COMPANY DATA:
COMPANY CONFORMED NAME:
DUPONT DIRECT FINANCIAL HOLDINGS, INCORPORATED.
CENTRAL INDEX KEY:
0000807904
STANDARD INDUSTRIAL CLASSIFICATION:
5700
IRS NUMBER:
59-3461241
STATE OF INCORPORATION:
GEORGIA
FISCAL YEAR END:
03/31
FILING VALUES:
FORM TYPE
FORM 10QSB
SEC FILE NUMBER:
000-15900
BUSINESS ADDRESS 1:
42 BROADWAY, SUITE 1100-26
NEW YORK, NEW YORK 10004
BUSINESS TELEPHONE:
917-320-4800
FORMER CONFORMED NAME:
FAB GLOBAL, INC.
DATE OF NAME CHANGE:
20000307
FORMER CONFORMED NAME:
MARCI INTERNATIONAL IMPORTS, INC.
1
DATE OF NAME CHANGE:
19970523
FORM 10QSB
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
450 Fifth Street, N.W.
Washington, D.C. 20549
[x] QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission file number 0-15900
For the Quarter ended June 30, 2002.
FORM 10-QSB
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
DUPONT DIRECT FINANCIAL HOLDINGS, INC.
(Exact name of Issuer as specified in its charter)
Georgia 59-3461241
(Jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
42 Broadway, Suite 1100-26
New York, New York 10004
(Address of principal executive offices) (Zip Code)
Issuer's telephone number: (917) 320-4800
Indicate by check mark whether the Issuer (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
Issuer was required to file such reports) and (2) has been subject to such
filing requirements
2
for the past 90 days.
Yes [X] No[_]
State the number of shares outstanding of each of the issuer's classes of common
stock, as of the latest practicable dates.
At June 30, 2002, there were 14,906,624 shares of common stock and equivalents
issued and outstanding, and 500,000 nonvoting, redeemable, convertible (2:1)
Series C Preferred shares issued and outstanding.
The Issuer's revenues for its most recent fiscal year, ended 03/31/2002, were
$5,113,904. The revenues for the most recent fiscal quarter were $1,211,000 and
$1,387,950, and for the quarter ended March 31, 2002.
DOCUMENTS INCORPORATED BY REFERENCE
The contents of the following documents filed by the Company, with the
Securities and Exchange Commission (the "Commission" or "SEC") are incorporated
by reference into this Interim Report on Form 10-QSB by reference and shall be
deemed to be a part hereof:
Annual Reports, and all amendments thereto, on Forms 10-KSB for F/Y/E 03/31/02
dated 06/28/02; 03/31/01 dated 06/29/01; for F/Y/E 03/31/00 dated August 8,
2000; for F/Y/E 05/1999 dated February 8, 2000.
Report SC 14F1 dated February 25, 2000.
All Current Reports on Forms 8-K dated since April 20, 1999.
All amendments to such Current Reports on Forms 8-K that are subsequently filed
by the Company pursuant to Sections 13(a), 13(c), 14 and 15(d) of the Exchange
Act.
Interim Reports on Forms 10-QSB dated, August 15, 2000, November 14, 2000,
February 14, 2001, August 14, 2001, November 14, 2001, and February 14, 2002,
for the fiscal periods ended approximately forty-five (45) days earlier.
ITEM 1 (ITEM 310(b) of REGULATION S-B). FINANCIAL STATEMENTS.
The financial statements required to be set forth in this Item precede and
accompany this narrative description. The comparable year-earlier period is
presented and the comparable results are discussed below.
3
ITEM 2 (ITEM 303 of REGULATION S-B).
MANAGEMENT'S DISCUSSION AND ANALYSIS
AND PLAN OF OPERATIONS.
A. SAFE HARBOR STATEMENT UNDER THE
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995.
Certain statements contained in this section and elsewhere in this Form 10-QSB
constitute "forward looking statements" within the meaning of the Private
Securities Reform Act of 1995. Such forward-looking statements involve a number
of known and unknown risks, uncertainties, and other factors which may cause
actual results, performance or achievements of the Company to be materially
different from future results, performance or achievements expressed or implied
by such forward-looking statements. Such factors include, but are not limited
to, changes in the markets for the Company's products and services, regulatory
and economic factors, economic cycles competition, litigation, client or
customer arrangements that may expand or contract, adverse weather conditions,
possible technological advances or obselesences in existing or future products
or services, the variability in the value of the Company's securities inventory
products, customer concentration, and other risks detailed in the Company's
other periodic reports filed with the United States Securities and Exchange
Commission (SEC). The words "believe," "expect," "anticipate," "may," "plan,"
and similar expressions identify forward-looking statements. Readers are
cautioned not to place undue reliance on these forward-looking statements, which
speak only as of the date the statement was made.
B. FINANCIAL RESULTS OF OPERATIONS.
During the fiscal quarter starting April 1, 2002 and ending June 30, 2002, the
consolidated Company had revenues of $1,270,000 (rounded) and a net loss of
($23,700) (rounded) before taxes On a per share basis this computes to flat
earnings per share.
The largest component of revenues were derived from customer-driven riskless (or
nearly riskless) principal proprietary transactions of $1,041,000 (rounded).
The Company's management does not expect that quarter-to-quarter or present
period to year earlier comparisons to be particularly instructive or
enlightening in the current and near future reporting periods for the following
reasons. First, the Company is undergoing rapid change as business
lines/components are added and expanded as business opportunities are
discovered, cultivated and brought to fruition. That is, the Company's business
character is under development and by definition not yet mature. This is not a
process that occurs on a straight time line basis. Second, business cycles in
the financial services industry are not, in general, seasonal as in
4
certain other businesses; for example, a recession may cause several poor
quarters in a row while good weather is producing banner crops and all that goes
with them in seasonal businesses. The equity sector of financial services
products has been in material decline for nearly two years, although prior to
that it had been in ascent for an unprecedented period.
C. BACKGROUND.
The principal operating business during the June 30, 2002 quarter was Dupont
Securities Group, Inc. ("DSGI"), a broker-dealer registered with the United
States Securities and Exchange Commission ("SEC") with membership in the
National Association of Securities Dealers, Inc. ("NASD"). The other businesses
the Company owns are Wavecount Asset Management LLC (WAM), American
International Securities, Inc. (AIS), Wavecount Advisory Services, Inc. (WASI),
in which the Company performs its corporate advisory service functions that do
not necessarily require the issuance of securities and therefore the services of
a registered broker- dealer. DIRX has an approximately 48 percent interest in
Native American Financial Services Company ("NAFSCO").1
- --------
1 With respect to the operating businesses aside from DSGI, a brief description
of each of the other businesses was included in the Company's Form 10-Q filed
for the period ended September 30, 2000, and in the Company's Form 8-K filed on
or about February 8, 2000. Those discussions are incorporated herein by
reference as fully as though they were set forth here verbatim. NAFSCO is
oriented toward the development of financial services relations with the many
Native American Nations. At the present time, these relations are linked
principally to the Navajo Nation, which is the single largest Native American
Nation in population and land area. The Company is also involved with the Navajo
Nation's political subdivisions for the financing of badly-needed municipal
infrastructure such as schools and hospitals, and with the management of its
Trust Funds provided by the United States government in connection with the
resettlement of the Members (or their ancestors) from their native lands. The
Company also expects to enjoy the benefits of a significant amount of "directed"
retail equity stock and fixed income commission business. This means that the
institutional money mangers who control the investments of the Trust Funds will
be required to place a significant amount of the transactions for their Native
American funds through firms such as Native American Financial Services Co. and
Native American Securities Co. This business line has now become substantially
self- sufficient and is contributing a profit to the Company.
5
D. THE OPERATING COMPANIES.
1. Dupont Securities Group, Inc.
Dupont Securities Group, Inc. ("DSGI") is the Company's most active and
productive operating business.2
DSGI has a direct clearing arrangement with the Bank of New York, as the
acquirer of Schroder & Co., Inc.'s clearing agent subsidiary, in order to carry
on and maintain such institutional fixed income and retail equity trading. The
Bank of New York, the oldest bank in the country, was founded by Alexander
Hamilton. Its clearing subsidiary is housed in a separate clearing entity known
as Bank of New York Clearing Services LLC (BNY Clearing). As a result, DSGI has
posted collateral security with BNY Clearing adequate for this purpose. The
collateral deposited at BNY Clearing for the accommodation of Guaranty Letters
remains part of DSGI's capital (regulatory and otherwise).
- --------
2 DSGI is registered as a broker-dealer with the Securities and Exchange
Commission (SEC) pursuant to section 15 of the Securities Exchange Act of
1934,('34 Act or Exchange Act), and is a member of the National Association of
Securities Dealers, Inc. (NASD), a national securities association registered
with the SEC pursuant to section 15A of the '34 Act. It is also registered with
the Municipal Securities Rulemaking Board (MSRB), a board appointed by the SEC
and under its supervision, and a subscriber to the coverage of the Securities
Investors Protection Corporation (SIPC). As a result of these various
qualifications, it is eligible to conduct its operations nationwide and
worldwide, including all U.S. districts and territories, and is in fact directly
licensed to conduct its retail equity business in some 35 domestic
jurisdictions.
DSGI provides principal dealing services to Institutional and Retail Clients.
Currently, the firm has opened as accounts a number of well-known International
Banks, Investment Funds and Quasi-Governmental Agencies to trade in a variety of
Investment Grade Securities. Generally, a salesmen will receive a firm order to
buy or sell a security or group of securities from an Institutional account.
Typically, these orders are executed with large market-making bond dealers,
usually those designated as Primary Dealers by the Federal Reserve Bank, or
institutions of like standing. DSGI trades with these large accounts facilitated
with Guaranty Letters provided by BNY Clearing, and Prudential's clearing
subsidiary, Wexford Clearing Services Corporation.
6
DSGI provides a broad range of securities services to a diverse clientele,
including high net worth individuals, institutions, and other broker/dealers,
and corporation finance services to a variety of
businesses. As the business was originally envisioned, the main business lines
were expected to center around Fixed Income Securities, including Brokerage
Execution Services and the Management of Funds to be invested in Fixed Income.
DSGI clears most of its institutional fixed income business with Prudential
Securities Incorporated's (Prudential or PSI) wholly-owned Wexford Clearing
Services Corporation (Wexford or WCSC), another world-renowned financial
services company with a stature at least equal to that of BNY.
DSGI also specializes in providing Fixed Income execution services to small
dealers without their own bond desks or by providing expertise to other bond
traders in specialized securities. DSGI's staff3 has many years of experience in
a wide variety of Fixed Income products. DSGI has established alliances for this
purpose with many other dealers, with their exact number and identity constantly
changing, and generally increasing in number.
DSGI is a member of the NASD operating under Net Capital rules as a $100,000
broker dealer. This entitles DSGI to provide a full line of investment services
including underwriting, market-making in both Fixed Income and Equities, Private
Placements, and regular transactional brokerage services.
DSGI limits its corporate advisory services to businesses that contemplate a
near-term (within twelve months) need to raise capital, generally in the form of
securities, in which it has, through the experience of its senior staff, an
in-depth understanding of that particular business' orientation and financial
needs.
2. Wavecount Asset Management LLC
This company provides asset management services including a proprietary program
which matches investors needs to money managers strengths.
- --------
3 Each of the Company's senior managers has over 20 years of investment
experience, particularly Fixed Income. The senior managers have an established
clientele of institutional investors and individual investors who require a wide
variety of analytical and brokerage services, and that demand hands-on trading
and order execution capabilities that are not generally available through
similar-sized competitive firms in the securities brokerage, commodities
brokerage and investment banking industries.
7
3. Wavecount Advisory Services, Inc.
This subsidiary performs corporate finance and advisory services that do not
necessarily require the issuance of securities and therefore the services of a
registered broker-dealer.
4. American International Securities Company.
On or about March 16, 2001, the Company agreed to acquire another NASD member
broker-dealer, Erste Bank Artesia Securities Corp. (EBAS) from its shareholders.
The terms of the acquisition were that the Company would acquire 100% of the
stock of EBAS plus $30,000 in exchange for warrants to purchase the Company's
common stock. Because of a change in NASD Rules in late 2000, the stock of EBAS
could not be transferred to the Company prior to providing the NASD with thirty
(30) days prior notice. Accordingly, the EBAS stock was conveyed to the Company
on or about April 20, 2001. In connection with this acquisition, EBAS' name was
changed to American International Securities, Inc. (AIS).
The Company acquired EBAS for the purpose of housing within it certain business
lines that for practical business reasons, such as market acceptability and risk
management, it does not wish to develop within DSGI or NASCO. AIS/EBAS received
its approval to continue in membership in the NASD following its change in
ownership on or about September 29, 2001. Its business development is under way.
5. Native American Financial Services Co.
While not strictly a DIRX operating company (DIRX has an approximately 48%
interest, as an investment, in NAFSCO), DIRX continues to aid in the development
of this minority owned company. NAFSCO focuses on providing assistance to Native
American Nations in analyzing their financing requirements, structuring
offerings, evaluating business proposals for Tribal needs and raising and
managing funds. With DIRX's help NAFSCO is now enjoying growth in the minority
set aside securities execution business. This business is now at a break-even
level and is expected to grow, possibly exponentially, in the next several
fiscal periods. This portion of DIRX' business is now visible in the
consolidated financial statements as "minority-owned investment affiliates."
During the fall of 2001 NAFSCO's wholly-owned broker-dealer subsidiary, Native
American Securities Company (NASCO) was approved for membership in the NASD to
operate as a $5,000 net capital broker-dealer.
8
PART II. OTHER INFORMATION.
ITEM 1. LEGAL PROCEEDINGS (Item 103 of Regulation S-B).
As of June 30, 2002, several legal proceedings, including proceedings before
arbitral forums, have been initiated against the Company or its subsidiaries in
the normal course of its business. Management believes that all of these
proceedings are frivolous and were brought when the claimants learned that the
Company was no longer dormant and had acquired or agreed to acquire viable
operating businesses. Over the course of the year, several such matters have
been settled for relatively modest amounts that the Company's management
considers to be "nuisance" value, i.e., to avoid the demands such matters make
on the Company's management resources. With respect to any matter that cannot be
resolved for such nominal sums, it is management's intention to defend all such
matters vigorously. There are no matters required to be specifically identified
pursuant to Item 103 of Regulation S-B.
DSGI is registered as a broker-dealer with the SEC. The SEC has, in large part,
delegated ordinary, day-to-day oversight of broker-dealers to the
self-regulatory organizations of the stock market, i.e., the stock exchanges and
the NASD. The Designated Examining Authority (DEA) for DSGI is the NASD. DSGI is
subject to routine examination at any time by both the SEC and the NASD,
although it is subject to a cyclical routine examination by the NASD every two
years. As a regular matter in the ordinary course DSGI receives regulatory
inquiries on a wide range of securities industry subjects several times a year.
DSGI is also subject to the regulatory authority of every state jurisdiction in
which it is registered. If DSGI fails to comply with applicable laws and
regulations, it may face penalties or other sanctions that may be detrimental to
business. That is, for an alleged failure to comply with an applicable law or
regulation, government regulators and self regulatory organizations may
institute administrative or judicial proceedings against the Company that could
result in censure, fine, civil penalties (including treble damages in the case
of insider trading violations), the issuance of cease-and-desist orders, the
loss of status as a broker- dealer, the suspension or disqualification of
officers or employees or other adverse consequences. It would not be unusual for
the Company to settle such matters without respect to the underlying merits of
the allegations since it would unduly tax the Company's executive and staff
resources to contest such allegations, even though the Company may well not be
culpable in such situations. The imposition of any material penalties or orders
on DSGI could have a material adverse effect on the Company's business,
operating results and financial condition.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None.
9
ITEM 4. SUBMISSION OF MATTERS TO SHAREHOLDERS' VOTE.
None.
ITEM 5. OTHER INFORMATION.
None not heretofore reported.
SIGNATURES.
In accordance with the requirements of the Exchange Act, the Registrant caused
this Report to be signed on its behalf by the undersigned, duly authorized.
Dupont Direct Financial Holdings, Inc.
/s/
--------------------------------------------
Randy M. Strausberg, Chairman and
President
/s/
--------------------------------------------
David W. Parsons, Director and Secretary
August 13, 2002
10
DUPONT DIRECT FINANCIAL HOLDINGS INC.
CONSOLIDATED BALANCE SHEET
JUNE 30, 2002(UNAUDITED) AND MARCH 31, 2001
JUNE 30 MARCH 31
2002 2002
(Unaudited)
------------ ------------
ASSETS
Current Assets
Cash, brokerage clearing accounts $ 7,288 $ 227,910
Cash, other 110,962 168,893
Cash, tradable certificates of deposit 402,826 -
Due from clearing agents 17,945 37,298
Due from stockholders 254,367 203,699
Trading marketable equity securities 339,095 269,008
Gov't securities, at market value 862,006 1,007,569
Due from employee 63,500 -
Receivable from investee affiliate 108,270 20,836
Prepaid expenses and other current assets 232 18,698
------------ ------------
Total current assets 1,763,665 1,953,911
------------ ------------
Property and equipment at cost 162,575 162,575
Less accumulated depreciation (130,835) (125,423)
------------ ------------
31,740 37,152
------------ ------------
Other Assets
Investment in affiliates 48,638 130,346
Notes receivable stockholders-6% 2/28/03 1,000,000 1,000,000
in marketable restricted securities 119,603 -
Restricted investment securities 1,086,550 1,118,900
Rent security deposit 71,929 71,929
------------ ------------
2,326,720 2,321,175
------------ ------------
$ 4,122,125 $ 4,312,238
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Accounts payable and accrued expenses $ 368,281 $ 562,547
Payable to clearing broker 727,402 282,079
Commission payable to affiliate - 65,000
Corp. inc. and franch. taxes payable 50,396 42,271
Marketable securities sold short 5,274 5,278
------------ ------------
Total current liabilities 1,151,353 957,175
------------ ------------
Deferred rent payable 226,251 221,966
------------ ------------
Shareholders' Equity
Common stock, $0.01 par value-auth. 20,000,000 shs.,
June 30, 2002-issued 13,129,734 shares,
outstanding 12,979,734 shares;
December 31, 2001-issued 13,184,756 shares,
outstanding 14,632,756 shares, including
1,598,000 shares issuable by trans.agt. 147,928 146,328
Preferred stock, $0.01 par value-auth. 5,000,000 shs.
Class C nonvoting, conv. into 0.5 common share-
issued and outstanding 500,000 shares 1,000,000 1,000,000
Additional paid in capital 3,093,439 2,993,838
Accumulated deficit (1,055,670) (1,001,069)
Unrealized loss on inv. securities (38,350) (6,000)
------------ ------------
3,147,347 3,133,097
------------ ------------
$ 4,524,951 $ 4,312,238
============ ============
11
DUPONT DIRECT FINANCIAL HOLDINGS INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
AND CHANGES IN STOCKHOLDERS' EQUITY
FOR THE THREE MONTHS ENDED JUNE 30, 2002(UNAUDITED)
AND JUNE 30, 2001 (UNAUDITED)
2002 2001
------------- ------------
Revenues
Investment banking fees and advisory services $ 89,897 $ 279,500
Commissions 76,415 111,564
Rebates 7,723 -
Customer driven principal transactions 1,041,008 656,648
Handling charges and miscellaneous income 10,984 191,279
Firm trading (50,159) (69,502)
Dividends and interest 70,237 33,548
Net loss of affiliates (35,105) -
------------- ------------
Total revenue 1,211,000 1,203,037
------------- ------------
Expenses
Employee compensation 511,178 421,241
Clearance fees 144,541 106,399
Communications and data processing 31,806 43,804
Management fees and expenses- shareholder 105,112 -
Rent 49,458 44,037
Depreciation 5,412 4,714
Professional fees, other fees and licenses 187,554 137,341
Fees and commissions paid to affiliates 91,600 -
Interest 55,328 -
General and administrative 52,771 104,157
------------- ------------
Total expenses 1,234,760 861,693
------------- ------------
Loss before income taxes and extraordinary item (23,760) 341,344
Corporate income and franchise taxes 30,840 76,020
------------- ------------
Loss before extraordinary item (54,600) 265,324
------------- ------------
NET LOSS (54,600) 265,324
Accumulated deficit at beginning of period (1,001,070) (243,068)
------------- ------------
Accumulated deficit at end of period $ (1,055,670) $ 22,256
============= ============
Common stock-$.01 par-beg.of pd. $ 147,828 $ 121,268
Shares issu.-160,000in2002;72,079in2001 1,600 720
Shares owned by subsid. 150,000 shares (1,500) (1,500)
Shares outstanding at end of pd., 14,632,756
------------- ------------
shares in 2002 and 12,048,835 in 2001 $ 147,928 $ 120,488
============= ============
Class C Nonvoting Preferred Stock-$0.01 par value
Issued 500,000 shs. on March 30, 2001-at $2 $ 1,000,000 $ 1,000,000
------------- ------------
Balance at end of period-500,000 shares $ 1,000,000 1,000,000
============= ============
Additional paid in capital at beginning of period$ 2,993,838 $ 1,884,828
Additional amounts received during period 99,601 644
------------- ------------
Additional paid in capital at end of period $ 3,093,439 $ 1,885,472
============= ============
Unrealized loss on investment securities
Balance at beginning of period $ (6,000) $ (579,668)
Decline in value of investment securities (32,350) -
------------- ------------
Balance at end of period $ (38,350) $ (579,668)
============= ============
Shareholders Equity at end of period $ 3,147,347 $ 2,467,368
============= ============
Average number of shares outstanding 14,666,382 11,994,181
Basic and fully diluted income(loss) per share ($0.00) $0.02
12
DUPONT DIRECT FINANCIAL HOLDINGS INC.
STATEMENTS OF CONSOLIDATED CASH FLOW
FOR THE THREE MONTHS ENDED
JUNE 30,2002(UNAUDITED)AND2001(UNAUDITED)
2002 2001
---------------- ----------
Cash flows from operating activities
Net income (loss) $(54,600) $265,324
-------- --------
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization 5,412 5,263
Compensation and fees not paid in cash 91,200 36,038
Increase in government securities 145,563 (1,097)
Increase in receiv. from clearing agent 19,353 (555)
Increase in other current assets (121) (6,163)
Increase in accounts payable (111,589) (39,255)
Increase in brokerage credit balances 362,733 (68,539)
Increase in income taxes payable 8,125 68,250
Increase in deferred rent payable 4,285 4,285
Decrease (increase) in equity securities (70,087) (127,888)
Decrease in marketable securities sold short (4) (59,442)
Undistributed (earnings) loss of affiliate 35,105 --
-------- --------
Total adjustments 489,975 (189,103)
------- --------
Net cash provided (used) by operations 435,375 76,221
------- --------
Cash flow from investing activities:
Loan to development stage company -- (63,789)
Cash advanced to and invested in investees (73,000) (1,300)
Advances to affiliates (87,434) --
Cash lent to stockholder 4,000 --
Advances to employees (45,000) --
-------- -------
Net cash used by investing activities (201,434) (65,089)
-------- -------
Cash flow from financing activities:
Net cash remitted to shareholders (54,668) (257,116)
Cash balances-subsidiaries acquired -- 166,259
Cash collected for capital contributions 10,000 220,750
Commission payable, investee (65,000) --
--------- ---------
Net cash provided by financial activities (109,668) 129,893
--------- ---------
Net increase in cash and equivalents 124,273 141,025
Cash and equivalents, beginning of year 396,803 246,806
--------- ---------
Cash and equivalents, end of period $ 521,076 $ 387,831
========= =========
Supplemental disclosures of cash flow information: Cash paid during the year
for:
Interest expense 55,328 12,954
====== ======
Income Tax 21,321 7,569
====== ======
13
Note 1. HISTORY OF THE REGISTRANT
Dupont Direct Financial Holdings, Inc. (the "Company") was incorporated under
the laws of the State of Georgia as Marci International Imports, Inc. The
Company subsequently changed its name to FAB Global, Inc. and, on March 7, 2000
further changed it to Dupont Direct Financial Holdings, Inc. The Company
conducted an initial public offering in February 1987 on a Form S-18
Registration Statement under the Securities Act of 1933. As a result of
bankruptcy proceedings in 1989, the Company became inactive and had no material
assets, liabilities or business activities until May17, 2000, when, as a result
of a business combination, the Company issued 5,800,000 shares of the Company's
common stock to Wavecount, Inc.("Wavecount"), a privately-held financial
services holding company plus additional shares to some investors in Wavecount
in exchange for substantially all the assets of Wavecount.
The assets transferred to the Company in connection with this transaction
include all the outstanding stock of Dupont Securities Group, Inc.("DSGI"), a
registered United States securities broker-dealer operating under the NASD's
$100,000 net capital requirements, all outstanding stock of Wavecount Advisory
Services, Inc.("WASI"), an investment manager that is a New York State
investment advisor, formerly known as Wavecount Trading, Inc.,245 shares of the
common stock (a 47.5% interest) of Native American Financial Services Company
("NAFSCO"), a financial services company located in Window Rock, Arizona, the
capital of the Navajo Nation ( Together with the Navajo partner, Wavecount
established NAFSCO as the first Native American financial services company on a
native American reservation) and shares in several bulletin board listed public
companies and some inactive companies and LLC's.
A majority of the Company's consolidated revenues are derived from DSGI. The
Company and its subsidiaries elected to change its fiscal reporting period to
March 31, commencing with the period ended March 31, 2000.
Note 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
This summary of significant accounting policies of Dupont Direct Financial
Holdings, Inc. is presented to assist in understanding the Company's financial
statements. The financial statements are representations of the Company's
management, which is responsible for their integrity and objectivity. These
accounting policies conform to generally accepted accounting principles and have
been consistently applied in the preparation of the financial statements.
Cash and cash equivalents:
Cash and cash equivalents include cash in brokerage clearing accounts, time
deposits and all liquid debt instruments with original maturities of three
months or less which are not used as collateral.
14
Marketable equity and government securities:
The Company has adopted Statement of Financial Accounting Standards ("SFAS")
Number 115 "Accounting for Certain Investments in Debt and Equity Securities".
Those Company investments owned by DSGI are classified as "trading securities".
Accordingly, such securities are carried at market value with any unrealized
gains and losses being included in income. Realized gains or losses are computed
based on the average cost of the securities sold. Government securities at March
31, 2002 consisted of Treasury bills which are being used as collateral with its
clearing brokers. Securities received by the Company in exchange for shares of
its stock are considered investment securities and are carried at fair value at
date of acquisition, which is adjusted to market value, if lower, by a charge to
a shareholders' equity valuation account.
Property and equipment:
Property and equipment are stated at cost. Depreciation is computed over the
useful lives of the assets using the straight-line method. Expenditures for
repairs and maintenance are charged to operations in the period incurred.
Investments in subsidiaries and affiliates:
The financial statements of companies in which the Company has a majority
interest have been consolidated with those of the Company. Companies in which
the Company has a significant minority interest are recorded at equity. Under
this method the Company caries its investment at original cost, adjusted for its
share of their income or loss and amortization of the excess of original cost or
contributed capital over 40 years until March 31, 2002. Effective April 1, 2002,
the Company will no longer amortize this asset, in accordance with
pronouncements from the Financial Accounting Standards Board. This change will
have no significant effect on the financial statements of the Company.
Concentrations of credit risk:
Financial instruments that potentially subject the Company to major credit risk
consist principally of cash investments and securities carried as investments.
The Company places its cash investments with quality entities to minimize the
credit risk.
Income taxes:
The provision for income taxes is computed on the pre-tax income of the Company.
Deferred taxes result from the future tax consequences associated with temporary
differences between the amounts of assets and liabilities recorded for tax and
financial accounting purposes. As the Company on a separate company basis has
incurred losses and DSGI has incurred sufficient losses in all preceding years,
there are no material federal provisions for income taxes. The Company and its
subsidiaries have prepared their tax returns through March 31, 2001 on a
separate company basis, but expect to file on a consolidated basis for 2002 and
future years. The Company and its subsidiaries file separate state and local tax
returns. At March 31,2001 DSGI had a net operating loss carry forward of
approximately $34,000 which it used to reduce taxable income earned in 2002,
after applying approximately $517,000 to reduce 2001 taxable income. At March
31, 2001 the Company had a net operating loss carry forward of approximately
$700,000 available to reduce taxable income earned through 2021 and had a
capital loss carry forward of $580,000 available to reduce future capital gains
through 2007.
15
Litigation:
The Company is involved in various claims and lawsuits incidental to its
business. In the opinion of management, any ultimate liability arising out of
such claims and lawsuits will not have a material adverse effect on the
financial condition of results of operations of the Company or its subsidiaries.
Revenue recognition:
Transactions in securities and related commission expense are recorded on a
trade date basis.
Use of estimates:
The preparation of financial statements in conformity with generally accepted
accounting principles require management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosures of
contingent assets and liabilities at the date of the financial statements and
the reported amount of revenues and expenses during the reported period. Actual
results could differ from those estimates.
Note 3. DUE FROM CLEARING AGENT AND OTHERS
The Company's subsidiary, DSGI, has a clearing arrangement with Bank of New York
Clearing Inc. ("BNY") to act as its clearing agent on a fully disclosed basis on
which BNY maintains customer accounts. Maintenance of a clearing relationship
entails a risk of unreconcilable differences. The inability of BNY to meet its
obligations could result in substantial losses to the Company and the loss of
the investors' investment. At March 31, 2002 $501,439 in Treasury bills were
maintained as collateral for the Company's other accounts. In addition, the
Company had an additional $303,637 in Treasury securities at another broker.
Note 4. DUE FROM PURCHASER OF 500,000 SHARES OF PREFERRED STOCK
Since 1999, the Company has been authorized to issue 5,000,000 shares of
preferred stock with a par value of $0.01 per share and could determine the
characteristics of each class in the future. On March 30, 2001 the Board of
Directors authorized the issuance of 500,000 shares of a Class C Preferred Stock
to an investor for $1,000,000. The Class C Stock is nonvoting, redeemable at any
time at the option of the Company for $2 per share and is convertible to
ordinary voting common at the option of the investor at the ratio of one half
share of common for each share of Class C Preferred Stock tendered. In May 2001
the investor offered and the Company accepted 250,000 restricted shares of a
bulletin-board-traded stock, for the investor's $1,000,000 obligation. At the
time it was tendered, 250,000 tradable shares had a quoted market value of
approximately $1,875,000. Due to a decrease in the market value of those
previously issued shares in 2002, the investor issued additional shares of other
securities during 2002.
Note 5. TRANSACTIONS WITH PRINCIPAL SHAREHOLDER
During the years ended March 31, 2002 and 2001, Wavecount, Inc. the principal
stockholder of the Company charged the Company and its subsidiaries management
fees aggregating $342,433 and $516,691, respectively. At March 31, 2002 the
Company had a receivable of $270,787 from the stockholder and a subsidiary had a
payable of $67,750 from the stockholder. The Company has offset these amounts in
consolidation.
16
Note 6. BRIDGE LOANS
During the year ended March 31, 2002 and 2001, subsidiaries of the Company made
$75,289 and $114,290, respectively, in bridge loans to Diabetex International
Corporation, a development stage company. These loans bore interest at the rate
of 16% and mature in 2002. Collection of the receivable was dependent on the
borrower's ability to raise additional financing, which was not forthcoming.
During the year ended March 31, 2002 Diabetex settled these loans by issuing
2,560,000 shares of its common stock to the subsidiaries and the balance of the
loan and accrued interest ($95,060) in excess of the value of these shares was
charged off as a bad debt.
Note 7. INVESTMENT IN AFFILIATES
As described in Note 1, the Company has a 47.5% interest in Native American
Financial Services, Inc. ("NAFSCO"). NAFSCO has a 100% interest in Native
American Securities Co.("NASCO") The Company paid approximately $80,000 in
excess of equity for its 47.5% interest and during 2001 contributed an
additional $40,052 to fund the entire initial capital of NASCO although it only
received a 47.5% equity interest in that company. NAFSCO had a consolidated net
income of approximately $20,000 during the year. During the years ended March
31, 2002 and 2001 commissions of $373,540 and $88,495 to NASCO and an officer
who paid an equal amount as an administrative service fee to NAFSCO. In addition
the Company paid approximately $316,000 in investment banking fees to affiliates
during 2002.
During the year ended March 31, 2002,the Company prepared to issue $1,000,000 in
new preferred shares in exchange for developmental rights to certain diabetic
health products being developed in the Russian Federation, but this issuance was
cancelled. Instead Dupont Health Products, Inc. (DHP) a company formed to
coordinate the research effort, issued 1,000,000 shares to Dupont Merchant
Funding, Inc., an inactive wholly-owned subsidiary of the Company, but did not
assign a value to these shares. In addition, the Company, for cash of
$31,500,purchased an additional 31,500 shares in DHP. At March 31,2002, the
Company and its subsidiaries owned 1,031,500 shares of DHP, a 96.5% interest in
the common shares. DHP also has authorized preferred shares, which are
convertible to 1,000,000 common shares at the option of the holder to a company
which previously held the developmental rights. The preferred shares are
convertible into a 50% interest in DHP. In April 2002 additional common shares
were issued to officers of the Company and people connected with the development
which had the effect of reducing the Company's equity in DHP to about 82%.
During the year ended March 31, 2002 the Company recorded its equity ($30,850)
in the losses of DHP. The Company in considering its investment in DHP a
minority owned company rather than a subsidiary because due to the authorized
preferred shares and issuance of shares to others, its control is likely to be
temporary.
Note 8. INVESTMENT IN MARKETABLE SECURITIES
During the year ended March 31, 2001 the Company, in exchange for shares of its
stock acquired various interests in various securities which are traded on the
bulletin board:
Original March 31, 2001
Cost Value
Warrants-CDKNET.COM INC. to buy
254,799 shares at 60 cents a share $579,668 0
------- --------
Total $579,668 $ 0
======== ========
Since the cost of these securities exceeded their quoted value at March 31, 2001
by $579,668 a valuation allowance of that amount has been provided. During the
year ended March 31, 2002, these warrants expired worthless, and the asset was
written off as an extraordinary item.
17
Property and equipment consist of the following at March 31:
2002 2001
Computer equipment $126,982 $106,829
Furniture and office equipment 35,593 35,593
------- ---------
Total assets at cost 162,575 142,422
Less accumulated depreciation (125,423) (99,496)
------- ----------
Net carrying value $ 37,152 $ 42,926
========= ===========
Note 10. LEASE COMMITMENTS AND DEFERRED RENT
The Company is obligated under an operating lease for office space for a term of
10 years and 4 months with an escalation clause providing for annual increases
of minimum rent. In addition to the specified minimum rent, the Company is
required to pay 2.1% of the increases in real estate taxes over the base year
and must pay for electricity.
At March 31, 2002, the commitment for minimum rental payments was as follows:
Years ended March 31,
2003 164,604
2004 169,542
2005 176,431
2006 186,861
2007 192,745
Thereafter 631,572
----------
$1,521,755
The total amount of rental payments due over the lease term is being charged to
rent on the straight-line method over the term of the lease. The difference
between rent expense recorded and the amount paid is credited or charged to
"Deferred rent payable" which is included in current liabilities in the
accompanying balance sheets. During the years ended March 31, 2002 and 2001, the
Company paid $164,429 and $131,080, respectively under the lease.
Note 11. NET CAPITAL REQUIREMENTS
As a registered broker/dealer, DSGI is subject to Securities and Exchange
Commission's net capital rule which requires that DSGI maintain a minimum net
capital as defined, of 6.67% of aggregate indebtedness or $100,000 whichever is
greater. Net capital and aggregate indebtedness change from day-to-day, but as
of March 31, 2002, DSGI had net capital of $541,020. Net capital exceeded
requirements by $441,020 at March 31, 2002.
Note 12. OFFICER AND EMPLOYEE STOCK OPTIONS
In February 2000, the Company issued options to officers to purchase up to
625,000 shares of the Company's common stock through February 8, 2005 at a cost
of fifty cents a share. All options vested on February 8, 2001. In December
2001, the Company issued options to officers and employees to purchase up to
649,500 shares of the Company's restricted common stock through December 2006 at
a cost of fifty cents a share. All options have vested.
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Note 13. ISSUANCE OF SHARES FOR SERVICES
During the year ended March 31, 2001, the Company issued 1,381,559 shares to
officers and employees of the company and its affiliates. The shares have
restrictions on their sale for one year and were issued at no cost to the
officers and employees. An additional 722,000 shares were issued for consulting
and legal services. In the opinion of management, the fair value of these shares
was estimated to be equivalent to 25 percent of their quoted market value at
date of issuance, which was $308,938 for the shares issued to officers and
employees and $288,515 for shares issued for other services. In addition 446,000
shares were issued to Wavecount, Inc. the principal shareholder. No value was
ascribed to those shares. During the year ended March 31, 2002, only 83,000
shares were issued for services and the fair value of those services was
$38,538.
Note 14. TRADING SECURITIES OF PARENT COMPANY
A subsidiary, WASI, received 150,000 shares of the Company for use as trading
marketable equity securities during the three months ended December 31, 2000 as
payment for management advisory services. It has been recorded as trading
marketable securities on the books of the subsidiary and carried at market value
($138,000 at March 31, 2002) on such books but has been eliminated in
consolidation.
Note 15. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
Unaudited quarterly financial information follows:
Period - Year 3 months 3 months 3 months 3 months
ended ended ended ended ended
March 31, March 31, December 31, September 30, June 30,
2002 2002 2001 2001 2001
Revenue $5,125,410 $1,387,850 $1,608,359 $ 926,164 $1,203,037
Income (loss) before extraordinary item
(178,333) (815,052) 385,825 (14,430) 265,324
Extraordinary item
(579,668) (579,668)
Net income (loss)
$ (758,001) $(235,384) $ 385,825 $ (14,430) $ 265,324
Shares outstanding
13,143,028 14,612,256 13,516,014 12,469,116 11,994,181
Income (loss)per share
Before extraordinary item
$(0.01) $(0.06) $ 0.03 $0.00 $0.02
Extraordinary item
(0.04) (0.04)
Net $(0.06) $(0.02) $ 0.03 $0.00 $0.02
2001 2001 2000 2000 2000
Revenue $3,305,942 $ 881,404 $ 612,986 $1,548,090 $263,462
Net income(loss)
(148,548) (441,226) (368,117) 919,298 (258,503)
Shares outstanding:
7,992,705 9,233,499 9,023,163 8,731,985 4,976,355
Net income(loss)per share
$(0.02) $(0.05) $(0.04) $ 0.11 $(0.05)
19
The net income recognized during the three months ended September 30, 2000 was
principally derived from firm trading in which DSGI earned significant income
from selling certain securities short. The loss per share may differ from the
sum of its elements due to rounding.
Note 16. AQUISITION OF BROKER
On or about March 16, 2001, the Company agreed to acquire another NASD member
broker-dealer, Erste Bank Artesia Securities Corp. (EBAS) from its shareholders.
The terms of the acquisition were that the Company would acquire 100% of the
stock of EBAS plus receive $30,000 in exchange for warrants to purchase the
Company's common stock. The name of the Company was changed to American
International Securities Inc. (AIS) and AIS became a wholly owned subsidiary of
the Company. Based upon the audited financial statements filed with the NASD, as
of March 31, 2002, the net capital of AIS exceeded $200,000, which was over
$195,000 in excess of its required minimum capital of $5,000.
At the time of the acquisition of EBAS, EBAS was the lessee of certain office
premises on Wall Street. Under the terms of its lease, the landlord contends
that EBAS was required to obtain the prior approval of the landlord for such
change in ownership which, in effect, the landlord contends, is an assignment of
the lease. The landlord contends that EBAS did not seek or obtain such approval,
and as a consequence, has denied the Company, through EBAS/AIS, the quiet
enjoyment of the leased premises. EBAS/AIS has therefore not paid the May and
June rent. The outcome of this controversy is uncertain at this time, and in
management's judgment no further financial statement provision for it is
required.
Note 17 SUBSEQUENT EVENT
In April 2002 the Company and its subsidiaries agreed to retain the services of
Robert A. Brusca, an economist. In connection therewith, the Company agreed to
issue 120,000 of its common shares to the economist and pay him a minimum
compensation of $6500 per month plus participation in a bonus pool. It also
agreed to issue warrants to buy 25,000 shares of the Company's common stock at
an exercise price of $1.15 per share through April 1, 2007.
20