EXHIBIT 99.1
INDEPENDENT AUDITORS' REPORT
To the Stockholders of
Dalton Kent Securities Group, Inc.
New York, New York
We have audited the accompanying statement of financial condition of Dalton Kent
Securities Group, Inc. as of December 31, 1999, and the related statements of
income, changes in stockholders' equity and cash flows for the year 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 audit.
We conducted our audit in accordance with generally accepted auditing standards.
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, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements enumerated above present fairly, in all
material respects, the financial position of Dalton Kent Securities Group, Inc.
as of December 31, 1999, and the results of its operations and its cash flows
for the year then ended, in conformity with generally accepted accounting
principles.
Our audit was conducted for the purpose of forming an opinion on the basic
financial statements taken as a whole. The information contained in Schedule I
is presented for purposes of additional analysis and is not a required part of
the basic financial statements, but is supplementary information required by
Rule 17a-5 under the Securities Exchange Act of 1934. Such information has been
subjected to the auditing procedures applied in the audit of the basic financial
statements and, in our opinion, is fairly stated in all material respects in
relation to the basic financial statements taken as a whole.
Richard A. Eisner & Company, LLP
New York, New York
January 26, 2000
<PAGE>
DALTON KENT SECURITIES GROUP, INC.
<TABLE>
<CAPTION>
Statement of Financial Condition
December 31, 1999
<S> <C>
ASSETS
Cash and cash equivalents $ 1,187,636
Cash - restricted 223,052
Due from clearing broker 1,541,418
Securities owned, at market value 1,327,451
Prepaid income taxes 212,709
Furniture and equipment, net of $176,937 of accumulated depreciation 136,256
Other assets 164,210
-------------
$ 4,792,732
=============
LIABILITIES
Securities sold, not yet purchased, at market value $ 183,538
Note payable 100,000
Accounts payable and accrued expenses 2,663,269
-------------
2,946,807
-------------
Commitments and contingencies
STOCKHOLDERS' EQUITY
Common stock - $.98 par value; 105 shares authorized, issued and outstanding 103
Additional paid-in capital 533,406
Retained earnings 1,312,416
-------------
1,845,925
-------------
$ 4,792,732
=============
</TABLE>
See notes to financial statements
<PAGE>
DALTON KENT SECURITIES GROUP, INC.
<TABLE>
<CAPTION>
Statement of Income
Year Ended December 31, 1999
<S> <C>
Revenues:
Commissions $ 22,391,494
Net gain on principal transactions 7,698,020
Interest income 491,460
Dividend income 40,285
Other 444,102
------------
31,065,361
------------
Expenses:
Commissions 17,574,664
Clearing charges 838,328
Floor brokerage fees 682,144
Order execution charges 481,579
Regulatory fees 258,711
Employment costs 3,100,392
Communications 1,128,709
Occupancy costs 673,192
Professional and consulting fees 717,617
Depreciation and amortization 66,029
Other expenses 1,151,339
------------
26,672,704
------------
Income before provision for income taxes 4,392,657
Provision for income taxes 181,222
------------
Net income $ 4,211,435
============
</TABLE>
See notes to financial statements
<PAGE>
DALTON KENT SECURITIES GROUP, INC.
<TABLE>
<CAPTION>
Statement of Changes in Stockholders' Equity
Common Stock Additional
------------------ Paid-in Treasury Retained
Shares Amount Capital Stock Earnings Total
------- -------- ------------ ------------ -------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance - January 1, 1999 102 $ 100 $ 596,830 $ (354,217)* $ 1,001,053 $ 1,243,766
Distributions to stockholders (3,900,072) (3,900,072)
Shares issued to new stockholders 1 1 (90,831) 354,217 263,387
Shares sold to existing stockholder 2 2 27,407 27,409
Net income 4,211,435 4,211,435
------- -------- ------------ ------------ -------------- -------------
Balance - December 31, 1999 105 $ 103 $ 533,406 $ 0 $ 1,312,416 $ 1,845,925
======= ====== ============ ============ ============== =============
* 17 shares
</TABLE>
See notes to financial statements
<PAGE>
DALTON KENT SECURITIES GROUP, INC.
<TABLE>
<CAPTION>
Statement of Cash Flows
Year Ended December 31, 1999
<S> <C>
Cash flows from operating activities:
Net income $ 4,211,435
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization 66,029
Noncash compensation 263,386
Changes in:
Cash - restricted (8,222)
Due from clearing broker (721,000)
Securities owned, at market value (969,259)
Prepaid income taxes (200,099)
Other assets (60,423)
Securities sold, not yet purchased (65,791)
Accounts payable and accrued expenses 1,657,201
-------------
Net cash provided by operating activities 4,173,257
-------------
Cash flows from investing activities:
Purchase of furniture and equipment (84,443)
-------------
Cash flows from financing activities:
Distributions to stockholders (3,900,072)
Purchase of common stock by stockholder 27,410
Principal payments on notes payable (50,000)
-------------
Net cash used in financing activities (3,922,662)
-------------
Net increase in cash and cash equivalents 166,152
Cash and cash equivalents - January 1, 1999 1,021,484
-------------
Cash and cash equivalents - December 31, 1999 $ 1,187,636
=============
Supplemental disclosures of cash flows:
Interest expense $ 11,096
Income taxes $ 381,344
Supplemental disclosure of noncash financing activities:
During 1999 the Company issued treasury shares to nonstockholders of the
Company. The value of these shares was recorded as compensation to these
stockholders. The cost of the treasury shares in excess of their value was
applied against additional paid-in capital.
</TABLE>
See notes to financial statements
<PAGE>
DALTON KENT SECURITIES GROUP, INC.
NOTE A - ORGANIZATION
Dalton Kent Securities Group, Inc. (the "Company") is a nonclearing
broker-dealer in securities.
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
[1] Commissions and securities transactions:
Commissions earned from customer securities transactions are recorded on
a settlement date basis. Securities transactions of the Company are
recorded on a trade date basis.
[2] Furniture, equipment and depreciation:
Furniture and equipment are recorded at cost. For financial and tax
reporting purposes, the Company utilizes accelerated methods for
calculating depreciation.
[3] Marketable securities:
The Company considers marketable securities owned and securities sold,
not yet purchased, to be held for trading purposes and are valued based
upon the closing market price at December 31, 1999. The adjustment to
year-end market values is included in the statement of income in net gain
on principal transactions.
[4] Income taxes:
The Company has elected to be taxed as an S corporation pursuant to the
Internal Revenue Code ("IRC"). A similar election has been made for New
York State. As a result of the elections, the Company's income or loss is
reportable by the stockholders for federal and state income tax purposes
and, accordingly, only a nominal provision for New York State taxes has
been recorded by the Company. With respect to New York City, income taxes
continue to be accounted for at the corporate level.
[5] Estimates:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts. Actual results could differ
from those estimates.
[6] Cash and cash equivalents:
For purposes of the statement of cash flows, the Company considers all
highly liquid investments purchased with a maturity of three months or
less to be cash equivalents.
<PAGE>
DALTON KENT SECURITIES GROUP, INC.
[7] Cash - restricted:
Included in cash - restricted is a certificate of deposit with a
financial institution. This certificate of deposit in the amount of
$200,000 represents collateral for an open letter of credit and is
therefore restricted as to its use.
NOTE C - NET CAPITAL REQUIREMENTS
The Company's minimum net capital requirement under Rule 15c3-1 of the
Securities Exchange Act of 1934, as amended is the greater of 6 2/3% of
aggregate indebtedness ($184,218 at December 31, 1999) or $100,000. At December
31, 1999, the net capital, as computed, was $821,002. Consequently, the Company
had excess of net capital of $636,784.
At December 31, 1999, the aggregate indebtedness to net capital was 337% versus
an allowable percentage of 1,500%.
NOTE D - NOTE PAYABLE
At December 31, 1999, the Company was obligated under a noninterest bearing
$100,000 note payable to a former stockholder of the Company for a portion of
the purchase of treasury shares. No specific repayment terms have been
established.
NOTE E - COMMON STOCK TRANSACTIONS
During 1999, the Company issued seventeen treasury shares with an underlying
cost of $354,217 and an additional authorized common share to nonstockholders,
as compensation, at book value which approximates fair value. The cost of the
treasury shares in excess of their fair value was applied against additional
paid-in capital. The value of the additional authorized common share was treated
as additional paid-in capital.
Also during 1999, the Company authorized and sold two additional common shares
to an existing stockholder at book value.
The Company had a reverse stock split during 1999, effectively changing the par
value of common stock from $.0001 to $.98. The beginning balances included in
the statement of changes in stockholder' equity have been adjusted retroactively
to reflect this change.
<PAGE>
DALTON KENT SECURITIES GROUP, INC.
NOTE F - COMMITMENTS AND CONTINGENCIES
The Company is committed under the following:
[1] As assignee, for an operating lease for office space with a remaining
term through May 31, 2007. Future minimum annual rentals under the terms
of the lease are as follows:
Year Ending Minimum
December Annual
31, Rent
----------- -------------
2000 $ 525,472
2001 525,472
2002 554,209
2003 574,735
2004 574,735
Thereafter 1,388,943
-------------
$ 4,143,566
=============
Rent expense for the year ended December 31, 1999 was $720,121.
[2] During 1996, the Company entered into an equipment lease with Wexford
Clearing Services Corporation ("Wexford") for computer equipment. Monthly
lease payments are $2,557 per month for a term of 48 months ending June
2000. Future minimum lease payments required under the lease are $12,786.
[3] The Company is required to deposit cash or securities with a value of at
least $250,000 (clearing deposit). The deposit of $250,000 is included in
securities owned at December 31, 1999. The agreement is cancelable upon
60 days written notice from either party.
[4] At December 31, 1999, the Company has an available letter of credit for
approximately $200,000 with a financial institution. The letter of credit
is collateralized by a certificate of deposit.
[5] The Company is a party to certain claims, suits and complaints arising in
the ordinary course of business. In the opinion of management, all such
claims, suits and complaints are without merit, or involve amounts which
would not have a significant adverse effect on the financial position of
the Company. During 1999, the Company settled an employment related claim
pending at December 31, 1998.
[6] The Company sponsors a defined contribution retirement plan under Section
401(k) of the IRC that covers substantially all employees. Participant
contributions to the plan are voluntary and are subject to certain
limitations imposed by the IRC. The Company makes matching contributions
on behalf of the participants based on participant contributions up to a
certain percentage of the participant's salary. The Company may also make
discretionary contributions to the plan. No such contributions were made
in 1999.
<PAGE>
DALTON KENT SECURITIES GROUP, INC.
NOTE G - FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK AND CONCENTRATION OF
CREDIT RISK
In the normal course of business, the Company enters into transactions in
securities sold, but not yet purchased ("Short Sales") and equity options
purchased and written. Subsequent market fluctuations may require the Company to
purchase such securities sold and cover options written at prices significantly
higher than the market value reflected in the statement of financial condition.
The average fair value of equity options held during 1999 was $404. The fair
value and notional value of equity options held at December 31, 1999 was $1,250
and $360,000, respectively.
Included in net gain principal transactions are losses of approximately $7,250
related to the equity options.
Retail customer transactions are cleared through Wexford on a fully disclosed
basis. In the event that customers default in payment of funds or delivery of
securities, Wexford may charge the Company for any loss incurred in satisfying
customer obligations. Additional credit risk occurs if Wexford or counterparties
do not fulfill their obligations. The Company regularly monitors the activity in
its customer accounts for compliance with margin requirements.
At December 31, 1999, the Company had a concentration of credit risk in the
amount of approximately $683,000 from cash deposits held at a bank in excess of
federally insured limits.
Substantially all of the Company's cash equivalents, securities owned, and
amounts due from broker are held in custodial accounts by its custodian broker.
The Company's custodian broker is highly capitalized and a member of major
securities exchanges.
