10KSB 1 0001.txt U. S. SECURITIES AND EXCHANGE COMMISSION Washington, D. C. 20549 FORM 10-KSB (Mark One) ( x ) Annual Report pursuant to Section 13 or 15 (d) of the Securities Exchange Act of 1934 For the Fiscal year ended December 31, 2000 or -------------------------------- ( ) Transition Report under Section 13 or 15 (d) of the Securities Exchange Act of 1934 (No Fee Required) For the transition period from to ---------------- ---------------- Commission file number 1-11048 ----------- Dallas Gold and Silver Exchange, Inc. ------------------------------------- (Name of small business issuer) NEVADA 88-0097334 ------------------------------- ------------------------------ (State or other jurisdiction (I.R.S.Employer Identification incorporation or organization) Number) 2817 Forest Lane, Dallas, Texas 75234 ---------------------------------------- ------------- (Address of Principal Executive Offices) (Zip Code) Issuer's telephone number, including area code (972) 484-3662 -------------- Securities registered under Section 12(b) of the Exchange Act: Title of each class Name of each exchange on which registered ------------------- ----------------------------------------- None None Securities registered pursuant to Section 12 (g) of the Exchange Act: Title of each class Name of each exchange on which registered ------------------- ----------------------------------------- Common Stock None $ .01 par value Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15 (d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirement for the past 90 days. Yes X No --- Check if there is no disclosure of delinquent filers in response to Item 405 of Regulation S-B is not contained in this form, and no disclosure will 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-KSB or any amendment to this Form 10-KSB. [X] --- During fiscal year ended December 31, 2000, total revenues were $ 25,799,918. As of March 14, 2001, the aggregate market value of the voting stock held by non-affiliates of the registrant was $ 24,496,115. As of March 14, 2001, 4,907,990 shares of Common Stock were outstanding. Documents incorporated by reference: Portions of the proxy statement for the annual shareholders' meeting to be held June 25, 2001, are incorporated by reference into Part III. PART I ITEM 1. DESCRIPTION OF BUSINESS Dallas Gold and Silver Exchange, Inc. (the "Company") sells jewelry and bullion products to both retail and wholesale customers throughout the United States and makes collateralized loans to individuals. During the last three years the Company has focused its efforts toward expanding its retail jewelry operations and internet related businesses. Management expects this trend to continue until such time that interest in precious metals results in significantly higher gross profit margins on bullion related products. The Company's products are marketed through its facilities in Dallas and Carrollton, Texas and Mt. Pleasant South Carolina and through its internet web sites dgse.com; FirstJewelryAuctions.com; USBullionExchange.com; FirstCoinAuction.com; FairchildWatches.com; SilvermanLiquidations.com; and ejewelryportal.com. The Company also provides consulting services involving the reorganization of other business enterprises (primarily enterprises that are or have been involved in proceedings under Chapter 11 of the United States Bankruptcy Code). These services are provided through the Company's subsidiary DLS Financial Services, Inc. ("DLS"). The Company operates seven internet sites on the World Wide Web. Through dgse.com the Company operates a virtual store and a real-time auction of its jewelry products. Customers and the Company buy and sell items of jewelry and are free to set their own prices in an interactive market. FirstJewelryAuctions.com provides a forum for business to business and business to consumer auctions for the jewelry industry. For its services the Company receives a fee from the seller. The Company also offers customers current quotations for precious metals prices on its internet site USBullionExchange.com. During 2000 the Company launched three new sites. FirstCoinAuctions.com provides auctions of the Company's rare coin products. FairchildWatches.com provides wholesale customers a virtual catalog of the Company's fine watch inventory and SilvermanLiquidations.com provides a real-time auction of closeout jewelry products. By December 31, 2000, over 7,500 items were available for sale on the Company's internet sites including $ 10,000,000 in diamonds. In addition, the Company recently launched a consolidating portal through which all of its web sites can be accessed, ejewelryportal.com. During 1998, the Company continued the development of its internet software and in February 1999, announced the release of Virtual Auctioneer v2.0, an electronic commerce product that allows users to easily build online auction sites. The Company began marketing its internet software product in late 1999 through its subsidiary eye media, inc. ("eye media"). In December 1998, the Company acquired the assets including inventory, pawn loans, equipment and pawn license of Belt Line Pawn Shop located in Carrollton, Texas. The Company formed a new wholly-owned subsidiary in February 1999, National Jewelry Exchange, Inc. ("NJE") and transferred these assets to this new subsidiary. The operations of Belt Line Pawn Shop are being continued under NJE. The Company has focused the operations of NJE on sales and pawn loans of jewelry products. In August 1999 the Company purchased substantially all assets of The Silverman Group ("Silverman") located in Mt. Pleasant, South Carolina. Silverman's primary business is conducting liquidation, consolidation, promotional or other large-scale retail sales for jewelry stores and other types of retailers. The purchase price of $ 3,115,000 consisted of the issuance of 200,000 shares of the Company's newly issued restricted common stock and the assumption by the Company of a $ 2,500,000 obligation to a bank. The purchase price has been allocated as follows: inventory ($ 2,500,000); property and equipment ($ 131,000); and goodwill ($ 484,000). The results of Silverman have been included in the consolidated financial statements since the date of acquisition. On March 2, 2000, the Company acquired certain assets of Fairchild International, Inc. ("Fairchild") located in Dallas, Texas. Fairchild's primary business is the wholesaling of fine watches. The purchase price consisted of $350,000 in cash, a promissory note for $450,000 and 62,745 newly issued restricted shares of the Company's common stock. The acquisition has been accounted for as a purchase. Accordingly, a portion of the purchase price has been allocated to net tangible and intangible assets acquired based on their estimated fair values. The results of Fairchild have been included in the consolidated financial statements since the date of acquisition. Products and Services --------------------- JEWELRY ------- The Company's jewelry operations include sales to both wholesale and retail customers. The Company sells finished jewelry, gem stones, and findings (gold jewelry components) and makes custom jewelry to order. Jewelry inventory is readily available from wholesalers throughout the United States. In addition, the Company purchases inventory from pawn shops and individuals. During the last three years management has focused its efforts toward expanding its retail jewelry business. Additional resources have been invested in advertising and additional staff has been added in jewelry sales and jewelry and watch repair. The Company's bullion 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 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 15.9% of total sales for 2000 and 41.3% in 1999 (For further details, see Item 6 below). The Company did not have any customer or supplier that accounted for more than 10% of total sales or purchases during 2000 or 1999. PAWN ---- 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 is transferred to inventory which is recovered through sale. Although revenues from the Company's pawn loans have not been significant, management believes this activity to be a good source of jewelry inventory and provides an excellent return on investment. CONSULTING SERVICES ------------------- DLS provides insolvency advisory services primarily to business enterprises that are or have been involved in proceedings under Chapter Products and Services (continued...) --------------------- 11 of the United States Bankruptcy Code. Services provided by DLS include assistance in developing plans of reorganization, negotiations with creditors and general management advice. DLS earns a cash fee and or equity participation in the organizations to which it provides services. DLS expects to accept only a limited number of assignments each year which meet the criteria of having significant fee and or substantial growth potential. Where equity participation is involved, as the client enterprises mature, DLS plans to sell its equity interest subject to compliance with state and federal securities law in order to provide non-dilutive resources for the expansion of the Company's other business activities. During 2000 and 1999, the DLS sold a portion of these equity securities and realized gains in the amount of $ 266,714 and $ 83,116, respectively. In addition, during 1999 the Company had unrealized gains on trading securities in the amount of $ 109,771. As of December 31, 2000 the Company's investment in these enterprises totaled $ 856,081. In addition, during 2000 DLS completed a consulting engagement for which DLS received fee in the form of common stock in the client company. This common stock had a value of $ 456,000 and has been recorded as consulting service revenue during 2000. INTERNET -------- During 1995 the Company developed a World Wide Web Site on the Internet located at dgse.com. This web site is a fully integrated live trading market in jewelry items on the internet. Customers can buy and sell items of jewelry and are free to set their own prices in an interactive market. For its services, the Company collects a listing fee and a sales commission from the seller. In addition, the Company may offer for sale its own inventory. This site also includes a virtual store of the Company's jewelry products. In April 1996 the Company began operating an additional web site. This site allows customers unlimited access to current quotations for prices on approximately 200 precious metals, coins and other bullion related products. This site is located at USBullionExchange.com. During 1997 management made a decision to significantly expand the Company's internet activities. With over 1 million page views during its first two years of operations, it became apparent that the Internet was a viable mechanism to sell products and introduce customers from around the world to the business of the Company. dgse.com was one of the first to utilize the auction format to sell jewelry and related products. In addition, introduction of a live real time trading floor in jewelry, diamonds and fine watches allowed this commercial site to attract wide participation. Our internet store functions as a CyberCashTM authorized site which allows customers to purchase products automatically, securely and on line. Auctions close at least five times per week and trading floor transactions can occur twenty-four hours per day. In September 1999, the Company launched its third internet site FirstJewelryAuctions.com. This new site significantly expanded the Company's offerings on the internet and provides a forum for business to business auctions for the jewelry industry. By December 31, 2000, over 7,500 items were available for sale including over $ 10 million in diamonds. Products and Services (continued...) --------------------- During 2000 the launched three new sites. FirstCoinAuctions.com provides auctions of the Company's rare coin products. FairchildWatches.com provides wholesale customers a virtual catalog of the Company's fine watch inventory and SilvermanLiquidations.com provides a real-time auction of closeout jewelry products. In addition, the Company recently launched a consolidating portal through which all of its web sites can be accessed, ejewelryportal.com. SOFTWARE -------- During 1998, management decided to continue the development of its internet software and in February 1999 announced the release of Virtual Auctioneer v2.0, an electronic commerce product that allows users to easily build online auction sites. Virtual Auctioneer is built around an eye media developed bidding engine, which was created utilizing the Allaire ColdFusiontm development environment. Virtual Auctioneer allows clients unparalleled flexibility, customization and power, placing it in its own market space, by offering a complete, integrated online product. LIQUIDATION ----------- On August 13, 1999 the Company purchased substantially all of the assets of Silverman located in Mt. Pleasant, South Carolina. Silverman's primary business is conducting liquidation, consolidation, promotional or other large-scale retail sales for jewelry stores and other types of retailers. The Company is conducting the business of the through a newly formed wholly owned subsidiary, Silverman Consultants, Inc. ("SCI"). All senior management and key employees of the Silverman have become employees of the SCI. During December 2000 the Company opened a new jewelry super store located in Mt. Pleasant, South Carolina. The store operates through a newly formed wholly owned subsidiary, Charleston Gold And Diamond Exchange, Inc. ("CGDE"). A newly leased facility located in Mt. Pleasant, South Carolina now houses the operations of CGDE and SCI. RECENT DEVELOPMENTS ------------------- On March 2, 2000 the Company purchased certain assets of Fairchild International, Inc. ("Fairchild") located in Dallas, Texas. Fairchild's primary business is the wholesale of fine watches and other jewelry products. Four former Fairchild key employees have become employees of the Company. The business is being conducted from the Company's facility in Dallas, Texas. Sales and Marketing ------------------- All Company activities other than consulting services rely heavily on local television, print media, the internet, pamphlets, and brochures to attract retail customers. Solicitations of wholesale customers are made through local print media, direct mailings, and direct contact. Marketing activities emphasize what the Company perceives to be the attractiveness of its pricing and its customer service. The Company relies on professional contacts of the Company's Chairman in order to attract new consulting clients. The Company markets its bullion trading services through a combination of advertising in national coin publications, local print media, coin and bullion wire services and its internet web site. Trades are primarily with coin and bullion dealers on a "cash on confirmation" basis which is prevalent in the industry. Cash on confirmation means that once credit is approved the buyer remits funds by mail or wire concurrently with the mailing of the precious metals. Customer orders for bullion trades are customarily delivered within three days of the order or upon clearance of funds depending on the customer's credit standing. Consequently, there was no significant backlog for bullion orders as of December 31, 2000 or 1999. Company backlogs for fabricated jewelry products were also insignificant as of December 31, 2000 and 1999. Seasonality ----------- The retail and wholesale jewelry business and the liquidation business is seasonal. The Company realized 32.5% and 38.2% of its annual sales in the fourth quarters of 2000 and 1999, respectively. While the Company's bullion business is not seasonal, management believes it is directly impacted by the perception of inflation trends. Historically, anticipation of increases in the rate of inflation have resulted in higher levels of interest in precious metals as well as higher prices for such metals. Other Company business activities are not seasonal. Competition ----------- The Company operates in a highly competitive industry where competition is based on a combination of price, service and product quality. The jewelry and consumer loan activities of the Company compete with numerous other retail jewelers and consumer lenders in Dallas, Texas and Mt. Pleasant, South Carolina and the surrounding areas. The bullion industry in which the Company competes is dominated by substantially larger enterprises which wholesale bullion and other precious metal products. Likewise, the consulting and liquidation industry in which the Company competes is dominated by large investment banking, accounting, consulting and liquidation firms. The Company attempts to compete in these industries by offering quality products and services at prices below that of its competitors and by maintaining a staff of highly qualified employees to provide customers services such as watch and jewelry repairs and custom jewelry design. Management is of the opinion that the Company is a factor in the Dallas area jewelry market. However, its consumer lending, bullion trading, consulting and liquidation activities are dominated by larger companies. Employees --------- As of December 31, 2000, the Company employed 53 individuals, all of which were full time employees. ITEM 2. DESCRIPTION OF PROPERTY The Company owns a 6,000 square foot building in Dallas, Texas which houses retail jewelry, consumer lending and bullion trading operations and its principal executive offices. The land and building are subject to a mortgage maturing in January 2014, with a balance outstanding of approximately $ 591,000 as of December 31, 2000. The Company leases a 5,000 square foot building in Dallas, Texas which housed a retail jewelry store. The lease has a term of ten years beginning July 1, 1994 and requires monthly payments of $ 7,500 for the first five years and $ 9,000 thereafter. In November 1995, the Company closed this store and during 1999, the Company moved its internet activities into this facility. During July 2000 the Company subleased this facility for a term ending on June 30, 2004. The Company leases a 2,400 square foot facility in Carrollton, Texas which houses National Jewelry Exchange. The lease expires on July 31, 2002 and requires monthly lease payments in the amount of $ 1,088. Silverman and CGDE are housed in a leased 11,000 square foot facility in Mt. Pleasant, South Carolina. The lease expires in August 2005 and requires monthly lease payments in the amount of $ 14,421. The Company also maintains a resident agent office in Nevada at the office of its Nevada counsel, McDonald, Carano, Wilson, McClure, Bergin, Frankovitch and Hicks, 241 Ridge Street, Reno, Nevada 89505. ITEM 3. LEGAL PROCEEDINGS The Company is not a party to any material pending legal proceedings which are expected to have a material adverse effect on the Company and none of its property is the subject of any material pending legal proceedings. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Not applicable. PART II ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS On June 29, 1999 the Company's Common Stock began trading on the NASDAQ Small CAP Market under the symbol "DGSE". Previously, the Company's Common Stock was traded on the American Stock Exchange ("ASE") pursuant to its "Emerging Companies" listing program under the symbol "DLS.EC". The following table sets forth for the period indicated, the per share high and low sale prices as reported by the NASDAQ or the ASE, as the case may be, for the common stock. During the past two years, the Company has not declared any dividends with respect to its common stock. The Company intends to retain all earnings to finance future growth; accordingly, it is not anticipated that cash dividends will be paid to holders of common stock in the foreseeable future. High and low stock prices for the last two years were: 2000 1999 ---- ---- High Low High Low ---- --- ---- --- First Quarter 7 5/8 4 1/2 4 17/32 2 Second Quarter 9 1/8 5 4 1/8 2 3/4 Third Quarter 8 5/8 6 3/4 4 1/8 3 17/32 Fourth Quarter 10 1/8 7 1/8 6 3 1/8 On March 14, 2001, the closing sales price for the Company's common stock was $ 8.25 and there were 675 shareholders of record. ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION. GENERAL ------- The Company's bullion trading operation has the ability to significantly increase or decrease sales by adjusting the "spread" or gross profit margin added to bullion products. In addition, economic factors such as inflation and interest rates as well as political uncertainty are major factors affecting both bullion sales volume and gross profit margins. Historically, the Company has earned gross profit margins of from 2.0% to 3.0% on its bullion trading operations compared to 29.0% to 32.0% on the sale of jewelry products. As a result, the Company emphasizes the more profitable jewelry products. Management expects this trend to continue until such time that interest in precious metals results in higher gross margins on bullion products. In 1993 the Company founded DLS in an effort to generate additional revenue and enhance shareholder value by capitalizing on the experience and professional contacts of the Company's Chairman. DLS provides insolvency advisory services to businesses that are or have been involved in proceedings under Chapter 11 of the United States Bankruptcy Code. Marketable equity securities have been categorized as either available-for-sale or trading 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, while unrealized gains and losses for trading securities are included in the statement of income. Realized gains and losses on the sale of securities are based on the specific identification method. Results of Operations --------------------- Sales increased by $ 3,554,302 (16.6%) in 2000. This increase was the result of a $ 2,124,490 increase in sales from the liquidations segment, a $ 1,412,982 (7.5%) increase in sales from the jewelry segment and a $ 45,368 (28.4%) increase in the sale of internet software products. The increase in sales from the liquidations segment was the result of the acquisition of Silverman in August 1999. The increase in sales from the jewelry segment were the result of sales in the amount of $ 4,389,486 from Fairchild acquired in March 2000. This increase in sales from Fairchild was partially offset by a decrease in the amount of $3,924,931 in sales of bullion products. Consulting services revenue during 2000 was the result of common stock in a client company received for services rendered by DLS during the year. The Company sold marketable trading securities during 2000 and 1999 and realized gains of $ 266,714 and $ 83,116, respectively. The unrealized gains on trading securities during 1999 in the amounts of $ 109,771 was the result of an increase in market value of the Company's investment in trading securities. These realized and unrealized gains on trading securities are reflected in the statement of income. During 2000 the Company transferred all unsold trading securities to held for sale securities. As a result, unrealized gains and losses on these investments are include as a component of shareholders' equity net of tax. Sales increased by $ 5,597,390 in 1999. This increase was the result of $ 2,212,060 in sales from Silverman, $ 1,438,976 increase in the sales Results of Operations (continued...) --------------------- of jewelry products, $ 1,786,354 increase in the sale of bullion products and $ 160,000 in the sale of internet software products. Management believes that the Company's Internet related activities have had a significant impact on all sectors of its business. In addition, public concerns related to Y2K issues during 1999 resulted in an increase in demand for bullion products. The Company sold marketable trading securities during 1999 realizing a gain in the amount of $ 83,116. The unrealized gains on trading securities in 1999 was the result of an increase in the market value of the Company's investment in trading securities. Cost of goods sold increased by $ $ 1,759,357 (10.3%) during 2000 and $ 3,987,148 (30.5%) during 1999 due to the changes in sales volume. Consulting services cost decreased by $ 132,091 during 1999 due to lower travel and related costs. Selling, general and administrative expenses increased $ 1,862,032 during 2000 and $ 1,403,875 during 1999 due to the acquisitions of Belt Line Pawn in December 1998, the acquisition of Silverman in August 1999 and the acquisition of Fairchild in March 2000. Depreciation and amortization increased by $ 177,858 during 2000 and $ 108,949 during 1999 due to the acquisitions of Beltline Pawn, Silverman and Fairchild. Interest expense increased by $ 283,019 during 2000 and $ 9,627 during 1999 due to notes payable issued for the acquisitions of Silverman and Fairchild. Liquidity and Capital Resources ------------------------------- During 2000 the Company generated $ 2,730,745 cash flow from operating activities. These funds were used to reduce net indebtness by $ 1,017,773, purchase and retire common stock in the amount of $ 148,863, purchase Fairchild in the amount of $ 369,933, purchase property and equipment in the amount of $ 147,174 and purchase marketable securities in the amount of $ 36,500. As a result, cash and cash equivalents increased by $ 98,502. Management of the Company expects capital expenditures to total approximately $ 100,000 during 2001. 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 unforseen working capital requirements. This report contains forward-looking statements which reflect the view of Company's management with respect to future events. Although management believes that the expectations reflected in such forward-looking statements are reasonable, it can give no assurance that such expectations will prove to have been correct. Important factors that could cause actual results to differ materially from such expectations are a down turn in the current strong retail climate and the potential for fluctuations in precious metals prices. The forward-looking statements contained herein reflect the current views of the Company's management and the Company assumes no obligation to update the forward-looking statements or to update the reasons actual results could differ from those contemplated by such forward-looking statements. ITEM 7. FINANCIAL STATEMENTS (a) Financial Statements (see pages 15 - 31 of this report). ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT The information contained in Dallas Gold and Silver Exchange, Inc.'s Proxy Statement to be filed pursuant to Regulation 14A within 120 days after the end of the fiscal year covered by this Form 10-KSB with respect to directors and executive officers of the Company, is incorporated by reference in response to this item. ITEM 10. EXECUTIVE COMPENSATION The information contained in Dallas Gold and Silver Exchange, Inc.'s Proxy Statement to be filed pursuant to Regulation 14A within 120 days after the end of the fiscal year covered by this Form 10-KSB, with respect to executive compensation and transactions, is incorporated by reference in response to this item. ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information contained in the Dallas Gold and Silver Exchange, Inc.'s Proxy Statement to be filed pursuant to Regulation 14A within 120 days after the end of the fiscal year covered by this Form 10-KSB with respect to security ownership of certain beneficial owners and management, is incorporated by reference in response to this item. ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information contained in Dallas Gold and Silver Exchange, Inc.'s Proxy Statement to be filed pursuant to Regulation 14A within 120 days after the end of the fiscal year covered by this Form 10-KSB, with respect to certain relationships and related transactions, is incorporated by reference in response to this item. ITEM 13. EXHIBITS REPORTS ON FORM 8-K (a) Exhibits: 21 - List of subsidiaries DGSE Corporation International Jewelry Exchange, Inc. (formerly Dallas Global Travel, Inc.) DLS Financial Services, Inc. eye media, inc. National Jewelry Exchange, Inc. Silverman Consultants, Inc. Charleston Gold And Diamond Exchange, Inc. 10.1 LEASE AGREEMENT dated JUNE 2, 2000 by and between SND PROPERTIES and CHARLESTON GOLD AND DIAMOND EXCHAMGE, INC. The following exhibits are incorporated by reference to the Company's Form 10-QSB dated May 14, 2000: 10.2 EXHIBIT 10.1 - BILL OF SALE AND ASSET PURCHASE AGREEMENT dated March 2, 2000 by and among Dallas Gold AND Silver Exchange, INC., FAIRCHILD INTERNATIONAL, INC. and MACK H. HOSKINS. The following exhibits are incorporated by reference to the Company's Form 8-K dated August 26, 1999: 10.3 EXHIBIT 1.0 AGREEMENT AND PLAN OF MERGER dated AUGUST 13, 1999 by and among Dallas Gold and Silver Exchange Silver Exchange, Inc., SILVERMAN ACQUISITION, INC., JEWEL CASH, INC. (the "COMPANY") and the COMPANY'S SHAREHOLDERS. 10.4 EXHIBIT 2.0 ASSIGNMENT AGREEMENT DATED AUGUST 13, 1999 between SILVERMAN JEWELRY CONSULTANTS, INC., FIRST UNION NATIONAL BANK OF SOUTH CAROLINA, and DALLAS GOLD & SILVER EXCHANGE, INC. (a) Exhibits:, continued 10.5 EXHIBIT 3.0 PROMISSORY NOTE DATED AUGUST 13, 1999 BY DALLAS GOLD & SILVER EXCHANGE, INC. PAYABLE TO FIRST UNION NATIONAL BANK. 10.6 EXHIBIT 4.0 SECURITY AGREEMENT DATED AUGUST 13, 1999 BY DALLAS GOLD & SILVER EXCHANGE, INC. and FIRST UNION NATIONAL BANK. 10.7 EXHIBIT 5.0 BILL OF SALE DATED AUGUST 13, 1999 BY AND BETWEEN FIRST UNION NATIONAL BANK, SILVERMAN RETAIL CONSULTANTS, SILVERMAN JEWELRY CONSULTANTS AND DALLAS GOLD & SILVER EXCHANGE, INC. The following exhibits are incorporated by reference to the Company's Form 10-KSB for the year ended December 31, 1998: 10.8 EXHIBIT 10.1 Renewal of Shopping Center Lease dated as of August 1, 1997 by and between Beltline Pawn Shop and Belt Line - Denton Road Associates. The following exhibits are incorporated by reference to the Company's Form 10-KSB for the year ended December 31, 1996: 10.9 EXHIBIT 10.1 Agreement For Purchase And Sale Of Stock dated December 30, 1996 by and among Dallas Gold And Silver Exchange, Inc. and Henry Hirschman. The following exhibits are incorporated by reference to the Company's Form 10-KSB for the year ended December 31, 1995: 10.10 EXHIBIT 10.1 9% Convertible Promissory Note dated December 5, 1995, by and among Dallas Gold And Silver Exchange, Inc. and A-Mark Precious Metals, Inc. The following exhibits are incorporated by reference to the Company's Form 10-KSB for the year ended December 31, 1994: 10.11 EXHIBIT 10.1 Lease Agreement dated February 11, 1994, by and among Dallas Gold And Silver Exchange, Inc. and Stanley Kline. 10.12 EXHIBIT 10.2 renewal, extension, modification agreement dated January 28, 1994 by and among DGSE Corporation And Michael E. Hall and Marion Hall. (b) Reports on Form 8-K - None SIGNATURES In accordance with Section 13 or 15(d) of the Exchange Act, the Registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Dallas Gold and Silver Exchange, Inc. By: /s/ L. S. Smith Dated: March 21, 2001 ------------------------- 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: March 21, 2001 ------------------------- L.S Smith Chairman of the Board, Chief Executive Officer and Secretary By: /s/ W. H. Oyster Dated: March 21, 2001 ------------------------- W. H. Oyster Director, President and Chief Operating Officer By: /s/ John Benson Dated: March 21, 2001 ------------------------- John Benson Director and Chief Financial Officer (Principal Accounting Officer) BY: /s/ William P. Cordeiro Dated: March 21, 2001 ----------------------- Director By: /s/ James Walsh Dated: March 21, 2001 --------------- Director Report of Independent Certified Public Accountants Board of Directors and Shareholders Dallas Gold and Silver Exchange, Inc. We have audited the accompanying consolidated balance sheet of Dallas Gold and Silver Exchange, Inc. and Subsidiaries as of December 31, 2000, and the related consolidated statements of income, shareholders' equity, and cash flows for each of the two years ended December 31, 2000 and 1999. These 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 auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. 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. 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 Dallas Gold and Silver Exchange, Inc. and Subsidiaries as of December 31, 2000, and the consolidated results of their operations and their cash flows for the years ended December 31, 2000 and 1999 in conformity with accounting principles generally accepted in the United States of America. GRANT THORNTON LLP Dallas, Texas February 7, 2001 Dallas Gold and Silver Exchange, Inc. and Subsidiaries CONSOLIDATED BALANCE SHEET December 31, 2000 ASSETS CURRENT ASSETS Cash and cash equivalents $ 1,362,219 Trade receivables 935,002 Inventories 7,087,265 Prepaid expenses 142,291 ------------ Total current assets 9,526,777 MARKETABLE SECURITIES - AVAILABLE FOR SALE 856,081 PROPERTY AND EQUIPMENT - AT COST, NET 1,391,618 DEFERRED TAX ASSETS 171,432 GOODWILL, NET OF ACCUMULATED AMORTIZATION OF $209,702 1,343,804 OTHER ASSETS 123,531 ------------ $ 13,413,243 ============ LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES Notes payable $ 2,899,918 Current maturities of long-term debt 830,561 Accounts payable - trade 2,176,834 Accrued expenses 458,191 Accrued compensation 322,539 Customer deposits 127,144 Federal income taxes payable 656,604 ------------ Total current liabilities 7,471,791 LONG-TERM DEBT, less current maturities 949,838 SHAREHOLDERS' EQUITY Common stock, $.01 par value; authorized 10,000,000 shares; issued and outstanding 4,907,990 shares 49,080 Additional paid-in capital 5,609,445 Accumulated other comprehensive loss (690,749) Retained earnings 23,838 ------------ Total shareholders' equity 4,991,614 ------------ $ 13,413,243 ============ The accompanying notes are an integral part of this statement. Dallas Gold and Silver Exchange, Inc. and Subsidiaries CONSOLIDATED STATEMENTS OF INCOME Years ended December 31, 2000 1999 ----------- ----------- Revenue Sales $24,969,467 $21,415,165 Pawn service fees 95,718 62,809 Consulting services 456,000 -- Gain on sale of marketable securities 266,714 83,116 Unrealized gains on marketable securities -- 109,771 Other income 12,019 1,744 ----------- ----------- 25,799,918 21,672,605 Costs and expenses Cost of goods sold 18,834,689 17,075,332 Consulting service costs 115,053 114,670 Selling, general and administrative expenses 5,467,265 3,605,233 Depreciation and amortization 387,963 210,105 Interest expense 497,004 213,985 ----------- ----------- 25,301,974 21,219,325 ----------- ----------- Income before income taxes 497,944 453,280 Income tax expense 246,260 167,978 ----------- ----------- Net Income $ 251,684 $ 285,302 =========== =========== Earnings per common share Basic $ .05 $ .07 Diluted $ .05 $ .06 Weighted average number of common shares Basic 4,682,375 4,256,920 Diluted 5,043,103 4,612,245 The accompanying notes are an integral part of these statements.
Dallas Gold and Silver Exchange, Inc. and Subsidiaries CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY Years ended December 31, 2000 and 1999 Accumulated Common stock Additional other Total -------------------------- paid-in Retained comprehensive shareholders' Shares Amount capital earnings loss equity ----------- ----------- ----------- ----------- ----------- ----------- Balances at January 1, 1999 4,144,912 $ 41,449 $ 3,341,387 $ (513,148) $ (4,950) $ 2,864,738 Net income -- -- -- 285,302 -- 285,302 Other comprehensive income: Unrealized loss on marketable securities, net of tax -- -- -- -- (1,980) (1,980) ----------- Comprehensive income -- -- -- -- -- 283,322 ----------- Purchase and retirement of common shares (39,500) (395) (128,581) -- -- (128,976) Issuance of warrants in connection with debt -- -- 30,000 -- -- 30,000 Common stock issued on conversion of debt 25,000 250 18,500 -- -- 18,750 Common stock issued for services 37,500 375 93,625 -- -- 94,000 Common stock issued for acquisition 200,000 2,000 613,000 -- -- 615,000 ----------- ----------- ----------- ----------- ----------- ----------- Balances at December 31, 1999 4,367,912 43,679 3,967,931 (227,846) (6,930) 3,776,834 Net income -- -- -- 251,684 -- 251,684 Other comprehensive income: Unrealized loss on marketable securities, net of tax -- -- -- -- (683,819) (683,819) ----------- Comprehensive loss -- -- -- -- -- (432,135) ----------- Purchase and retirement of common shares (24,500) (245) (148,618) -- -- (148,863) Issuance of warrants in connection with debt -- -- 53,584 -- -- 53,584 Common stock issued on conversion of debt 498,333 4,983 1,403,002 -- -- 1,407,985 Common stock issued for services 3,500 35 14,173 -- -- 14,208 Common stock issued for acquisition 62,745 628 319,373 -- -- 320,001 ----------- ----------- ----------- ----------- ----------- ----------- Balances at December 31, 2000 4,907,990 $ 49,080 $ 5,609,445 $ 23,838 $ (690,749) $ 4,991,614 =========== =========== =========== =========== =========== ===========
The accompanying notes are an integral part of these statements.
Dallas Gold and Silver Exchange, Inc. and Subsidiaries CONSOLIDATED STATEMENTS OF CASH FLOWS Years ended December 31, 2000 1999 ----------- ----------- Reconciliation of net income to net cash provided by (used in) operating activities Net income $ 251,684 $ 285,302 Adjustments to reconcile net income to cash provided by (used in) operating activities Common stock issued for services 14,208 94,000 Marketable securities received for consulting services 456,000 -- Depreciation and amortization 387,963 210,105 Unrealized gain on marketable securities - trading -- (109,771) Realized gain on marketable securities - trading (266,714) -- Accretion of debt discount 56,792 -- Deferred taxes (438,136) 32,962 Change in operating assets and liabilities Net change in marketable securities - trading 1,966,902 30,955 Trade receivables (199,224) (568,849) Inventories (1,174,784) (1,655,411) Prepaid expenses and other assets (142,626) (80,707) Accounts payable and accrued expenses 1,289,806 656,712 Accrued compensation (48,102) 5,914 Customer deposits 36,950 (84,406) Federal income taxes payable 540,026 104,920 ----------- ----------- Total net cash provided by (used in) operating activities 2,730,745 (1,078,274) Cash flows from investing activities Purchase of marketable securities (36,500) -- Decrease in notes receivable - officers -- 4,001 Purchases of property and equipment (147,174) (172,280) Acquisition of Fairchild assets (369,933) -- ----------- ----------- Net cash used in investing activities (553,607) (168,279) ----------- -----------
The accompanying notes are an integral part of these statements.
Dallas Gold and Silver Exchange, Inc. and Subsidiaries CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED Years ended December 31, 2000 1999 ----------- ----------- Cash flows from financing activities Proceeds from indebtness $ 1,001,136 $ 3,524,079 Repayment of indebtness (2,018,909) (1,889,670) Purchase and retirement of common stock (148,863) (128,976) ----------- ----------- Net cash provided by (used in) financing activities (1,166,636) 1,505,433 ----------- ----------- Net increase in cash and cash equivalents 98,502 258,880 Cash and cash equivalents at beginning of year 1,263,716 1,004,836 ----------- ----------- Cash and cash equivalents at end of year $ 1,362,218 $ 1,263,716 =========== ===========
Supplemental schedule of noncash, investing and financing activities: Interest paid during 2000 and 1999 amounted to $457,518 and $211,189, respectively. Income taxes paid during 2000 amounted to $165,153. No taxes were paid in 1999. During 2000 and 1999, debt amounting to $1,006,863 and $18,750, respectively, was converted to common stock. As more fully described in Note L, in connection with the Company's acquisition of Silverman Consultants, Inc., 200,000 shares of common stock were issued with a value of $615,000 and a $2,500,000 note payable was assumed for $2,500,000 of inventory and $131,000 of furniture and fixtures. As more fully described in Note L, in connection with the Company's acquisition of Fairchild International, Inc., 62,745 shares of common stock were issued with a value of $320,001 as part of the purchase price which included $350,000 in cash and a promissory note in the amount of $450,000. The accompanying notes are an integral part of these statements. Dallas Gold and Silver Exchange, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2000 and 1999 NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Nature of Operations -------------------- Dallas Gold and Silver Exchange, Inc. and its subsidiaries (the Company), sell jewelry and bullion products to both retail and wholesale customers throughout the United States through its facility in Dallas, Texas and through its internet sites. In addition, the Company provides consulting services related to reorganization of other business enterprises and liquidations of jewelry retailers. Principles of Consolidation --------------------------- The consolidated financial statements include the accounts of the Company and its subsidiaries. All material intercompany transactions and balances have been eliminated. Cash and Cash Equivalents ------------------------- For purposes of the statements of cash flows, the Company considers all highly liquid debt instruments purchased with a maturity of three months or less to be cash equivalents. Investments in Marketable Securities ------------------------------------ Marketable equity securities have been categorized as either available-for-sale or trading 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, while unrealized gains and losses for trading securities are included in the statement of income. Realized gains and losses on the sale of securities are based on the specific identification method. 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 five to thirty years. Machinery and equipment under capital lease are amortized on the straight-line method over their useful lives. Goodwill -------- Goodwill is being amortized over periods expected to be benefited using the straight-line method with periods ranging from five to ten years. Dallas Gold and Silver Exchange, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED December 31, 2000 and 1999 NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued Financial Instruments --------------------- The carrying amounts reported in the consolidated balance sheet 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 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 $439,300 and $398,400 for 2000 and 1999. Income Taxes ------------ Deferred tax liabilities and assets are recognized for the expected future tax consequences of events that have been included in the financial statements or tax returns. Under this method, deferred tax liabilities and assets are determined based on the difference between the financial statement and tax basis of assets and liabilities. Earnings 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, warrants and convertible securities. 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. Use of Estimates ---------------- The preparation of financial statements in conformity with generally accepted accounting principles 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 year's consolidated financial statements to conform to the current year presentation. Dallas Gold and Silver Exchange, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED December 31, 2000 and 1999 NOTE B - INVENTORIES A summary of inventories at December 31, 2000 is as follows: Jewelry $6,695,405 Scrap gold 188,045 Bullion 42,632 Other 159,183 ---------- $7,087,265 ========== NOTE C - INVESTMENTS IN MARKETABLE SECURITIES Marketable securities have been classified in the consolidated balance sheet according to management's intent. The carrying amount of available-for-sale securities and their fair values at December 31, 2000 follows: Gross Gross unrealized unrealized Fair Cost gains losses value ---------- ---------- ---------- ---------- Equity securities $1,908,288 $ 115,200 $1,167,407 $ 856,081 ========== ========== ========== ========== NOTE D - PROPERTY AND EQUIPMENT A summary of property and equipment at December 31, 2000 is as follows: Land $ 551,300 Buildings and improvements 682,253 Machinery and equipment 758,320 Furniture and fixtures 202,742 ---------- 2,194,615 Less accumulated depreciation and amortization (802,997) ---------- $1,391,618 ========== Property and equipment under capital lease is $158,000. Accumulated depreciation for these assets was $113,200 as of December 31, 2000.
Dallas Gold and Silver Exchange, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED December 31, 2000 and 1999 NOTE E - NOTES PAYABLE A summary of notes payable at December 31, 2000 follows: Note payable to bank, due in variable weekly installments based on 90% of sales price of inventory collateral approximating $815,896 The note bears interest at 9.25% and is due June 24, 2001 $1,582,117 Line of credit payable to bank with interest at prime plus 1% collateralized by inventory and accounts receivable and due November 1, 2001. Maximum borrowings under the line of credit are $600,000 500,000 Note payable to limited partnership with interest at 10%, collateralized by marketable securities and due April 1, 2001, net of discount of $26,792 248,208 Various demand notes to individuals with interest rates from 8% to 14% 569,593 ---------- $2,899,918 ========== In connection with note payable to limited partnership, the Company issued warrants for 27,500 shares of common stock expiring December 31, 2001. The warrants have an exercise price of $6.20 and were valued at $66,550 at the date of grant. NOTE F - LONG-TERM DEBT A summary of long-term debt at December 31, 2000 follows: Mortgage payable, due in monthly installments of $6,452, including interest based on 30 year US Treasury note rate plus 2-1/2% (10.96% at December 31, 2000); balance due in January 2014 $ 590,764 Note payable, due March 2, 2005. Interest is payable quarterly at a rate of 8% 415,850 Note payable, due December 31, 2001. Interest is payable quarterly at a rate of 8% 675,000 Capital lease obligations 98,785 ---------- 1,780,399 Less current maturities (830,561) ---------- $ 949,838 ==========
Dallas Gold and Silver Exchange, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED December 31, 2000 and 1999 NOTE F - LONG-TERM DEBT - Continued Convertible Note ---------------- In December 1996, the Company issued a long-term convertible note in the amount of $875,000. The note bears interest at 8% payable quarterly. During 2000, $100,000 of the note was converted to 100,000 shares of common stock. The remaining principal of $675,000 is due December 2001. Also during 2000, approximately $907,000 of debt was converted into 398,333 shares of common stock. The following table summarizes the aggregate maturities of long-term debt and payments on the capital lease obligations: Obligations under Long-term capital debt leases Totals --------- --------- --------- 2001 $ 802,880 $ 36,688 $ 839,568 2002 114,980 34,242 149,222 2003 124,605 32,504 157,109 2004 135,089 12,346 147,435 2005 66,483 1,248 67,731 Thereafter 437,576 -- 437,576 --------- --------- --------- Total 1,681,614 117,028 1,798,642 Amounts representing interest (interest rates Ranging from 10.8% to 23.3%) -- (18,242) (18,242) --------- --------- --------- 1,681,614 98,785 1,780,399 Less current portion (802,880) (27,681) (830,561) --------- --------- --------- $ 878,734 $ 71,104 $ 949,838 ========= ========= =========
Dallas Gold and Silver Exchange, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED December 31, 2000 and 1999 NOTE G - EARNINGS PER 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, 2000 and 1999 is as follows: 2000 --------------------------------- Per-share Income Shares amount --------- --------- --------- Basic earnings per common share Income from operations allocable to common stockholders $ 251,684 4,682,375 .05 ========= Effect of dilutive securities Stock options and warrants -- 204,872 Convertible debt 11,360 155,856 --------- --------- Diluted earnings per common share Income from operations available to common stockholders plus assumed conversions $ 263,044 5,043,103 .05 ========= ========= ========= 1999 --------------------------------- Per-share Income Shares amount --------- --------- --------- Basic earnings per common share Income from operations allocable to common stockholders $ 285,302 4,256,920 $ .07 ========= Effect of dilutive securities Stock options and warrants -- 95,006 Convertible debt 11,629 260,319 --------- --------- Diluted earnings per common share Income from operations available to common stockholders plus assumed conversions $ 296,931 4,612,245 $ .06 ========= ========= =========
NOTE H - STOCK OPTIONS The Company has granted stock options to key employees to purchase shares of the Company's common stock. Each option issued vests according to schedules designated by the Board of Directors, not to exceed three years. The exercise price is based upon the estimated fair market value of the Company's common stock at the date of grant, and is payable when the option is exercised.
Dallas Gold and Silver Exchange, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED December 31, 2000 and 1999 NOTE H - STOCK OPTIONS - Continued The Company has adopted only the disclosure provisions of Financial Accounting Standard No. 123, "Accounting for Stock-Based Compensation" (FAS 123). It applies APB Opinion No. 25, "Accounting for Stock Issued to Employees," and related Interpretations in accounting for its plans and does not recognize compensation expense for its stock-based compensation. The following table summarizes the activity in common shares subject to options for the two years ended December 31, 2000: 2000 1999 ----------------------- ----------------------- Weighted Weighted average average Options exercise price Options exercise price ------- -------------- ------- -------------- Outstanding at beginning of year 434,000 2.55 340,000 $2.12 Granted - - 94,000 4.13 ------- ------- ----- Outstanding at end of year 434,000 2.55 434,000 $2.55 ======= ==== ======= ===== Exercisable at end of year 408,000 2.49 395,000 $2.45 ======= ==== ======= ===== Weighted average fair value of options granted during the year - $3.39 ==== =====
Stock options outstanding at December 31, 2000: Options Outstanding Options Exercisable ----------------------- ----------------------- Weighted Weighted Weighted Range of average average average exercise price Options expected life exercise price Options exercise price -------------- ------- ------------- -------------- ------- -------------- $1.63 to $2.25 340,000 8 years $2.12 340,000 $2.12 $3.63 to $4.19 59,000 8 years $3.69 34,000 $3.83 $4.88 35,000 5 years $4.88 35,000 $4.88 ------- ------- 434,000 408,000 ======= =======
Dallas Gold and Silver Exchange, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED December 31, 2000 and 1999 NOTE H - STOCK OPTIONS - Continued Had compensation costs for stock-based compensation plans been determined consistent with the fair value method of SFAS 123, the Company's net earnings and net earnings per common and diluted share for 1999 would have been: 2000 1999 -------- -------- Net earnings As reported $251,684 $285,302 Pro forma 227,917 155,106 Basic earnings per common share As reported .05 .07 Pro forma .05 .04 Diluted earnings per common share As reported .05 .06 Pro forma .05 .03 The effects of applying SFAS 123 in this pro forma disclosure are not indicative of future disclosures because they do not take into effect pro forma compensation expense related to grants made before fiscal 1996. 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 86%, risk-free rate of 6.3 to 6.6%, no dividend yield and expected life of 8 years. NOTE I - COMPREHENSIVE INCOME Comprehensive income at December 31, 2000 and 1999 is as follows: Before-Tax Tax Net-of-Tax Amount Benefit Amount ----------- -------- ---------- Comprehensive income (loss) at January 1, 1999 $ (7,500) $ 2,550 $ (4,950) Unrealized holding losses arising during 1999 (3,000) 1,020 (1,980) ----------- -------- ---------- Comprehensive income (loss) at December 31, 1999 (10,500) 3,570 (6,930) Unrealized holding losses arising during 2000 (1,041,707) 357,888 (683,819) ----------- -------- ---------- Comprehensive income (loss) at December 31, 2000 $(1,052,207) $361,458 $ (690,749) =========== ======== ==========
Dallas Gold and Silver Exchange, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED December 31, 2000 and 1999 NOTE J - INCOME TAXES The income tax provision reconciled to the tax computed at the statutory Federal rate follows: 2000 1999 --------- --------- Tax expense at statutory rate $ 169,301 $ 154,115 Nondeductible goodwill 32,844 11,949 Basis difference in acquired assets 36,687 -- Other 7,428 -- --------- --------- Tax expense $ 246,260 $ 167,978 ========= ========= Current $ 684,396 $ 135,016 Deferred (438,136) 32,962 --------- --------- $ 246,260 $ 167,978 ========= ========= Deferred income taxes are comprised of the following at December 31, 2000: Deferred tax assets: Unrealized loss on available for sale securities $ 151,489 Property and equipment 11,443 Goodwill 8,500 --------- $ 171,432 =========
NOTE K - OPERATING LEASES The Company leases certain of its facilities under operating leases. The minimum rental commitments under noncancellable operating leases are as follows: Year ending Lease Sub-lease December 31, obligations receivables Total ------------ ----------- ----------- ---------- 2001 $ 386,943 $ (90,000) $ 296,943 2002 386,760 (90,000) 296,760 2003 388,764 (90,000) 298,764 2004 259,176 (60,000) 199,176 ----------- ----------- ---------- $ 1,421,643 $ (330,000) $1,091,643 =========== =========== ========== Rent expense for the years ended December 31, 2000 and 1999 was approximately $386,000 and $221,000, respectively, and was decreased by sublease income of approximately $23,000 and $18,000, respectively. Dallas Gold and Silver Exchange, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED December 31, 2000 and 1999 NOTE L - ACQUISITIONS On March 2, 2000, the Company acquired certain assets of Fairchild International, Inc. The purchase price of $1,120,001 consisted of $350,000 in cash, a promissory note for $450,000, and 62,745 shares of the Company's common stock valued at $320,001. The acquisition has been accounted for as a purchase. Accordingly, a portion of the purchase price has been allocated to net tangible and intangible assets acquired based on their estimated fair values. The purchase price has been allocated to furniture and fixtures in the amount of $120,000 and goodwill in the amount of $1,000,000. Goodwill is being amortized over ten years. On August 13, 1999 the Company purchased substantially all assets of Silverman Consultants, Inc. ("Silverman") located in Mt. Pleasant, South Carolina. Silverman's primary business is conducting liquidation, consolidation, promotional or other large-scale retail sales for jewelry stores and other types of retailers. The purchase price of $3,100,000 consisted of the issuance of 200,000 of the Company's newly issued unregistered common stock and the assumption by the Company of a $2,500,000 obligation to a bank. The purchase price has been allocated as follows: inventory ($2,500,000); property and equipment ($131,000); and goodwill ($469,000). Goodwill is being amortized over five years. The results of Silverman have been included in the consolidated financial statements since August 13, 1999. The following unaudited pro forma information presents a summary of 2000 and 1999 consolidated results of operations as if the acquisitions had occurred on January 1, 1999: 2000 1999 ----------- ----------- Revenue $25,998,000 $26,645,518 Net income (loss) 232,592 (518,566) Earnings per share Basic .05 (.12) Diluted .05 (.12)
Dallas Gold and Silver Exchange, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED December 31, 2000 and 1999 NOTE M - SEGMENT INFORMATION Management identifies reportable segments by product or service offered. The Company's operations by segment were as follows: Consulting Corporate Software Liquidations Jewelry Services & other Consolidated -------- ------------ ----------- ---------- --------- ------------ Revenues 2000 $205,368 $ 4,336,550 $20,535,286 $ 722,714 $ -- $ 25,799,918 1999 160,000 2,212,060 19,107,084 193,461 -- 21,672,605 Operating income (loss) 2000 $ 50,291 $ (347,276) $ 278,941 $ 369,080 $ (99,352) $ 251,684 1999 86,715 (48,371) 462,582 (45,150) (170,474) 285,302 Identifiable assets 2000 $134,241 $ 3,765,941 $ 8,620,016 $ 886,045 $ 7,000 $ 13,413,243 1999 132,315 3,682,549 4,699,172 3,951,319 -- 12,465,355 Capital expenditures 2000 $ 52,915 $ 44,702 $ 245,010 $ 2,017 $ -- $ 344,644 1999 19,375 131,426 104,764 8,738 -- 264,303 Depreciation and amortization 2000 $ 12,737 $ 142,207 $ 216,552 $ 16,467 $ -- $ 387,963 1999 4,045 89,318 99,115 17,627 -- 210,105