-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, UAPm7KZ10zJucLTIsbDKjSco9Czxrm2dV4yNj+nEUd+umSHvQ3OafB6N3Al9cxjd FLd6omevpG47+/uJ9oYxIg== 0001010549-02-000310.txt : 20020516 0001010549-02-000310.hdr.sgml : 20020516 20020516150409 ACCESSION NUMBER: 0001010549-02-000310 CONFORMED SUBMISSION TYPE: 10KSB/A PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20011231 FILED AS OF DATE: 20020516 FILER: COMPANY DATA: COMPANY CONFORMED NAME: DALLAS GOLD & SILVER EXCHANGE INC /NV/ CENTRAL INDEX KEY: 0000701719 STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-JEWELRY STORES [5944] IRS NUMBER: 880097334 STATE OF INCORPORATION: NV FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10KSB/A SEC ACT: 1934 Act SEC FILE NUMBER: 001-11048 FILM NUMBER: 02654820 BUSINESS ADDRESS: STREET 1: 2817 FOREST L STREET 2: STE 202 CITY: DALLAS STATE: TX ZIP: 75234 BUSINESS PHONE: 9724843662 MAIL ADDRESS: STREET 1: 2817 FOREST LN CITY: DALLAS STATE: TX ZIP: 75234 FORMER COMPANY: FORMER CONFORMED NAME: CANYON STATE CORP DATE OF NAME CHANGE: 19860819 FORMER COMPANY: FORMER CONFORMED NAME: AMERICAN PACIFIC MINT INC DATE OF NAME CHANGE: 19920703 10KSB/A 1 dgse10ksba123101.txt U. S. SECURITIES AND EXCHANGE COMMISSION Washington, D. C. 20549 FORM 10-KSB/A (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, 2001 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 ------- DGSE Companies, Inc. (formerly Dallas Gold & 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: Common Stock, $ .01 par value - ------------------------------ (Title of Class) 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, 2001, total revenues were $ 21,116,809. As of March 11, 2002, the aggregate market value of the voting stock held by non-affiliates of the registrant was $ 6,804,467 As of March 11, 2002, 4,913,290 shares of Common Stock were outstanding. Documents incorporated by reference: Portions of the proxy statement for the annual shareholders' meeting to be held June 14, 2002, are incorporated by reference into Part III. PART I ITEM 1. DESCRIPTION OF BUSINESS DGSE Companies, Inc (formerly 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 jewelrywatchesdiamonds.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. 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. Over 7,500 items are available for sale on the Company's internet sites including $ 10,000,000 in diamonds. The Company recently launched a consolidating portal through which all of its web sites can be accessed, jewelrywatchesdiamonds.com. The Company has developed internet software called Virtual Auctioneer v2.0 which is an electronic commerce product that allows users to easily build online auction sites. The Company markets its internet software product through its subsidiary eye media, inc. ("eye media"). The Company's wholly-owned subsidiary, National Jewelry Exchange, Inc. ("NJE") operates a pawn shop in Carrollton, Texas. The Company has focused the operations of NJE on sales and pawn loans of jewelry products. 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 DESCRIPTION OF BUSINESS (continued...) - ----------------------- estimated fairvalues. The results of Fairchild have been included in the consolidated financial statements since the date of acquisition. 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. 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 have 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 18.5% of total sales for 2001 and 15.9% in 2000 (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 2001 or 2000. 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. 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. Products and Services (continued...) - --------------------- 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 are transferred to inventory. 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. The Company has 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. The Company also operates 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. The Company also operates a live real time trading floor in jewelry, diamonds and fine watches. 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. Additional sites operated by the Company include FirstCoinAuction.com, FirstJewelryAuctions.com, FairchildWatches.com and Silvermanliquidations.com. The Company recently launched a consolidating portal through all of its sites can be accessed, jewelrywatchesdiamonds.com. CONSULTING SERVICES - ------------------- DLS provides insolvency advisory services primarily to business enterprises that are or have been involved in proceedings under Chapter 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. During 2001 DLS did not engage any new consulting clients or receive any revenues for services. 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 liquidity for the expansion of the Company's other business activities. As of December 31, 2001, the Company's investment in these enterprises totaled $ 426,414. Products and Services (continued...) SOFTWARE - -------- The Company has developed internet software, 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 Silverman 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. 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, 2001 or 2000. Company backlogs for fabricated jewelry products were also not significant as of December 31, 2001 and 2000. Seasonality - ----------- The retail and wholesale jewelry business and the liquidation business is seasonal. The Company realized 33.8% and 32.5% of its annual sales in the fourth quarters of 2001 and 2000, 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. Employees - --------- As of December 31, 2001, the Company employed 40 individuals, 38 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, pawn 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 $ 564,000 as of December 31, 2001. 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 and receives monthly rental payments in the amount of $ 7,500. 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 NASDAQ for the common stock. During the past two years, the Company has not declared any dividends with respect to its common stock. The Company intends to retain all earnings to finance future growth; accordingly, it is not anticipated that cash dividends will be paid to holders of common stock in the foreseeable future. High and low stock prices for the last two years were: 2001 2000 High Low High Low ---- --- ---- --- First Quarter 9 7/8 3 1/2 7 5/8 4 1/2 Second Quarter 9 1/2 4 3/4 9 1/8 5 Third Quarter 7 3/4 1.95 8 5/8 6 3/4 Fourth Quarter 5.05 1.83 10 1/8 7 1/8 On March 11, 2002, the closing sales price for the Company's common stock was $ 2.20 and there were 698 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. The Company Operates DLS, a wholly-owned subsidiary, 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 available-for-sale and are carried at fair value. Unrealized gains and losses for available-for-sale securities are included as a component of shareholders' equity net of tax until realized. Realized gains and losses on the sale of securities are based on the specific identification method. Results of Operations - --------------------- 2001 vs 2000 - ------------ Sales decreased by $ 3,973,347 (15.9%) in 2001. This decrease was the result of a $ 2,477,247 decrease in sales from the liquidations segment, a $ 1,269,339 decrease in sales from the jewelry segment and a $ 201,790 decrease in the sale of internet software products. The decrease in sales from the liquidations segment was the result of the strong retail environment during 2000 and early 2001. Although nation wide retail sales slowed significantly during the second half of 2001, the Company was not able to generate new liquidations sales in time to recover from the slow first half. The decrease in sales from the jewelry segment was the result of a nation wide softness in the retail environment. Software sales declined due to continued softness in the web site development market. Consulting services revenue during 2000 was the result of one project. The Company booked no new consulting contracts during 2001. The Company sold marketable trading securities during 2000 which realized gains of $ 266,714. Cost of goods decreased by $ 2,795,031 during 2001 primarily due to the lower sales volume. Gross margins declined from 24.6% in 2000 to 23.6% in 2001 due to a slight decline in the sale of high-end jewelry products which tend to have higher margins. Selling, general and administrative expenses decreased by $ 881,958 due to staff reductions and salary cuts. Depreciation and amortization increased by 10.2% during 2001 due to the acquisition of Fairchild in March 2000. Liquidity and Capital Resources - ------------------------------- The Company's short-term debt, including current maturities of long-term debt totaled $ 4,027,172 as of December 31, 2001. During January 2002 the Company retired $ 575,000 of this debt and renewed or extended $1,800,000. The Company did not pay its federal income taxes during 2000 and negotiated payment terms with the Internal Revenue Service. It is anticipated these taxes will be paid in fiscal 2002. Management of the Company expects capital expenditures to total approximately $100,000 during 2002. It is anticipated that these expenditures will be funded from working capital. 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 continue to do so in the near future. From time to time, management has adjusted the Company's inventory levels to meet seasonal demand or in order to meet working capital requirements. Management is of the opinion that if additional working capital is required, additional loans can be obtained from individuals or from commercial banks. If necessary, inventory levels may be adjusted or a portion of the Company's investments in marketable securities may be liquidated in order to meet 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. Critical Accounting Policies - ---------------------------- Our reported results are impacted by the application of certain accounting policies that require us to make subjective estimates or judgments. Changes in estimates and judgments could significantly affect our results of operations, financial condition and cash flows in future years. We believe that the following critical accounting policies are affected by significant judgments and estimates used in the preparation of its consolidated financial statements: Critical Accounting Policies (continued...) - ---------------------------- Impairment of Investment Securities results in a charge to operations when a market decline below cost is other than temporary. Management regularly reviews each investment security for impairment based on criteria that include the extent to which cost exceeds market value, the duration of that market decline and the financial health of and specific prospects for the issuer. The Company's investment securities amounted to approximately $426,000 as of December 31, 2001. Gross unrealized gains and losses were $115,000 and $1,613,000, respectively, at December 31, 2001. Goodwill was accounted for in accordance with APB 16 "Business Combinations" (ABP 16) for acquisitions and SFAS No. 121 "Accounting for the Impairment of Long-Lived Assets and for Long Lived Assets to be Disposed Of" (SFAS 121) for the periodic evaluation of goodwill impairment. Purchase accounting required by APB 16 involved judgment with respect to the valuation of the acquired assets and liabilities in order to determine the final amount of goodwill. Management believes that the estimates that it has used to record prior acquisitions were reasonable and in accordance with APB 16. The Company performs an annual evaluation for the impairment of Long-Lived Assets, including goodwill, based on expectations of non-discounted future cash flows compared to the carrying value of the subsidiary. The Company's cash flow estimates are based on historical cash flows, as well as future projected cash flows. Management believes that its procedures for estimating gross future cash flows are reasonable and consistent with current market conditions. Subsequent to December 31, 2001, the Company will account for acquired goodwill and goodwill impairment in accordance with the new standards outlined in Note A of the Consolidated Financial Statements. These new pronouncements will also require considerable judgment and may require that the Company use third parties to provide pertinent information to assist in management's evaluation of any future goodwill impairment. The Company has approximately $840,000 and $311,000 of goodwill related to its jewelry and liquidation segments, respectively. Inventory Obsolescence Accruals may be required based on management's estimation of obsolescence or unmarketable inventory, in order to write-down inventory to its estimated net realizable value based upon assumptions about future demand and market conditions. If actual market conditions are less favorable than those projected by management, inventory write-downs may be required. ITEM 7. FINANCIAL STATEMENTS (a) Financial Statements (see pages 15 - 33 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 Company's Proxy Statement to be filed pursuant to Regulation 14A within 120 days after the end of the fiscal year covered by this Form 10-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 the Company's Proxy Statement to be filed pursuant to Regulation 14A within 120 days after the end of the fiscal year covered by this Form 10-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. The following exhibits are incorporated by reference to the Company's Form 10-KSB dated March 21, 2001: 10.1 EXHIBIT 10.1 - LEASE AGREEMENT dated JUNE 2, 2000 by and between SND PROPERTIES and CHARLESTON GOLD AND DIAMOND EXCHAMGE, INC. The following exhibits are incorporated by reference to the Company's Form 10-QSB dated May 14, 2000: 10.2 EXHIBIT 10.1 - BILL OF SALE AND ASSET PURCHASE AGREEMENT dated March 2, 2000 by and among Dallas Gold AND Silver Exchange, INC., FAIRCHILD INTERNATIONAL, INC. and MACK H. HOSKINS. The following exhibits are incorporated by reference to the Company's Form 8-K dated August 26, 1999: 10.3 EXHIBIT 1.0 AGREEMENT AND PLAN OF MERGER dated AUGUST 13, 1999 by and among Dallas Gold and Silver Exchange Silver Exchange, Inc., SILVERMAN ACQUISITION, INC., JEWEL CASH, INC. (the "COMPANY") and the COMPANY'S SHAREHOLDERS. 10.4 EXHIBIT 2.0 ASSIGNMENT AGREEMENT DATED AUGUST 13, 1999 between SILVERMAN JEWELRY CONSULTANTS, INC., FIRST UNION NATIONAL BANK OF SOUTH CAROLINA, and DALLAS GOLD & SILVER EXCHANGE, INC. 10.5 EXHIBIT 3.0 PROMISSORY NOTE DATED AUGUST 13, 1999 BY DALLAS GOLD & SILVER EXCHANGE, INC. PAYABLE TO FIRST UNION NATIONAL BANK. 10.6 EXHIBIT 4.0 SECURITY AGREEMENT DATED AUGUST 13, 1999 BY DALLAS GOLD & SILVER EXCHANGE, INC. and FIRST UNION NATIONAL BANK. 10.7 EXHIBIT 5.0 BILL OF SALE DATED AUGUST 13, 1999 BY AND BETWEEN FIRST UNION NATIONAL BANK, SILVERMAN RETAIL CONSULTANTS, SILVERMAN JEWELRY CONSULTANTS AND DALLAS GOLD & SILVER EXCHANGE, INC. The following exhibits are incorporated by reference to the Company's Form 10-KSB for the year ended December 31, 1998: 10.8 EXHIBIT 10.1 Renewal of Shopping Center Lease dated as of August 1, 1997 by and between Beltline Pawn Shop and Belt Line - Denton Road Associates. The following exhibits are incorporated by reference to the Company's Form 10-KSB for the year ended December 31, 1996: 10.9 EXHIBIT 10.1 Agreement For Purchase And Sale Of Stock dated December 30, 1996 by and among Dallas Gold And Silver Exchange, Inc. and Henry Hirschman. The following exhibits are incorporated by reference to the Company's Form 10-KSB for the year ended December 31, 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 28, 2002 ------------------------- 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 28, 2002 ------------------------- L.S Smith Chairman of the Board, Chief Executive Officer and Secretary By: /s/ W. H. Oyster Dated: March 28, 2002 ------------------------- W. H. Oyster Director, President and Chief Operating Officer By: /s/ John Benson Dated: March 28, 2002 ------------------------- John Benson Director and Chief Financial Officer (Principal Accounting Officer) BY: /s/ William P. Cordeiro Dated: March 28, 2002 ------------------------- Director By: /s/ James Walsh Dated: March 28, 2002 ------------------------- Director Financial Statements and Report of Independent Certified Public Accountants DGSE Companies, Inc. December 31, 2001 and 2000 Report of Independent Certified Public Accountants Board of Directors and Shareholders DGSE Companies, Inc. We have audited the accompanying consolidated balance sheets of DGSE Companies, Inc. and Subsidiaries as of December 31, 2001 and 2000, and the related consolidated statements of operations, shareholders' equity, and cash flows for each of the years then ended. 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 DGSE Companies, Inc. and Subsidiaries as of December 31, 2001 and 2000, and the consolidated results of their operations and their cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America. GRANT THORNTON LLP Dallas, Texas February 15, 2002
DGSE Companies, Inc. and Subsidiaries CONSOLIDATED BALANCE SHEETS December 31, ASSETS 2001 2000 ------------ ------------ CURRENT ASSETS Cash and cash equivalents $ 1,063,060 $ 1,362,219 Trade receivables 646,583 935,002 Inventories 6,297,320 7,087,265 Prepaid expenses 128,213 142,291 ------------ ------------ Total current assets 8,135,176 9,526,777 MARKETABLE SECURITIES - available for sale 426,414 856,081 PROPERTY AND EQUIPMENT - at cost, net 1,327,822 1,366,213 DEFERRED INCOME TAX ASSETS 206,141 171,432 GOODWILL, net of accumulated amortization of $402,386 and $209,702, respectively 1,151,120 1,343,804 OTHER ASSETS 153,688 148,936 ------------ ------------ $ 11,400,361 $ 13,413,243 ============ ============ LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES Notes payable $ 3,161,487 $ 2,899,918 Current maturities of long-term debt 865,685 830,561 Accounts payable - trade 1,007,311 2,176,834 Accrued expenses 587,392 458,191 Accrued compensation 47,482 322,539 Customer deposits 90,696 127,144 Federal income taxes payable 320,681 656,604 Deferred income taxes 86,093 -- ------------ ------------ Total current liabilities 6,166,827 7,471,791 LONG-TERM DEBT, less current maturities 764,102 949,838 SHAREHOLDERS' EQUITY Common stock, $.01 par value; authorized 10,000,000 shares; issued and outstanding 4,913,290 and 4,907,990 shares, respectively 49,133 49,080 Additional paid-in capital 5,708,301 5,609,445 Accumulated other comprehensive loss (987,277) (690,749) Retained earnings (accumulated deficit) (300,725) 23,838 ------------ ------------ Total shareholders' equity 4,469,432 4,991,614 ------------ ------------ $ 11,400,361 $ 13,413,243 ============ ============
The accompanying notes are an integral part of these statements.
DGSE Companies, Inc. and Subsidiaries CONSOLIDATED STATEMENTS OF OPERATIONS Years ended December 31, 2001 2000 ------------ ------------ Revenue Sales $ 20,996,120 $ 24,969,467 Pawn service fees 120,689 95,718 Consulting services -- 456,000 ------------ ------------ 21,116,809 25,521,185 Costs and expenses Cost of goods sold 16,039,658 18,834,689 Consulting service costs 55,462 115,053 Selling, general and administrative expenses 4,585,307 5,467,265 Depreciation and amortization 427,676 387,963 ------------ ------------ 21,108,103 24,804,970 Other income (expense) Interest expense (467,685) (497,004) Other income 18,626 12,019 Gain on sale of marketable securities -- 266,714 ------------ ------------ Total other income (expense) (449,059) (218,271) ------------ ------------ (Loss) income before income taxes (440,353) 497,944 Income tax (benefit) expense (115,790) 246,260 ------------ ------------ Net (Loss) Income $ (324,563) $ 251,684 ============ ============ Earnings (loss) per common share Basic $ (.07) $ .05 Diluted $ (.07) $ .05 Weighted average number of common shares Basic 4,924,665 4,682,375 Diluted 4,924,665 5,043,103
The accompanying notes are an integral part of these statements.
DGSE Companies, Inc. and Subsidiaries CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY Years ended December 31, 2001 and 2000 Retained Total Common stock Additional earnings other Accumulated ----------------------------- paid-in (Accumulated) comprehensive shareholders' Shares Amount capital (deficit) loss equity ------------- ------------- ------------- ------------- ------------- ------------- Balances at January 1, 2000 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 Net loss -- -- -- (324,563) -- (324,563) Other comprehensive income: Unrealized loss on marketable securities, net of tax -- -- -- -- (296,528) (296,528) ------------- Comprehensive loss (621,091) ------------- Purchase and retirement of common shares (14,700) (147) (30,944) -- -- (31,091) Common stock issued on conversion of debt 20,000 200 129,800 -- -- 130,000 ------------- ------------- ------------- ------------- ------------- ------------- Balances at December 31, 2001 4,913,290 $ 49,133 $ 5,708,301 $ (300,725) $ (987,277) $ 4,469,432 ============= ============= ============= ============= ============= =============
The accompanying notes are an integral part of this statement.
DGSE Companies, Inc. and Subsidiaries CONSOLIDATED STATEMENTS OF CASH FLOWS Years ended December 31, 2001 2000 ----------- ----------- Cash flows from operating activities Net (loss) income $ (324,563) $ 251,684 Adjustments to reconcile net (loss) income to cash (used in) provided by operating activities Common stock issued for services -- 14,208 Marketable securities received for consulting services -- (456,000) Depreciation and amortization 427,675 387,963 Realized gain on marketable securities - trading -- (266,714) Accretion of debt discount 26,793 56,792 Deferred taxes 198,524 (438,136) Change in operating assets and liabilities Net change in marketable securities - trading -- 1,966,902 Trade receivables 288,419 (199,224) Inventories 784,052 (1,174,784) Prepaid expenses and other assets (3,419) (142,626) Accounts payable and accrued expenses (1,040,323) 1,289,807 Accrued compensation (275,057) (48,102) Customer deposits (36,448) 36,950 Federal income taxes payable (335,923) 540,026 ----------- ----------- Total net cash (used in) provided by operating activities (290,270) 1,818,746 Cash flows from investing activities Purchase of marketable securities (15,750) (36,500) Purchases of property and equipment (31,230) (147,174) Acquisition of Fairchild assets -- (369,933) ----------- ----------- Net cash used in investing activities (46,980) (553,607) ----------- -----------
DGSE Companies, Inc. and Subsidiaries CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED Years ended December 31, 2001 2000 ----------- ----------- Cash flows from financing activities Proceeds from indebtness $ 1,143,176 $ 1,001,136 Repayment of indebtness (1,073,994) (2,018,909) Purchase and retirement of common stock (31,091) (148,863) ----------- ----------- Net cash provided by (used in) financing activities 38,091 (1,166,636) ----------- ----------- Net (decrease) increase in cash and cash equivalents (299,159) 98,503 Cash and cash equivalents at beginning of year 1,362,219 1,263,716 ----------- ----------- Cash and cash equivalents at end of year $ 1,063,060 $ 1,362,219 =========== ===========
Supplemental cash flow information: Interest paid during 2001 and 2000 amounted to $365,170 and $457,518, respectively. Income taxes paid during 2001 and 2000 amounted to $17,901 and $165,153. Supplemental schedule of noncash, investing and financing activities: During 2001 and 2000, debt amounting to $130,000 and $1,006,863, respectively, was converted to common stock. In addition, equipment was acquired by capital lease in the amount of $150,876 in 2001. As more fully described in Note L, in connection with the Company's acquisition of Fairchild International, Inc. in 2000, 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. DGSE Companies, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2001 and 2000 NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Nature of Operations -------------------- DGSE Companies, Inc. and its subsidiaries (the Company), sell jewelry and bullion products to both retail and wholesale customers throughout the United States through its 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 have been prepared in accordance with accounting principles generally accepted in the United States of America and include the accounts of the Company and its subsidiaries. All material intercompany transactions and balances have been eliminated. Cash and Cash Equivalents ------------------------- For purposes of the statements of cash flows, the Company considers all highly liquid debt instruments purchased with a maturity of three months or less to be cash equivalents. Investments in Marketable 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 value 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 statement of operations. Inventories ----------- 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 ten years for machinery and equipment, furniture and fixtures and building improvements. Buildings are depreciated over 30 years. Machinery and equipment under capital lease are amortized on the straight-line method over the life of the lease. Expenditures for repairs and maintenance are charged to expense as incurred. Impairment of Long-lived Assets ------------------------------- The Company assesses the recoverability of its long-lived assets (including tangible assets) based on their current and anticipated future undiscounted cash flows. An impairment occurs when the 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. DGSE Companies, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED December 31, 2001 and 2000 NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued Goodwill -------- Goodwill was amortized over periods expected to be benefited using the straight-line method with periods ranging from five to ten years. 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 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 $588,138 and $439,300 for 2001 and 2000. 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. Revenue Recognition ------------------- Sales revenue consists of direct sales to customers for jewelry and software. Sales are recognized when product is shipped for software and when title and risk of loss have passed to the customer, which is at point-of-sale for jewelry. Provisions for discounts and rebates to customers and returns and other adjustments are provided in the period the related sales are recorded. Liquidation service revenue is also included in sales and is recognized as inventory is sold during the respective liquidation sale. Consulting service revenue is recognized when the services are performed. 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 (or the fair value of the collateral, if lower) becomes the carrying value of the forfeited collateral ("inventories") which is recovered through sale to customers. Earnings (Loss) Per Share ------------------------- Basic earnings (loss) per common share is based upon the weighted average number of shares of common stock outstanding. Diluted earnings (loss) 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. NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued 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. Comprehensive income includes net income (loss) and unrealized gains and losses on securities available for sale, net of tax. 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 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 year's consolidated financial statements to conform to the current year presentation. New Accounting Pronouncements ----------------------------- In July 2001, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 141, Business Combinations ("SFAS 141"), and Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets ("SFAS 142"). SFAS 141 requires all business combinations initiated after June 30, 2001 be accounted for under the purchase method. SFAS 141 supercedes APB Opinion No. 16, Business Combinations, and Statement of Financial Accounting Standards No. 38, Accounting for Preacquisition Contingencies of Purchased Enterprises, and is effective for all business combinations initiated after June 30, 2001. SFAS 142 addresses the financial accounting and reporting for acquired goodwill and other intangible assets. Under the new rules, a company is no longer required to amortize goodwill and other intangible assets with indefinite lives, but will be subject to periodic testing for impairment. SFAS 142 supercedes APB Opinion No. 17, Intangible Assets and is effective January 1, 2002. In September 2001, the FASB issued Statement of Financial Accounting Standards No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets ("SFAS 144"). SFAS 144 established a single accounting model for the impairment or disposal of long-lived assets, including discontinued operations. The Company plans to adopt these statements as of their effective dates and does not expect that the adoption will have a material impact on its consolidated results of operations or financial position.
NOTE B - INVENTORIES A summary of inventories at December 31 is as follows: 2001 2000 ---------- ---------- Jewelry $6,000,372 $6,741,572 Scrap gold 192,276 188,045 Bullion 6,585 44,632 Other 98,087 113,016 ---------- ---------- $6,297,320 $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 cost of available-for-sale securities and their fair values at December 31 follows: Gross Gross unrealized unrealized Fair Cost gains losses value ---------- ---------- ---------- ---------- Equity securities at 2000 $1,908,288 $ 115,200 $1,167,407 $ 856,081 ========== ========== ========== ========== Equity securities at 2001 $1,924,038 $ 115,200 $1,612,824 $ 426,414 ========== ========== ========== ==========
NOTE D - PROPERTY AND EQUIPMENT A summary of property and equipment at December 31 is as follows: 2001 2000 ---------- ---------- Buildings and improvements $ 700,212 $ 682,253 Machinery and equipment 750,294 728,529 Furniture and fixtures 233,252 202,742 ---------- ---------- 1,683,758 1,613,524 Less accumulated depreciation and amortization 907,236 798,611 ---------- ---------- 776,522 814,913 Land 551,300 551,300 ---------- ---------- $1,327,822 $1,366,213 ========== ========== Property and equipment under capital leases is $202,469 and $158,000 as of December 31, 2001 and 2000, respectively. Accumulated depreciation for these assets was $56,564 and $113,200 as of December 31, 2001 and 2000, respectively.
NOTE E - NOTES PAYABLE A summary of notes payable at December 31 follows: 2001 2000 ---------- ---------- Note payable to bank, due in variable weekly installments based on 90% of sales of the collateral inventory of which approximately $1,236,039 remained at December 31, 2001 The note bears interest at 10.75% and is due June 30, 2002 $1,413,342 $1,582,117 Line of credit payable to bank with interest at 7.25%, collateralized by inventories and accounts receivable, due December 31, 2002 Maximum borrowings under the line of credit are $1,200,000 Guaranteed by Chairman and CEO of the Company. 1,100,000 -- 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 on demand, net of discount of $-0- and $26,792, respectively 100,000 248,208 Various demand notes to individuals with interest rates from 10% to 12% 548,145 569,593 ---------- ---------- $3,161,487 $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. The warrants were not exercised.
NOTE F - LONG-TERM DEBT A summary of long-term debt at December 31 follows: 2001 2000 ----------- ----------- Mortgage payable, due in monthly installments of $6,452, including interest based on 30 year US Treasury note rate plus 2-1/2% (8.04% at December 31, 2001); balance due in January 2014 $ 564,260 $ 590,764 Note payable, due March 2, 2005. Interest is payable quarterly at 8% per annum 199,349 415,850 Note payable, due October 2002. Interest is payable quarterly at 8% per annum 675,000 675,000 Capital lease obligations, due in monthly installments ranging from $58 to $2,405, due from November 2003 through January 2006 191,178 98,785 ----------- ----------- 1,629,787 1,780,399 Less current maturities (865,685) (830,561) ----------- ----------- $ 764,102 $ 949,838 =========== ===========
The following table summarizes the aggregate maturities of long-term debt and payments on the capital lease obligations: Obligations Long-term capital under debt leases Totals ----------- ----------- ----------- 2002 $ 790,740 $ 86,423 $ 877,163 2003 124,606 77,649 202,255 2004 51,377 32,694 84,071 2005 36,136 21,196 57,332 2006 39,365 2,646 42,012 Thereafter 396,385 -- 396,385 ----------- ----------- ----------- Total 1,438,609 220,608 1,659,218 Amounts representing interest (interest rates ranging from 10.8% to 23.3%) -- (29,430) (29,430) ----------- ----------- ----------- 1,438,609 191,178 1,629,787 Less current portion (790,740) (74,945) (865,685) ----------- ----------- ----------- $ 647,869 $ 116,233 $ 764,102 =========== =========== ===========
NOTE F - LONG-TERM DEBT - Continued 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. Of the remaining principal of $675,000, $225,000 was paid in January of 2002 with the remaining balance to be paid $50,000 per month until due in October 2002. Also during 2000, approximately $907,000 of debt was converted into 398,333 shares of common stock, and in 2001, approximately $130,000 of debt was converted into 20,000 shares of common stock. In the first quarter of 2002, the Company paid an additional $350,000 of notes payable. Management believes that the Company has the ability to satisfy the remainder of its short-term debt through a combination of cash flows from operations and/or refinancing the obligations. NOTE G - EARNINGS (LOSS) PER SHARE A reconciliation of the income (loss) and shares of the basic earnings (loss) per common share and diluted earnings (loss) per common share for the years ended December 31, 2001 and 2000 is as follows: 2001 ---------------------------------- Income Per-share (loss) Shares amount --------- --------- --------- Basic earnings (loss) per common share Loss from operations allocable to common stockholders $(324,563) 4,924,665 (.07) ========= Effect of dilutive securities Stock options and warrants -- -- Convertible debt -- -- --------- --------- Diluted loss per common share Loss from operations available to common stockholders $(324,563) 4,924,665 (.07) ========= ========= =========
NOTE G - EARNINGS (LOSS) PER SHARE - Continued 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 ========= ========= =========
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. Options expire six months after termination of employment. The exercise price is based upon the estimated fair market value of the Company's common stock at the date of grant, and is payable when the option is exercised. The Company has adopted only the disclosure provisions of Financial Accounting Standard No. 123, Accounting for Stock-Based Compensation (FAS 123). It applies APB Opinion No. 25, Accounting for Stock Issued to Employees, and related Interpretations in accounting for its plans and does not recognize compensation expense for its stock-based compensation. The following table summarizes the activity in common shares subject to options for the two years ended December 31, 2001: 2001 2000 ------------------------ ------------------------ Weighted Weighted average average exercise exercise Options price Options price ---------- ---------- ---------- ---------- Outstanding at beginning of year 434,000 $ 2.55 434,000 $ 2.55 Granted 757,777 2.25 -- -- Forfeited (27,000) 3.63 -- -- ---------- ---------- ---------- ---------- Outstanding at end of year 1,164,777 $ 2.33 434,000 $ 2.55 ========== ========== ========== ========== Exercisable at end of year 1,160,777 $ 2.33 409,000 $ 2.49 ========== ========== ========== ========== Weighted average fair value of options granted during the year $ 1.70 -- ========== ==========
NOTE H - STOCK OPTIONS - Continued Stock options outstanding at December 31, 2001: Options Outstanding Options Exercisable --------------------- --------------------- Weighted Weighted average average Range of exercise exercise exercise price Options price Options price -------------- --------- --------- --------- --------- $1.63 to $2.25 1,097,777 $ 2.21 1,097,777 $ 2.21 $3.63 to $4.19 32,000 $ 3.81 28,000 $ 3.83 $4.88 35,000 $ 4.88 35,000 $ 4.88 --------- --------- --------- --------- 1,164,777 1,160,777 ========= ========= Had compensation costs for stock-based compensation plans been determined consistent with the fair value method of SFAS 123, the Company's net earnings (loss) and net earnings (loss) per common and diluted share would have been: 2001 2000 ------------- ----------- Net (loss) earnings As reported $ (324,563) $ 251,684 Pro forma (1,643,392) 227,917 Basic earnings (loss) per common share As reported (.07) .05 Pro forma (.33) .05 Diluted earnings (loss) per common share As reported (.07) .05 Pro forma (.33) .05 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 4.6 to 6.6%, no dividend yield and expected life of 8 years.
NOTE I - ACCUMULATED OTHER COMPREHENSIVE LOSS Accumulated other comprehensive loss at December 31, 2001 and 2000 is as follows: Before-Tax Tax Net-of-Tax Amount Benefit Amount ----------- ----------- ----------- Accumulated other comprehensive loss at January 1, 2000 $ (10,500) $ 3,570 $ (6,930) Unrealized holding losses arising during 2000 (1,041,707) 357,888 (683,819) ----------- ----------- ----------- Accumulated other comprehensive loss at December 31, 2000 (1,052,207) 361,458 (690,749) Unrealized holding losses arising during 2001 (443,667) 147,140 (296,528) ----------- ----------- ----------- Accumulated other comprehensive loss at December 31, 2001 $(1,495,874) $ 508,597 $ (987,277) =========== =========== ===========
NOTE J - INCOME TAXES The income tax provision reconciled to the tax computed at the statutory Federal rate follows: 2001 2000 --------- --------- Tax (benefit) expense at statutory rate $(149,720) $ 169,301 Nondeductible goodwill 31,353 32,844 Basis difference in acquired assets -- 36,687 Other 2,577 7,428 --------- --------- Tax expense $(115,790) $ 246,260 ========= ========= Current $ (67,641) $ 684,396 Deferred (48,149) (438,136) --------- --------- $(115,790) $ 246,260 ========= =========
NOTE J - INCOME TAXES - Continued Deferred income taxes are comprised of the following at December 31: Deferred tax assets: Unrealized loss on available for sale securities $ 508,597 $ 354,850 Unrealized gain on available for sale securities with cost basis difference (134,640) -- Unrealized gain on trading securities before transfer to available for sale securities (203,361) (203,361) --------- --------- Net unrealized loss on available for sale securities 170,596 151,489 Property and equipment 15,254 11,443 Goodwill 20,291 8,500 --------- --------- $ 206,141 $ 171,432 ========= ========= Deferred tax liability: Inventories $ 86,093 $ -- ========= =========
The Company has not paid its 2000 Federal income tax liability. Payment terms have been negotiated with the Internal Revenue Service to pay in 2002. NOTE K - OPERATING LEASES The Company leases certain of its facilities under operating leases. The minimum commitments under noncancellable operating leases are as follows: Year ending Lease Sub-lease December 31, obligations receivables Total ------------ ----------- ------------ ------------ 2002 $ 310,190 $ (90,000) $ 220,190 2003 293,898 (90,000) 203,898 2004 263,476 (60,000) 203,476 2005 130,344 -- 130,344 ----------- ------------ ------------ $ 997,908 $ ( 240,000) $ 757,908 =========== ============ ============ Rent expense for the years ended December 31, 2001 and 2000 was approximately $307,000 and $386,000, respectively, and was decreased by sublease income of approximately $90,000 and $23,000, respectively. NOTE L - ACQUISITION 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 on a straight-line basis over ten years. The following unaudited pro forma information presents a summary of 2000 consolidated results of operations as if the acquisition had occurred on January 1, 2000: Revenue $ 25,998,000 Net income 232,592 Earnings per share Basic .05 Diluted .05
NOTE M - SEGMENT INFORMATION Management identifies reportable segments by product or service offered. Each segment is managed separately. The jewelry segment consists of sales to both wholesale and retail customers. This segment also includes pawn operations and bullion sales. The consulting services segment includes consulting services related to insolvency advisory services primarily to business enterprises that are involved in or have beeen involved in proceedings under Chapter 11 of the U.S. Bankruptcy Code. Liquidations are conducted through the Company's wholly-owned subsidiary, Silverman Consultants, Inc. (SCI). SCI conducts liquidation, consolidation, promotional or other large scale retail sales for jewelry stores and other types of stores. The software segment consists of sales of the Company's auction software that allows users to easily build on-line auction internet sites. Corporate and other includes certain general and administrative expenses not allocated to segments. The Company's operations by segment were as follows: Consulting Corporate Software Liquidations Jewelry Services and other Consolidated ------------ ------------ ------------ ------------ ------------ ------------ Revenues 2001 3,578 1,859,303 19,253,928 -- 21,116,809 2000 205,368 4,336,550 20,523,267 456,000 -- 25,521,185 Net income (loss) 2001 (38,094) (500,878) 301,319 (46,542) (40,368) (324,563) 2000 50,291 (347,276) 278,941 369,080 (99,352) 251,684 Identifiable assets 2001 70,971 2,884,909 7,773,362 671,119 -- 11,400,361 2000 134,241 3,765,941 8,627,016 886,045 -- 13,413,243 Capital expenditures 2001 3,461 7,129 171,516 -- -- 182,106 2000 52,915 44,702 245,010 2,017 -- 344,644 Depreciation and amortization 2001 21,259 163,660 234,675 8,081 427,675 2000 12,737 142,207 216,552 16,467 -- 387,963
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