-----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, KpOrykB5PpQRUmhy/6GH1OkqkYNnSITDEap80+tcLPLaZARVjwR1ZkTTmjCuZR7K lFgGAYA9J+FjB9N6FG8IuQ== 0001010549-05-000816.txt : 20051114 0001010549-05-000816.hdr.sgml : 20051111 20051114120644 ACCESSION NUMBER: 0001010549-05-000816 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20050930 FILED AS OF DATE: 20051114 DATE AS OF CHANGE: 20051114 FILER: COMPANY DATA: COMPANY CONFORMED NAME: DGSE COMPANIES INC 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: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-11048 FILM NUMBER: 051198177 BUSINESS ADDRESS: STREET 1: 2817 FOREST LANE 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: DALLAS GOLD & SILVER EXCHANGE INC /NV/ DATE OF NAME CHANGE: 19930114 FORMER COMPANY: FORMER CONFORMED NAME: AMERICAN PACIFIC MINT INC DATE OF NAME CHANGE: 19920703 FORMER COMPANY: FORMER CONFORMED NAME: CANYON STATE CORP DATE OF NAME CHANGE: 19860819 10-Q 1 dgse10q093005.txt SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) (X) Quarterly Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the quarterly period ended September 30, 2005 -------------------------------- (_) Transition Report under Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from to -------------- -------------- Commission File Number 1-11048 ---------------------------------------- DGSE Companies, Inc. --------------------- (Exact name of registrant as specified in its charter) Nevada 88-0097334 - --------------------------------- ------------------------------- (State or other jurisdiction (I.R.S. Employer Identification of incorporation or organization) Number) 2817 Forest Lane, Dallas, Texas 75234 - ---------------------------------------- ---------------- (Address of principal executive offices) (Zip Code) (Issuer's telephone number, including area code) (972) 484-3662 -------------- Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Class Outstanding at October 25, 2005 - ---------------------------- ------------------------------- Common Stock, $.01 per value 4,913,290
PART I. FINANCIAL INFORMATION Item 1. Financial Statements Consolidated Balance Sheets (Unaudited) September 30, December 31, 2005 2004 ------------- ------------- ASSETS CURRENT ASSETS Cash and cash equivalents $ 310,626 314,897 Trade receivables 802,318 907,238 Inventories 7,385,918 6,791,383 Prepaid expenses 294,986 161,985 ------------- ------------- Total current assets 8,793,848 8,175,503 MARKETABLE SECURITIES - AVAILABLE FOR SALE 120,079 77,062 PROPERTY AND EQUIPMENT - AT COST, NET 957,920 885,301 DEFERRED INCOME TAXES 1,206 15,994 GOODWILL 837,117 837,117 OTHER ASSETS 263,611 290,722 ------------- ------------- Total Assets $ 10,973,781 $ 10,281,699 ============= ============= LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES Notes payable $ 2,601,457 548,093 Current maturities of long-term debt 349,003 76,172 Accounts payable - trade 286,340 590,412 Accrued expenses 242,735 513,775 Customer deposits 1,726,721 67,173 Federal income taxes payable 79,952 146,210 ------------- ------------- Total current liabilities 3,732,208 1,941,835 Long-term debt, less current maturities 1,300,929 2,749,278 ------------- ------------- Total liabilities 5,033,137 4,691,113 SHAREHOLDERS' EQUITY Common stock, $.01 par value; authorized 10,000,000 shares; issued and outstanding 4,913,290 shares 49,133 49,133 Additional paid-in capital 5,708,760 5,708,760 Accumulated other comprehensive (loss) (93,972) (122,582) Retained earnings (deficit) 276,723 (44,725) Total shareholders' equity 5,940,644 5,590,586 ------------- ------------- $ 10,973,781 $ 10,281,699 ============= =============
The accompanying notes are an integral part of these consolidated financial statements
DGSE Companies, Inc. and Subsidiaries CONSOLIDATED STATEMENTS OF OPERATIONS Three months ended September 30, (Unaudited) 2005 2004 ----------- ----------- Revenue Sales $ 7,129,321 $ 6,239,150 Pawn services charges 85,536 68,463 ----------- ----------- 7,214,857 6,307,613 Costs and expenses Cost of goods sold 5,837,846 4,973,392 Selling, general and administrative expenses 1,124,435 987,094 Depreciation and amortization 46,219 35,031 ----------- ----------- 7,008,500 5,995,517 ----------- ----------- Operating income 206,357 278,189 ----------- ----------- Other income (expense) Other income 3,895 39,098 Interest expense (71,533) (73,005) ----------- ----------- Total other income (expense) (67,638) (33,907) Income before income taxes 138,719 278,189 Income tax expense 47,165 94,584 ----------- ----------- Net income from continuing operations 91,554 183,605 Loss from discontinued operations, net of income taxes -- (73,864) ----------- ----------- Net income $ 91,554 $ 109,741 =========== =========== Earnings per common share Basic and diluted From continuing operations $ .02 $ .04 From discontinued operations -- (.02) ----------- ----------- $ .02 $ .02 =========== =========== Weighted average number of common shares: Basic 4,913,290 4,913,290 Diluted 5,040,148 5,155,141
The accompanying notes are an integral part of these consolidated financial statements
DGSE Companies, Inc. and Subsidiaries CONSOLIDATED STATEMENTS OF OPERATIONS Nine months ended September 30, (Unaudited) 2005 2004 ------------ ------------ Revenue Sales $ 20,475,598 $ 19,160,794 Pawn services charges 257,481 163,177 ------------ ------------ 20,733,079 19,323,971 Costs and expenses Cost of goods sold 16,608,461 15,414,425 Selling, general and administrative expenses 3,288,686 2,792,576 Depreciation and amortization 138,090 107,428 ------------ ------------ 20,035,237 18,314,429 ------------ ------------ Operating income 697,842 1,009,542 ------------ ------------ Other income (expense) Other income 3,895 39,098 Interest expense (214,696) (218,063) ------------ ------------ Total other income (expense) (210,801) (178,965) Income before income taxes 487,041 830,577 Income tax expense 165,594 282,396 ------------ ------------ Net income from continuing operations 321,447 548,181 Loss from discontinued operations, net of income taxes -- (151,965) ------------ ------------ Net income $ 321,447 $ 396,216 ============ ============ Earnings per common share Basic and diluted From continuing operations $ .06 $ .11 From discontinued operations -- (.03) ------------ ------------ $ .06 $ .08 ============ ============ Weighted average number of common shares: Basic 4,913,290 4,913,290 Diluted 5,059,709 5,159,458
The accompanying notes are an integral part of these consolidated financial statements
DGSE COMPANIES, Inc. and Subsidiaries CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) Nine Months Ended September 30, 2005 2004 ----------- ----------- Cash Flows From Operations Reconciliation of income to net cash used in operating activities Net income $ 321,447 $ 396,216 Depreciation and amortization 138,090 107,428 Gain on sale of assets -- (32,529) Realized gain on sale of marketable securities (3,895) -- Other -- 8,704 (Increase) decrease in operating assets and liabilities Trade receivables 52,935 286,932 Inventories (594,535) (400,533) Prepaid expenses and other current assets (133,001) (51,102) Accounts payable and accrued expenses (575,112) (1,116,872) Change in customer deposits 105,548 (39,464) Federal income taxes payable (66,258) (100,319) Other assets 27,111 -- ----------- ----------- Total net cash used in operating activities (727,670) (941,539) Cash flows from investing activities Pawn loans made (469,839) (445,024) Pawn loans repaid 338,069 312,675 Recovery of pawn loan principal through Sale of forfeited collateral 220,356 66,491 Pay day loans made 100,871) -- Pay day loans repaid 64,270 -- Purchase of property and equipment (210,709) (95,039) Proceeds from sale of marketable securities 4,277 -- Proceeds from sale of assets -- 150,000 ----------- ----------- Net cash (used) provided by investing activities (154,447) (10,897) Cash flows from financing activities Proceeds from notes issued 3,481,365 1,068,660 Payments on notes payable (2,603,519) (606,604) ----------- ----------- Net cash provided by financing activities 877,846 462,056 ----------- ----------- Net decrease in cash and cash equivalents (4,271) (490,380) Cash and cash equivalents at beginning of year 314,897 735,293 ----------- ----------- Cash and cash equivalents at end of period $ 310,626 $ 244,913 =========== ===========
Supplemental disclosures: Interest paid for the nine months ended September 30, 2005 and 2004 was $ 214,696 and $ 218,063, respectively. Income taxes paid for the nine months ended September 30, 2005 and 2004 was $225,000 and $304,430, respectively. Pawn loans forfeited and transferred to inventory amounted to $ 220,356 and $ 312,675, respectively, for the nine months ended September 30, 2005 and 2004. The accompanying notes are an integral part of these consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - ------------------------------------------ (1) Basis of Presentation: The accompanying unaudited condensed consolidated financial statements of DGSE Companies, Inc. and Subsidiaries include the financial statements of DGSE Companies, Inc. and its wholly-owned subsidiaries, DGSE Corporation, National Jewelry Exchange, Inc., Charleston Gold and Diamond Exchange, Inc. and American Pay Day Centers, Inc. In July 2004 the Company sold the goodwill and trade name of Silverman Consultants, Inc. and discontinued the operations of this subsidiary. As a result, operating results for this subsidiary have been reclassified to discontinued operations for all periods presented. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. The Company's operating results for the periods ended September 30, 2005, are not necessarily indicative of the results that may be expected for the year ended December 31, 2005. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company's annual report on Form 10-K for the year ended December 31, 2004. Certain reclassifications were made to the prior year's consolidated financial statements to conform to the current year presentation. Pawn loans receivable in the amount of $ 142,611 and $ 181,199 as of September 30, 2005 and 2004, respectively, are included in the Consolidated Balance Sheets caption trade receivables. The related pawn service charges receivable in the amount of $ 50,433 and $ 76,136 as of September 30, 2005 and 2004, respectively, are also included in the Consolidated Balance Sheets caption trade receivables. Pay day loans receivable in the amount of $ 27,614 as of September 30, 2005 are also included in the Consolidated Balance Sheets caption trade receivables. There were no pay day loans receivable as of September 30, 2004. The 10-K for the year ended December 31, 2004 and the 10-Q for the period ended March 31, 2005 will be amended to include additional disclosures. (2) - 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 periods ended September 30, 2005, and 2004 is as follows: 2005 2005 Nine months Three months --------------------------------- --------------------------------- Per-Share Per-Share Income Shares Amount Income Shares Amount --------------------------------- --------------------------------- Basic earnings per common share Income from operations allocable to common shareholders $ 321,447 4,913,290 $ .06 $ 91,554 4,913,290 $ .02 Effect of dilutive securities Stock options -- 146,413 -- -- 126,858 -- --------- --------- --------- --------- --------- --------- Diluted earnings per common share Income from operations available to common shareholders plus assumed conversions $ 321,447 5,059,709 $ .06 $ 91,554 5,040,148 $ .02 ========= ========= ========= ========= ========= ========= 2004 2004 Nine months Three months --------------------------------- --------------------------------- Per-Share Per-Share Income Shares Amount Income Shares Amount --------------------------------- --------------------------------- Basic earnings per common share Income from operations allocable to common shareholders $ 396,216 4,913,290 $ .08 $ 109,741 4,913,290 .02 Effect of dilutive securities Stock options -- 246,168 -- -- 241,851 -- --------- --------- --------- --------- --------- --------- Diluted earnings per common share Income from operations available to common shareholders plus assumed conversions $ 396,216 5,159,458 $ .06 $ 109,741 5,155,141 $ .02 ========= ========= ========= ========= ========= =========
(3) - Business segment information Management identifies reportable segments by product or service offered. Each segment is managed separately. Corporate and other includes certain general and administrative expenses not allocated to segments and pawn operations. The Company's operations by segment for the nine months ended September 30 were as follows: (Amounts in thousands) Retail Wholesale Rare Corporate Jewelry Jewelry Bullion Coins and Other Consolidated ------------ ------------ ------------ ------------ ------------ ------------ Revenues 2005 $ 9,790 $ 2,962 $ 5,536 $ 1,895 $ 550 $ 20,733 2004 9,293 2,872 5,590 1,238 331 19,324 Net income (loss) 2005 204 144 27 145 (199) 321 2004 285 150 37 61 (137) 396 Identifiable Assets 2005 8,041 1,742 236 145 810 10,974 2004 7,790 1,745 169 94 784 10,582 Capital Expenditures 2005 169 -- -- -- 42 211 2004 95 -- -- -- -- 95 Depreciation and Amortization 2005 85 16 -- -- 37 138 2004 84 16 -- -- 7 107 The Company's operations by segment for the three months ended September 30 were as follows: (Amounts in thousands) Retail Wholesale Rare Corporate Jewelry Jewelry Bullion Coins and Other Consolidated ------------ ------------ ------------ ------------ ------------ ------------ Revenues 2005 $ 3,362 $ 1,015 $ 1,964 $ 732 142 $ 7,215 2004 3,115 1,001 1,397 668 127 6,308 Net income (loss) 2005 44 45 12 58 (68) 91 2004 82 54 (5) 34 (55) 110 Identifiable Assets 2005 8,041 1,742 236 145 810 10,974 2004 7,790 1,745 169 94 784 10,582 Capital Expenditures 2005 18 -- -- -- 26 44 2004 35 -- -- -- -- 35 Depreciation and Amortization 2005 29 5 -- -- 12 46 2004 27 5 -- -- 3 35
(4) Other Comprehensive income: Other comprehensive income is as follows: Tax Before Tax (Expense) Net-of-Tax Amount Benefit Amount ---------- ---------- ---------- Other comprehensive income at December 31, 2003 $ -- $ -- $ -- Unrealized holding gains arising during the Three months ended March 31, 2004 106,373 (36,167) 70,206 ---------- ---------- ---------- Other comprehensive income at March 31, 2004 106,373 (36,167) 70,206 Unrealized holding losses during the Three months ended June 30, 2004 (86,020) 29,247 (56,773) ---------- ---------- ---------- Other comprehensive income at June 30, 2004 $ 20,353 $ (6,920) $ 13,433 ========== ========== ========== Other comprehensive income loss at December 31, 2004, March 31,2005 And June 30, 2005 $ (150,784) $ 28,202 $ (122,582) Unrealized holding gains arising during the Three months ended September 30, 2005 43,348 (14,738) 28,610 ---------- ---------- ---------- Other comprehensive income at September 30, 2005 $ (107,436) $ 13,464 $ (93,972) ========== ========== ==========
(5) Stock-based Compensation: The Company accounts for stock-based compensation to employees using the intrinsic value method. Accordingly, compensation cost for stock options to employees is measured as the excess, if any , of the quoted market price of the Company's common stock at the date of the grant over the amount an employee must pay to acquire the stock. The following table illustrates the effect on net income and earnings per share if the Company had applied the fair value recognition provisions of FASB Statement No. 123, Accounting for Stock-Based Compensation, to stock-based employee compensation.
Nine Months Ended September 30, ------------------------------- 2005 2004 -------------- -------------- Net income as reported $ 321,447 $ 396,216 Deduct: Total stock-based employee compensation Expense determined under fair value based method For all awards, net of related tax effects -- -- -------------- -------------- Pro forma net income $ 321,447 $ 396,216 ============== ============== Earnings per share: Basic - as reported $.06 $.08 Basic - pro forma $.06 $.08 Diluted - as reported $.06 $.08 Diluted pro forma $.06 $.08 Three Months Ended September 30, -------------------------------- 2005 2004 -------------- --------------- Net income as reported $ 91,554 $ 109,741 Deduct: Total stock-based employee compensation Expense determined under fair value based method For all awards, net of related tax effects -- -- -------------- --------------- Pro forma net income $ 91,554 $ 109,741 ============== =============== Earnings per share: Basic - as reported $.02 $.02 Basic - pro forma $.02 $.02 Diluted - as reported $.02 $.02 Diluted pro forma $.02 $.02
The fair value of these options was estimated at the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions used for grants after 1998, expected volatility of 70% to 96%, risk-free rate of 3.9% to 6.6%, no dividend yield and expected life of 5 to 8 years. (6) Recently Issued Accounting Standards In December 2004, the FASB issued SFAS No. 123R, "Share-Based Payment". SFAS No. 123R is a revision of SFAS No. 123, "Accounting for Stock Based Compensation", and supersedes APB 25. Among other items, SFAS 123R eliminates the use of APB 25 and the intrinsic value method of accounting, and requires companies to recognize the cost of employee services received in exchange for awards of equity instruments, based on the grant date fair value of those awards, in the financial statements. The effective date of SFAS 123R had been set for the first reporting period beginning after June 15, 2005, which is third quarter 2005 for calendar year companies. However, on April 14, 2005, the Securities and Exchange Commission (SEC) announced the effective date of SFAS 123R was suspended until January 1, 2006, for calendar year companies. Early adoption is allowed. SFAS 123R permits companies to adopt its requirements using either a "modified prospective" method, or a "modified retrospective" method. Under the "modified prospective" method, compensation cost is recognized in the financial statements beginning with the effective date, based on the requirements of SFAS 123R for all share-based payments granted after that date, and based on the requirements of SFAS 123 for all unvested awards granted prior to the effective date of SFAS 123R. Under the "modified retrospective" method, the requirements are the same as under the "modified prospective" method, but also permits entities to restate financial statements of previous periods based on proforma disclosures made in accordance with SFAS 123. The Company currently utilizes a standard option pricing model (i.e., Black- Scholes) to measure the fair value of stock options granted to Employees. While SFAS 123R permits entities to continue to use such a model, the standard also permits the use of a "lattice" model. The Company has not yet determined which model it will use to measure the fair value of employee stock options granted after the adoption of SFAS 123R. SFAS 123R also requires that the benefits associated with the tax deductions in excess of recognized compensation cost be reported as a financing cash flow, rather than as an operating cash flow as required under current literature. This requirement will reduce net operating cash flows and increase net financing cash flows in periods after the effective date. These future amounts cannot be estimated because they depend on, among other things, when employees exercise stock options. The Company currently expects to adopt SFAS 123R effective January 1, 2006, based on the new effective date announced by the SEC, and plans to utilize the modified prospective method. The Company has not yet determined the financial statement impact of adopting SFAS 123R for periods beyond 2005. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION Results of Operations - --------------------- Nine months ended September 30, 2005 vs 2004: - --------------------------------------------- Sales increased by $ 1,314,804 (6.9%) in 2005. This increase was primarily the result of a $497,000 (5.3%) increase in retail jewelry sales, a $ 90,000 (3.1%) increase in wholesale jewelry sales and a $ 657,000 (53.1%) increase in the sale of rare coin products. These increases were the result of increased concentration in the local markets through increased advertising. Bullion sales decreased $ 54,000 (1.0%) due to reduced volatility in the bullion market. Pawn service fees increased by $94,304 in 2005 due to an increase in pawn loans outstanding during the year. Cost of goods as a percentage of sales increased from 80.4% in 2004 to 81.1% in 2005 due the significant increase in rare coin sales. Selling, general and administrative expenses increased by $496,110 or 17.8%. This increase was primarily due to an increase in staff and payroll related cost ($196,000), higher advertising cost ($81,000) and $ 145,000 in cost related to the new pay day loan stores. The increase in staff was necessary to maintain a high level of customer service as sales increased and the opening of three pay day loan stores. The increase in advertising was necessary in order to attract new customers in our local markets. Depreciation and amortization increased by $30,662 during 2005 due to capital assets acquired for the pay day loan stores. Historically, changes in the market prices of precious metals have had a significant impact on both revenues and cost of sales in the rare coin and precious metals segments in which the Company operates. It is expected that due to the commodity nature of these products, future price changes for precious metals will continue to be indicative of the Company's performance in these business segments. Changes in sales and cost of sales in the retail and wholesale jewelry segments are primarily influenced by the national economic environment. It is expected that this trend will continue in the future due to the nature of these product. Income taxes are provided at the corporate rate of 34% for both 2005 and 2004. Loss from discontinued operations during 2004 in the amount of $ 151,965 net of income taxes is the operating results of Silverman Consultants, Inc. which was sold during 2004. Three months ended September 30, 2005 vs 2004: - ---------------------------------------------- Sales increased by $ 890,171 (14.3%) in 2005. This increase was primarily the result of a $247,000 (7.9%) increase in retail jewelry sales, a $ 567,000 (40.6%) increase in bullion sales and a $ 64,000 (9.6%) increase in the sale of rare coin products. These increases were the result of increased concentration in the local markets through increased advertising as well as a 12.4% increase in the price of gold bullion. Pawn service fees increased by $ 17,073 in 2005 due to an increase in pawn loans outstanding during the year. Cost of goods as a percentage of sales increased from 79.7% in 2004 to 81.9% in 2005 due the significant increase in bullion sales. Selling, general and administrative expenses increased by $137,341 or 13.9%. This increase was primarily due to an increase in staff and payroll related cost ($19,000), higher advertising cost ($56,000) and $ 62,000 in cost related to the new pay day loan stores. The increase in staff was necessary to maintain a high level of customer service as sales increase and the opening of three pay day loan stores. The increase in advertising was necessary in order to attract new customers in our local markets. Depreciation and amortization increased by $11,188 during 2005 due to capital assets acquired for the pay day loan stores.
Historically, changes in the market prices of precious metals have had a significant impact on both revenues and cost of sales in the rare coin and precious metals segments in which the Company operates. It is expected that due to the commodity nature of these products, future price changes for precious metals will continue to be indicative of the Company's performance in these business segments. Changes in sales and cost of sales in the retail and wholesale jewelry segments are primarily influenced by the national economic environment. It is expected that this trend will continue in the future due to the nature of these product. Income taxes are provided at the corporate rate of 34% for both 2005 and 2004. Loss from discontinued operations during 2004 in the amount of $ 73,005 net of income taxes is the operating results of Silverman Consultants, Inc. which was sold during 2004. Liquidity and Capital Resources The Company's short-term debt, including current maturities of long-term debt totaled $ 624,265 as of December 31, 2004. During March 2005 the Company re-financed its outstanding bank debt. This new credit facility in the amount of $3,500,000 extended the maturity of its bank debt to March 31, 2006 and provided the Company with an additional $700,000 of unused liquidity. Management of the Company expects capital expenditures to total approximately $125,000 during the next twelve months. It is anticipated that these expenditures will be funded from working capital and its new credit facility. As of September 30, 2005 there were no commitments outstanding for capital expenditures. The Company incurred $ 152,000 of prepaid construction costs in the nine months ended September 30, 2005 related to its new facility in Charleston, South Carolina. In the event of significant growth in retail and or wholesale jewelry sales, the demand for additional working capital will expand due to a related need to stock additional jewelry inventory and increases in wholesale accounts receivable. Historically, vendors have offered the Company extended payment terms to finance the need for jewelry inventory growth and management of the Company believes that they will continue to do so in the future. Any significant increase in wholesale accounts receivable will be financed under the Company's bank credit facility. 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 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 unforeseen working capital requirements. Contractual Cash Obligations Payments due by year end - ------------------------------ -------------------------------------------------------------- Total 2005 2006 2007 2008 2009 Thereafter ---------- ---------- ---------- ---------- ---------- ---------- ---------- Notes payable $2,601,457 $ 186,758 $2,414,699 -- -- -- -- Long-term debt and capital leases 1,649,932 104,118 383,623 $ 365,623 $ 133,956 $ 369,728 $ 292,884 Federal income taxes 79,952 79,952 -- -- -- -- -- Operating leases 503,655 32,081 128,325 128,325 88,394 63,093 31,546 ---------- ---------- ---------- ---------- ---------- ---------- ---------- $4,803,105 $ 402,909 $2,926,647 $ 493,948 $ 222,350 $ 432,827 $ 324,430 ========== ========== ========== ========== ========== ========== ==========
In addition, the Company estimates that it will pay approximately $ 282,000 in interest during the next twelve months. This report contains forward-looking statements which reflect the view of Company's management with respect to future events. Although management believes that the expectations reflected in such forward-looking statements are reasonable, it can give no assurance that such expectations will prove to have been correct. Important factors that could cause actual results to differ materially from such expectations are a down turn in the current strong retail climate and the potential for fluctuations in precious metals prices. The forward-looking statements contained herein reflect the current views of the Company's management and the Company assumes no obligation to update the forward-looking statements or to update the reasons actual results could differ from those contemplated by such forward-looking statements. ITEM 3. Quantitative and Qualitative Disclosures About Market Risk. The following discussion about the Company's market risk disclosures involves forward-looking statements. Actual results could differ materially from those projected in the forward-looking statements. The Company is exposed to market risk related to changes in interest rates and gold values. The Company also is exposed to regulatory risk in relation to its payday loans. The Company does not use derivative financial instruments. The Company's earnings and financial position may be affected by changes in gold values and the resulting impact on pawn lending and jewelry sales. The proceeds of scrap sales and the Company's ability to liquidate excess jewelry inventory at an acceptable margin are dependent upon gold values. The impact on the Company's financial position and results of operations of a hypothetical change in gold values cannot be reasonably estimated. ITEM 4. Controls and Procedures Controls and Procedures Under the supervision and with the participation of the Company's management, including its Chief Executive Officer and Chief Financial Officer, the Company has evaluated the effectiveness of its disclosure controls and procedures, as of the end of the period covered by this report. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that these disclosure controls and procedures are effective in enabling the Company to record, process, summarize and report information required to be included in its periodic SEC filings within the required time period. There has been no change in the Company's internal control over financial reporting that occurred during the Company's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting. Item 6. Exhibits and Reports on Form 8-K. Exhibits: 31.1 Certificate of L.S. Smith pursuant to Section 3026 of the Sarbanes-Oxley Act of 2002, Chief Executive Officer. 31.2 Certificate of John Benson pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, Chief Financial Officer . 32.1 Certificate of L.S. Smith pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, Chief Executive Officer. 32.2 Certificate of John Benson pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, Chief Financial Officer. Reports on Form 8-K : None SIGNATURES In accordance with Section 13 and 15(d) of the Exchange Act, the Registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. DGSE Companies, Inc. By: /s/ L. S. Smith Dated: November 11, 2005 ------------------------- 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: November 11, 2005 ------------------------- L. S. Smith Chairman of the Board, Chief Executive Officer and Secretary By: /s/ W. H. Oyster Dated: November 11, 2005 ------------------------- W. H. Oyster Director, President and Chief Operating Officer By: /s/ John Benson Dated: November 11, 2005 ------------------------- John Benson Chief Financial Officer (Principal Accounting Officer) EX-31.1 2 dgse10qex311093005.txt SECTION 302 CERTIFICATION OF CEO EXHIBIT 31.1 Certifications: I, L.S. Smith, Certify that: 1. I have reviewed this quarterly report on Form 10-Q of DGSE Companies, Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the Company as of, and for, the periods presented in this quarterly report; 4. The Company's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the Company and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the Company, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) Evaluated the effectiveness of the Company's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) Presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The Company's other certifying officers and I have disclosed, based on our most recent evaluation, to the Company's auditors and the audit committee of the Company's board of directors (or persons performing the equivalent functions): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the Company's ability to record, process, summarize and report financial data and have identified for the Company's auditors any material weakness in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the Company's internal controls; and 6. The Company's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective action with regard to significant deficiencies and material weaknesses. Date: November 11,2005 /s/ L.S. Smith ------------------------------------ Chairman and Chief Executive Officer EX-31.2 3 dgse10qex312093005.txt SECTION 302 CERTIFICATION OF CFO EXHIBIT 31.2 Certifications: I, John Benson, Certify that: 1. I have reviewed this quarterly report on Form 10-Q of DGSE Companies, Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the Company as of, and for, the periods presented in this quarterly report; 4. The Company's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the Company and we have: a. designed such disclosure controls and procedures to ensure that material information relating to the Company, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b. Evaluated the effectiveness of the Company's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c. Presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The Company's other certifying officers and I have disclosed, based on our most recent evaluation, to the Company's auditors and the audit committee of the Company's board of directors (or persons performing the equivalent functions): a. all significant deficiencies in the design or operation of internal controls which could adversely affect the Company's ability to record, process, summarize and report financial data and have identified for the Company's auditors any material weakness in internal controls; and b. any fraud, whether or not material, that involves management or other employees who have a significant role in the Company's internal controls; and 6. The Company's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective action with regard to significant deficiencies and material weaknesses. Date: November 11, 2005 /s/ John Benson ----------------------- Chief Financial Officer EX-32.1 4 dgse10qex321093005.txt SECTION 906 CERTIFICATION OF CEO Exhibit 32.1 Certification of Chief Executive Officer CERTIFICATION PURSUANT TO SECTIONS 906 OF THE SARBANES-OXLEY ACT OF 2002 (18 U.S.C. 1350) In connection with the Quarterly Report of DGSE Companies, Inc. (the "Company") on Form 10-Q for the period ended September 30, 2005 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), the undersigned certifies pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to his knowledge: 1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and 2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Dated: November 11, 2005 By /s/ L.S. Smith ------------------------------------- L.S. Smith, Chairman of the Board, Chief Executive Officer and Secretary EX-32.2 5 dgse10qex322093005.txt SECTION 906 CERTIFICATION OF CFO Exhibit 32.2 Certification of Chief Financial Officer CERTIFICATION PURSUANT TO SECTIONS 906 OF THE SARBANES-OXLEY ACT OF 2002 (18 U.S.C. 1350) In connection with the Quarterly Report of DGSE Companies, Inc. (the "Company") on Form 10-Q for the period ended September 30, 2005 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), the undersigned certifies pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to his knowledge: 3) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and 4) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Dated: November 11, 2005 By /s/ John Benson ------------------------------------ John Benson, Chief Financial Officer -----END PRIVACY-ENHANCED MESSAGE-----