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 June 30, 2006
-------------------
( ) Transition Report under Section 13 or 15(d) of the Securities Exchange Act
of 1934
For the transition period from to
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Commission File Number 1-11048
---------------------------
DGSE Companies, Inc.
--------------------
(Name of issuer)
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 August 10, 2006
---------------------------- ------------------------------
Common Stock, $.01 per value 4,913,290
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets
(Unaudited)
ASSETS June 30, December 31,
2006 2005
------------- -------------
CURRENT ASSETS
Cash and cash equivalents $ 198,467 $ 1,042,834
Trade receivables 963,023 688,810
Inventories 8,018,214 7,570,120
Prepaid expenses 236,516 215,560
------------- -------------
Total current assets 9,416,220 9,517,324
MARKETABLE SECURITIES - AVAILABLE FOR SALE 74,929 65,444
PROPERTY AND EQUIPMENT - AT COST, NET 1,048,021 1,121,662
DEFERRED INCOME TAXES -- 779
GOODWILL 837,117 837,117
OTHER ASSETS 438,621 287,790
------------- -------------
$ 11,814,908 $ 11,830,116
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Notes payable $ 194,183 $ 594,183
Current maturities of long-term debt 259,273 259,152
Accounts payable - trade 482,470 789,724
Accrued expenses 251,416 580,823
Customer deposits 248,802 206,320
Federal income taxes payable 154,898 13,920
------------- -------------
Total current liabilities 1,591,042 2,444,122
Long-term debt, less current maturities 3,724,801 3,314,886
Deferred income taxes 2,446 13,920
------------- -------------
Total liabilities 5,318,289 5,759,008
SHAREHOLDERS' EQUITY
Common stock, $.01 par value; authorized 10,000,000
shares; issued and outstanding 4,913,290 shares at
The end of each period 49,133 49,133
Additional paid-in capital 5,708,760 5,708,760
Accumulated other comprehensive loss (120,992) (127,252)
Retained earnings 859,718 440,467
------------- -------------
Total shareholders' equity 6,496,619 6,071,108
$ 11,814,908 $ 11,830,116
============= =============
The accompanying notes are an integral part of these consolidated financial
statements
DGSE Companies, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF OPERATIONS
Three months ended
(Unaudited)
June 30, 2006 June 30, 2005
------------- -------------
Revenue
Sales $ 12,444,265 $ 6,708,363
Pawn services charges 101,788 92,047
------------- -------------
12,546,053 6,800,410
Costs and expenses
Cost of goods sold 10,760,456 5,453,742
Selling, general and administrative expenses 1,261,648 1,105,367
Depreciation and amortization 39,715 49,068
------------- -------------
12,061,819 6,608,177
------------- -------------
Operating income 484,234 192,233
------------- -------------
Other expense
Interest expense (73,975) (72,039)
------------- -------------
Total other expense (73,972) (72,039)
Income before income taxes 410,259 120,194
Income tax expense 139,488 40,866
------------- -------------
Net income $ 270,771 $ 79,328
============= =============
Earnings per common share
Basic and diluted $ .05 $ .02
Weighted average number of common shares:
Basic 4,913,290 4,913,290
Diluted 5,045,242 5,069,489
The accompanying notes are an integral part of these consolidated financial
statements
DGSE Companies, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF OPERATIONS
Six months ended
(Unaudited)
June 30, 2006 June 30, 2005
------------- -------------
Revenue
Sales $ 22,072,918 $ 13,346,277
Pawn services charges 194,132 171,945
------------- -------------
22,267,050 13,518,222
Costs and expenses
Cost of goods sold 18,928,536 10,770,615
Selling, general and administrative expenses 2,473,689 2,164,251
Depreciation and amortization 79,015 91,871
------------- -------------
21,481,240 13,026,737
Operating income 785,810 491,485
------------- -------------
Other expense
Interest expense (150,581) (143,163)
------------- -------------
Total other expense (150,581) (143,163)
Income before income taxes 635,229 348,322
Income tax expense 215,978 118,429
------------- -------------
Net income $ 419,251 $ 229,893
============= =============
Earnings per common share
Basic $ .09 $ .05
============= =============
Diluted $ .08 $ .05
============= =============
Weighted average number of common shares:
Basic 4,913,290 4,913,290
Diluted 4,955,530 5,069,489
The accompanying notes are an integral part of these consolidated financial
statements
DGSE COMPANIES, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Six Months Ended
June 30,
2006 2005
----------- -----------
Cash Flows From Operations
Reconciliation of income to net cash
used in operating activities
Net income $ 419,251 $ 229,893
Depreciation and amortization 79,015 91,871
(Increase) decrease in operating assets and liabilities
Trade receivables (225,008) 89,714
Inventories (448,094) (364,922)
Prepaid expenses and other current assets (20,956) (131,041)
Accounts payable and accrued expenses (636,661) (755,347)
Change in customer deposits 42,482 63,554
Federal income taxes payable 140,978 43,428
Other assets (150,831) (9,171)
----------- -----------
Total net cash used in operating activities (799,824) (742,021)
Cash flows from investing activities
Pawn loans made (266,210) (329,428)
Pawn loans repaid 218,069 223,053
Recovery of pawn loan principal through
Sale of forfeited collateral 45,543 111,522
Pay day loans made (126,770) (51,580)
Pay day loans repaid 80,163 21,138
Purchase of property and equipment (5,374) (168,287)
----------- -----------
Net cash used in investing activities (54,579) (193,582)
Cash flows from financing activities
Proceeds from notes issued 500,000 3,181,365
Payments on notes payable (489,964) (2,408,193)
----------- -----------
Net cash provided by financing activities 10,036 773,172
----------- -----------
Net decrease in cash and cash equivalents (844,367) (162,431)
Cash and cash equivalents at beginning of year 1,042,834 314,897
----------- -----------
Cash and cash equivalents at end of period $ 198,467 $ 152,466
=========== ===========
Supplemental disclosures:
Interest paid for the six months ended June 30, 2006 and 2005 was $ 148,595 and
$ 143,163, respectively. Income taxes paid for the six months ended June 30,
2006 and 2005 was $75,000 and $75,000, respectively. Pawn loans forfeited and
transferred to inventory amounted to $ 45,543 and $ 184,381, respectively, for
the six months ended June 30, 2006 and 2005.
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 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 June 30, 2006, are not
necessarily indicative of the results that may be expected for the year ended
December 31, 2006. 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, 2005. 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 $ 113,381 and $ 132,811 as of June 30,
2006 and 2005, respectively, are included in the Consolidated Balance Sheets
caption trade receivables. The related pawn service charges receivable in the
amount of $32,339 and $ 74,299 as of June 30, 2006 and 2005, respectively, are
also included in the Consolidated Balance Sheets caption trade receivables. Pay
day loans receivable in the amount of $ 61,887 as of June 30, 2006 and $ 28,142
as of June 30, 2005, respectively, are also included in the Consolidated Balance
Sheets caption trade receivables.
(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 June 30, 2006, and 2005 is as follows:
2006 2005
Six months Six months
--------------------------------- ---------------------------------
Per-Share Per-Share
Income Shares Amount Income Shares Amount
--------- --------- --------- --------- --------- ---------
Basic earnings per common share
Income from operations allocable
to common shareholders $ 419,251 4,913,290 $ .09 $ 229,893 4,913,290 $ .05
Effect of dilutive securities
Stock options -- 42,240 -- -- 156,199 --
--------- --------- --------- --------- --------- ---------
Diluted earnings per common share
Income from operations available
to common shareholders plus
assumed conversions $ 419,251 4,955,530 $ .08 $ 229,893 5,069,489 $ .05
========= ========= ========= ========= ========= =========
2006 2005
Three 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 $ 270,771 4,913,290 $ .05 $ 79,328 4,913,290 $ .02
Effect of dilutive securities
Stock options -- 131,952 -- -- 156,199 --
--------- --------- --------- --------- --------- ---------
Diluted earnings per common share
Income from operations available
to common shareholders plus
assumed conversions $ 270,771 5,045,242 $ .05 $ 79,328 5,069,489 $ .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 six months ended June 30 were as follows:
(Amounts in thousands)
Retail Wholesale Rare Discontinued Corporate
Jewelry Jewelry Bullion Coins Operations and Other Consolidated
------------ ------------ ------------ ------------ ------------ ------------ ------------
Revenues
2006 $ 7,560 $ 2,303 $ 9,591 $ 2,518 -- $ 295 $ 22,267
2005 6,428 1,947 3,572 1,163 -- 408 13,518
Net income
(loss)
2006 153 57 150 166 -- (107) 419
2005 160 98 15 88 -- (131) 230
Identifiable
Assets
2006 8,633 1,944 172 372 -- 694 11,815
2005 7,781 1,735 165 174 5 776 10,636
Capital
Expenditures
2006 5 -- -- -- -- -- 5
2005 151 -- -- -- -- 17 168
Depreciation and
Amortization
2006 48 -- -- -- -- 31 79
2005 56 11 -- -- -- 25 92
The Company's operations by segment for the three months ended June 30 were as
follows:
(Amounts in thousands)
Retail Wholesale Rare Discontinued Corporate
Jewelry Jewelry Bullion Coins Operations and Other Consolidated
------------ ------------ ------------ ------------ ------------ ------------ ------------
Consolidated
Revenues
2006 $ 4,332 $ 1,182 $ 5,711 $ 1,184 -- $ 137 $ 12,546
2005 3,408 1,007 1,579 614 -- 192 6,800
Net income
(loss)
2006 113 33 88 98 -- (61) 271
2005 74 43 4 41 -- (83) 79
Identifiable
Assets
2006 8,633 1,944 172 372 -- 694 11,815
2005 7,781 1,735 165 174 5 776 10,636
Capital
Expenditures
2006 2 -- -- -- -- -- 2
2005 144 -- -- -- -- 4 151
Depreciation and
Amortization
2006 24 -- -- -- -- 16 40
2005 28 6 -- -- -- 15 49
(4) Other Comprehensive income:
Other comprehensive income is as follows:
Tax
Before Tax (Expense) Net-of-Tax
Amount Benefit Amount
---------- ---------- ----------
Other comprehensive loss at
December 31, 2005 $ (162,071) $ 34,819 $ (127,252)
Unrealized gains during the period ended
March 31, 2006 4,385 (1,491) 2,894
---------- ---------- ----------
Other comprehensive loss at March 31, 2006 (157,686) 33,328 (124,358)
Unrealized gains during the period ended
June 30, 2006 5,100 (1,734) 3,366
---------- ---------- ----------
Other comprehensive loss at June 30, 2006 $ (152,586) $ 31,594 $ (120,992)
========== ========== ==========
(5) Stock-based Compensation:
Prior to January 1, 2006, we elected to follow Accounting Principles Board
Opinion (APB) NO.25, Accounting for Stock Issued to Employees, and related
interpretations to account for our employee and director stock options, as
permitted by Statement of Financial Accounting Standards (SFAS) NO. 123,
Accounting for Stock-Based Compensation. Effective January 1, 2006, we adopted
the fair value recognition provision of SFAS No. 123 (revised 2004), Share-Based
Payments, (SFAS No. 123(R) for all share-based payment awards to employees and
directors including employee stock options. In addition, we have applied the
provisions of Staff Accounting Bulletin No. 107 (SAB No. 107), issued by the
Securities and Exchange Commission, in our adoption of SFAS No. 123(R).
We adopted SFAS No. 123(R) using the modified-prospective-transition method.
Under this transition method, stock-based compensation expense recognized after
the effective date includes: (1) compensation cost for all share-based payments
granted prior to, but not yet vested as of January 1, 2006, based on the grant
date fair value estimate in accordance with the original provisions of SFAS No.
123, and (2) compensation cost for all share-based payments granted subsequent
to January 1, 2006, based on the grant-date fair value estimate in accordance
with the provision of SFAS No. 123. Results from prior periods have not been
restated and do not include the impact of SFAS No. 123(R). Stock-based
compensation expense under SFAS No. 123(R) for the first quarter of 2006 was $0,
relating to employee and director stock options and our employee stock purchase
plan. Stock-based compensation expense under the provision of APB No. 25 for the
first quarter of 2005 was insignificant.
Stock-based compensation expense recognized each period is based on the value of
the portion of share-based payment awards that is ultimately expected to vest
during the period. SFAS No. 123(R) requires forfeitures to be estimated at the
time of grant and revised, if necessary, in subsequent periods if actual
forfeitures differ from those estimates. In our pro forma disclosures required
under SFAS No. 123 for periods prior to 2006, we accounted for forfeitures as
they occurred.
Upon adoption of SFAS No. 123(R), we elected to use the Black-Scholes-Merton
option-pricing formula to value share-based payments granted to employees
subsequent to January 1, 2006 and elected to attribute the value of stock-based
compensation to expense using the straight-line single option method. These
methods were previously used for our pro forma information required under SFAS
No. 123.
On November 10, 2005, the Financial Accounting Standards Board (FASB) issued
FASB Staff Position No. FAS 123(R)-3, "Transition Election Related to Accounting
for Tax Effects of Share-Based Payment Awards", which detailed an alternative
transition method for calculating the tax effects of stock-based compensation
pursuant to SFAS No. 123( R ). This alternative transition method included
simplified methods to establish the beginning balance of the additional paid-in
capital pool (APIC pool) related to the tax effects of employee stock-based
compensation and to determine the subsequent impact on the APIC pool and
Consolidated Statement of Cash Flows of the tax effects of employee stock-based
compensation awards that are outstanding upon adoption of SFAS No. 123 (R). As
all options outstanding have vested prior to December 31, 2005, the Company has
not recorded the tax effects of employee stock-based compensation and have no
APIC pool.
Prior to the adoption of SFAS No. 123( R )l tax benefits of deductions resulting
from the exercise of stock options were required to be presented as operating
cash flows in the Consolidated Statement of Cash Flows. SFAS No. 123(R) requires
the cash flows resulting from the tax benefits resulting from tax deductions in
excess of the compensation cost recognized for those options (excess tax
benefits) to be classified as financing cash flows. As there have been no stock
options exercised, the Company has not reported these excess tax benefits as of
June 30, 2006.
Effective January 1, 2006, the Company adopted the fair value recognition
provisions of SFAS No. 123( R ) for all share based payment awards to employees
and directors including employee stock options granted under the Company's
employee stock option plan. As all options outstanding have vested prior to
December 31, 2006, no stock based compensation expense has been recorded as of
June 30, 2006.
The following table presents the effect on net income and net income per share
compared with pro forma information as if we had adopted SFAS No. 123 for the
periods ended June 30,
Three Months Ended June 30,
---------------------------
2006 2005
------------ ------------
Net income as reported $ 270,771 $ 79,328
Less stock-based compensation under the fair value method -- --
------------ ------------
Pro forma net loss $ 270,771 $ 79,328
============ ============
Earnings per share:
Basic and diluted income per common share, as reported $.05 $.02
Basic and diluted income per common share, including the
Effect of stock-based compensation expense $.05 $.02
Six Months Ended June 30,
---------------------------
2006 2005
------------ ------------
Net income as reported $ 419,251 $ 229,893
Less stock-based compensation under the fair value method -- --
------------ ------------
Pro forma net loss $ 419,251 $ 229,893
============ ============
Earnings per share:
Basic income per common share, as reported $.09 $.05
Basic income per common share, including the
Effect of stock-based compensation expense $.09 $.05
Diluted income per common share, as reported $.09 $.05
Diluted income per common share, including the
Effect of stock-based compensation expense $.08 $.05
(6) Subsequent Event
On July 17, 2006 the Company announced that it had executed a definitive
agreement to acquire all of the issued and outstanding stock of Superior
Galleries, Inc. in a transaction valued at $ 14,000,000. For additional
information regarding this transaction reference is made to the Company's Form
8-K filed on July 17, 2006.
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
Results of Operations
---------------------
Six months ended June 30, 2006 vs 2005:
Sales increased by $ 8,726,641 (65.4%) in 2006. This increase was primarily the
result of a $6,019,000 (169.0%) increase in bullion sales, a $ 1,132,000 (17.6%)
increase in retail jewelry sales, a $ 356,000 (18.3%) increase in wholesale
jewelry sales and a $ 1,355,000 (116.5%) increase in the sale of rare coin
products. The increase in both retail and wholesale jewelry sales were due to
higher gold prices and improved activity from our customers. The increase in
rare coin and bullion sales were the result of an increase in gold prices,
increased volatility in the bullion market and the Company's increased focus on
these segments of our business. Consumer loan service fees increased $22,187 in
2006 due to an increase in pay day loans outstanding during the period. Cost of
goods as a percentage of sales increased from 80.7% in 2005 to 85.8 % in
2006.This increase was due to the increase in rare coin and bullion revenue as a
percentage of total sales.
Selling, general and administrative expenses increased by $309,348 or 14.3%.
This increase was primarily due to an increase in staff and payroll related cost
($180,000), higher advertising cost ($73,000) and $ 63,000 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 decreased by
$12,856 during 2006 due to certain assets becoming fully depreciated.
Income taxes are provided at the corporate rate of 34% for both 2006 and 2005.
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.
Three months ended June 30, 2006 vs 2005:
-----------------------------------------
Sales increased by $ 5,735,902 (85.5%) in 2006. This increase was primarily the
result of a $4,132,000 (261.7%) increase in bullion sales, a $ 924,000 (27.1%)
increase in retail jewelry sales, a $ 175,000 (17.4%) increase in wholesale
jewelry sales and a $ 570,000 (92.8%) increase in the sale of rare coin
products. The increase in both retail and wholesale jewelry sales were due to
higher gold prices and improved activity from our customers. The increase in
rare coin and bullion sales were the result of an increase in gold prices,
increased volatility in the bullion market and the Company's increased focus on
these segments of our business. Consumer loan service fees increased $9,741 in
2006 due to an increase in pay day loans outstanding during the period. Cost of
goods as a percentage of sales increased from 81.2% in 2005 to 86.5% in 2006.
This increase was due to the increase in rare coin and bullion revenue as a
percentage of total sales.
Selling, general and administrative expenses increased by $156,281 or 14.3%.
This increase was primarily due to an increase in staff and payroll related cost
($97,000), higher advertising cost ($47,000) and $ 16,000 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 decreased by
$9,353 during 2006 due to certain assets becoming fully depreciated.
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 2006 and 2005.
Liquidity and Capital Resources
Management of the Company expects capital expenditures to total approximately
$50,000 during the next twelve months. It is anticipated that these expenditures
will be funded from working capital and its credit facility. As of June 30, 2006
there were no commitments outstanding for capital expenditures.
In the event of significant growth in retail and or wholesale jewelry sales, the
demand for additional working capital will expand due to a related need to stock
additional jewelry inventory and increases in wholesale accounts receivable.
Historically, vendors have offered 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 2006 2007 2008 2009 2010 Thereafter
---------- ---------- ---------- ---------- ---------- ---------- ----------
Notes payable $ 194,183 194,183 -- -- -- -- --
Long-term debt and capital leases 3,984,074 148,074 3,118,904 $ 381,654 $ 74,677 $ 70,580 $ 190,185
Federal income taxes 154,898 154,898 -- -- -- -- --
Operating leases 396,907 85,296 137,418 100,994 54,899 18,300 --
---------- ---------- ---------- ---------- ---------- ---------- ----------
$4,730,062 $ 582,451 $3,256,322 $ 482,648 $ 129,576 $ 88,880 $ 190,185
========== ========== ========== ========== ========== ========== ==========
In addition, the Company estimates that it will pay approximately $ 290,000 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.
PART II- OTHER INFORMATION
Item 4. Submission of Matters to a vote of Security Holders
The Company's annual meeting of stockholders was held on June 27, 2006. The
purpose of the meeting was the election of directors and approval of the 2006
equity incentive plan.
The following is a tabulation of voting at the meeting:
For election of directors
: Against or
For Withheld Abstentions
----------------------------------------
L.S. Smith 4,683,403 300 0
William Oyster 4,700,862 20,859 0
William Cordeiro 4,700,929 20,792 0
Craig Alan-Lee 4,700,929 20,792 0
Paul Hagen 4,700,929 20,792 0
For the approval of the 2006
Equity incentive plan 4,394,954 39,055 3,266
Item 5. Other Information
On July 17, 2006 the Company announced that it had executed a definitive
agreement to acquire all of the issued and outstanding stock of Superior
Galleries, Inc. in a transaction valued at $ 14,000,000. For additional
information regarding this transaction reference is made to the Company's Form
8-K filed on July 17, 2006.
Item 6. Exhibits and Reports on Form 8-K.
Exhibits:
31.1 Certificate of L.S. Smith pursuant to Section 302 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: August 10, 2006
-------------------------
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: August 10, 2006
-------------------------
L. S. Smith
Chairman of the Board,
Chief Executive Officer and
Secretary
By: /s/ W. H. Oyster Dated: August 10, 2006
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W. H. Oyster
Director, President and
Chief Operating Officer
By: /s/ John Benson Dated: August 10, 2006
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John Benson
Chief Financial Officer
(Principal Accounting Officer)