substantially equivalent benefits,
(vii) the imposition of any requirement that the executive be based
outside the Dallas-Fort Worth metropolitan area, (viii) our failure to
obtain the express assumption of the agreement by any successor, or (ix)
any violation by us of any agreement (including the new employment
agreement) between us and the executive;
and
|
|
·
|
“change
in control” is defined as (A) any person or group becomes the
beneficial owner of shares representing 20% or more of the combined
outstanding voting power of our company, (B) in any 12-month period,
our directors at the beginning of that period cease to constitute a
majority of our board of directors and a majority of the initial directors
still in office neither elected all of the new directors nor nominated
them all for election by our stockholders, or (C) a person or group
acquires in any 12-month period gross assets of our company constituting
at least 50% of the fair market value of all our gross
assets.
|
Under the
new employment agreement of Mr. Benson, if DGSE were to terminate Mr. Benson’s
employment during the initial 2-year term, he would be entitled to receive a
lump sum payment of (i) his base salary for the remainder of the initial
term, plus (ii) six months salary based on the salary then in effect. If
Mr. Benson would have been terminated by us on January 1, 2008 and his new
employment agreement had then been in effect, we would have been obligated to
pay him a lump sum payment of $437,500. If we were to terminate Mr. Benson’s
employment after the initial 2-year term, he would be entitled to receive a lump
sum payment of three months salary based on his salary then in
effect.
In the
event Mr. Benson were to resign upon not less than 30 days notice to us, and we
were immediately to relieve Mr. Benson of his duties, he would be entitled to
receive a lump sum payment of his salary until the date his resignation were to
be effective. If Mr. Benson would have delivered a resignation notice to us on
January 1, 2008 indicating his decision to resign on March 1, 2008, his new
employment agreement had then been in effect and we would have immediately
relieved him of his duties and terminated the employment agreement, we would
have been obligated to pay him a lump sum payment of $29,000.
Compensation
of Directors
The
following table sets forth information concerning the compensation of our
directors during our 2008 fiscal year, except for directors who are also named
executive officers and whose compensation is reflected in the Summary
Compensation Table.
Name
|
Fees Earned or
Paid in Cash
|
Option Awards
|
Total
|
|||||||||
Dr.
William P. Cordeiro, Ph.D.
|
$ | 8,167 | 10,000 | (1) | $ | 8,167 | ||||||
Craig
Alan-Lee
|
$ | 7,667 | 10,000 | (2) | $ | 7,667 | ||||||
David
Rector
|
$ | 6,167 | 10,000 | (3) | $ | 6,167 |
(1)
|
Dr.
Cordeiro has been granted options to purchase 32,500 shares of DGSE’s
common stock at an exercise price equal to the then fair market value of
DGSE’s common stock.
|
37
(2)
|
Mr.
Alan-Lee has been granted an option to purchase 15,000 shares of DGSE’s
common stock at an exercise price equal to the then fair market value of
DGSE’s common stock.
|
(2)
|
Mr.
Rector has been granted an option to purchase 10,000 shares of DGSE’s
common stock at an exercise price equal to the then fair market value of
DGSE’s common stock.
|
Directors
who are also employees of DGSE do not receive any compensation for serving as a
director or as a member of a committee of the board of directors.
ITEM
12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
AND RELATED STOCKHOLDER MATTERS.
The
following table sets forth certain information regarding the ownership of our
common stock as of June 26, 2009 by: (i) each director; (ii) each of the named
executive officers reflected in the Summary Compensation Table; (iii) all
our executive officers and directors as a group; and (iv) all those known by us
to be beneficial owners of more than five percent of our common
stock.
Name and Address
of Beneficial Owner
|
Amount and
Nature
of Beneficial
Ownership(1)
|
Percent
of Class(1)
|
||||||
Dr.
L. S. Smith, Ph.D.
Director,
chairman and chief executive officer
519
Interstate 30, #243
Rockwall,
Texas 75087
|
6,616,438 |
(2),
(8)
|
67.3 | % | ||||
William
H. Oyster
Director, president
and chief operating officer(3)
|
290,115 |
(4)
|
3.0 | % | ||||
John
Benson
Chief financial
officer(3)
|
161,500 |
(5)
|
1.6 | % | ||||
S.
Scott Williamson
Executive vice
president(3)
|
20,000 |
(6)
|
* | |||||
Dr.
William P. Cordeiro, Ph.D.
Director
P.O.
Box 6010
Malibu,
California 90264
|
27,500 |
(7)
|
* | |||||
Craig
Alan-Lee
Director
11230
Dilling Street
North
Hollywood, California 91602
|
325,000 |
(8),
(9)
|
3.3 | % | ||||
David
Rector
Director(3)
|
5,462 |
(10)
|
* | |||||
Stanford
International Bank Ltd.
No.
11 Pavilion Drive
St.
John’s, Antigua, West Indies
|
6,616,438 |
(11)
|
67.3 | % | ||||
All
directors and officers
as
a group (8 individuals)
|
7,446,015 |
(12)
|
75.7 | % |
(1)
|
Based
upon information furnished to us by the directors and executive officers
or obtained from our stock transfer books showing 9,833,635 shares of
common stock outstanding as of June 30, 2009. We are informed
that these persons hold the sole voting and dispositive power with respect
to the common stock except as otherwise stated in the footnotes
below. For purposes of computing “beneficial ownership” and the
percentage of outstanding common stock held by each person or group of
persons named above as of July 3, 2009, any security which such person or
group of persons has the right to acquire within 60 days after such date
is deemed to be outstanding for the purpose of computing beneficial
ownership and the percentage ownership of such person or persons, but is
not deemed to be outstanding for the purpose of computing the percentage
ownership of any other person. A “*” indicates less than one
percent.
|
38
(2)
|
Includes
577,777 and 267,857 shares currently exercisable under stock options with
exercise prices of $2.25 and $1.12 per share, respectively; 493,282 shares
subject to proxies pursuant to which Dr. L.S. Smith holds sole voting
power; and 3,390,727 shares subject to a corporate governance agreement
with Stanford International Bank Ltd., which we refer to as Stanford, and
us. The corporate governance agreement entitles Stanford and
Dr. Smith to each nominate two independent directors to our board of
directors and entitles Dr. Smith and Mr. Oyster to be nominated to our
board for so long as he remains an executive officer of our
company. Pursuant to this agreement, Dr. Smith has shared
voting power with respect to the 3,390,727 shares beneficially owned by
Stanford. Dr. Smith disclaims beneficial ownership of the
3,884,009 shares subject to the proxies or the corporate governance
agreement.
|
(3)
|
The
address for Messrs. Oyster, Benson, Williamson and Rector is 11311 Reeder
Road, Dallas,
Texas 75229.
|
(4)
|
Includes
250,000 shares currently exercisable under stock options with an average
exercise price of $2.23 per share. In addition, W.H. Oyster has granted
Dr. L.S. Smith a proxy to vote 38,615 of his currently outstanding
shares.
|
(5)
|
Includes
150,000 shares currently exercisable under stock options with an average
exercise price of $2.02 per share. In addition, John Benson has granted
Dr. L.S. Smith a proxy to vote his 11,500 shares currently
outstanding.
|
(6)
|
Includes
20,000 shares currently exercisable under stock options with an exercise
price of $2.43 per share.
|
(7)
|
Includes
22,500 shares currently exercisable under stock options with an exercise
price of $2.47 per share and 5,000 shares owned by Bartik, Cordeiro &
Associates, as to which Dr. Cordeiro has shared voting and investment
powers.
|
(8)
|
Craig
Alan-Lee has granted Dr. L.S. Smith a proxy to vote his 320,000 shares
currently outstanding.
|
(9)
|
Includes
5,000 shares currently exercisable under a stock option with an exercise
price of $2.82 per share.
|
(10)
|
Includes
2,731 and 2,731 shares currently exercisable under stock options with an
exercise price of $7.32 and $10.07, respectively, per
share.
|
(11)
|
Includes
422,817 shares currently issuable upon the exercise of stock purchase
warrants with an exercise price of $1.89 per share and 3,164,665 shares
beneficially owned by Dr. Smith subject to the corporate governance
agreement. James M. Davis is the chief financial officer of
Stanford. R. Allen Stanford is a director and, indirectly, the
principal shareholder of Stanford. Both Messrs. Stanford and Davis share
voting and dispositive power with respect to shares held by
Stanford. Pursuant to the corporate governance agreement,
Stanford has shared voting power with respect to the 3,164,665 shares
beneficially owned by Dr. Smith. Stanford disclaims beneficial
ownership of the 3,164,665 shares subject to the corporate governance
agreement.
|
(12)
|
Includes
577,777, 267,857, 250,000, 150,000, 45,000, 10,000 and 20,000 shares
currently exercisable under stock options with an exercise price or
average price, as the case may be, of $2.25, $1.12, $2.23, $2.02, $2.47,
$2.82 and $2.43, respectively, per share, and 493,282 shares subject to
proxies granting Dr. L.S. Smith sole voting
powers.
|
39
ITEM
13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE.
Transactions
with Related Persons
Our
company has not entered into any transaction since the beginning of our 2008
fiscal year required to be disclosed in this report, other than transactions
described elsewhere herein.
Review,
Approval or Ratification of Transactions with Related Persons
We have
adopted a written policy regarding the review, approval or ratification of
transactions with designated related persons, which is available from our
website, www.DGSE.com. In accordance with the policy, our audit
committee or the chairperson of our audit committee reviews transactions in
which the amount involved exceeds $120,000 and in which any related person had,
has, or will have a direct or indirect material interest. In general,
the policy applies to the following categories of related
persons: directors, nominees, executive officers, and stockholders
owning five percent or more of our outstanding stock, and their respective
immediate family members. The committee or chairperson approve or
ratify only those transactions which are in, or not inconsistent with, the best
interests of our company and our stockholders. The audit committee
chairperson reviews and approves or ratifies transactions when it is not
practicable or desirable to delay review of a transaction until our audit
committee can meet. The chairperson reports any transactions with
related persons he has approved or ratified to our audit committee and any
transactions with related persons he or the audit committee has approved or
ratified to our board. Our audit committee will annually review any
previously approved or ratified related person transactions that remain
ongoing.
ITEM
14. PRINCIPAL ACCOUNTING FEES AND SERVICES
The
following table presents fees billed by Cornwell Jackson for professional
services rendered for the fiscal years ended December 31, 2008 and
2007.
2008
|
2007
|
|||||||
Audit
Fees (1)
|
$ | 84,459 | $ | 54,785 | ||||
Audit
Related Fees
|
3,318 | 3,600 | ||||||
Tax
Fees(2)
|
17,883 | 12,906 | ||||||
All
Other Fees (3)
|
19,926 | 35,454 | ||||||
Total
|
$ | 125,586 | $ | 106,745 |
(1)
|
Represents
the aggregate fees billed by Cornwell Jackson for professional services
rendered for the audit of our annual financial statements for the fiscal
year indicated above.
|
(2)
|
Represents
the aggregate fees billed by Cornwell Jackson for professional services
rendered in various tax matters during 2008 and
2007.
|
(3)
|
Represents
the aggregate fees billed by Cornwell Jackson for professional services
rendered for the review of quarterly reports on Form 10-Q for the periods
ended March 31, June 30 and September 30 for the fiscal years indicated
above. During 2007, Cornwell Jackson provided additional professional
services for due diligence requirements for the Superior Galleries
acquisition.
|
40
PART
IV
ITEM
15. EXHIBITS AND
FINANCIAL STATEMENT SCHEDULES
(a)
|
Exhibits
|
Exhibit
|
Filed
|
Incorporated
|
Date
Filed
|
Exhibit
|
||||||||||
No.
|
Description
|
Herein
|
by
Reference
|
Form
|
with
SEC
|
No.
|
||||||||
2.1
|
Amended
and Restated Agreement and Plan of Merger and Reorganization, dated as of
January 6, 2007
|
×
|
8-K
|
January 9,
2007
|
2.1
|
|||||||||
2.2
|
Limited
Joinder Agreement, dated as of January 6, 2007
|
×
|
8-K
|
January 9,
2007
|
2.9
|
|||||||||
3.1
|
Articles
of Incorporation dated September 17, 1965
|
×
|
8-A12G
|
June 23,
1999
|
3.1
|
|||||||||
3.2
|
Certificate
of Amendment to Articles of Incorporation, dated October 14,
1981
|
×
|
8-A12G
|
June 23,
1999
|
3.2
|
|||||||||
3.3
|
Certificate
of Resolution, dated October 14, 1981
|
×
|
8-A12G
|
June 23,
1999
|
3.3
|
|||||||||
3.4
|
Certificate
of Amendment to Articles of Incorporation , dated July 15,
1986
|
×
|
8-A12G
|
June 23,
1999
|
3.4
|
|||||||||
3.5
|
Certificate
of Amendment to Articles of Incorporation, dated August 23,
1998
|
×
|
8-A12G
|
June 23,
1999
|
3.5
|
|||||||||
3.6
|
Certificate
of Amendment to Articles of Incorporation, dated June 26,
1992
|
×
|
8-A12G
|
June 23,
1999
|
3.6
|
|||||||||
3.7
|
Certificate
of Amendment to Articles of Incorporation, dated June 26,
2001
|
×
|
8-K
|
July 3,
2001
|
1.0
|
|||||||||
3.8
|
Certificate
of Amendment to Articles of Incorporation, dated May 22,
2007
|
x
|
8-K
|
May
31, 2007
|
3.1
|
|||||||||
3.9
|
By-laws,
dated March 2, 1992
|
×
|
8-A12G
|
June 23,
1999
|
3.7
|
|||||||||
4.1
|
Specimen
Common Stock Certificate
|
×
|
S-4
|
January 6,
2007
|
4.1
|
41
10.1
|
Renewal,
Extension And Modification Agreement dated January 28, 1994, by and among
DGSE Corporation and Michael E. Hall And Marian E. Hall
|
×
|
10-KSB
|
March
1995
|
10.2
|
|||||||||
10.2
|
Lease
Agreement dated June 2, 2000 by and between SND Properties and
Charleston Gold and Diamond Exchange, Inc.
|
×
|
10-KSB
|
March 29,
2001
|
10.1
|
|||||||||
10.3
|
Lease
agreement dated October 5, 2004 by and between Beltline Denton Road
Associates and Dallas Gold & Silver Exchange
|
×
|
10-K
|
April 15,
2005
|
10.2
|
|||||||||
10.4
|
Lease
agreement dated December 1, 2004 by and between Stone Lewis Properties and
Dallas Gold & Silver Exchange
|
×
|
10-K
|
April 15,
2005
|
10.3
|
|||||||||
10.5
|
Lease
agreement dated November 18, 2004 by and between Hinkle Income Properties
LLC and American Pay Day Centers, Inc.
|
×
|
10-K
|
April 15,
2005
|
10.4
|
|||||||||
10.6
|
Lease
Agreement dated January 17, 2005 by and between Belle-Hall Development
Phase III Limited Partnership and DGSE Companies, Inc.
|
×
|
S-4
|
January 6,
2007
|
10.6
|
|||||||||
10.7
|
Sale
agreement dated executed July 5, 2007 by and between DGSE Companies,
Inc. and Texas Department of Transportation
|
×
|
8-K
|
July
11, 2007
|
10.1
|
|||||||||
10.8
|
Purchase
agreement dated July 5, 2007 by and between DGSE Companies, Inc. and
11311 Reeder Road Holdings, LP
|
×
|
8-K
|
July
11, 2007
|
10.2
|
|||||||||
10.9
|
Loan
Agreement, dated as of December 22, 2005, between DGSE Companies,
Inc. and Texas Capital Bank, N.A.
|
×
|
8-K/A
|
August 17,
2006
|
10.1
|
42
10.10
|
Third
Amendment to Loan Agreement, dated as of May 10, 2007, by and between DGSE
Companies, Inc. and Texas Capital Bank, N.A.
|
×
|
8-K
|
May
9, 2007
|
3.0
|
|||||||||
10.11
|
Support
Agreement, DGSE stockholders, dated as of January 6,
2007
|
×
|
8-K
|
January 9,
2007
|
99.1
|
|||||||||
10.12
|
Securities
Exchange Agreement, dated as of January 6, 2007
|
×
|
8-K
|
January 9,
2007
|
99.2
|
|||||||||
10.13
|
Warrant
to DiGenova, issued January 6, 2007
|
×
|
8-K
|
January 9,
2007
|
99.3
|
|||||||||
10.14
|
Support
Agreement, Superior stockholders, dated as of January 6,
2007
|
×
|
8-K
|
January 9,
2007
|
99.5
|
|||||||||
10.15
|
Asset
purchase agreement, dated May 9, 2007, by and between DGSE
Companies, Inc. and Euless Gold & Silver, Inc.
|
×
|
8-K
|
May
9, 2007
|
1.0
|
|||||||||
10.16
|
Subordinated
Promissory Note dated May 9, 2007
|
×
|
8-K
|
May
9, 2007
|
2.0
|
|||||||||
10.17
|
Registration
Rights Agreement with Stanford International Bank Ltd., dated as of May
30, 2007
|
×
|
8-K
|
May
31, 2007
|
99.1
|
|||||||||
10.18
|
Corporate
Governance Agreement with Dr. L.S. Smith and Stanford International Bank
Ltd., dated as of May 30, 2007
|
×
|
8-K
|
May
31, 2007
|
99.2
|
|||||||||
10.19
|
Escrow
Agreement with American Stock Transfer & Trust Company and Stanford
International Bank Ltd., as stockholder agent, dated as of May 30,
2007
|
×
|
8-K
|
May
31, 2007
|
99.3
|
|||||||||
10.20
|
Form
of Warrants
|
×
|
8-K
|
May
31, 2007
|
99.4
|
|||||||||
10.21
|
Amended
and Restated Commercial Loan and Security Agreement, by and between
Superior Galleries Inc. and Stanford International Bank Ltd., dated as of
May 30, 2007
|
×
|
8-K
|
May
31, 2007
|
99.5
|
43
10.22
|
Employment
Agreement with L.S. Smith, dated as of May 30, 2007
|
×
|
8-K
|
May
31, 2007
|
99.6
|
|||||||||
10.23
|
Employment
Agreement with William H. Oyster, dated as of May 30, 2007
|
×
|
8-K
|
May
31, 2007
|
99.7
|
|||||||||
10.24
|
Employment
Agreement with John Benson, dated as of May 30, 2007
|
×
|
8-K
|
May
31, 2007
|
99.8
|
|||||||||
23.1
|
Consent
of Cornwell Jackson
|
×
|
||||||||||||
31.1
|
Certification
pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934
implementing Section 302 of the Sarbanes-Oxley Act of 2002 by Dr.
L.S. Smith
|
×
|
||||||||||||
31.2
|
Certification
pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934
implementing Section 302 of the Sarbanes-Oxley Act of 2002 by John
Benson
|
×
|
||||||||||||
32.1
|
Certification
pursuant to 18 U.S.C. Section 1350 as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002 by Dr. L.S.
Smith
|
×
|
||||||||||||
32.2
|
Certification
pursuant to 18 U.S.C. Section 1350 as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002 by John
Benson
|
×
|
(b)
Reports on Form 8-K :
None.
44
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 22, 2010
|
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 22, 2010
|
L.S
Smith
|
||
Chairman
of the Board,
|
||
Chief
Executive Officer and
|
||
Secretary
|
||
By:
|
/s/ W. H. Oyster
|
Dated:
March 22, 2010
|
W.
H. Oyster
|
||
Director,
President and
|
||
Chief
Operating Officer
|
||
By:
|
/s/ John Benson
|
Dated:
March 22, 2010
|
John
Benson
|
||
Chief
Financial Officer
|
||
(Principal
Accounting Officer)
|
||
By:
|
/s/ William P. Cordeiro
|
Dated: March 22, 2010
|
Director
|
||
By:
|
/s/ Craig Allan-Lee
|
Dated: March 22, 2010
|
Director
|
||
By:
|
/s/Mitch Stoltz
|
Dated: March 22, 2010
|
Director
|
||
By:
|
/s/David Rector
|
Dated: March 22, 2010
|
Director
|
45
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 (the “Company”) as of December 31, 2008 and 2007, and the
related consolidated statements of operations, shareholders’ equity and
comprehensive income, and cash flows for the years ended December 31, 2008,
2007, and 2006. 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 the Company as of
December 31, 2008 and 2007, and the consolidated results of operations and its
cash flows for the years ended December 31, 2008, 2007, and 2006 in conformity
with accounting principles generally accepted in the United States of
America.
/s/
Cornwell Jackson Advisors
Plano,
Texas
March 31,
2009
46
DGSE
COMPANIES, INC. AND SUBSIDIARIES
CONSOLIDATED
BALANCE SHEETS
December 31,
|
||||||||
2008
|
2007
|
|||||||
ASSETS
|
||||||||
Current
Assets:
|
||||||||
Cash
and cash equivalents
|
$ | 244,429 | $ | 536,548 | ||||
Trade
receivables
|
2,326,337 | 3,249,229 | ||||||
Inventories
|
16,052,833 | 12,975,777 | ||||||
Prepaid
expenses
|
533,318 | 459,486 | ||||||
Prepaid
federal income tax
|
639,372 | 59,341 | ||||||
Current
assets of discontinued operations
|
900,306 | 1,290,245 | ||||||
Total
current assets
|
20,696,595 | 18,570,631 | ||||||
Marketable
securities – available for sale
|
- | 61,769 | ||||||
Property
and equipment, net
|
4,868,305 | 4,193,869 | ||||||
Deferred
income taxes
|
1,908,032 | 1,805,205 | ||||||
Goodwill
|
837,117 | 8,952,181 | ||||||
Intangible
assets
|
2,492,673 | 2,521,340 | ||||||
Other
assets
|
235,917 | 309,836 | ||||||
Non-current
assets of discontinued operations
|
305,275 | 444,383 | ||||||
$ | 31,343,915 | $ | 36,859,214 | |||||
LIABILITIES
|
||||||||
Current
Liabilities:
|
||||||||
Notes
payable
|
$ | 191,078 | $ | 187,467 | ||||
Current
maturities of long-term debt
|
599,972 | 501,631 | ||||||
Line
of credit
|
3,595,000 | - | ||||||
Accounts
payable – trade
|
734,906 | 1,069,194 | ||||||
Accrued
expenses
|
647,536 | 1,018,003 | ||||||
Customer
deposits
|
1,230,991 | 315,437 | ||||||
Current
liabilities of discontinued operations
|
33,144 | - | ||||||
Total
current liabilities
|
7,032,627 | 3,091,732 | ||||||
Long-term
debt, less current maturities
|
11,715,765 | 13,489,901 | ||||||
18,748,392 | 16,581,633 | |||||||
STOCKHOLDERS’
EQUITY
|
||||||||
Common
stock, $.01 par value; 30,000,000 shares authorized; 9,833,635 and
9,490,357 shares issued and outstanding at the end of each period in 2008
and 2007
|
98,337 | 94,904 | ||||||
Additional
paid-in capital
|
18,541,662 | 18,473,234 | ||||||
Accumulated
other comprehensive loss
|
- | (97,288 | ) | |||||
Retained
earnings
|
(6,044,476 | ) | 1,806,731 | |||||
12,595,523 | 20,277,581 | |||||||
$ | 31,343,915 | $ | 36,859,214 |
The
accompanying notes are an integral part of these consolidated financial
statements
47
DGSE
COMPANIES, INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF OPERATIONS
Years ended December 31,
|
||||||||||||
2008
|
2007
|
2006
|
||||||||||
Revenue
|
||||||||||||
Sales
|
$ | 104,670,207 | $ | 60,912,663 | $ | 43,668,973 | ||||||
Consumer loan service
charges
|
548,853 | 306,413 | 187,772 | |||||||||
Management
fees
|
- | 250,000 | — | |||||||||
105,219,060 | 61,469,076 | 43,856,745 | ||||||||||
Costs and
expenses
|
||||||||||||
Cost of goods sold
|
91,237,578 | 51,711,643 | 36,809,910 | |||||||||
Selling, general and
administrative expenses
|
9,841,806 | 8,321,544 | 5,529,314 | |||||||||
Depreciation and amortization
|
484,832 | 247,857 | 111,259 | |||||||||
Impairment of
goodwill
|
7,337,443 | — | — | |||||||||
Gain of sale of
property
|
— | (579,447 | ) | — | ||||||||
108,901,659 | 59,701,597 | 42,450,483 | ||||||||||
Operating
income
|
(3,682,599 | ) | 1,767,479 | 1,406,262 | ||||||||
Other (income)
expense
|
||||||||||||
Other income
|
87,693 | 26,782 | (16,534 | ) | ||||||||
Interest
expense
|
902,897 | 675,199 | 408,269 | |||||||||
Earnings before income
taxes
|
(4,673,189 | ) | 1,065,498 | 1,014,527 | ||||||||
Income tax
expense
|
1,048,997 | 250,056 | 348,188 | |||||||||
Net earnings (loss) from
continuing operations
|
(5,721286 | ) | 815,442 | 666,339 | ||||||||
Discontinued
operations:
|
||||||||||||
Loss (Gain) from discontinued
operations (less applicable income tax benefit (expense) of $1,097,231,
($18,556) and $28,382, respectively)
|
2,129,920 | (21,207 | ) | 55,094 | ||||||||
Loss on disposal
of discontinued operations (less applicable income tax benefit
of $0, $26,208 and $0, respectively)
|
— | 81,630 | — | |||||||||
Net
earnings
|
$ | (7,851,207 | ) | $ | 755,019 | $ | 611,245 | |||||
Earnings per common
share
|
||||||||||||
Basic
|
||||||||||||
From continuing
operations
|
$ | (.58 | ) | $ | .11 | $ | .14 | |||||
From discontinued
operations
|
(.23 | ) | (.01 | ) | (.02 | ) | ||||||
Net earnings per common
share
|
$ | (.81 | ) | $ | .10 | $ | .12 | |||||
Diluted
|
||||||||||||
From continuing
operations
|
$ | (.58 | ) | $ | .10 | $ | .13 | |||||
From discontinued
operations
|
(.23 | ) | (.01 | ) | (.01 | ) | ||||||
Net earnings per common
share
|
$ | (.81 | ) | $ | .09 | $ | .12 | |||||
Weighted average number of common
shares:
|
||||||||||||
Basic
|
9,708,045 | 7,507,579 | 4,913,920 | |||||||||
Diluted
|
9,708,045 | 8,281,887 | 5,006,909 |
The
accompanying notes are an integral part of these consolidated financial
statements
48
DGSE
COMPANIES, INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF STOCKHOLDERS’ EQUITY
FOR
THE YEARS ENDED DECEMBER 31,
Common Stock
|
Additional
Paid-in
|
Retained
Earnings
(Accumulated
|
Comprehensive
|
Accumulated
Other
Comprehensive
|
Total
Stockholder’s
|
|||||||||||||||||||||||
Shares
|
Amount
|
Income (Loss)
|
Deficit)
|
Income (Loss)
|
Income (Loss)
|
Equity
|
||||||||||||||||||||||
Balance
at January 1, 2006
|
4,913,290 | $ | 49,133 | $ | 5,708,760 | $ | 440,467 | $ | (127,252 | ) | $ | 6,071,128 | ||||||||||||||||
Net
earnings
|
611,245 | $ | [(611,245 | )] | 611,245 | |||||||||||||||||||||||
Other
comprehensive income, net of tax:
|
||||||||||||||||||||||||||||
Unrealized
loss on marketable securities
|
(4,993 | ) | (4,993 | ) | (4,993 | ) | ||||||||||||||||||||||
Comprehensive
income
|
$ | [( 606,252 | )] | |||||||||||||||||||||||||
Balance
at December 31, 2006
|
4,913,290 | $ | 49,133 | $ | 5,708,760 | $ | 1,051,712 | $ | (132,245 | ) | $ | 6,677,360 | ||||||||||||||||
Net
earnings
|
755,019 | $ | [( 755,019 | )] | 755,019 | |||||||||||||||||||||||
Other
comprehensive income, net of tax:
|
||||||||||||||||||||||||||||
Unrealized
gain on marketable securities
|
34,957 | 34,957 | 34,957 | |||||||||||||||||||||||||
Comprehensive
income
|
$ | [( 789,976 | )] | |||||||||||||||||||||||||
Acquisition
of Superior
|
3,669,067 | 36,691 | 12,593,172 | 12,629,863 | ||||||||||||||||||||||||
Conversion
of warrants
|
908,000 | 9,080 | 142,485 | 151,565 | ||||||||||||||||||||||||
Stock
based compensation
|
28,817 | 28,817 | ||||||||||||||||||||||||||
Balance
at December 31, 2007
|
9,490,357 | $ | 94,904 | $ | 18,473,234 | $ | 1,806,731 | $ | (97,288 | ) | $ | 20,277,581 | ||||||||||||||||
Net
loss
|
$ | (7,851,207 | ) | $ | [(7,851,207 | )] | $ | (7,851,207 | ) | |||||||||||||||||||
Other
comprehensive income, net of tax:
|
||||||||||||||||||||||||||||
Impairment
of marketable securities
|
97,288 | 97,288 | 97,288 | |||||||||||||||||||||||||
Comprehensive
income
|
$ | [(7,753,919 | )] | |||||||||||||||||||||||||
Stock
option expense
|
36,092 | 36,092 | ||||||||||||||||||||||||||
Stock
issued in Heritage settlement
|
8,372 | 83 | 49,916 | 49,999 | ||||||||||||||||||||||||
Stock
warrants exercised
|
334,906 | 3,350 | (17,580 | ) | (14,230 | ) | ||||||||||||||||||||||
Balance
at December 31, 2008
|
9,833,635 | $ | 98,337 | $ | 18,541,662 | $ | (6,044,476 | ) | $ | — | $ | 12,595,523 |
The
accompanying notes are an integral part of these consolidated financial
statements.
49
DGSE
COMPANIES, INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOWS
FOR
THE YEARS ENDED DECEMBER 31,
2008
|
2007
|
2006
|
||||||||||
Cash flows from operating
activities
|
||||||||||||
Net
earnings
|
$
|
(7,851,207
|
)
|
$
|
755,019
|
$
|
611,245
|
|||||
Adjustments to reconcile net
earnings to net cash provided by operating
activities
|
||||||||||||
Depreciation and
amortization
|
484,832
|
253,887
|
139,395
|
|||||||||
Impairment of
Goodwill
|
8,185,443
|
—
|
—
|
|||||||||
Deferred
taxes
|
(102,827
|
)
|
(31,692
|
)
|
(3,801
|
)
|
||||||
(Gain)/Loss on sale of marketable
securities
|
115,991
|
(3,890
|
)
|
—
|
||||||||
Stock options
expense
|
18,512
|
28,817
|
||||||||||
Loss on discontinued
operations
|
—
|
120,495
|
—
|
|||||||||
Gain on sale of
building
|
—
|
(579,447
|
)
|
—
|
||||||||
Settlement of Heritage
litigation
|
50,000
|
—
|
—
|
|||||||||
(Increase) decrease in operating
assets and liabilities
|
||||||||||||
Trade
receivables
|
1,473,136
|
(3,345,559
|
)
|
(317,694
|
)
|
|||||||
Inventories
|
(3,077,051
|
)
|
(928,838
|
)
|
(225,908
|
)
|
||||||
Prepaid expenses and other current
assets
|
(27,417
|
)
|
(70,810
|
)
|
23,181
|
|||||||
Change in other long term
assets
|
73,919
|
181,855
|
(11,826
|
)
|
||||||||
Accounts payable and accrued
expenses
|
(668,000
|
)
|
(785,193
|
)
|
179,081
|
|||||||
Change in customer
deposits
|
915,554
|
24,712
|
(34,408
|
)
|
||||||||
Federal income taxes
payable
|
(580,031
|
)
|
38,131
|
(111,392
|
)
|
|||||||
Net cash provided by (used in)
operating activities
|
(989,146
|
)
|
(4,342,513
|
)
|
247,793
|
|||||||
Cash flows from investing
activities
|
||||||||||||
Pawn loans
made
|
(1,294,876
|
)
|
(714,209
|
)
|
(485,595
|
)
|
||||||
Pawn loans
repaid
|
649,122
|
380,060
|
417,124
|
|||||||||
Recovery of pawn loan principal
through sale of forfeited collateral
|
624,557
|
204,121
|
100,960
|
|||||||||
Pay day loans
made
|
—
|
(164,289
|
)
|
(274,973
|
)
|
|||||||
Pay day loans
repaid
|
—
|
125,982
|
195,534
|
|||||||||
Purchase of property and
equipment
|
(1,130,602
|
)
|
(3,780,554
|
)
|
(42,058
|
)
|
||||||
Deal cost for Superior Galleries
acquisition
|
(70,379
|
)
|
(375,280
|
)
|
(569,782
|
)
|
||||||
Acquisition of Euless Gold &
Silver
|
—
|
(600,000
|
)
|
—
|
||||||||
Proceeds from sale of discontinued
operations
|
—
|
77,496
|
—
|
|||||||||
Proceeds from sale of
building
|
—
|
1,299,898
|
—
|
|||||||||
Proceeds from sale of marketable
securities
|
—
|
396
|
—
|
|||||||||
Net cash used in investing
activities
|
(1,222,178
|
)
|
(3,546,379
|
)
|
(658,790
|
)
|
||||||
Cash flows from financing
activities
|
||||||||||||
Proceeds from
debt
|
2,500,000
|
6,991,578
|
1,247,350
|
|||||||||
Mortgage on new corporate office
and store location
|
—
|
2,441,922
|
—
|
|||||||||
Issuance of common
stock
|
—
|
139,500
|
—
|
|||||||||
Repayments of notes
payable
|
(580,795
|
)
|
(2,357,842
|
)
|
(668,905
|
)
|
||||||
Net cash provided by financing
activities
|
1,919,205
|
7,215,158
|
578,445
|
|||||||||
Net increase (decrease) in cash
and cash equivalents
|
(292,119
|
)
|
(673,734
|
)
|
167,448
|
|||||||
Cash and cash equivalents at
beginning of period
|
536,548
|
1,210,282
|
1,042,834
|
|||||||||
Cash and cash equivalents at end
of period
|
$
|
244,429
|
$
|
536,548
|
$
|
1,210,282
|
The
accompanying notes are an integral part of these consolidated financial
statements.
50
DGSE
COMPANIES, INC. AND SUBSIDIARIES
Consolidated Statements of Cash
Flows (Continued)
Supplemental
disclosures:
2008
|
2007
|
2006
|
||||||||||
Cash
paid during the year for:
|
||||||||||||
Interest
|
$ | 904,242 | $ | 572,592 | $ | 378,562 | ||||||
Income
taxes
|
$ | 600,000 | $ | 50,000 | $ | 435,000 |
The
accompanying notes are an integral part of these consolidated financial
statements.
51
DGSE
Companies, Inc. and Subsidiaries
Notes
to Consolidated Financial Statements
December
31, 2008, 2007 and 2006
Note
1 – Summary of Accounting Policies and Nature of Operations
A summary
of the significant accounting policies applied in the preparation of the
accompanying consolidated financial statements follows:
Principles
of Consolidation and 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 and Euless, Texas, Mt. Pleasant, South
Carolina, Woodland Hills California and through its internet sites.
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.
On July
13, 2007, the Company sold the loan balances from our American Pay Day Center
locations and discontinued operations in those locations. In November
2008, the Company decided to
discontinue the live auction segment of its business activities. This decision
was based on the substantial losses being incurred by this operating segment
during 2008. As a result, the operating results of the auction
segment have been reclassified to discontinued operations for both 2008 and
2007. During 2008 the auction segment incurred a pretax loss of $2,379,151.
As a result of these dispositions, the Consolidated Financial Statements
and related notes have been reclassed to present the results of the American Pay
Day Center locations and auction segment activities as discontinued
operations.
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).
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 three 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.
52
DGSE
COMPANIES, INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements - continued
December
31, 2008, 2007 and 2006
Note
1 – Summary of Accounting Policies and Nature of Operations - continued
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 $2,598,488, $1,442,723 and
$823,106 for 2008, 2007 and 2006, respectively.
Accounts
Receivable
The
Company records trade receivables when revenue is recognized. No
product has been consigned to customers. The Company’s allowance for
doubtful accounts is primarily determined by review of specific trade
receivables. Those accounts that are doubtful of collection are
included in the allowance. These provisions are reviewed to determine
the adequacy of the allowance for doubtful accounts. Trade
receivables are
charged off when there is certainty as to their being
uncollectible. Trade receivables are considered delinquent when
payment has not been made within contract terms. As of December 31,
2008, the Company had a recorded allowance amount of $97,922. The
balance of the Company’s trade receivables is net of the allowance
amount.
Pawn
loans receivable in the amount of $306,620 and $263,856 as of December 31, 2008
and 2007, respectively, are included in the Consolidated Balance Sheets caption
trade receivables. The related pawn service charges receivable in the amount of
$89,235 and $63,532 as of December 31 2008 and 2007, respectively, are also
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
Revenue
is generated from wholesale and retail sales of rare coins, precious metals,
bullion and second-hand jewelry. The recognition of revenue varies for wholesale
and retail transactions and is, in large part, dependent on the type of payment
arrangements made between the parties. The Company recognizes sales on an F.O.B.
shipping point basis.
The
Company sells rare coins to other wholesalers/dealers within its industry on
credit, generally for terms of 14 to 60 days, but in no event greater than one
year. The Company grants credit to new dealers based on extensive
credit evaluations and for existing dealers based on established business
relationships and payment histories. The Company generally does not obtain
collateral with which to secure its accounts receivable when the sale is made to
a dealer. The Company maintains reserves for potential credit losses
based on an evaluation of specific receivables and its historical experience
related to credit losses.
Revenues
for monetary transactions (i.e., cash and receivables) with dealers are
recognized when the merchandise is shipped to the related
dealer.
53
DGSE
COMPANIES, INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements - continued
December
31, 2008, 2007 and 2006
The
Company also sells rare coins to retail customers on credit, generally for terms
of 30 to 60 days, but in no event greater than one year. The Company
grants credit to new retail customers based on extensive credit evaluations and
for existing retail customers based on established business relationships and
payment histories. When a retail customer is granted credit, the Company
generally collects a payment of 25% of the sales price, establishes a payment
schedule for the remaining balance and holds the merchandise as collateral as
security against the customer’s receivable until all amounts due under the
credit arrangement are paid in full. If the customer defaults in the
payment of any amount when due, the Company may declare the customer’s
obligation in default, liquidate the collateral in a commercially reasonable
manner using such proceeds to extinguish the remaining balance and disburse any
amount in excess of the remaining balance to the customer.
Under
this retail arrangement, revenues are recognized when the customer agrees to the
terms of the credit and makes the initial payment. We have a
limited-in-duration money back guaranty policy (as discussed
below).
In
limited circumstances, the Company exchanges merchandise for similar merchandise
and/or monetary consideration with both dealers and retail customers, for which
the Company recognizes revenue in accordance with SFAS 153, “Exchanges of Nonmonetary Assets – An
Amendment of APB Opinion No. 29.” When the Company exchanges merchandise
for similar merchandise and there is no monetary component to the exchange, the
Company does not recognize any revenue. Instead, the basis of the merchandise
relinquished becomes the basis of the merchandise received, less any indicated
impairment of value of the merchandise relinquished. When the Company exchanges
merchandise for similar merchandise and there is a monetary component to the
exchange, the Company recognizes revenue to the extent of monetary assets
received and determine the cost of sale based on the ratio of monetary assets
received to monetary and non-monetary assets received multiplied by the cost of
the assets surrendered.
The
Company has a return policy (money-back guarantee). The policy covers
retail transactions involving graded rare coins only. Customers may return
graded rare coins purchased within 7 days of the receipt of the rare coins for a
full refund as long as the rare coins are returned in exactly the same condition
as they were delivered. In the case of rare coin sales on account, customers may
cancel the sale within 7 days of making a commitment to purchase the rare coins.
The receipt of a deposit and a signed purchase order evidences the commitment.
Any customer may return a coin if they can demonstrate that the coin is not
authentic, or there was an error in the description of a graded
coin.
Revenues
from the sale of consigned goods are recognized as commission income on such
sale if the Company is acting as an agent for the consignor. If in the process
of selling consigned goods, the Company makes an irrevocable payment to a
consignor for the full amount due on the consignment and the corresponding
receivable from the buyer(s) has not been collected by the Company at that
payment date, the Company records that payment as a purchase and the sale of the
consigned good(s) to the buyer as revenue as the Company has assumed all
collection risk.
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”.
54
DGSE
COMPANIES, INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements - continued
December
31, 2008, 2007 and 2006
Note
1 – Summary of Accounting Policies and Nature of Operations - continued
Fair
Value Measures
In
September 2006, the FASB issued SFAS No. 157, “Fair Value Measures” (“SFAS No.
157”). SFAS No. 157 defines fair value, establishes a framework for measuring
fair value and enhances disclosures about fair value measures required under
other accounting pronouncements, but does not change existing guidance as to
whether or not an instrument is carried at fair value. SFAS No. 157 is effective
for fiscal years beginning after November 15, 2007. Effective January
1, 2008, the Company has adopted the provisions of SFAS 157.
SFAS No.
157 emphasizes that fair value is a market-based measurement, not an
entity-specific measurement. Therefore, a fair value measurement should be
determined based on the assumptions that market participants would use in
pricing the asset or liability. As a basis for considering market participant
assumptions in fair value measurements, SFAS No. 157 establishes a fair value
hierarchy that distinguishes between market participant assumptions based on
market data obtained from sources independent of the reporting entity
(observable inputs that are classified within Levels 1 and 2 of the hierarchy)
and the reporting entity's own assumptions about market participant assumptions
(unobservable inputs classified within Level 3 of the hierarchy).
Level 1
inputs utilize quoted prices (unadjusted) in active markets for identical assets
or liabilities that we have the ability to access. Level 2 inputs are inputs
other than quoted prices included in Level 1 that are observable for the asset
or liability, either directly or indirectly. Level 2 inputs may include quoted
prices for similar assets and liabilities in active markets, as well as inputs
that are observable for the asset or liability (other than quoted prices), such
as interest rates, foreign exchange rates, and yield curves that are observable
at commonly quoted intervals. Level 3 inputs are unobservable inputs for the
asset or liability, which are typically based on an entity's own assumptions, as
there is little, if any, related market activity. In instances where the
determination of the fair value measurement is based on inputs from different
levels of the fair value hierarchy, the level in the fair value hierarchy within
which the entire fair value measurement falls is based on the lowest level input
that is significant to the fair value measurement in its entirety. Our
assessment of the significance of a particular input to the fair value
measurement in its entirety requires judgment, and considers factors specific to
the asset or liability. The adoption did not have any financial impact on the
Company’s results of operations and financial position.
Shipping
and Handling Costs
Shipping
and handling costs are included in selling general and administrative expenses,
and amounted to $305,988, $266,867 and $178,999 for 2008, 2007 and 2006,
respectively.
Taxes Collected From
Customers
In June of 2006, the FASB issued
Emerging Issues Task Force 06-03, "How Taxes Collected from Customers and
Remitted to Governmental Authorities Should Be Presented in the Income
Statement" ("EITF 06-03"). The consensus reached in EITF 06-03 allows companies
to adopt a policy of presenting taxes in the income statement on either a gross
basis (included in revenues and costs) or net basis (excluded from revenues).
Taxes within the scope of EITF 06-03 would include taxes that are imposed on a
revenue transaction between a seller and a customer, for example, sales taxes,
use taxes, value-added taxes and some types of excise taxes. The Company has
consistently recorded all taxes within the scope of EITF 06-03 on a net
basis.
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.
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.
55
DGSE
COMPANIES, INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements - continued
December
31, 2008, 2007 and 2006
Stock-based
Compensation
Effective
January 1, 2006, we adopted the fair value recognition provisions of SFAS No.
123 (revised 2004), Share Based Payment, (SFAS No. 123(R)) for all share-based
payment award to employees and directors including stock options related to our
employee stock purchase plan. In addition, we applied the provisions
of Staff Accounting Bulletin No. 107(SAB No. 107), issued by the SEC,
in our adoption of SFAS No. 123(R).
We
adopted SFAS No. 123(R) using the modified-prospective-transition
method. Under this transition method, stock-based compensation
expense recognized after the effective date includes: (1) compensation cost for
all share-based payments granted prior to, but not yet vested as of January 1,
2006, based on the measurement date fair value estimate in accordance with the
original provisions of SFAS No. 123, and (2) compensation cost for all
share-based payments granted subsequent to January 1, 2006, based on the
measurement date fair value estimate in accordance with the provisions of SFAS
No. 123(R).
Stock-based
compensation expense recognized each period is based on the greater of the value
of the portion of share-based payment awards under the straight-line method or
the value of the portion of share-based payment awards that is ultimately
expected to vest during the period. In accordance with SFAS No.
123(R), we estimate forfeitures at the time of grant and revise our estimate, if
necessary, in subsequent period if actual forfeitures differ from those
estimates.
Upon
adoption of SFAS No. 123(R), we elected to use the Black-Scholes-Merton
option-pricing formula to value share-based payments granted to employees
subsequent to January 1, 2006 and elected to attribute the value of
stock-based compensation to expense using the straight-line single option
method.
On
November 10, 2005, the Financial Accounting Standards Board (FASB) issued
FASB Staff Position No. FAS 123(R)-3, “Transition Election Related to Accounting
for Tax Effects of Share-Based Payment Awards,” which detailed an alternative
transition method for calculating the tax effects of stock-based compensation
pursuant to SFAS No. 123(R). This alternative transition method included
simplified methods to establish the beginning balance of the additional paid-in
capital pool (APIC pool) related to the tax effects of employee stock-based
compensation and to determine the subsequent impact on the APIC pool and
Consolidated Statement of Cash Flows of the tax effects of employee stock-based
compensation awards that are outstanding upon adoption of SFAS No. 123(R).
The tax effect of employee stock-based compensation has no APIC
pool.
SFAS
No. 123(R) requires the cash flows resulting from the tax benefits
resulting from tax deductions in excess of the compensation cost recognized for
those options (excess tax benefits) to be classified as financing cash flows.
There has been no excess tax benefit as of December 31, 2008, 2007 and
2006.
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.
In
response to certain SEC comments in conjunction with their procedural review of
the Company’s Form 10K for the years ended December 31, 2008 and 2007 filed on
March 31, 2009. The Company has made certain reclassifications to the
Statement of Operation for the years ended December 31, 2008 and 2007 which are
included herein to the Amended Form 10K for the years ended December 31, 2008
and 2007. The Company reclassified the impairment of goodwill in the
amount of $8,185,444 from other income (expense) to discontinued operations
($559,681), net of applicable income tax expense ($289,220) and to costs and
expenses ($7,337,443). The reclassifications were made in order to comply with
presentation required by SFAS 144, Accounting for the Impairment or
Disposal of Long-Lived Assets. The reclassification did not affect the
Company’s net earnings for the year ended December 31, 2008. The
following outlines the effect of the reclassification for the year ended
December 31, 2008.
As
Originally
Reported
|
As
Adjusted
|
Effect
of
Change
|
||||||||||
Sales
|
$ | 105,219,060 | $ | 105,219,060 | - | |||||||
Costs
and expenses
|
101,564,216 | 108,901,659 | 7,337,443 | |||||||||
Operating
income
|
3,654,844 | (3,682,599 | ) | 7,337,443 | ||||||||
Other
(income) expense
|
9,176,034 | 990,590 | (8,185,444 | ) | ||||||||
Earnings
before income taxes
|
(5,521,190 | ) | (4,673,189 | ) | (848,001 | ) | ||||||
Income
tax expense
|
759,777 | 1,048,997 | 289,220 | |||||||||
Net
earnings (loss) from continuing operations
|
(6,280,967 | ) | (5,721,286 | ) | (559,681 | ) | ||||||
Discontinued
operations:
|
||||||||||||
Loss
(Gain) from discontinued
operations (less applicable
income tax benefit (expense)
|
1,570,240 | 2,129,920 | 559,681 | |||||||||
Loss
on disposal of discontinued operations (less applicable income tax
benefit)
|
- | - | - | |||||||||
Net
earnings
|
$ | (7,851,207 | ) | $ | (7,851,207 | ) | - | |||||
Earnings
per common share
|
||||||||||||
Basic
|
||||||||||||
From
continuing operations
|
$ | (.65 | ) | $ | (.58 | ) | $ | .07 | ||||
From
discontinued operations
|
(.16 | ) | (.23 | ) | (.07 | ) | ||||||
Net
earnings per common share
|
$ | (.81 | ) | $ | (.81 | ) | $ | - | ||||
Diluted
|
||||||||||||
From
continuing operations
|
$ | (.65 | ) | $ | (.58 | ) | $ | .07 | ||||
From
discontinued operations
|
(.16 | ) | (.23 | ) | (.07 | ) | ||||||
Net
earnings per common share
|
$ | (.81 | ) | $ | (.81 | ) | $ | - |
56
DGSE
COMPANIES, INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements - continued
December
31, 2008, 2007 and 2006
Certain
reclassifications have been made to the Company’s Statement of Operation for the
year ended December 31, 2007. The Company reclassed the gain on the
sale of the Company’s previous operating facility in the amount of $579,447 from
other income (expense) to costs and expenses. The reclassifications were made in
order to comply with presentation required by SFAS 144, Accounting for the Impairment or
Disposal of Long-Lived Assets. The reclassification did not affect the
Company’s net earnings for the year ended December 31, 2007. The
following outlines the effect of the reclassification for the year ended
December 31, 2007.
As
Originally
Reported
|
As
Adjusted
|
Effect
of
Change
|
||||||||||
Sales
|
$ | 61,469,076 | $ | 61,469,076 | - | |||||||
Costs
and expenses
|
60,281,044 | 59,701,597 | (579,447 | ) | ||||||||
Operating
income
|
1,188,032 | 1,767,479 | ( 579,447 | ) | ||||||||
Other
(income) expense
|
122,534 | 701,981 | 579,117 | |||||||||
Earnings
before income taxes
|
1,065,498 | ) | 1,065,498 | -- | ||||||||
Income
tax expense
|
250,056 | 250,056 | -- | |||||||||
Net
earnings (loss) from continuing operations
|
815,442 | ) | 815,442 | -- | ||||||||
Discontinued
operations:
|
||||||||||||
Loss
(Gain) from discontinued
operations (less applicable
income tax benefit (expense)
|
(21,207 | ) | (21,207 | ) | -- | |||||||
Loss
on disposal of discontinued operations (less applicable income tax
benefit)
|
81,630 | 81,630 | - | |||||||||
Net
earnings
|
$ | 755,019 | ) | $ | 755,019 | ) | - | |||||
Earnings
per common share
|
||||||||||||
Basic
|
||||||||||||
From
continuing operations
|
$ | .11 | $ | .11 | $ | .-- | ||||||
From
discontinued operations
|
(.01 | ) | (01 | ) | -- | |||||||
Net
earnings per common share
|
$ | .10 | $ | .10 | $ | - | ||||||
Diluted
|
||||||||||||
From
continuing operations
|
$ | .10 | $ | .10 | ) | $ | -- | |||||
From
discontinued operations
|
(.01 | ) | (.01 | ) | -- | |||||||
Net
earnings per common share
|
$ | (.09 | ) | $ | (.09 | ) | $ | - |
New
Accounting Pronouncements
In September 2006, the
FASB issued SFAS No. 157, “Fair Value Measures” (“SFAS No. 157”). SFAS No. 157
defines fair value, establishes a framework for measuring fair value and
enhances disclosures about fair value measures required under other accounting
pronouncements, but does not change existing guidance as to whether or not an
instrument is carried at fair value. SFAS No. 157 is effective for fiscal years
beginning after November 15,
2007. Effective January 1,
2008, the Company has adopted the provisions of SFAS 157. The adoption did not
have any financial impact on the Company’s results of operations and financial
position.
In February 2007, the FASB issued SFAS
No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities”
(SFAS No. 159). SFAS No. 159 permits entities to choose to measure many
financial assets and financial liabilities at fair value. Unrealized gains and
losses on items for which the fair value option has been elected will be
reported in earnings. SFAS No. 159 is effective for fiscal years beginning after
November 15, 2007. Effective January 1, 2008, the Company has adopted
the provisions of SFAS 159 except as it applies to those nonfinancial assets and
nonfinancial liabilities. Due to the fact that management has not elected to use
the fair value option for eligible items, the adoption did not have any
financial impact on the Company’s results of operations and financial
position.
In December 2007, the FASB issued
SFAS No. 141 (revised 2007), “Business Combinations” (“SFAS 141R”). Among
other changes, SFAS 141R requires the acquiring entity in a business combination
to recognize all (and only) the assets acquired and liabilities assumed in the
transaction at fair value; and establishes the acquisition-date fair value as
the measurement objective for all assets acquired and liabilities assumed,
including earn-out provisions. SFAS 141R is effective for business combinations
occurring in the first annual reporting period beginning after December 15,
2008. The Company
is evaluating the
anticipated effect of this recently issued standard on our consolidated results
of operations, financial position and cash flows.
In April 2008, the FASB issued FASB
Staff Position No. 142-3, “Determination of the Useful Life of Intangible
Assets” (“FSP No. 142-3”), which amends the factors that should be considered
when developing renewal or extension assumptions used to determine the useful
life of an intangible asset under Statement of Financial Accounting Standards
No. 142 (“SFAS No. 142”), “Goodwill and Other Intangible Assets”, in order to
improve consistency between SFAS No. 142 and the period of expected cash flows
to measure the fair value of the asset under Statement of Financial Accounting
Standards No. 141 (revised 2007), “Business Combinations” and other U.S.
generally accepted accounting practices. This FASB Staff Position is effective
for fiscal periods beginning on or after December 15, 2008. The adoption of FSP
No. 142-3 is not expected to have a material impact the Company’s results of operations and financial
position.
In May 2008, the FASB issued SFAS
No. 162, “The Hierarchy of Generally Accepted Accounting Principles” (“SFAS
162”). This statement identifies the sources of accounting principles and the
framework for selecting the principles used in the preparation of financial
statements of nongovernmental entities that are presented in accordance with
GAAP. With the issuance of this statement, the
FASB concluded that the GAAP hierarchy should be directed toward the entity and
not its auditor, and reside in the accounting literature established by the FASB
as opposed to the American Institute of Certified Public Accountants (AICPA)
Statement on Auditing Standards No. 69, “The Meaning of Present Fairly in
Conformity With Generally Accepted Accounting Principles.” This statement is
effective 60 days following the SEC’s approval of the Public Company Accounting
Oversight Board amendments to AU Section 411, “The Meaning of Present
Fairly in Conformity With Generally Accepted Accounting Principles.”
The Company has evaluated the new statement and
has determined that it will
not have a significant impact on the determination or reporting of its financial
results.
57
DGSE
COMPANIES, INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements - continued
December
31, 2008, 2007 and 2006
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:
2008
|
2007
|
|||||||
Jewelry
|
$ | 10,925,247 | $ | 8,118,454 | ||||
Scrap
gold
|
636,843 | 414,099 | ||||||
Bullion
|
1,931,925 | 486,991 | ||||||
Rare
coins
|
1,827,294 | 3,482,248 | ||||||
Other
|
731,524 | 473,990 | ||||||
Total
|
$ | 16,052,833 | $ | 12,975,782 |
Note
4 – Investments in Marketable Equity Securities
As of
December 31, 2008 and 2007, the Company’s marketable securities were classified
as follows:
2008
|
||||||||||||||||
Cost
|
Gross
Unrealized
Gains
|
Gross
Unrealized
Losses
|
Fair Value
|
|||||||||||||
Non-Current:
|
||||||||||||||||
Available-for-sale:
|
||||||||||||||||
Marketable
Equity Securities
|
- | * | - | - | - | * |
* See discussion below
regarding permanent impairment of marketable securities
2007
|
||||||||||||||||
Cost
|
Gross
Unrealized
Gains
|
Gross
Unrealized
Losses
|
Fair Value
|
|||||||||||||
Non-Current:
|
||||||||||||||||
Available-for-sale:
|
||||||||||||||||
Marketable
Equity Securities
|
199,915 | - | 138,146 | 61,769 |
Investment
income (loss) for the years ended December 31, 2008, 2007 and 2006 consists of
the following:
2008
|
2007
|
2006
|
||||||||||
Interest
Income
|
- | - | - | |||||||||
Dividend
Income
|
- | - | - | |||||||||
(Loss)
on sale of marketable securities
|
- | (3,890 | ) | - | ||||||||
Impairment
of marketable securities
|
(115,991 | ) | - | - | ||||||||
Total
|
(115,991 | ) | (3,890 | ) | - |
The
Company invests in various equity securities for business and strategic
purposes. Investments in public companies are classified as “available for sale”
and are carried at fair value based on quoted market prices. The Company reviews
its marketable equity holdings in publicly traded companies on a regular basis
to determine if any security has experienced an other-than-temporary decline in
fair value. The Company considers the investee company’s cash position, earnings
and revenue outlook, stock price performance, liquidity and management
ownership, among other factors, in its review. If it is determined that an
other-than-temporary decline exists in a marketable equity security, the Company
writes down the investment to its market value and records the related
write-down as an investment loss in its Statement of
Operations.
58
DGSE
COMPANIES, INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements - continued
December
31, 2008, 2007 and 2006
At
December 31, 2008, the Company wrote-off the value its equity security
investments. The write-off amounted to $115,992 and was due to a decline in the
fair value of the equity security which, in the opinion of management, was
considered to be other than temporary. The write-off is included in “Other
income (expense)s” in the accompanying Statement of Operations for
2008.
59
DGSE
COMPANIES, INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements - continued
December
31, 2008, 2007 and 2006
Note
5 – Property and Equipment
A summary
of property and equipment at December 31, 2008 and 2007 is as
follows:
2008
|
2007
|
|||||||
Buildings
and improvements
|
$ | 3,175,242 | $ | 2,565,533 | ||||
Machinery
and equipment
|
1,224,457 | 812,833 | ||||||
Furniture
and fixtures
|
939,168 | 806,108 | ||||||
5,325,613 | 4,184,474 | |||||||
Less
accumulated depreciation and amortization
|
1,631,031 | 1,151,075 | ||||||
3,707,836 | 3,033,399 | |||||||
Land
|
1,160,470 | 1,160,470 | ||||||
Total
Property and Equipment
|
$ | 4,868,306 | $ | 4,193,869 |
During
2007, we sold the land and building at which our Dallas retail store and
corporate headquarters were previously located for $1,299,898. The
net pretax gain from the sale was $579,447 and is included in “Income from
continuing operations” in the 2007 Statement of Operations. The net
book value of the assets sold was $712,518, which is net of accumulated
depreciation of $352,982.
Note
6 – Acquisitions
Superior Galleries,
Inc. On May 30, 2007, we completed our acquisition of Superior
Galleries, Inc., which we refer to as Superior, pursuant to an amended and
restated agreement and plan of merger and reorganization dated as of January 6,
2007, which we refer to as the merger agreement, with Superior and Stanford
International Bank Ltd., then Superior’s largest stockholder and its principal
lender, which we refer to as Stanford, as stockholder agent for the Superior
stockholders, whereby Superior
became a wholly owned subsidiary of DGSE Companies, Inc. Superior’s principal line of business is
the sale of rare coins on a retail, wholesale, and auction
basis. Superior
now operates a store in Woodland Hills, CA. The total purchase price of
approximately $13.6 million was broken down as
follows:
Shares
|
Stock Price
|
Extended Price
|
||||||||||
Common
stock
|
3,669,067 | $ | 2.55 | $ | 9,356,121 | |||||||
A warrants
|
845,634 | 1.27 | (1) | 1,073,955 | ||||||||
B warrants
|
863,000 | 2.55 | 2,220,650 | |||||||||
Exercise Price B
warrants
|
863,000 | $ | .001 | (863 | ) | |||||||
Direct transaction
costs
|
1,176,290 | |||||||||||
Total purchase
price
|
$ | 13,806,153 |
(1)
|
The $1.27 is the fair value of the
warrants calculated under the Black Sholes method as of the acquisition
date.
|
The total purchase price has been
allocated to the fair value of assets acquired and liabilities assumed as
follows:
Goodwill
|
$
|
8,203,448
|
||
Intangible
assets...
|
2,521,340
|
|||
Deferred tax
asset
|
1,860,475
|
(1)
|
||
Property and other
assets
|
1,068,958
|
|||
Inventory
|
3,260,766
|
|||
Liabilities
assumed
|
(3,108,834
|
)
|
||
Total purchase
price
|
$
|
13,806,153
|
(1) Subsequent to date of acquisition the Company recorded an adjustment to reduce goodwill and increase deferred tax assets to reflect the change in estimated fair value of the net operating loss carryforwards acquired in the Superior acquisition.
60
DGSE
COMPANIES, INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements - continued
December
31, 2008, 2007 and 2006
In accordance with SFAS 142, the
goodwill will not be amortized but instead tested for impairment in accordance
with the provisions of SFAS 142 at least annually and more frequently upon
the occurrence of certain events.
During
2008, the Company reflected $8,185,443 of goodwill relating to the acquisition
of Superior Galleries. Inc. in May 2007. Under SFAS No. 142, the Company is
required to undertake an annual impairment test at its year end or when there is
a triggering event. In addition to the annual impairment review, there were a
number of triggering events in the fourth quarter due to the significant
operating losses of Superior and the impact of the economic downturn on
Superior’s operations and the decline in the Company’s share price resulting in
a substantial discount of the market capitalization to tangible net asset value.
An evaluation of the recorded goodwill was undertaken and it was determined that
it was impaired. Accordingly, to reflect the impairment, the Company recorded a
non-cash charge of $8,185,443, which eliminated the value of the goodwill
related to Superior.
The
operating results of Superior have been included in the consolidated financial
statements since the acquisition date of May 30, 2007. The following unaudited
condensed consolidated financial information reflects the pro forma results of
operations for the year ended December 31, 2007 as if the acquisition of
Superior had occurred on January 1 of 2007 after giving effect to purchase
accounting adjustments as compared to actual results of operations for the year
ended December 31, 2008 and the effects of the discontinued operations related
to the auction segment.
The pro
forma results have been prepared for comparative purposes only and do not
purport to be indicative of what operating results would have been had
the acquisition actually taken place at the beginning of the period, and may not
be indicative of future operating results (in thousands, except per share data):
Year Ended December 31,
|
||||||||
(In thousands, except per share data)
|
2008
|
2007
|
||||||
(Unaudited)
|
||||||||
Pro Forma
|
||||||||
Total revenue
|
$ | 105,219 | $ | 73,565 | ||||
Net earnings
(loss)
|
$ | (7,851 | ) | $ | (2,922 | ) | ||
Net earnings per share —
basic
|
$ | (.80 | ) | $ | (.33 | ) | ||
Net earnings per share —
diluted
|
$ | (.80 | ) | $ | (.33 | ) | ||
Weighted average shares —
basic
|
9,834 | 8,582 | ||||||
Weighted average shares —
diluted
|
9,834 | 10,353 |
In relation to the acquisition, as of
June 29, 2007, Stanford and Dr. L.S. Smith, our chairman and chief
executive officer, collectively had the power to vote approximately 63% of our
voting securities, and beneficially owned approximately 56.4% of our voting
securities on a fully-diluted basis (after giving effect to the exercise of all
options and warrants held by them which are exercisable within sixty days of
June 29, 2007 but not giving effect to the exercise of any other options or
warrants). Consequently, these two stockholders may have sufficient voting power
to control the outcome of virtually all corporate matters submitted to the vote
of our common stockholders. Those matters could include the election of
directors, changes in the size and composition of our board of directors,
mergers and other business combinations involving us, or the liquidation of our
company. In addition, Stanford and Dr. Smith have entered into a corporate
governance agreement with us, which entitles Stanford and Dr. Smith to each
nominate two “independent” directors to our board and entitles Dr. Smith,
our chairman and chief executive officer, and William H. Oyster, our president
and chief operating officer, to be nominated to our board for so long as each
remains an executive officer.
61
DGSE
COMPANIES, INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements - continued
December
31, 2008, 2007 and 2006
Through this control of company
nominations to our board of directors and through their voting power, Stanford
and Dr. Smith are able to exercise substantial control over certain
decisions, including decisions regarding the qualification and appointment of
officers, dividend policy, access to capital (including borrowing from
third-party lenders and the issuance of additional equity securities), a merger
or consolidation with another company, and our acquisition or disposition of
assets. Also, the concentration of voting power in the hands of Stanford and
Dr. Smith could have the effect of delaying or preventing a change in
control of our company, even if the change in control would benefit our other
stockholders. The significant concentration of stock ownership may adversely
affect the trading price of our common stock due to investors’ perception that
conflicts of interest may exist or arise.
Euless Gold &
Silver, Inc.
On May 9, 2007 we purchased all of the
tangible assets of Euless Gold and Silver, Inc., located in Euless,
Texas. The purchase price paid for these assets totaled $1,000,000
including $600,000 in cash and a two year note in the amount of
$400,000. We opened a new retail store in the former Euless Gold
& Silver facility and operate under the name of Dallas Gold & Silver
Exchange. Of the assets received, $990,150 was inventory and the
remainder was fixed assets.
We entered into these transactions
seeing them as opportunistic acquisitions that would allow us to expand our
operations and provide a platform for future
growth.
62
DGSE
COMPANIES, INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements - continued
December
31, 2008, 2007 and 2006
Note
7 – Goodwill
The
Company recognized an increase in goodwill as a result of the Superior
Galleries, Inc. acquisition during 2007. At December 31, goodwill was
reflected for the following reporting units:
2008
|
2007
|
|||||||
Superior
Galleries, Inc
|
$ | — | $ | 8,115,064 | ||||
Wholesale
Watch Sales
|
$ | 837,117 | $ | 837,117 | ||||
Total
Goodwill
|
$ | 837,117 | $ | 8,952,181 |
During
2008, the Company reflected $8,185,443 of goodwill, including $70,379 relating
to Superior merger costs classified in other assets during 2008 relating to the
acquisition of Superior Galleries, Inc. in May 2007, which were subsequently
reclassified in 2008 to goodwill prior to recognition of impairment. Under SFAS
No. 142, the Company is required to undertake an annual impairment test at its
year end or when there is a triggering event. In addition to the annual
impairment review, there were a number of triggering events in the fourth
quarter due to the significant operating losses of Superior and the impact of
the economic downturn on Superior’s operations and the decline in the Company’s
share price resulting in a substantial discount of the market capitalization to
tangible net asset value. An evaluation of the recorded goodwill was undertaken,
which considered two methodologies to determine the fair-value of the
entity:
|
·
|
A
market capitalization approach, which measure market capitalization at the
measurement date.
|
|
·
|
A
discounted cash flow approach, which entails determining fair value using
a discounted cash flow methodology. This method requires
significant judgment to estimate the future cash flow and to determine the
appropriate discount rates, growth rates, and other
assumptions.
|
Each of
these methodologies the Company believes has merit, and resulted in the
determination that goodwill was impaired. Accordingly, to reflect the
impairment, the Company recorded a non-cash charge of $8,185,443, which
eliminated the value of the goodwill related to Superior.
No
impairment losses were recognized during 2007 or 2006.
Note
8 – Notes Payable
At
December 31, 2008, the Company was obligated to various individuals under
unsecured, demand notes bearing annual interest rates of 8% to 12% totaling
$191,078.
At
December 31, 2007, the Company was obligated to various individuals under
unsecured, demand notes bearing annual interest rates of 8% to 12% totaling
$187,468.
At
December 31, 2006, the Company was obligated to various individuals under
unsecured, demand notes bearing annual interest rates of 8% to 12% totaling
$183,708.
63
DGSE
COMPANIES, INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements - continued
December
31, 2008, 2007 and 2006
Note
9 – Long-Term Debt
2008
|
2007
|
|||||||
A
summary of long-term debt at December 31, follows:
|
||||||||
Revolving promissory notes payable
to bank, a note of $3,595,000 at December 31, 2008 and 2007 which bears
interest at prime plus 1-1/2% (4.25% and 9.5% at December 31, 2008 and
2007), respectively, and is due June 22, 2009 and a note of $1,000,000
which bears interest at prime plus 1-1/2% ( 4.25 and 9.5% at December 31,
2008 and 2007), respectively, is due in equal monthly installments of
$16,667 through June 2009. Balance of note was $399,976 and $584,721 as of
December 31, 2008 and 2007, respectively. The defined borrowing base
requirement is based on eligible trade receivables and inventory. As of
December 31, 2008, available but unused borrowing capacity on the revolver
was $0. 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. In addition to the above, the Company
has an additional $11,500,000 line of credit with Stanford International
Bank, LTD. Interest on this facility is at the prime rate, as reported in
the Wall Street Journal and the facility will mature and become due in May
2011. Of this line, $9,200,000 has been drawn against, most of which
related to the Superior Galleries acquisition. As of December 31, 2008,
$2,300,000 was available to us.
|
$ | 13,194,976 | $ | 10,879,721 | ||||
Our mortgage
payable as of December 31, 2008 is due in monthly installments of $22,744,
including interest of 6.70% with a balance due in August
2016.
|
||||||||
2,332,484 | 2,435,364 | |||||||
Note
payable, due in quarterly payments of $57,691 including interest of
8.25%. The final payment is due May 1, 2009
|
110,791 | 315,128 | ||||||
Note
payable, due January 2, 2009. Interest is payable monthly at a rate of
8%
|
247,556 | 310,556 | ||||||
Capital
lease obligations
|
24,930 | 50,763 | ||||||
15,910,737 | 13,991,532 | |||||||
Line
of credit
|
(3,595,000 | ) | ||||||
Less
current maturities
|
(599,972 | ) | (501,631 | ) | ||||
$ | 11,715,765 | $ | 13,489,901 |
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:
December 31,
|
Long-term Debt
|
Obligations under
Capital Leases
|
Totals
|
|||||||||
2009
|
$ | 4,173,977 | $ | 21,048 | $ | 4,195,025 | ||||||
2010
|
99,109 | 3,882 | 102,991 | |||||||||
2011
|
9,300,280 | — | 9,300,280 | |||||||||
2012
|
107,209 | — | 107,209 | |||||||||
2013
|
362,172 | — | 362,172 | |||||||||
Thereafter
|
1,843,060 | — | 1,843,060 | |||||||||
15,885,807 | 24,930 | 15,910,737 | ||||||||||
Less
current portion
|
(578,924 | ) | (21,048 | ) | (599,972 | ) | ||||||
Less
line of credit
|
(3,595,000 | ) | — | (3,595,000 | ) | |||||||
$ | 11,711,883 | $ | 3,882 | $ | 11,715,765 |
64
DGSE
COMPANIES, INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements - continued
December
31, 2008, 2007 and 2006
Note
10 – 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, 2008,
2007 and 2006 is as follows:
Net Earnings
|
|
Shares
|
Per Share
|
|||||||||
|
(In
thousands, except per share data)
|
|||||||||||
Year
ended December 31, 2008
|
||||||||||||
Basic
earnings per common share
|
$ | (7,851,207 | ) | 9,708,045 | $ | (0.81 | ) | |||||
Effect
of dilutive stock options
|
— | — | ||||||||||
Diluted
earnings per common share
|
$ | (7,851,207 | ) | 9,708,045 | $ | (0.81 | ) | |||||
Year
ended December 31, 2007
|
||||||||||||
Basic
earnings per common share
|
$ | 755,019 | 7,507,579 | $ | 0.10 | |||||||
Effect
of dilutive stock options
|
— | 774,308 | ||||||||||
Diluted
earnings per common share
|
$ | 755,019 | 8,281,887 | $ | 0.09 | |||||||
Year
ended December 31, 2006
|
||||||||||||
Basic
earnings per common share
|
$ | 611,245 | 4,913,920 | $ | 0.12 | |||||||
Effect
of dilutive stock options
|
— | 93,619 | ||||||||||
Diluted
earnings per common share
|
$ | 611,245 | 5,006,909 | $ | 0.12 |
For the year ended December 31, 2008,
2007 and 2006, approximately 1.4 million shares, 0 share and 0 shares,
respectively related to employee stock options were not added to the denominator
because inclusion of such shares would be antidilutive.
For the year ended December 31, 2008,
2007 and 2006, approximately 400,000 shares, 0 share and 0 shares, respectively
related to warrants issued in conjunction with certain acquisitions were not
added to the denominator because inclusion of such shares would be
antidilutive.
The following table sets forth
outstanding shares of common stock issued in the form of stock purchase
warrants and employee stock options as of December 31:
2008
|
2007
|
2006
|
||||||||||
Warrants issued in conjunction
with financing
|
- | 3,982 | 45,000 | |||||||||
Warrants issued in conjunction
with acquisitions
|
438,672 | 370,928 | ||||||||||
Common stock
options
|
1,443,134 | 399,398 | - |
The warrants issued in conjunction with
financing were issued to expire on July 5, 2008 and were issued at an exercise price of
$3.10. The warrants issued in conjunction with acquisitions were
issued to expire on May 29, 2014 at an exercise price of $1.89.
Note
11 – Stock Options
In March 2004, our board of directors
and the stockholders approved the 2004 Stock Option Plan that provided for
incentive stock options and nonqualified stock options to be granted to key
employee and certain directors. Our Board of Directors or designated
committee established the terms of each option granted under the 2004 Stock
Option Plan. The stock options granted under the plan generally vest
over 1 to 5 years and have a maximum contractual life of 10 years. At
December 31, 2008 we had 241,845 options available for grant and 1,458,155
options granted and outstanding under the 2004 Stock Option
Plan.
65
DGSE
COMPANIES, INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements - continued
December
31, 2008, 2007 and 2006
In May 2007, our board of directors and
the stockholders approved the 2006 Equity Inventive Plan that provided for
incentive stock options and nonqualified stock options to be granted to key
employee and certain directors. Our Board of Directors or designated
committee established the terms of each option granted under the 2006 Equity
Incentive Plan. The stock options granted under the plan generally
vest over 1 to 5 years and have a maximum contractual life of 10
years. At December 31, 2008 we had 750,000 options available for
grant and no options granted and outstanding under the 2006 Equity Incentive
Plan.
Prior to January 1, 2006, the Company
elected to follow Accounting Principles Board Opinion (APB) NO.25, Accounting
for Stock Issued to Employees, and related interpretations to account for its
employee and director stock options, as permitted by Statement of Financial
Accounting Standards (SFAS) No. 123, Accounting for Stock-Based
Compensation. Effective January 1, 2006, the Company adopted the fair
value recognition provision of SFAS No. 123 (revised 2004), Share-Based
Payments, (SFAS No. 123(R) for all share-based payment awards to employees and
directors including employee stock options. In addition, the Company
has applied the provisions of Staff Accounting Bulletin No. 107 (SAB No. 107),
issued by the Securities and Exchange Commission, in our adoption of SFAS No.
123(R).
The Company adopted SFAS No. 123(R)
using the modified-prospective-transition method. Under this
transition method, stock-based compensation expense recognized after the
effective date includes: (1) compensation cost for all share-based
payments granted prior to, but not yet vested as of January 1, 2006, based on
the grant date fair value estimate in accordance with the original provisions of
SFAS No. 123, and (2) compensation cost for all share-based payments granted
subsequent to January 1, 2006, based on the grant-date fair value estimate in
accordance with the provision of SFAS No. 123. Results from prior
periods have not been restated and do not include the impact of SFAS No.
123(R). Stock-based compensation expense under SFAS No. 123(R) for
the year ended December 31, 2006 was $0, relating to employee and director stock
options and our employee stock purchase plan. Stock-based
compensation expense under the provision of APB No. 25 for the year ended
December 31, 2006 was insignificant.
Stock-based compensation expense
recognized each period is based on the value of the portion of share-based
payment awards that is ultimately expected to vest during the
period. SFAS No. 123(R) requires forfeitures to be estimated at the
time of grant and revised, if necessary, in subsequent periods if actual
forfeitures differ from those estimates. In our pro forma disclosures
required under SFAS No. 123 for periods prior to 2006, the Company accounted for
forfeitures as they occurred.
Upon adoption of SFAS No. 123(R), the
Company elected to use the Black-Scholes-Merton option-pricing formula to value
share-based payments granted to employees subsequent to January 1, 2006 and
elected to attribute the value of stock-based compensation to expense using the
straight-line single option method. These methods were previously
used for the Company’s pro forma information required under SFAS No.
123.
On November 10, 2005, the Financial
Accounting Standards Board (FASB) issued FASB Staff Position No. FAS 123(R)-3,
“Transition Election Related to Accounting for Tax Effects of Share-Based
Payment Awards”, which detailed an alternative transition method for calculating
the tax effects of stock-based compensation pursuant to SFAS No. 123(R). This
alternative transition method included simplified methods to establish the
beginning balance of the additional paid-in capital pool (APIC pool) related to
the tax effects of employee stock-based compensation and to determine the
subsequent impact on the APIC pool and Consolidated Statement of Cash Flows of
the tax effects of employee stock-based compensation awards that are outstanding
upon adoption of SFAS No. 123(R). As of December 31, 2008, we have
not recorded the tax effects of employee stock-based compensation and have made
no adjustments to the APIC pool.
SFAS No. 123(R) requires the cash flows
resulting from the tax benefits resulting from tax deductions in excess of the
compensation cost recognized for those options (excess tax benefits) to be
classified as financing cash flows. As there have been no stock options
exercised, we have not reported these excess tax benefits as of December 31,
2008. The following table summarizes the activity in common shares subject to
options for the years ended December 31, 2008, 2007 and
2006:
66
DGSE
COMPANIES, INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements - continued
December
31, 2008, 2007 and 2006
At December 31,
|
||||||||||||||||||||||||
2008
|
2007
|
2006
|
||||||||||||||||||||||
Shares
|
Weighted
average
exercise
price
|
Shares
|
Weighted
average
exercise
price
|
Shares
|
Weighted
average
exercise
price
|
|||||||||||||||||||
Outstanding at beginning of
year
|
1,479,252 | $ | 2.13 | 1,403,134 | $ | 2.03 | 1,403,134 | $ | 2.03 | |||||||||||||||
Granted
|
- | 6.00 | 126,468 | 9.22 | - | 0.00 | ||||||||||||||||||
Exercised
|
- | 0.00 | - | 0.00 | - | 0.00 | ||||||||||||||||||
Forfeited
|
(21,097 | ) | 5.72 | (50,350 | ) | 14.36 | - | 0.00 | ||||||||||||||||
Outstanding at end of
year
|
1,458,155 | $ | 2.17 | 1,479,252 | $ | 2.35 | 1,403,134 | $ | 2.03 | |||||||||||||||
Options exercisable at end of
year
|
1,418,155 | $ | 2.16 | 1,417,645 | $ | 2.13 | 1,403,134 | $ | 2.03 |
The weighted average estimated fair
value of stock options granted during 2007 was $4.62 using the
Black-Scholes-Morton option pricing formula utilizing a dividend yield of $0,
volatility of 55%, risk-free rate of 3.8%, and expected life of 7
years. Dividend yield was determined to be $0 as these have not been
historically paid. Expected volatility is based on the historical
volatility calculated from the historical values of the Company’s stock
prices. The risk-free rate is based on the U.S. treasury yield curve
in effect at the time of grant. The company estimates for forfeitures
based on historical data.
Information about Plan stock options
outstanding at December 31, 2008 is summarized as follows:
Options outstanding
|
|||||||||||||
Range of exercise prices
|
Number
outstanding
|
Weighted average
remaining
contractual life
|
Weighted
average
exercise price
|
Aggregate
intrinsic value
|
|||||||||
$1.12
|
267,857 |
4 years
|
$ | 1.12 | $ | 155,000 | |||||||
$1.13 to
$2.25
|
1,072,777 |
4 years
|
2.21 | - | |||||||||
$2.26 to
$2.82
|
35,000 |
4 years
|
2.60 | - | |||||||||
$2.83 to
$4.19
|
17,500 |
1 years
|
3.88 | - | |||||||||
$6.00
|
50,000 |
9 years
|
6.00 | - | |||||||||
$13.91 to
$15.56
|
15,021 |
3 years
|
14.06 | - | |||||||||
1,458,155 | $ | 155,000 |
Options exercisable
|
|||||||||||||
Range of exercise prices
|
Number
outstanding
|
Weighted average
remaining
contractual life
|
Weighted
average
exercise price
|
Aggregate
intrinsic value
|
|||||||||
$1.12
|
267,857 |
4 years
|
$ | 1.12 | $ | 155,000 | |||||||
$1.13 to
$2.25
|
1,072,777 |
4 years
|
2.21 | - | |||||||||
$2.26 to
$2.82
|
35,000 |
4 years
|
2.60 | - | |||||||||
$2.83 to
$4.19
|
17,500 |
1 years
|
3.88 | - | |||||||||
$6.00
|
10,000 |
9 years
|
6.00 | - | |||||||||
$13.91 to
$15.56
|
15,021 |
3 years
|
14.06 | - | |||||||||
1,418,155 | $ | 155,000 |
The aggregate intrinsic values in the
above table were based on the closing price of our common stock of $1.70 as of
December 31, 2008. The aggregate fair value of stock options vesting
during 2008 and 2007 was $63,000 and $171,000, respectively.
During 2008, 2007, and 2006, we
recognized $18,512, $28,817 and $0, respectively, of stock-based compensation
expense related to the plans, which was recorded in selling, general, and
administrative expenses. At December 31, 2008, the balance of
unearned stock-based compensation to be expensed in future periods related to
unvested share-based awards was approximately$130,000. The weighted
average period over which the unearned stock-based compensation was expected to
be recognized was approximately 5 years.
67
DGSE
COMPANIES, INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements - continued
December
31, 2008, 2007 and 2006
Note
12 – Comprehensive Income
Comprehensive
income at December 31, 2008, 2007 and 2006 is as follows:
Before-Tax
|
Net-of-Tax
|
|||||||||||
Amount
|
Tax Benefit
|
Amount
|
||||||||||
Accumulated
comprehensive income (loss) at January 1, 2006
|
$ | (162,071 | ) | $ | 34,819 | $ | (127,252 | ) | ||||
Unrealized
holding losses arising during 2006
|
(7,519 | ) | 2,572 | (4,993 | ) | |||||||
Accumulated
comprehensive income (loss) at December 31, 2006
|
(169,590 | ) | 37,391 | (132,245 | ) | |||||||
Unrealized
holding losses arising during 2007
|
25,714 | 9,197 | 34,957 | |||||||||
Accumulated
comprehensive income (loss) at December 31, 2007
|
(143,876 | ) | 46,588 | (97,288 | ) | |||||||
Unrealized
holding gains arising during 2008
|
(59,906 | ) | 19,294 | (40,508 | ) | |||||||
Accumulated
comprehensive income (loss) prior to being written off
|
(203,782 | ) | 65,882 | (137,796 | ) | |||||||
Write-off
of securities
|
203,782 | (65,882 | ) | 137,796 | ||||||||
Accumulated
comprehensive income (loss) at December 31, 2008
|
$ | — | $ | — | $ | — |
68
DGSE
COMPANIES, INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements - continued
December
31, 2008, 2007 and 2006
Note
13 – Intangible Assets
Intangible
assets represent the customer base and trade name resulting from the Superior
Acquisition as follows:
December 31, 2008
|
December 31, 2007
|
|||||||
Customer
base
|
$ | 401,333 | $ | 430,000 | ||||
Trade
name
|
$ | 2,091,340 | $ | 2,091,340 | ||||
Intangible
assets
|
$ | 2,492,673 | $ | 2,521,340 |
Only the
customer base intangible asset will be subject to amortization and will be
amortized over a 15 year life. The accumulated amortization as of
December 31, 2008 is $28,667.
Note
14 – Income Taxes
The
income tax provision reconciled to the tax computed at the statutory Federal
rate follows:
2008
|
2007
|
2006
|
||||||||||
Tax
expense at statutory rate
|
$ | (2,801,643 | ) | $ | 272,658 | $ | 316,484 | |||||
Goodwill
impairment
|
2,783,051 | — | — | |||||||||
Other
|
(30,542 | ) | (30,254 | ) | 3,323 | |||||||
Tax
expense
|
(49,134 | ) | 242,404 | 319,807 | ||||||||
Current
|
53,694 | 77,424 | 323,653 | |||||||||
Deferred
|
(102,828 | ) | 164,980 | (3,846 | ) | |||||||
Total
|
$ | (49,134 | ) | $ | 242,404 | $ | 319,807 |
Deferred
income taxes are comprised of the following at December 31, 2008 and
2007:
2008
|
2007
|
|||||||
Deferred
tax assets (liabilities):
|
||||||||
Inventory
|
$ | 123,655 | $ | 90,546 | ||||
Allowance
for bad debt
|
33,293 | — | ||||||
Unrealized
loss on available for sale securities
|
(4,969 | ) | 46,588 | |||||
Property
and equipment
|
(8,389 | ) | (12,764 | ) | ||||
Capital
loss carryover
|
8,366 | 8,366 | ||||||
Superior
NOL
|
1,849,968 | 1,766,361 | ||||||
Goodwill
|
(93,892 | ) | (93,892 | ) | ||||
Total
deferred tax assets
|
$ | 1,908,032 | $ | 1,805,205 |
The tax provision on pretax income from
continuing operations includes the following:
2008
|
2007
|
2006
|
||||||||||
Federal—
|
||||||||||||
Current
|
$ | 1,097,231 | $ | 46,826 | $ | 352,034 | ||||||
Deferred
|
(92,545 | ) | 148,482 | (3,735 | ) | |||||||
1,004,686 | 195,308 | 348,299 | ||||||||||
State
and foreign—
|
||||||||||||
Current
|
53,694 | 38,250 | - | |||||||||
Deferred
|
(10,283 | ) | 16,498 | (111 | ) | |||||||
43,411 | 54,748 | (111 | ) | |||||||||
$ | 1,048,097 | $ | 250,056 | $ | 348,188 |
A reconciliation of the effective tax
rate to the amount computed by applying the federal income tax rate to pretax
income
69
DGSE
COMPANIES, INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements - continued
December
31, 2008, 2007 and 2006
2008
|
2007
|
2006
|
||||||||||
Tax
expense at statutory rate
|
$ | (1,704,412 | ) | $ | 280,310 | $ | 344,929 | |||||
Goodwill
impairment
|
2,783,051 | - | - | |||||||||
Other
|
(30,542 | ) | (30,254 | ) | 3,259 | |||||||
1,048,097 | 250,056 | 348,188 |
The net
operating loss carry-forward of approximately $1.42 million begins to expire in
2019.
Note
15 – Operating Leases
The
Company leases certain of its facilities under operating leases. The
minimum rental commitments under noncancellable operating leases as of December
31, 2008 are as follows:
Year Ending
|
Lease
|
|||
December 31,
|
Obligations
|
|||
2009
|
$ | 681,054 | ||
2010
|
645,192 | |||
2011
|
611,827 | |||
2012
|
606,804 | |||
Thereafter
|
148,656 | |||
$ | 2,693,533 |
Rent
expense for the years ended December 31, 2008, 2007 and 2006 was approximately
$595,770, $437,069 and $201,810 respectively.
Note
16 – Discontinued Operations
In November 2008 we decided to discontinue the live auction segment
of the Company’s business activities. This decision was based on the substantial
losses being incurred by this operating segment during 2008. As a result, the
operating results of the auction segment have been reclassified to discontinued
operations for both 2008 and 2007. During 2008 the auction segment incurred a
pretax loss of $2,379,151.
The following summarizes the carrying
amount of assets and liabilities of the auction segment as of December 31,
2008:
Assets
|
||||
Accounts
receivable
|
$ | 900,306 | ||
Current
assets
|
$ | 900,306 | ||
Long-term
receivable
|
$ | 305,275 | ||
Total
assets
|
$ | 1,205,581 | ||
Liabilities
|
||||
Auctions
payable
|
$ | 33,144 |
On July
13, 2007, we sold the loan balances from our American Pay Day Center locations
for $77,496 and discontinued operations in those locations. The
receivables sold, including interest due, had a balance of $120,573 at the time
of the sale. The sales price was determined based on the age of the
outstanding receivables. As a result of the sale and discontinued
operations, we recognized a pretax loss of $107,838 on the disposal and a pretax
loss on discontinued operations of $51,938 for the year ended December 31,
2007.
70
DGSE
COMPANIES, INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements - continued
December
31, 2008, 2007 and 2006
As a
result, operating results from these business segments have been reclassified to
discontinued operations for all periods presented. The company had no
significant non cash items other than depreciation and amortization and goodwill
impairment. Goodwill impairment in the amounts of $7,337,443 and $848,000
were charged to the rare coin and discontinued operations segments in
2008, respectively. As of December 31, 2008 there were no operating
assets to be disposed of or liabilities to be paid in completing the disposition
of these operations.
Note
17 – 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:
(In thousands)
|
Retail
Jewelry
|
Wholesale
Jewelry
|
Bullion
|
Rare
Coins
|
Discontinued
Operations
|
Corporate
and Other
|
Consolidated
|
|||||||||||||||||||||
Revenues
|
||||||||||||||||||||||||||||
2008
|
$ | 36,592 | $ | 5,125 | $ | 45,449 | $ | 15,913 | $ | — | $ | 2,140 | $ | 105,219 | ||||||||||||||
2007
|
19,338 | 5,785 | 21,153 | 13,921 | — | 1,271 | 61,469 | |||||||||||||||||||||
2006
|
16,519 | 5,997 | 16,026 | 4,697 | — | 618 | 43,857 | |||||||||||||||||||||
Net
income (loss)
|
||||||||||||||||||||||||||||
2008
|
1,698 | 71 | 139 | (7,446 | ) | (2,130 | ) | (183 | ) | (7,851 | ) | |||||||||||||||||
2007
|
319 | 197 | 235 | 8 | 42 | (46 | ) | 755 | ||||||||||||||||||||
2006
|
143 | 270 | 148 | 101 | — | (51 | ) | 611 | ||||||||||||||||||||
Identifiable
assets
|
||||||||||||||||||||||||||||
2008
|
23,396 | 1,710 | 1,955 | 1,827 | 1,206 | 1,250 | 31,344 | |||||||||||||||||||||
2007
|
16,132 | 2,164 | 536 | 11,651 | 2,987 | 3,389 | 36,859 | |||||||||||||||||||||
2006
|
10,020 | 1,940 | 114 | 235 | — | 837 | 11,830 | |||||||||||||||||||||
Capital
Expenditures
|
||||||||||||||||||||||||||||
2008
|
1,081 | — | 6 | — | — | 10 | 1,097 | |||||||||||||||||||||
2007
|
3,126 | — | 23 | — | — | 274 | 3,423 | |||||||||||||||||||||
2006
|
11 | — | — | — | — | 31 | 285 | |||||||||||||||||||||
Depreciation
and amortization
|
||||||||||||||||||||||||||||
2008
|
140 | — | 104 | 104 | 48 | 89 | 485 | |||||||||||||||||||||
2007
|
130 | — | 33 | 32 | 32 | 21 | 248 | |||||||||||||||||||||
2006
|
107 | — | — | — | — | 4 | 111 | |||||||||||||||||||||
Goodwill
|
||||||||||||||||||||||||||||
2008
|
— | 837 | — | — | — | — | 837 | |||||||||||||||||||||
2007
|
— | 837 | — | 7,337 | 848 | — | 8,185 | |||||||||||||||||||||
2006
|
837 | — | — | — | — | 837 | ||||||||||||||||||||||
Interest
expense
|
||||||||||||||||||||||||||||
2008
|
545 | — | 179 | 179 | — | — | 903 | |||||||||||||||||||||
2007
|
587 | 34 | 27 | — | 27 | 675 | ||||||||||||||||||||||
2006
|
408 | — | — | — | — | — | 408 | |||||||||||||||||||||
Income
tax expense
|
||||||||||||||||||||||||||||
2008
|
658 | 55 | 27 | 68 | — | (48 | ) | 760 | ||||||||||||||||||||
2007
|
102 | 57 | 65 | 2 | — | 24 | 250 | |||||||||||||||||||||
2006
|
89 | 139 | 76 | 52 | — | (8 | ) | 348 |
71
DGSE
COMPANIES, INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements - continued
December
31, 2008, 2007 and 2006
Note
18 – Quarterly Results of Operations (Unaudited)
1st Quarter
|
2nd Quarter
|
3rd Quarter
|
4th Quarter
|
|||||||||||||
(In thousands, except per share data)
|
||||||||||||||||
Year
ended December 31, 2008
|
||||||||||||||||
Revenues
|
$ | 32,175 | $ | 25,715 | $ | 23,994 | $ | 23,335 | ||||||||
Operating
profit
|
1,051 | 557 | 1,085 | 962 | ||||||||||||
Net
earnings
|
182 | 278 | 166 | (8,477 | ) | |||||||||||
Basic
earnings per common share
|
$ | 0.04 | $ | 0.05 | $ | 0.02 | $ | (0.86 | ) | |||||||
Diluted
earnings per common share
|
$ | 0.04 | $ | 0.04 | $ | 0.02 | $ | (0.86 | ) | |||||||
Year
ended December 31, 2007
|
||||||||||||||||
Revenues
|
$ | 10,240 | $ | 12,220 | $ | 16,154 | $ | 22,993 | ||||||||
Operating
profit
|
384 | 263 | (5 | ) | 534 | |||||||||||
Net
earnings
|
182 | 271 | 108 | 84 | ||||||||||||
Basic
earnings per common share
|
$ | 0.04 | $ | 0.05 | $ | 0.02 | $ | 0.02 | ||||||||
Diluted
earnings per common share
|
$ | 0.04 | $ | 0.05 | $ | 0.02 | $ | 0.02 | ||||||||
Year
ended December 31, 2006
|
||||||||||||||||
Revenues
|
$ | 9,721 | $ | 12,546 | $ | 9,609 | $ | 12,207 | ||||||||
Operating
profit
|
302 | 484 | 242 | 295 | ||||||||||||
Net
earnings
|
148 | 271 | 108 | 84 | ||||||||||||
Basic
earnings per common share
|
$ | 0.03 | $ | 0.05 | $ | 0.02 | $ | 0.02 | ||||||||
Diluted
earnings per common share
|
$ | 0.03 | $ | 0.05 | $ | 0.02 | $ | 0.02 |
72