SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
( X ) Quarterly Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended March 31, 2004
------------------------------
( ) Transition Report under Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the transition period from to
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Commission File Number 1-11048
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DGSE Companies, Inc.
(Name of small business issuer)
Nevada 88-0097334
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(State or other jurisdiction (I.R.S. Employer Identification
of incorporation or organization) Number)
2817 Forest Lane, Dallas, Texas 75234
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(Address of principal executive offices) (Zip Code)
(Issuer's telephone number, including area code) (972) 484-3662
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Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at April 14, 2004
---------------------------- -----------------------------
Common Stock, $.01 per value 4,913,290
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
DGSE Companies, Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEETS
(Unaudited)
March 31, December 31,
2004 2003
------------ ------------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 54,438 $ 735,293
Trade receivables 715,255 774,586
Other receivables 204,430 204,430
Inventories 6,887,659 6,673,865
Prepaid expenses 143,073 149,277
------------ ------------
Total current assets 8,004,855 8,537,451
MARKETABLE SECURITIES - AVAILABLE FOR SALE 349,818 243,446
PROPERTY AND EQUIPMENT - AT COST, NET 957,896 989,966
GOODWILL 1,151,120 1,151,120
OTHER ASSETS 150,497 149,546
------------ ------------
$ 10,614,186 $ 11,071,529
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Notes payable $ 2,403,059 $ 541,546
Current maturities of long-term debt 197,315 197,315
Accounts payable - trade 512,864 859,269
Accrued expenses 214,202 705,756
Customer deposits 91,499 150,088
Federal income taxes payable 308,654 512,991
------------ ------------
Total current liabilities 3,727,593 2,966,965
Long-term debt, less current maturities 1,209,438 2,719,482
Deferred income taxes 58,911 22,743
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Total liabilities 4,995,942 5,709,190
SHAREHOLDERS' EQUITY
Common stock, $.01 par value; authorized 10,000,000
shares; issued and outstanding 4,913,290 shares at
March 31, 2004 and December 31, 2003 49,133 49,133
Additional paid-in capital 5,708,760 5,708,760
Accumulated other comprehensive income 70,206 --
Retained earnings (deficit) (209,855) (395,554)
------------ ------------
Total shareholders' equity 5,618,244 5,362,339
$ 10,614,186 $ 11,071,529
============ ============
The accompanying notes are an integral part of these consolidated financial
statements
2
DGSE Companies, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF OPERATIONS
Three months ended
(Unaudited)
March 31, 2004 March 31, 2003
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Revenue
Sales $ 6,848,946 $ 5,217,920
Pawn services charges 47,630 41,882
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6,896,576 5,259,802
Costs and expenses
Cost of goods sold 5,486,910 4,190,058
Selling, general and administrative expenses 1,020,966 976,462
Depreciation and amortization 35,285 34,788
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6,543,161 5,201,308
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Operating income 353,415 58,494
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Other income (expense)
Interest expense (72,053) (68,030)
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Total other income (expense) (72,053) (68,030)
Income (loss) before income taxes 281,362 (9,536)
Income tax expense (benefit) 95,663 (3,242)
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Net income (loss) from continuing operations 185,699 (6,294)
Loss from discontinued operations, net of income taxes -- (15,149)
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Net income (loss) $ 185,699 $ (21,443)
============== ==============
Earnings per common share
Basic and diluted $ .04 --
============== ==============
Weighted average number of common shares: 4,913,290 4,913,790
Basic
Diluted 5,137,431 4,913,790
The accompanying notes are an integral part of these consolidated financial
statements
3
DGSE COMPANIES, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months Ended
March 31,
2004 2003
--------- ---------
Cash Flows From Operations
Reconciliation of net loss to net cash
used in operating activities
Net income (loss) $ 185,699 $ (21,443)
Depreciation and amortization 35,285 42,018
Deferred taxes -- (11,046)
(Increase) decrease in operating assets and liabilities
Trade receivables 59,331 174,824
Inventories (213,794) (236,911)
Prepaid expenses and other current assets 6,204 (3,488)
Accounts payable and accrued expenses (837,959) (620,937)
Federal income taxes payable (204,337) (150,000)
Other assets (951) (18,044)
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Total net cash used in operating activities (970,522) (845,027)
Cash flows from investing activities
Purchase of property and equipment (4,164) (2,393)
Change in deposits (58,589) 69,964
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Net cash (used) provided by investing activities (62,753) 67,571
Cash flows from financing activities
Proceeds from notes issued 625,000 625,000
Payments on notes payable (272,580) (219,680)
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Net cash provided by financing activities 352,420 405,320
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Net decrease in cash and cash equivalents (680,855) (372,136)
Cash and cash equivalents at beginning of year 735,293 498,408
--------- ---------
Cash and cash equivalents at end of period $ 54,438 $ 126,272
========= =========
Supplemental schedule of non-cash, investing and financing activities:
Interest paid for the three months ended March 31, 2004 and 2003 was $ 72,053
and $ 68,030, respectively.
Income taxes paid for the three months ended March 31, 2004 and 2003 was
$300,000 and $150,000, respectively.
The accompanying notes are an integral part of these consolidated financial
statements.
4
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) Basis of Presentation:
The accompanying unaudited condensed consolidated financial statements of DGSE
Companies, Inc. and Subsidiaries include the financial statements of DGSE
Companies, Inc. and its wholly-owned subsidiaries, DGSE Corporation, National
Jewelry Exchange, Inc., Silverman Consultants, Inc.and Charleston Gold And
Diamond Exchange, Inc. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included.
The Company's operating results for the three months ended March 31, 2004, are
not necessarily indicative of the results that may be expected for the year
ended December 31, 2004. For further information, refer to the consolidated
financial statements and footnotes thereto included in the Company's annual
report on Form 10-KSB for the year ended December 31, 2003. Certain
reclassifications were made to the prior year's consolidated financial
statements to conform to the current year presentation.
(2) Earnings per share
No reconciliation is provided for the periods ended March 31 2004 and 2003
because the effect is not dilutive.
(3) Business segment information
The Company's operations by business segment for the three months ended March
31, were as follows:
Discontinued Corporate
Jewelry Liquidations Operations & Other Consolidated
------------ ------------ ------------ ------------ ------------
Revenues
2004 $ 6,799,082 $ 97,494 $ -- $ -- $ 6,896,576
2003 $ 5,141,927 $ 117,875 $ -- $ -- $ 5,259,802
Net income (loss)
2004 $ 237,729 $ (31,995) $ -- $ (20,035) $ 185,699
2003 $ 19,269 $ (9,722) $ (15,149) $ (15,841) $ (21,443)
Identifiable assets
2004 $ 9,673,272 $ 331,678 $ -- $ 609,236 $ 10,614,186
2003 $ 9,499,275 $ 775,700 $ -- $ 3,002 $ 10,277,977
Capital expenditures
2004 $ 4,164 $ -- $ -- $ -- $ 4,164
2003 $ 2,393 $ -- $ -- $ -- $ 2,393
Depreciation and
amortization
2004 $ 33,410 $ -- $ -- $ 1,875 $ 35,285
2003 $ 40,143 $ 1,875 $ -- $ -- $ 42,018
5
(4) Other Comprehensive income:
Other comprehensive income is as follows:
Tax
Before Tax (Expense) Net-of-Tax
Amount Benefit Amount
----------- ----------- -----------
Other comprehensive income at
December 31, 2003 $ -- $ -- $ --
Unrealized holding gains arising during the
Three months ended March 31, 2004 106,373 (36,167) 70,206
----------- ----------- -----------
Other comprehensive income at
March 31, 2004 $ 106,373 $ (36,167) $ 70,206
=========== =========== ===========
Other comprehensive income loss at
December 31, 2002 $(1,728,130) $ 593,180 $(1,134,950)
Unrealized holding gains arising during the
Three months ended March 31, 2003 75,278 (25,594) 49,684
----------- ----------- -----------
Other comprehensive income (loss) at
March 31, 2003 $(1,652,852) $ 567,586 $(1,085,266)
=========== =========== ===========
(5) Stock-based Compensation:
The Company accounts for stock-based compensation to employees using the
intrinsic value method. Accordingly, compensation cost for stock options to
employees is measured as the excess, if any , of the quoted market price of the
Company's common stock at the date of the grant over the amount an employee must
pay to acquire the stock.
The following table illustrates the effect on net income and earnings per share
if the Company had applied the fair value recognition provisions of FASB
Statement No. 123, Accounting for Stock-Based Compensation, to stock-based
employee compensation.
Three Months Ended March 31,
----------------------------
2004 2003
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Net income(loss) as reported $ 185,699 $ (21,443)
Deduct: Total stock-based employee compensation
Expense determined under fair value based method
For all awards, net of related tax effects -- --
------------ ------------
Pro forma net loss $ 185,699 $ (21,443)
============ ============
Earnings per share:
Basic - as reported $ .04 --
Basic - pro forma $ .04 --
Diluted - as reported $ .04 --
Diluted pro forma $ .04 --
The fair value of these options was estimated at the date of grant using the
Black-Scholes option-pricing model with the following weighted average
assumptions used for grants after 1998, expected volatility of 70% to 96%,
risk-free rate of 3.9% to 6.6%, no dividend yield and expected life of 5 to 8
years.
6
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
Results of Operations
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Quarter ended March 31, 2004 vs 2003:
-------------------------------------
Revenue for the first quarter of 2004 increased by $ 1,636,774 or 31.1% when
compared to the corresponding quarter of 2003. The increase was the result of a
$ 1,657,155 increase in sales from the jewelry segment. The increase in jewelry
segment sales was the result of a $ 630,214 increase in precious metal sales and
a $ 1,026,941 increase in jewelry sales. These increases were due to a
nation-wide improvement in the retail environment and significant price
increases in precious metal products. Pawn service fees increased by 13.7% due
to an increase in loan volume. Cost of sales increased primarily due to the
increase in sales. Gross margins increased from 19.7% in 2003 to 19.9% in 2004
due to the increase in sales of jewelry products.
Selling, general and administration expenses increased by $ 44,504 due an
increase in sales staff. Income taxes are provided at the corporate rate of 34%
for both 2004 and 2003
Loss from discontinued operations during 2003 in the amount of $ 15,149 net of
income taxes is the combined results of two subsidiaries of the Company, DLS
Financial Services, Inc. and eye media, inc. The operations of these two
companies were discontinued during 2003.
Liquidity and Capital Resources
-------------------------------
The Company's short-term debt, including current maturities of long-term debt
totaled $2,600,374 as of March 31, 2004. The ability of the Company to finance
its operations and working capital needs are dependent upon management's ability
to negotiate extended terms or refinance its short-term debt. The Company has
historically renewed, extended or replaced short-term debt as it matures and
management believes that it will be able to do so in the future as short-term
debt matures.
Management of the Company expects capital expenditures to total approximately
$50,000 during the balance of 2004. It is anticipated that these expenditures
will be funded from working capital.
From time to time, management has adjusted the Company's inventory levels to
meet seasonal demand or in order to meet working capital requirements.
Management is of the opinion that if additional working capital is required,
additional loans can be obtained from individuals or from commercial banks. If
necessary, inventory levels may be adjusted or a portion of the Company's
investments in marketable securities may be liquidated in order to meet working
capital requirements.
Contractual Cash Obligations Payments due by year end
---------------------------- --------------------------------------------------------------
Total 2004 2005 2006 2007 2008 Thereafter
---------- ---------- ---------- ---------- ---------- ---------- ----------
Notes payable $2,403,059 $ 278,059 $2,125,000 -- -- -- --
Long-term debt and capital leases 1,406,753 185,224 $ 484,737 $ 137,906 $ 135,330 $ 135,606 $ 327,950
Federal income taxes 308,654 308,654 -- -- -- -- --
Operating leases 354,027 175,570 148,205 18,886 11,366 -- --
---------- ---------- ---------- ---------- ---------- ---------- ----------
$4,472,493 $ 947,507 $2,757,942 $ 156,792 $ 146,696 $ 135,606 $ 327,950
========== ========== ========== ========== ========== ========== ==========
This report contains forward-looking statements which reflect the view of
Company's management with respect to future events. Although management believes
that the expectations reflected in such forward-looking statements are
reasonable, it can give no assurance that such expectations will prove to have
been correct. Important factors that could cause actual results to differ
materially from such expectations are a down turn in the current strong retail
climate and the potential for fluctuations in precious metals prices. The
forward-looking statements contained herein reflect the current views of the
Company's management and the Company assumes no obligation to update the
forward-looking statements or to update the reasons actual results could differ
from those contemplated by such forward-looking statements.
7
ITEM 3. Controls and Procedures
Under the supervision and with the participation of our management, including
our principal executive officer and principal financial officer, we have
evaluated the effectiveness of the design and operation of our disclosure
controls and procedures within 90 days of the filing date of this quarterly
report, and, based on their evaluation, our principal executive officer and
principal financial officer have concluded that these controls and procedures
are effective. There are no significant changes in our internal controls or
other factors that could significantly affect these controls subsequent to the
date of their evaluation. Disclosure controls and procedures are our controls
and other procedures that are designed to ensure that information required to be
disclosed by us in the reports that we file or submit under the Exchange Act is
recorded, processed, summarized and reported, within the time period specified
in the Securities and Exchange Commission's rules and forms. Disclosure controls
and procedures include, without limitation, controls and procedures designed to
ensure that information required to be disclosed by us in the reports that we
file under the Exchange Act is accumulated and communicated to our management,
including our principal executive officer and principal financial officer, as
appropriate to allow timely decisions regarding required disclosure.
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
31.1 Certificate of L.S. Smith pursuant to Section 3026 of the
Sarbanes-Oxley Act of 2002, Chief Executive Officer.
31.2 Certificate of John Benson pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002, Chief Financial Officer .
32.1 Certificate of L.S. Smith pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, Chief Executive Officer.
32.2 Certificate of John Benson pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, Chief Financial Officer.
Reports on Form 8-K - None
8
SIGNATURES
In accordance with Section 13 and 15(d) of the Exchange Act, the
Registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
DGSE Companies, Inc.
By: /s/ L. S. Smith Dated: April 26, 2004
----------------------------
L. S. Smith
Chairman of the Board,
Chief Executive Officer and
Secretary
In accordance with the Exchange Act, this report has been signed below
by the following persons on behalf of the Registrant and in the capacities and
on the date indicated.
By: /s/ L. S. Smith Dated: April 26, 2004
-------------------------
L. S. Smith
Chairman of the Board,
Chief Executive Officer and
Secretary
By: /s/ W. H. Oyster Dated: April 26, 2004
-------------------------
W. H. Oyster
Director, President and
Chief Operating Officer
By: /s/ John Benson Dated: April 26, 2004
-------------------------
John Benson
Chief Financial Officer
(Principal Accounting Officer)
9