____________________________________________________________________________
____________________________________________________________________________
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, 2002
or
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number: 0-12926
DETWILER, MITCHELL & CO.
(Exact name of registrant as specified in its charter)
Delaware 95-2627415
- -------------------------------- --------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
225 Franklin Street
Boston, MA 02110
- ------------------------------------------ --------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 617-451-0100
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
------------- -------------
APPLICABLE ONLY TO CORPORATE ISSUERS:
As of August 12, 2002, the registrant had 2,702,357 shares of
common stock, $0.01 par value, issued and outstanding.
____________________________________________________________________________
____________________________________________________________________________
DETWILER, MITCHELL & CO.
INDEX TO FORM 10-Q
Page
----
PART I. - FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statement of Financial Condition at
June 30, 2002 and December 31, 2001..................3
Consolidated Statement of Operations for the
three and six-month periods ended June 30, 2002
and 2001.............................................4
Consolidated Statement of Cash Flows for the three
and six-month periods ended June 30, 2002
and 2001.............................................5
Notes to Consolidated Financial Statements.............6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.................10
Item 3. Quantitative and Qualitative Disclosures About
Market Risk.........................................15
PART II. - OTHER INFORMATION
Item 4. Submission of Matters to Vote of Securities
Holders...........................................16
Item 5. Other Information...................................16
Item 6. Exhibits and Reports on Form 8-K....................17
Signatures....................................................18
2 of 18
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
DETWILER, MITCHELL & CO.
CONSOLIDATED STATEMENT OF FINANCIAL CONDITION
JUNE 30, DECEMBER 31,
------------- -------------
2002 2001
(UNAUDITED)
ASSETS
Cash and cash equivalents $ 1,214,951 $ 1,124,191
Security deposits 202,661 350,589
Securities borrowed - 445,400
Deposits with clearing organizations 298,604 268,604
Commissions, current income taxes
and other receivables 1,088,744 279,577
Receivables from brokers, dealers
and clearing organizations - 15,093
Due from customers - 5,038,833
Marketable investments, at fair value - 31,995
Non-marketable investments, at fair value 310,000 250,000
Deferred income taxes 175,717 414,517
Fixed assets, net 465,177 565,933
Intangible assets 417,385 1,567,885
Prepaid expenses and other 322,086 362,225
------------- -------------
Total Assets $ 4,495,325 $ 10,714,842
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Notes payable $ 450,000 $ 2,100,000
Payable to brokers, dealers and
clearing organizations - 1,410,829
Due to customers - 929,737
Salaries and commissions payable 436,343 314,258
Accounts payable and accrued liabilities 580,262 746,185
------------- -------------
Total Liabilities 1,466,605 5,501,009
------------- -------------
Contingencies (Note 5)
Stockholders' Equity:
Preferred stock, no par value; 5,000,000
shares authorized, none issued - -
Common stock, $0.01 par value; 20,000,000
shares authorized, 2,702,357 and 2,652,357
shares outstanding at June 30, 2002
and December 31, 2001, respectively 27,023 26,523
Paid-in-capital 4,880,487 4,728,987
Retained earnings (deficit) (1,878,790) 458,323
------------- -------------
Total Stockholders' Equity 3,028,720 5,213,833
------------- -------------
Total Liabilities and Stockholders'
Equity $ 4,495,325 $ 10,714,842
============= =============
See Accompanying Notes to Consolidated Financial Statements.
3 of 18
DETWILER, MITCHELL & CO.
CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE THREE MONTHS FOR THE SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
---------------------------- ---------------------------
2002 2001 2002* 2001
-------------- ------------- ------------- -------------
(unaudited)
REVENUES
Commissions $ 2,109,887 $ 3,654,863 $ 3,721,900 $ 7,556,609
Principal transactions 279,629 959,190 777,415 3,255,076
Investment banking 52,913 451,783 215,015 520,611
Interest 14,875 89,493 61,809 201,711
Other 90,466 92,734 158,702 194,490
-------------- ------------- ------------- -------------
Total revenues 2,547,770 5,248,063 4,934,841 11,728,497
-------------- ------------- ------------- -------------
EXPENSES
Compensation and benefits 1,530,213 3,341,604 3,127,454 7,177,514
General and administrative 560,584 631,970 1,097,256 1,270,779
Execution costs 469,702 1,059,136 1,006,392 2,477,882
Occupancy, communications
and systems 438,824 354,898 869,926 675,347
Interest 7,392 6,585 38,447 25,902
Amortization of intangibles - 19,500 - 39,000
-------------- ------------- ------------- -------------
Total expenses 3,006,715 5,413,693 6,139,475 11,666,424
-------------- ------------- ------------- -------------
Income (loss) before cumulative
effect of change in accounting
principle and income taxes (458,945) (165,630) (1,204,634) 62,073
Cumulative effect of change in
accounting principle - - (1,150,500) -
-------------- ------------- ------------- -------------
Income (loss) before income
taxes (458,945) (165,630) (2,355,134) 62,073
Income tax (expense) benefit (169,676) 61,464 18,021 (26,752)
-------------- ------------- ------------- -------------
Net income (loss) $ (628,621) $ (104,166) $ (2,337,113) $ 35,321
============== ============= ============= =============
NET INCOME (LOSS) PER SHARE:
Basic $ (0.24) $ (0.04) $ (0.88) $ 0.01
============== ============= ============= =============
Diluted $ (0.24) $ (0.04) $ (0.87) $ 0.01
============== ============= ============= =============
WEIGHTED AVERAGE SHARES OUTSTANDING:
Basic 2,654,579 2,602,313 2,653,468 2,605,730
============== ============= ============= =============
Diluted 2,654,958 2,608,751 2,699,847 2,628,267
============== ============= ============= =============
* FIRST QUARTER 2002 RESTATED - SEE NOTE 10.
See Accompanying Notes to Consolidated Financial Statements.
4 of 18
DETWILER, MITCHELL & CO.
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30,
---------------------------------
2002 2001
--------------- ---------------
(UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (2,337,113) $ 35,321
Adjustments to reconcile net income (loss)
to net cash provided by (used in) operating
activities:
Depreciation and amortization 112,254 117,927
Deferred income taxes 238,800 -
Impairment of goodwill 1,150,500 -
Changes in:
Commissions, current income taxes
and other receivables (809,167) -
Deposits with clearing organizations (30,000) (333,410)
Receivables from brokers, dealers
and clearing organizations 15,093 382,479
Due from customers 5,038,833 618,031
Securities borrowed 445,400 2,272,700
Security deposits 147,928 -
Prepaid expenses and other assets 40,139 (364,058)
Payables to brokers, dealers
and clearing organizations (1,410,829) (117,811)
Due to customers (929,737) (2,565,644)
Salaries and commissions payable 122,085 (154,976)
Accounts payable and accrued liabilities (115,923) (56,675)
--------------- ---------------
Net cash provided by (used in)
operating activities 1,678,263 (166,116)
--------------- ---------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of K&S, net of cash acquired - (1,200,000)
Purchase of marketable investments - (282,415)
Proceeds from sale of marketable investments 31,995 -
Purchase of non-marketable investments (60,000) (54,545)
Capital expenditures (11,498) (214,645)
--------------- ---------------
Net cash used in investing activities (39,503) (1,751,605)
--------------- ---------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase (decrease) in notes payable (1,650,000) 500,000
Increase in common stock
and paid-in-capital 102,000 -
Purchase and retirement of common stock - (38,156)
--------------- ---------------
Net cash provided by (used in)
financing activities (1,548,000) 461,844
--------------- ---------------
Net increase (decrease) in cash 90,760 (1,455,877)
Cash and cash equivalents at
beginning of period 1,124,191 2,737,434
--------------- ---------------
Cash and cash equivalents at
end of period $ 1,214,951 $ 1,281,557
=============== ===============
Cash Payments:
Interest expense $ 38,447 $ 7,306
Income taxes - 424,398
SUPPLEMENTAL DISCLOSURE OF NON-CASH
TRANSACTIONS:
Increase in prepaid expenses
and other assets $ - $ 40,000
Increase in intangible assets - 22,500
Increase in notes payable - 300,000
Increase in common stock and
paid-in-capital 50,000 62,500
See Accompanying Notes to Consolidated Financial Statements
5 of 18
DETWILER, MITCHELL & CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. ORGANIZATION
Detwiler, Mitchell & Co. (the "Company") is the holding
company for its four principal operating subsidiaries: Fechtor,
Detwiler & Co., Inc., a channel research, institutional sales and
retail brokerage company headquartered in Boston, MA; K. & S.,
Inc., a specialist firm with operations on the Boston Stock
Exchange; James Mitchell & Co., a financial services company
headquartered in San Diego, CA and Detwiler, Mitchell & Co. (UK)
Limited ("DMC UK"), an institutional sales firm headquartered in
London, England.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation - The consolidated financial
statements of Detwiler, Mitchell & Co. have been prepared in
accordance with the rules and regulations of the Securities and
Exchange Commission and generally accepted accounting principles.
In the opinion of management, all adjustments, consisting only of
normal recurring accruals, have been made to present fairly the
financial statements of the Company. Certain accounts of prior
period financial statements have been reclassified to conform
with the current period presentation.
Principles of Consolidation - The consolidated financial
statements of Detwiler, Mitchell & Co. include the accounts of
its wholly owned subsidiaries. All material intercompany
transactions have been eliminated in consolidation.
Cash Equivalents - Cash equivalents include instruments with
an original maturity of three months or less.
Marketable and Non-Marketable Investments - The Company may
receive, as additional consideration for the performance of
investment banking services, warrants to acquire an equity
interest in firms or may lend to or make direct equity
investments in companies through its merchant banking activities.
Marketable and non-marketable investments are recorded at fair
value and may result in the recognition of unrealized gains or
losses due to changes in their fair value. Realized gains and
losses are recognized when the investment is sold.
Fair Value of Other Financial Instruments - The carrying
amount of receivables, payables, and securities owned are
reported in the statement of financial condition at fair value.
Securities Transactions - Proprietary securities
transactions in regular way trades are recorded on the settlement
date (normally the third business day following the trade date),
which is not materially different from the trade date.
Securities transactions for customers are reported on the
settlement date. Commission revenues and expenses are recorded
on the trade date.
Principal Transactions - Principal transactions revenues
primarily represent amounts earned from executing transactions by
K&S on behalf of its customers on the Boston Stock Exchange, Inc.
Income Taxes - Income tax liabilities or assets are recorded
through charges or credits to the statement of operations for the
estimated income taxes payable or refundable for the current
period. Deferred income tax assets or liabilities are recorded
for future tax consequences attributable to differences between
the financial statement carrying amounts of assets and
liabilities and their respective tax bases. Deferred tax assets
and liabilities are measured using enacted tax rates. A deferred
tax valuation allowance is established if it is more likely than
not that all or a portion of the deferred tax assets will not be
realized.
6 of 18
DETWILER, MITCHELL & CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Use of Estimates - The preparation of the Company's
financial statements in conformity with accounting principles
generally accepted in the United States of America requires
management to make estimates and assumptions that affect amounts
reported in the accompanying financial statements. Actual
results could vary from the estimates that were used.
NOTE 3. NET CAPITAL REQUIREMENT
The Company's principal broker dealer subsidiary, Fechtor
Detwiler, is subject to the Uniform Net Capital Rule 15c3-1 of
the Securities and Exchange Commission. Fechtor Detwiler
computes its net capital under the alternative method permitted
by the Rule which requires its minimum net capital to be $250,000.
At June 30, 2002, Fechtor Detwiler's net capital was
$609,000, which is $359,000 in excess of its minimum net capital
requirement of $250,000.
Effective April 26, 2002, Fechtor Detwiler changed from a
self-clearing to a fully disclosed broker dealer (see Note 6
below) with National Financial Services LLC ("NFS"), a wholly
owned subsidiary of Fidelity Investments as clearing broker. As
a result, the Rule 15c3-1 minimum net capital requirement is
expected to be reduced to $100,000 in August 2002. Fechtor
Detwiler has agreed with NFS to maintain minimum net capital of
$500,000 through December 31, 2002, $750,000 through June 30,
2003, and $1,000,000 on July 1, 2003 and beyond. Additionally,
Fechtor Detwiler has a $250,000 clearing deposit with NFS which
will be reduced to $100,000 in July 2003.
NOTE 4. EARNINGS PER SHARE
Basic and diluted net income (loss) per share and weighted
average shares outstanding follows:
FOR THE THREE MONTHS FOR THE SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
--------------------------- ---------------------------
2002 2001 2002* 2001
------------- ------------- ------------- -------------
Net income (loss) $ (628,621) $ (104,166) $ (2,337,113) $ 35,321
============= ============= ============= =============
Net income (loss) per share:
Basic $ (0.24) $ (0.04) $ (0.88) $ 0.01
============= ============= ============= =============
Diluted $ (0.24) $ (0.04) $ (0.87) $ 0.01
============= ============= ============= =============
Weighted average shares
outstanding:
Basic 2,654,579 2,602,313 2,653,468 2,605,730
Incremental shares assumed
outstanding from exercise
of stock options 379 6,438 46,379 22,537
------------- ------------- ------------- -------------
Diluted 2,654,958 2,608,751 2,699,847 2,628,267
============= ============= ============= =============
* FIRST QUARTER 2002 RESTATED - SEE NOTE 10.
7 of 18
DETWILER, MITCHELL & CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 5. LEGAL PROCEEDINGS
The Firm is involved in several legal proceedings concerning
matters arising in connection with its business operations.
Management believes, based on currently available information,
that the results of such proceedings, in the aggregate, will not
have a material adverse effect on the Firm's financial condition,
but may be material to the Firm's operating results for any
particular period, depending in part upon the operating results
for such period.
Reference is made to the Company's Annual Report on Form 10-
K for the year ended December 31, 2001 for additional information
with respect to certain pending legal proceedings which have
remained substantially unchanged since last reported upon by the
Company.
NOTE 6. CHANGE FROM A SELF-CLEARING TO A FULLY DISCLOSED BROKER DEALER
On April 26, 2002, Fechtor Detwiler began introducing
customer transactions on a fully disclosed basis to NFS as
clearing broker. Accordingly, Fechtor Detwiler is no longer a
self-clearing broker dealer and no longer holds funds on behalf
of its customers.
The decision to change from a self-clearing broker dealer to
a fully disclosed broker dealer was based upon several factors.
Most significant are the competitive environment of the
securities industry, expanded products and services the Firm will
be able to offer its customers through its relationship with NFS,
business risks associated with remaining a self-clearing broker
dealer, increased insurance coverage for customer accounts, and
the increased ability to retain and hire competent retail broker
and financial planning sales professionals because of enhanced
products, services and technology offered by NFS. Future net
operating costs of Fechtor Detwiler are not expected to increase
significantly as a result of the conversion.
NOTE 7. RELATED PARTY TRANSACTIONS
On March 22, 2002, the Company borrowed $300,000 from James
H. Graves, its Vice Chairman, and issued a promissory note to him
(the "Note") due May 22, 2003 at 10% interest rate per annum.
The Note is secured by four of the Company's non-marketable
investments having a book value of $303,500 at June 30, 2002.
The Note allows Mr. Graves to purchase the non-marketable
investments securing the Note, upon giving the Company three
business days notice, in exchange for canceling the Note's stated
principal balance and any interest due thereon prior to May 22,
2003.
In June 2002, the Company discharged an obligation to pay
$50,000 for consulting services to Erwin, Graves & Associates
by issuing 50,000 common shares to Erwin, Graves & Associates
of which Mr. James H. Graves is a principal shareholder.
NOTE 8. INCOME TAXES
In connection with the merger of JMC Group, Inc. with
Fechtor, Detwiler & Co., Inc. in August 1999, a stock option plan
was established and 150,000 options (post reverse stock split)
were granted to certain key employees, by the founding partners
of Fechtor Detwiler, to acquire common shares of Fechtor Detwiler
prior to the merger. In September 1999, the Company recorded an
increase in paid-in-capital of $850,000, compensation expense of
$850,000 and a $340,000 deferred income tax asset. In the second
quarter of 2002, management determined certain stock options
granted to individuals no longer employed by the Company had
terminated. At June 30, 2002, 27,000 of such options
remained outstanding at an exercise price of $0.40 per
share. Based upon the aforementioned termination of 123,000 options,
this deferred income tax asset was reduced by a non-cash charge
of $279,000 recorded in the second quarter of 2002.
8 of 18
DETWILER, MITCHELL & CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 9. STOCKHOLDERS' EQUITY
The Company has been advised by NASDAQ that its common stock
may no longer meet the requirements for continued listing on the
NASDAQ SmallCap Market and that its common stock may be removed
from trading in the SmallCap Market. The common stock of the
Company must have a minimum closing bid price of $1.00 per share
for ten consecutive trading days before January 6, 2003 to
maintain its listing status. If compliance with the listing
requirements is not met, the Company's common stock will be
traded on the Over-the-Counter Bulletin Board.
The Company also received notice from the Pacific Exchange
("PCX") that the PCX will be reviewing the Company's current
listing status on that exchange to assure compliance with its
listing requirements.
In May 2002, the president of K&S reimbursed the Company
for certain trading losses totaling $102,000. This amount was
recorded as paid-in-capital.
NOTE 10. IMPAIRMENT OF GOODWILL
During the second quarter of 2002, the transition provisions of
Statement of Financial Accounting Standards No. 142, "Goodwill
and Other Intangible Assets," were completed with respect to
the evaluation of the fair value of recorded goodwill which
resulted from the acquisition of K. & S., Inc. As a result, the Company
recorded a transition impairment adjustment of goodwill of $1,150,500.
In accordance with the requirements of Statement No. 142, this
transition adjustment was recorded as of January 1, 2002, requiring
restatement of the Company's results of operations for the
three-month period ended March 31, 2002.
Of the $1,522,500 of goodwill resulting from the acquisition
of K&S, $72,000 was amortized to expense for the year ended
December 31, 2001 and $1,150,500 was recorded as a transition impairment
adjustment of goodwill as of January 1, 2002. As a result, the
Company has recorded, at fair value, an intangible asset of
$300,000 assigned to K&S at the January 1, 2002 evaluation
date. Fair value was determined based upon many factors
including: the operating results of K&S since the acquisition
date verses projections developed at acquisition to determine
fair value, the ability of K&S to generate earnings during
unfavorable market conditions, the impact of decimalization on
net trading profits and sources and costs to obtain sustainable
order flow on stocks where K&S serves as a specialist on the
Boston Stock Exchange. The Company's remaining goodwill of
$117,385 relates to the 1999 merger of JMC Group, Inc. and
Fechtor Detwiler and was not considered impaired under Statement
No. 142 transition provisions.
9 of 18
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL
Detwiler, Mitchell & Co. (the "Company") is the holding
company for its four principal operating subsidiaries: Fechtor,
Detwiler & Co., Inc., a channel research, institutional sales and
retail brokerage company headquartered in Boston, MA; K. & S.,
Inc., a specialist firm with operations on the Boston Stock
Exchange; James Mitchell & Co., a financial services company
headquartered in San Diego, CA and Detwiler, Mitchell & Co. (UK)
Limited ("DMC UK"), an institutional sales firm headquartered in
London, England.
During the six months ending June 30, 2002, the Company
experienced some difficult challenges due to adverse market
conditions, the decline in retail sales, institutional sales and
trading opportunities and a decline in investment banking activity.
Therefore, comparisons with prior periods are quite dramatic.
Because of the changes in the industry, the Company has
changed its strategy by clearing through NFS, freeing up capital,
and providing a better product offering to its customers. In
addition, management has replaced its commission-only
compensation system with one that is aligned more with production
volume as well as overall firm profitability and is restaffing
with more experienced professionals available in the industry due to
overall economic conditions.
STATEMENT OF OPERATIONS FOR THE THREE-MONTH PERIOD ENDED JUNE 30, 2002
COMPARED TO THE THREE MONTH PERIOD ENDED JUNE 30, 2001
Net loss of $629,000 or $0.24 per share - basic and diluted,
on 2,655,000 basic and diluted weighted average shares
outstanding, for the three months ended June 30, 2002 compared to
net loss of $104,000 or $0.04 per share - basic and diluted, on
2,602,000 basic and 2,609,000 diluted weighted average shares
outstanding, for the three months ended June 30, 2001. Excluding
the $279,000 non-cash write-off of a deferred income tax asset,
net loss was $350,000 for the three months ended June 30, 2002.
Total revenues for the quarter ended June 30, 2002 were
$2,548,000, a decrease of $2,700,000 or 51%, compared to
$5,248,000 for the same period in 2001.
Commission revenues for the quarter ended June 30, 2002 were
$2,110,000, a decrease of $1,545,000 or 42%, compared to the
same period last year primarily due to the reorganization of the
institutional sales, research and trading departments following
the resignations of key personnel in October 2001 and adverse
market conditions.
Principal transaction revenues for the quarter ended June
30, 2002 were $280,000, a decrease of $679,000 or 71%, compared
to the same period last year principally due to adverse market
conditions and lower transaction volumes from certain customers
which were sharply lower in 2002 compared to the same period of
the prior year. Additionally, lower revenues resulted from the
cessation of NASD market making activities and the impact of
decimalization on trading spreads previously available in the
industry.
Investment banking revenues for the quarter ended June 30,
2002 were $53,000, a decrease of $399,000 or 88%, compared to the
same period last year due to greater investment banking
transactions during the second quarter of 2001 and more favorable
market conditions.
Interest income for the quarter ended June 30, 2002 was
$15,000, a decrease of $75,000 or 83%, compared to the same
period last year, due to significantly reduced customer margin
account balances and the transfer of customer margin accounts to
NFS on April 26, 2002.
Compensation and benefits expense of $1,530,000 for the
quarter ended June 30, 2002, a decrease of $1,811,000, or 54%,
compared to the same period last year due to reduced commission,
principal transaction and investment banking revenues, reductions
in commission and salaried employees, certain voluntary salary
reductions for executives and other key employees and the new
reduced and restructured compensation plan, effective December 1,
2001, which pays less commissions to capital markets employees in
exchange for a guaranteed salary.
10 of 18
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
STATEMENT OF OPERATIONS FOR THE THREE-MONTH PERIOD ENDED JUNE 30, 2002
COMPARED TO THE THREE MONTH PERIOD ENDED JUNE 30, 2001 (CONTINUED)
General and administrative expense of $561,000 for the
quarter ended June 30, 2002 decreased $71,000 compared to last
year due primarily to the reorganization of various departments
and subsidiaries to increase efficiency and the elimination of
goodwill amortization effective January 1, 2002.
Execution costs of $470,000 for the quarter ended June 30,
2002 decreased $589,000 or 56%, compared to the same period last
year primarily due to lower commission and principal transaction
revenues.
Occupancy, communications and systems expense for the quarter
ended June 30, 2002 of $439,000 increased $84,000 compared to the
same period last year primarily due to costs incurred by DMC UK.
Income tax expense for the quarter ended June 30, 2002 of
$170,000 includes a $279,000 write-off of a deferred income tax
asset of questionable realization (See Note 8) partially offset by current
income taxes receivable of $129,000 recorded on the loss from
operations for the quarter ended June 30, 2002.
STATEMENT OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 2002
COMPARED TO THE SIX MONTHS ENDED JUNE 30, 2001
Net loss of $2,337,000, $0.88 per share - basic and $0.87
per share - diluted on 2,654,000 basic and 2,700,000 diluted
weighted average shares outstanding, for the six months ended
June 30, 2002 compared to net income of $35,000, $0.01 per share
- - basic and diluted on 2,606,000 basic and 2,628,000 diluted
weighted average shares outstanding, for the six months ended
June 30, 2001. Excluding the non-cash transition impairment
adjustment of goodwill of $1,150,500 from the implementation of
Financial Accounting Standard No. 142 and the $279,000 non-cash
write-off of deferred income tax asset, net loss was $908,000 for
the six months ended June 30, 2002.
Total revenues for the six months ended June 30, 2002 were
$4,935,000, a decrease of $6,794,000 or 58%, compared to
$11,728,000 for the same period last year. The decrease primarily
results from the reorganization of the institutional sales,
research and trading departments following the resignations of
key personnel in October 2001 and adverse market conditions.
Commission revenues for the six months ended June 30, 2002
were $3,722,000, a decrease of $3,835,000 or 51%, compared to
the same period last year primarily due to the reorganization of
the institutional sales, research and trading departments
following the resignations of key personnel in October 2001 and
adverse market conditions.
Principal transaction revenues for the six months ended June
30, 2002 were $777,000, a decrease of $2,478,000 or 76%, compared
to the same period last year principally due to adverse market
conditions and transaction volumes from certain customers which
were sharply lower in 2002 compared to the same period of the
prior year. Additionally, lower revenues resulted from the
cessation of NASD market making activities and the impact of
decimalization on trading spreads previously available in the
industry.
Investment banking revenues for the six months ended June
30, 2002 were $215,000, a decrease of $306,000 or 59%, compared
to the same period last year due to higher investment banking
transactions during 2001 and more favorable market conditions.
Interest income for the six months ended June 30, 2002 was
$62,000, a decrease of $140,000 or 69%, compared to the same
period last year due to significantly reduced customer margin
account balances and the transfer of customer margin accounts
to NFS on April 26, 2002.
11 of 18
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
STATEMENT OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 2002
COMPARED TO THE SIX MONTHS ENDED JUNE 30, 2001 (CONTINUED)
Compensation and benefits expense of $3,127,000 for the six
months ended June 30, 2002 decreased $4,050,000 or 56%,
compared to the same period last year due to reduced commission,
principal transaction and investment banking revenues, reduction
in commission and salaried employees, certain voluntary salary
reductions for executives and other key employees and the new
reduced and restructured compensation plan, effective December 1,
2001, which pays less commissions to capital markets employees in
exchange for a guaranteed salary.
General and administrative expense of $1,097,000 for the six
months ended June 30, 2002 decreased $174,000 compared to last
year due primarily to the reorganization of various departments
and subsidiaries to increase efficiency and the elimination of
goodwill amortization effective January 1, 2002.
Execution costs of $1,006,000 for the six months ended June 30,
2002 decreased $1,471,000 or 59%, compared to the same period
last year primarily due to lower commission and principal
transaction revenues.
Occupancy, communications and systems expense of $870,000
for the six months ended June 30, 2002 increased $195,000 or 29%,
compared to the same period last year due primarily due to costs
incurred by DMC UK.
Income tax benefit of $18,000 for the six months ended June 30, 2002
includes a $279,000 reserve for a deferred income tax asset of questionable
realization (See Note 8) partially offset by current income taxes receivable
of $297,000 recorded on the loss from operations for the six months ended
June 30, 2002.
During the second quarter of 2002, the provisions of
Statement of Financial Accounting Standards No. 142 were
implemented with respect to the evaluation of the fair value of
recorded goodwill which resulted from the acquisition of K&S,
Inc. As a result, the Company recorded a $1,150,500 transition impairment
adjustment of goodwill via restatement of the Company's results
of operations for the three-month period ended March 31, 2002 as
required by Statement No. 142.
CAPITAL RESOURCES AND LIQUIDITY
Cash and cash equivalents at June 30, 2002 of $1,215,000
increased $91,000 from December 31, 2001 primarily due to the
transfer of clearing activities to NFS on April 26, 2002 which
resulted in the conversion of balances due from customers and
certain clearing deposits to cash. Such increases in cash were
used to fund the 2002 year-to-date operating loss of the Company.
At June 30, 2002, cash and cash equivalents included $499,000 of
clearing deposits held at the Boston Stock Exchange and The
Securities and Futures Authority.
Fechtor Detwiler terminated its two revolving line of credit
facilities on April 23, 2002 when customer transactions began
processing on a fully disclosed basis with NFS. Borrowings on
such lines of credit were collateralized by securities held in
margin accounts of customers. Accordingly, the Firm no longer
has access to such lines of credit.
In March 2002, the Company borrowed $300,000 from its Vice
Chairman and issued a promissory note (the "Note") due May 22,
2003 at 10% interest rate per annum. The Note is secured by
$303,500 of non-marketable investments recorded at fair value at
June 30, 2002. The Note allows the lender to purchase the non-
marketable investments securing the Note in exchange for
canceling the Note and any interest due thereon prior to May 22,
2003.
In May 2002, the president of K&S reimbursed the Company
for certain trading losses totaling $102,000. This amount
was recorded as paid-in-capital.
In June 2002, the Company discharged an obligation to pay
$50,000 for consulting services by issuing 50,000 common shares
to Erwin, Graves & Associates of which Mr. James H. Graves is a
principal shareholder.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
TRENDS AND UNCERTAINTIES
The Company has been advised by NASDAQ that its common stock
does not currently meet the requirements for continued listing on
the NASDAQ SmallCap Market and that its common stock may be
removed from trading. The common stock of the Company must have
a minimum closing bid price of $1.00 per share for ten
consecutive trading days before January 6, 2003 to maintain its
current listing. If compliance with the listing requirements is
not met, the Company's common stock will be traded on the Over-
the-Counter Bulletin Board.
The Company also received notice from the Pacific Exchange
("PCX") that the PCX will be reviewing the Company's current
listing status on that exchange to assure compliance with its
listing requirements.
STRATEGIC OUTLOOK
During the first half of 2002, management identified and met
with many portfolio managers and hedge fund analysts to introduce
Fechtor Detwiler, its capital markets staff and its channel
research information and capabilities. Institutional clients
engage the Firm to provide research information and analysis
unencumbered by investment banking relationships. During the
past seven months, approximately one hundred new clients were
added to our customer base. Management believes this statistic,
especially in view of the world economy, unpredictable trading
volumes and market volatility, validates the quality of our
research which is provided to investment managers throughout the
United States, the United Kingdom and Asia. Management is
hopeful that its research model continues to be well received and
in demand.
Commission revenues from institutional sales at DMC UK have
increased reflecting a growing acceptance of Fechtor Detwiler's
US-based research products and services presented to UK and
European clients of this subsidiary. Continued growth of DMC
UK, however, is also contingent upon the market factors discussed
above.
Retail commission revenues have been negatively impacted by
the continued market uncertainty, now well over two years in
length, and reduced the head count in retail sales professionals.
The Firm has begun to reposition the retail sales group with the
development of an attractive compensation plan for top brokers
and financial advisors to join Fechtor Detwiler. The
compensation plan provides retail sales professionals the
opportunity for greater participation in the success of their
efforts. Additionally, their efforts will include other
compensation in the form of stock option awards. Most
importantly, Fechtor Detwiler allows for the independence of the
customer representatives to manage the accounts of their
customers as they believe are appropriate for each client, as
opposed to the financial requirements of their employer as is
common in many large financial services companies.
Management is aggressively taking steps to return the
Company to profitability and is investigating other opportunities
to increase stockholder value. There can be no assurances,
however, that revenues can be increased or even sustained, that
costs can be reduced or additional capital can be secured during
these uncertain financial market conditions.
RECENT ACCOUNTING DEVELOPMENTS
In July 2001, the Financial Accounting Standards Board
issued SFAS No. 141, "Business Combinations" and SFAS No. 142,
"Goodwill and Intangible Assets." SFAS No. 141 requires that all
business combinations initiated after June 30, 2001 be accounted
for using the purchase method of accounting, and prohibits the
use of the pooling-of-interests method for such transactions.
The new standard also requires identified intangible assets
acquired in a business combination to be recognized as an asset
apart from goodwill if they meet certain criteria.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
RECENT ACCOUNTING DEVELOPMENTS (CONTINUED)
SFAS No. 142 applies to all goodwill and identified
intangible assets acquired in a business combination. Under the
new standard, all goodwill, including that acquired before
initial application of the standard, should not be amortized but
should be tested for impairment at least annually. Within six
months of initial application of the new standard, a transition
impairment test must be performed on all goodwill. Any
impairment loss recognized as a result of the transition
impairment test should be reported as a change in accounting
principle as of January 1, 2002. In addition to the transition
impairment test, the required annual impairment test should be
performed in the year of adoption of the standard.
The new standard is effective for fiscal years beginning
after December 15, 2001, and must be adopted as of the beginning
of a fiscal year. Retroactive application is not permitted. The
Company adopted the new standard on January 1, 2002, and ceased
the amortization of its goodwill, which totaled $78,000 for the
year ended December 31, 2001. The Company has evaluated the
impact of the Standard's transition impairment test on the
Company's value of goodwill and has recorded a $1,150,500 non-
cash charge to operations.
SFAS No. 143 "Accounting for Asset Retirement Obligations"
(SFAS No. 143) was issued in June 2001 and requires the fair
value of a liability for an asset retirement obligation to be
recorded in the period in which it is incurred. The associated
asset retirement costs must be capitalized as part of the
carrying amount of the long-lived asset. The standard is
effective for fiscal years beginning after June 15, 2002. The
Company is currently evaluating the impact SFAS No. 143, if any,
may have on its financial position and results of operations.
SFAS No. 144 "Accounting for the Impairment or Disposal of Long-
Lived Assets" (SFAS No. 144) was issued in August 2001 and
addresses financial accounting and reporting for the impairment
or disposal of long-lived assets. The Company adopted SFAS No.
144 on January 1, 2002. There was no impact on the Company's
financial position or results of operations upon adoption.
Statement of Financial Accounting Standards No. 145, "Rescission
of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13,
and Technical Corrections," (SFAS No. 145) was issued as of April 2002.
SFAS No. 145 rescinds FASB Statement No. 4, "Reporting Gains and Losses
from Extinguishment of Debt," and an amendment of that Statement, FASB
Statement No. 64, "Extinguishments of Debt Made to Satisfy Sinking-Fund
Requirements." SFAS No. 145 also rescinds FASB Statement No. 44, "Accounting
for Intangible Assets of Motor Carriers." SFAS No. 145 amends FASB Statement
No. 13, "Accounting for Leases," to eliminate an inconsistency between
the required accounting for sale-leaseback transactions and the required
accounting for certain lease modifications that have economic effects
that are similar to sale-leaseback transactions. SFAS No. 145 also amends
other existing authoritative pronouncements to make various technical
corrections, clarify meanings, or describe their applicability under changed
conditions. Most of the transition provisions of SFAS No. 145 are effective
for fiscal years beginning after May 15, 2002 and certain provisions are
effective for transactions entered into after May 15, 2002. Statement
No. 146 "Accounting for Costs Associated with Exit or Disposal Activities"
(SFAS No. 146) was issued in June 2002. SFAS No. 146 addresses financial
accounting and reporting for costs associated with exit or disposal and its
provisions are effective for exit or disposal activities initiated after
December 31, 2002. The Company is currently evaluating the impact SFAS
No. 145 and SFAS No. 146, if any, may have on its financial position and
results of operations.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
CAUTIONARY STATEMENT FOR PURPOSES OF THE "SAFE HARBOR" PROVISIONS
OF THE PRIVATE SECURITIES LITIGATION REFORM ACT
Any statements in this report that are not historical facts
are intended to fall within the safe harbor for forward-looking
statements provided by the Private Securities Litigation Reform
Act of 1995. These statements may be identified by such forward-
looking terminology as "expect", "look", "believe",
"anticipate", "may", "will" or similar statements or
variations of such terms. Any forward-looking statements should
be considered in light of the risks and uncertainties associated
with Detwiler, Mitchell & Co. and its businesses, economic and
market conditions prevailing from time to time, and the
application and interpretation of Federal and state tax laws and
regulations, all of which are subject to material changes and
which may cause actual results to vary materially from what had
been anticipated. Certain factors that affect Detwiler, Mitchell
& Co. include conditions affecting revenues, reliance on key
personnel, competition, and regulatory and legal matters as
follows:
Conditions Affecting Revenues. Revenues, cash flows and
earnings of the Company may be adversely affected by volatility
in the financial markets and fluctuating economic and political
conditions which could produce lower commissions, and lower
trading or investment banking revenues, or by a decline in client
account balances resulting from changing industry or economic
conditions or the performance of the capital markets.
Reliance on Key Personnel. The departure of key personnel,
such as skilled institutional and retail brokers, traders,
research analysts or employees responsible for significant client
relationships, could have a material adverse effect on the
results of operations of the Company.
Competition. The Company may experience losses in client
account balances due to the highly competitive nature of its
business, the performance of client accounts compared to the
performance of the market generally, the abilities and
reputations of the Company and its ability to attract new client
accounts and retain existing client relationships and changes in
the brokerage business such as the growth of internet security
trading and information availability.
Regulatory and Legal Factors. The Company's business may be
affected by developments or changes in applicable regulations, as
well as by legal proceedings and claims arising from the conduct
of its businesses.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Not Applicable.
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PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS.
a.) The Annual Meeting of Stockholders of Detwiler,
Mitchell & Co. (the "Company") was held on May 20,
2002.
b.) The following matters were submitted to a vote of the
Stockholders of the Company.
1. To approve a special grant of stock options covering
1,463,333 shares of our Common Stock.
Votes For: 1,259,835
Votes Against: 283,553
Abstain: 4,319
Non-votes: 980,224
2. To elect three Directors of the Company, each to
serve for three years or until their successor shall
be duly appointed or elected.
For Withheld
--------- --------
Barton Beek 2,488,472 79,459
Robert Detwiler 2,499,733 28,198
James Graves 2,499,300 28,631
4. To ratify the selection of PricewaterhouseCoopers
LLP as independent auditors for the Company for
2002.
Votes For: 2,519,516
Votes Against: 8,038
Abstain: 377
ITEM 5. OTHER INFORMATION
On July 30, 2002, the Sarbanes Oxley Act of 2002 was passed
into law, which would require the Securities and Exchange
Commission to adopt rules requiring that all public companies
have a majority of independent directors on their board of
directors. Likewise, Nasdaq also proposed rules to the
Securities and Exchange Commission requiring the same board of
directors composition. The Company's board of directors was
comprised of four independent directors and four directors who
were also officers of the Company. Although the requirement
would not go into effect for some time, Edward Hughes, Chief
Operating Officer and Director, wishing for the Company to be in
compliance with the new rules when they become effective,
voluntarily resigned as a director of the Company on August 8,
2002 and the Board subsequently amended the bylaws of the Company
to reduce the number of directors to seven. Mr. Hughes remains
an officer of the Company and a director and officer of the
Company's principal subsidiaries. The majority of the directors
on the Company's Board of Directors are now independent directors
as defined by the Securities and Exchange Commission.
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
a.) Exhibits.
The following Exhibits are filed herewith:
99.1 Notice received from Nasdaq Market System
regarding the non-compliance with listing and
qualification standards.
99.2 Notice received from Pacific Exchange regarding
the non-compliance with listing and qualification
standards.
99.3 On August 14, 2002, the Company issued a press
release containing its results of operations for
its second quarter ending June 30, 2002.
b.) Reports on Form 8-K
None.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act
of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned thereunto duly authorized.
/s/ Detwiler, Mitchell & Co.
----------------------------
Registrant
August 14, 2002 /s/ JAMES K. MITCHELL
- ----------------- ------------------------------------
Date James K. Mitchell
Chairman and Chief Executive Officer
August 14, 2002 /s/ STEPHEN D. MARTINO
- ----------------- ------------------------------------
Date Stephen D. Martino
Chief Financial Officer and
Principal Accounting Officer
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