_____________________________________________________________________
_____________________________________________________________________
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(MARK ONE)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 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 02110
BOSTON, MA
- ---------------------------------------- -------------
(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 November 8, 2002, the registrant had 2,702,357 shares
of common stock, $0.01 par value, issued and outstanding.
_____________________________________________________________________
_____________________________________________________________________
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DETWILER, MITCHELL & CO.
INDEX TO FORM 10-Q
Page
----
PART I. - FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statement of Financial Condition at
September 30, 2002 and December 31, 2001...............3
Consolidated Statement of Operations for the three and
nine-month periods ended September 30, 2002 and 2001...4
Consolidated Statement of Cash Flows for the three and
nine-month periods ended September 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 6. Exhibits and Reports on Form 8-K.........................16
Signatures........................................................17
Certifications....................................................18
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
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DETWILER, MITCHELL & CO.
CONSOLIDATED STATEMENT OF FINANCIAL CONDITION
SEPTEMBER 30, DECEMBER 31,
2002 2001
-------------- --------------
(UNAUDITED)
<s> <c> <c>
ASSETS
Cash and cash equivalents $ 1,075,178 $ 1,124,191
Security deposits 198,979 350,589
Securities borrowed - 445,400
Deposits with clearing organizations 276,000 268,604
Commissions, current income taxes and
other receivables 962,439 279,577
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 110,000 250,000
Deferred income taxes 175,717 414,517
Fixed assets, net 407,482 565,933
Intangible assets 117,385 1,567,885
Prepaid expenses and other 413,307 362,225
-------------- --------------
Total Assets $ 3,736,487 $ 10,714,842
============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Notes payable $ 465,054 $ 2,100,000
Payable to brokers, dealers and clearing
organizations - 1,410,829
Due to customers - 929,737
Salaries and commissions payable 461,269 314,258
Accounts payable and accrued liabilities 411,049 746,185
Total Liabilities 1,337,372 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 September 30, 2002
and December 31, 2001, respectively 27,023 26,523
Paid-in-capital 4,880,487 4,728,987
Retained earnings (deficit) (2,508,395) 458,323
-------------- -------------
Total Stockholders' Equity 2,399,115 5,213,833
-------------- -------------
Total Liabilities and Stockholders'
Equity $ 3,736,487 $ 10,714,842
============== ==============
See Accompanying Notes to Consolidated Financial Statements.
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<caption>
DETWILER, MITCHELL & CO.
CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE THREE MONTHS FOR THE NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
---------------------------- ----------------------------
2002 2001 2002 2001
------------- ------------- ------------- -------------
(UNAUDITED)
<s> <c> <c> <c> <c>
REVENUES
Commissions $ 2,493,924 $ 2,838,639 $ 6,215,825 $ 10,395,248
Principal transactions 406,632 898,813 1,184,048 4,153,888
Investment banking - 98,500 215,015 619,111
Interest 4,091 85,167 65,900 286,878
Other 76,545 83,942 235,247 278,432
------------- ------------- ------------- -------------
Total revenues 2,981,192 4,005,061 7,916,035 15,733,557
------------- ------------- ------------- -------------
EXPENSES
Compensation and benefits 1,875,178 2,254,922 5,002,632 9,432,436
General and administrative 631,645 692,935 1,728,901 1,963,713
Execution costs 428,898 751,924 1,435,289 3,229,806
Occupancy, communications
and systems 478,036 415,288 1,347,960 1,090,635
Interest - 6,000 38,446 31,901
Amortization of intangibles - 19,500 - 58,500
Loss on sale of specialist firm 213,000 - 213,000 -
Unrealized loss on non-marketable
securities 200,000 - 200,000 -
------------- ------------- ------------- -------------
Total expenses 3,826,757 4,140,569 9,966,228 15,806,991
------------- ------------- ------------- -------------
Loss before cumulative effect
of change in accounting
principle and income taxes (845,565) (135,508) (2,050,193) (73,434)
Cumulative effect of change in
accounting principle - - (1,150,500) -
------------- ------------- ------------- -------------
Loss before income taxes (845,565) (135,508) (3,200,693) (73,434)
Income tax (expense) benefit, net 215,960 (37,392) 233,975 (64,145)
------------- ------------- ------------- -------------
Net loss $ (629,605) $ (172,900) $ (2,966,718) $ (137,579)
============= ============= ============= =============
NET LOSS PER SHARE:
Basic $ (0.23) $ (0.07) $ (1.11) $ (0.05)
============= ============= ============= =============
Diluted $ (0.23) $ (0.07) $ (1.11) $ (0.05)
============= ============= ============= =============
WEIGHTED AVERAGE SHARES
OUTSTANDING:
Basic 2,702,357 2,602,313 2,669,764 2,604,591
============= ============= ============= =============
Diluted 2,702,500 2,602,313 2,674,296 2,607,402
============= ============= ============= =============
See Accompanying Notes to Consolidated Financial Statements.
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DETWILER, MITCHELL & CO.
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30,
---------------------------------------
2002 2001
------------- -------------
(UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (2,966,718) $ (137,579)
Adjustments to reconcile net loss to
net cash provided by (used in)
operating activities:
Depreciation and amortization 170,944 150,238
Deferred income taxes 238,800 -
Impairment and reduction of goodwill 1,450,500 -
Unrealized loss on non-marketable securities 200,000 -
Amortization of intangibles and purchased
service rights - 119,487
Changes in:
Commissions, current income taxes and
other receivables (682,862) -
Deposits with clearing organizations (7,396) (453,610)
Receivables from brokers, dealers and
clearing organizations 15,093 378,865
Due from customers 5,038,833 (883,117)
Securities borrowed 445,400 2,761,400
Security deposits 151,610 -
Prepaid expenses and other assets (51,082) (456,377)
Payables to brokers, dealers and
clearing organizations (1,410,829) 21,846
Due to customers (929,737) (2,291,637)
Salaries and commissions payable 147,011 (706,611)
Accounts payable and accrued liabilities (285,136) (235,636)
------------- -------------
Net cash provided by (used in)
operating activities 1,524,431 (1,732,731)
------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (12,493) (325,474)
Purchase of marketable investments (60,000) (112,603)
Proceeds from sale of marketable investments 31,995 -
Purchase of non-marketable investments - (54,545)
Acquisition of K&S, net of cash acquired - (1,200,000)
------------- -------------
Net cash used in investing activities (40,498) (1,692,622)
------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase (decrease) in notes payable, net (1,634,946) 2,100,000
Increase (decrease) in common stock and
paid-in-capital 102,000 (38,156)
------------- -------------
Net cash provided by (used in) financing
activities (1,532,946) 2,061,844
------------- -------------
Net decrease in cash (49,013) (1,363,509)
Cash and cash equivalents at beginning
of period 1,124,191 2,737,434
------------- -------------
Cash and cash equivalents at end of period $ 1,075,178 $ 1,373,925
============= =============
CASH PAYMENTS:
Interest expense $ 38,447 $ 24,613
Income taxes - 574,130
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
Decrease in accounts payable and accrued
liabilities 50,000 -
Increase in common stock and paid-in-capital 50,000 62,500
See Accompanying Notes to Consolidated Financial Statements
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DETWILER, MITCHELL & CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. ORGANIZATION
Detwiler, Mitchell & Co. (the "Company") is the holding
company for its three principal operating subsidiaries: Fechtor,
Detwiler & Co., Inc., a channel research, institutional sales and
private client group headquartered in Boston, MA; 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 the Company 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 the Company 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
the Company's specialist firm.
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 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.
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.
6 of 19
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DETWILER, MITCHELL & CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 September 30, 2002, Fechtor Detwiler's net capital was
$780,000, which is $530,000 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 November 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 loss per share and weighted average
shares outstanding follows:
FOR THE THREE MONTHS FOR THE NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
-------------------------- ------------------------
2002 2001 2002 2001
------------ ------------ ------------ -----------
Net loss $ (629,605) $ (172,900) $(2,966,718) $ (137,579)
============ ============ ============ ===========
Net loss per share:
Basic $ (0.23) $ (0.07) $ (1.11) $ (0.05)
============ ============ ============ ===========
Diluted $ (0.23) $ (0.07) $ (1.11) $ (0.05)
============ ============ ============ ===========
Weighted average shares
outstanding:
Basic 2,702,357 2,602,313 2,669,764 2,604,591
Incremental shares
assumed outstanding
from exercise of
stock options 143 - 4,532 2,811
------------ ------------ ------------ -----------
Diluted 2,702,500 2,602,313 2,674,296 2,607,402
============ ============ ============ ===========
NOTE 5. CONTINGENCIES
The Company 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
Company's financial condition, but may be material to the
Company's operating results for any particular period, depending
in part upon the operating results for such period.
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DETWILER, MITCHELL & CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 5. CONTINGENCIES (CONTINUED)
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.
The Company is exploring opportunities to reduce occupancy
costs at DMC UK. Any such actions may result in restructuring
costs.
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 Fechtor
Detwiler 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.
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. 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 September 30 and 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.
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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 at its November 21, 2002 meeting.
In May 2002, the president of K&S reimbursed the Company for
certain trading losses totaling $102,000, which was recorded as
paid-in-capital.
NOTE 10. IMPAIRMENT OF GOODWILL
During the second quarter of 2002, the Company implemented
the transition provisions of Statement of Financial Accounting
Standards No. 142, "Goodwill and Other Intangible Assets," 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.
NOTE 11. SALE OF K&S
On September 30, 2002, Detwiler, Mitchell & Co. sold K. &
S., Inc. ("K&S"), its wholly owned specialist business which
operated on the Boston Stock Exchange. The Company recorded a
loss from the sale of K&S of $213,000 in the third quarter of
2002. Kenneth M. King, president and director of K&S, reacquired
the business from the Company in consideration for the
forgiveness of a $150,000 promissory note due him which resulted
from the Company's January 1, 2001 purchase of K&S from Mr. King
and the cancellation of the remaining term of his employment
agreement with the Company having a remaining value of
approximately $150,000. Offers to purchase K&S were solicited by
the Company and it received two expressions of interest in
acquiring K&S from third parties. Mr. King, the former owner,
had the right of first refusal to present a superior purchase
offer pursuant to the terms of the purchase agreement, and his
offer was accepted by the Company.
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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 three principal operating subsidiaries: Fechtor,
Detwiler & Co., Inc., a channel research, institutional sales and
private client group headquartered in Boston, MA; 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.
K. & S., Inc., a specialist firm with operations on the Boston Stock
Exchange, was sold on September 30, 2002 (see Note 11 to the
financial statements).
During the nine months ending September 30, 2002, the
Company experienced a number of challenges due to adverse market
conditions, the decline in retail sales, institutional sales and
trading opportunities, and a decline in investment banking
revenues. As a result, comparisons with prior periods are
dramatic. Because of the changes in the industry, the Company has
altered its strategy by clearing transactions 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 experienced professionals available in the
industry due to overall economic conditions.
STATEMENT OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 30,
2002 COMPARED TO THE THREE MONTHS ENDED SEPTEMBER 30, 2001
The Company had a net loss of $630,000, or $0.23 per share -
basic and diluted on 2.7 million basic and diluted weighted
average shares outstanding, for the three months ended September
30, 2002 compared to a net loss of $173,000, or $0.07 per share -
basic and diluted on 2.6 million diluted weighted average shares
outstanding, for the three months ended September 30, 2001. Net
loss for the third quarter of 2002 included two non-cash charges:
a $213,000 loss on the sale of K. & S., Inc. and a $200,000
unrealized loss on non-marketable investments.
Total revenues for the quarter ended September 30, 2002 were
$2,981,000, a decrease of $1,024,000 or 26%, compared to
$4,005,000 for the same period in 2001.
Commission revenues for the quarter ended September 30, 2002
were $2,494,000, a decrease of $345,000 or 12%, 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
September 30, 2002 were $407,000, a decrease of $492,000 or 55%,
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 had no revenues for the quarter ended
September 30, 2002 compared to $99,000 in revenues for the same
period last year due to greater investment banking activity and
more favorable market conditions during 2001.
Interest income for the quarter ended September 30, 2002 was
$4,000, a decrease of $81,000 or 95%, compared to the same period
last year, due to significantly reduced customer margin account
balances and the transfer of customer margin accounts to NFS in
the second quarter of 2002.
Compensation and benefits expense for the quarter ended
September 30, 2002 was $1,875,000, a decrease of $380,000 or 17%,
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 lower commissions to capital markets employees
in exchange for a guaranteed salary.
10 of 19
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
STATEMENT OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 30,
2002 COMPARED TO THE THREE MONTHS ENDED SEPTEMBER 30, 2001 (CONTINUED)
General and administrative expense for the quarter ended
September 30, 2002 was $632,000, a decrease of $61,000 or 9%
compared to the same period last year, due primarily to the
reorganization of various departments and subsidiaries to
increase efficiency partially offset by increased legal costs.
Execution costs for the quarter ended September 30, 2002
were $429,000, a decrease of $323,000 or 43% 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 September 30, 2002 was $478,000, an increase of
$63,000 or 15% compared to the same period last year primarily
due to increased communication expense.
For the quarter ended September 30, 2002, the Company
recorded a loss from the sale of K&S of $213,000 and an
unrealized loss on non-marketable securities of $200,000 due to
the impairment of several merchant banking investments made by
the Company in prior years.
Income tax benefit for the quarter ended September 30, 2002
of $216,000 results from current income tax benefit recorded on
the loss from operations.
STATEMENT OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30,
2002 COMPARED TO THE NINE MONTHS ENDED SEPTEMBER 30, 2001
The Company had a net loss of $2,967,000, or $1.11 per share
- - basic and diluted on 2.7 million basic and diluted weighted
average shares outstanding, for the nine months ended September
30, 2002 compared to a net loss of $138,000, or $0.05 per share -
basic and diluted on 2.6 million weighted average shares
outstanding, for the nine months ended September 30, 2001. Net
loss for the nine month period ended September 30, 2002 included
four non-cash charges totaling $1,843,000: a $1,151,000 charge
from the write-down of goodwill on the implementation of
Financial Accounting Standard No. 142, a $279,000 deferred income
tax asset valuation allowance, a $213,000 loss on the sale of K&S
and a $200,000 unrealized loss on non-marketable investments.
Total revenues for the nine months ended September 30, 2002
were $7,916,000, a decrease of $7,818,000 or 50%, compared to
$15,734,000 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 nine months ended September 30,
2002 were $6,216,000, a decrease of $4,179,000 or 40% 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 nine months ended
September 30, 2002 were $1,184,000, a decrease of $2,970,000 or
71% 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 nine months ended
September 30, 2002 were $215,000, a decrease of $404,000 or 65%
compared to the same period last year, due to higher volume of
investment banking transactions and more favorable market
conditions during 2001.
Interest income of $66,000 for the nine months ended
September 30, 2002 decreased $221,000 or 77% compared to the same
period last year, due to significantly reduced customer margin
account balances and the transfer of customer margin accounts to
NFS during the second quarter of 2002.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
STATEMENT OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30,
2002 COMPARED TO THE NINE MONTHS ENDED SEPTEMBER 30, 2001
(CONTINUED)
Compensation and benefits expense of $5,003,000 for the nine
months ended September 30, 2002 decreased $4,430,000 or 47%
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 $1,729,000 for the
nine months ended September 30, 2002 decreased $235,000 or 12%
compared to last year, due primarily to the reorganization of
various departments and subsidiaries to increase efficiency
partially offset by increased legal costs.
Execution costs of $1,435,000 for the nine months ended
September 30, 2002 decreased $1,795,000 or 56% compared to the
same period last year, primarily due to lower commission and
principal transaction revenues.
Occupancy, communications and systems expense of $1,348,000
for the nine months ended September 30, 2002 increased $257,000
or 24%, compared to the same period last year due primarily to
costs incurred by DMC UK.
For the nine months ended September 30, 2002, the Company
recorded a loss from the sale of K&S of $213,000 and an
unrealized loss on non-marketable securities of $200,000 due to
the impairment of several merchant banking investments made by
the Company in prior years.
The Company recorded a $1,150,500 transition impairment
adjustment of the intangible asset which resulted from the
acquisition of K&S in the first quarter of 2002 in accordance
with Statement of Financial Accounting Standards No. 142,
"Goodwill and Other Intangible Assets." In addition, the Company
recorded a loss from the sale of K&S of $213,000 in the third
quarter of 2002.
Income tax benefit, net was $234,000 for the nine months
ended September 30, 2002. Income tax benefit is comprised of a
current income tax benefit of $513,000 on the loss from
operations for the nine months ended September 30, 2002,
partially offset by a $279,000 reserve for a deferred income tax
asset of questionable realization (see Note 8).
CAPITAL RESOURCES AND LIQUIDITY
Cash and cash equivalents at September 30, 2002 of
$1,075,000 decreased $49,000 from December 31, 2001 primarily due
to losses on operations partially offset by 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. At September 30, 2002, cash and cash
equivalents included $146,000 of clearing deposits held at DMC
UK.
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 under
such lines of credit were collateralized by securities held in
margin accounts of customers. Accordingly, the Company 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 partially
secured by $110,000 of non-marketable investments recorded at
fair value at September 30, 2002. During the quarter ended
September 30, 2002, the Company recorded a $200,000 unrealized
loss on non-marketable securities to reflect the decline in value
of certain portfolio investments. 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.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
CAPITAL RESOURCES AND LIQUIDITY (CONTINUED)
In May 2002, the president of K&S reimbursed the Company for
certain trading losses totaling $102,000, which 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.
The Company is presently exploring various means of raising
capital that may be needed to finance operations. Although the
Company believes it will have sufficient capital to maintain
operations through the end of the current fiscal year, it may not
be able to sustain additional losses over the longer term in the
absence of an additional capital infusion. There can be no
assurance that such capital will be available on favorable terms,
or will be available at all.
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 on 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 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 at their November 21 meeting to determine if
further extension of the Company's waiver of the $1.00 bid
requirement is warranted.
STRATEGIC OUTLOOK
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.
Throughout 2002, management has met with many portfolio
managers and hedge fund analysts to present Fechtor Detwiler, its
capital markets staff and its channel research information and
capabilities. Institutional clients engage Fechtor Detwiler to
provide research information and analysis unencumbered by
investment banking relationships. Since December 2001,
approximately 125 new clients have been added to the Firm's
customer base. Management believes this accomplishment,
especially in view of the world economy, unpredictable trading
volumes and market volatility, validates the quality of the
Firm's 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.
Through August 2002, 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.
Revenues at DMC UK have recently been less than expected,
possibly reflective of market conditions. Continued growth of
revenues and the achievement of profitable operations of DMC UK
is 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 the reduced head count in retail sales professionals.
The Company 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.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
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.
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 continuing operating losses, a possible need to
raise additional capital, conditions affecting revenues, reliance
on key personnel, competition, and regulatory and legal matters
as follows:
Continued Operating Losses. The Company has experienced
operating losses for the past six fiscal quarters and has
recognized additional losses due to impairment of goodwill and
the decline in value of certain of the Company's securities
holdings. These continuing losses have adversely affected the
Company's cash balances and management cannot predict when, and
if, the Company will return to profitability.
Possible Need to Raise Additional Capital. The Company's
operating losses have significantly eroded its cash balances and
the Company may need to raise additional capital to finance its
operations. There can be no assurance that such capital will be
available on favorable terms, or will be available at all.
Conditions Affecting Revenues. Revenues, cash flows and
earnings of the Company have been adversely affected by
volatility in the financial markets and fluctuating economic and
political conditions and continuation of these or other
conditions could produce lower revenues. Also, a decline in
client account balances resulting from changing industry or
economic conditions or the performance of the capital markets
could also adversely affect the Company's revenues, cash flows
and earnings.
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 6. EXHIBITS AND REPORTS ON FORM 8-K.
a.) Exhibits.
The following Exhibit is filed herewith:
99.1 On November 8, 2002, the Company issued a press
release containing its results of operations for
its third quarter ending September 30, 2002.
b.) Reports on Form 8-K
On October 2, 2002, the Company filed a Form 8-K
regarding the divestiture of K&S.
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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
November 8, 2002 /s/ James K. Mitchell
- ----------------- ------------------------------------
Date James K. Mitchell
Chairman and Chief Executive Officer
November 8, 2002 /s/ Stephen D. Martino
- ----------------- ------------------------------------
Date Stephen D. Martino
Chief Financial Officer and
Principal Accounting Officer
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CERTIFICATIONS
I, James K. Mitchell, certify that:
1. I have reviewed this quarterly report on Form 10-Q of
Detwiler, Mitchell & Co.;
2. Based on my knowledge, this quarterly report does not contain
any untrue statement of a material fact or omit to state a
material fact necessary to make the statements made, in light of
the circumstances under which such statements were made, not
misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other
financial information included in this quarterly report, fairly
present in all material respects the financial condition, results
of operations and cash flows of the registrant as of, and for,
the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are
responsible for establishing and maintaining disclosure controls
and procedures (as defined in Exchange Act Rules 13a-14 and 15d-
14) for the registrant and we have:
a) designed such disclosure controls and procedures to
ensure that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's
disclosure controls and procedures as of a date within 90
days prior to the filing date of this quarterly report (the
"Evaluation Date"); and
c) presented in this quarterly report our conclusions about
the effectiveness of the disclosure controls and procedures
based on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have
disclosed, based on our most recent evaluation, to the
registrant's auditors and the audit committee of registrant's
board of directors (or persons performing the equivalent
function):
a) all significant deficiencies in the design or operation
of internal controls which could adversely affect the
registrant's ability to record, process, summarize and
report financial data and have identified for the
registrant's auditors any material weaknesses in internal
controls; and
b) any fraud, whether or not material, that involves
management or other employees who have a significant role in
the registrant's internal controls; and
6. The registrant's other certifying officers and I have
indicated in this quarterly report whether or not there were
significant changes in internal controls or in other factors that
could significantly affect internal controls subsequent to the
date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material
weaknesses.
Date: November 8, 2002
/s/ James K. Mitchell
- ------------------------------------
Chairman and Chief Executive Officer
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CERTIFICATIONS
I, Stephen D. Martino, certify that:
1. I have reviewed this quarterly report on Form 10-Q of
Detwiler, Mitchell & Co.;
2. Based on my knowledge, this quarterly report does not contain
any untrue statement of a material fact or omit to state a
material fact necessary to make the statements made, in light of
the circumstances under which such statements were made, not
misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other
financial information included in this quarterly report, fairly
present in all material respects the financial condition, results
of operations and cash flows of the registrant as of, and for,
the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are
responsible for establishing and maintaining disclosure controls
and procedures (as defined in Exchange Act Rules 13a-14 and 15d-
14) for the registrant and we have:
a) designed such disclosure controls and procedures to
ensure that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's
disclosure controls and procedures as of a date within 90
days prior to the filing date of this quarterly report (the
"Evaluation Date"); and
c) presented in this quarterly report our conclusions about
the effectiveness of the disclosure controls and procedures
based on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have
disclosed, based on our most recent evaluation, to the
registrant's auditors and the audit committee of registrant's
board of directors (or persons performing the equivalent
function):
a) all significant deficiencies in the design or operation
of internal controls which could adversely affect the
registrant's ability to record, process, summarize and
report financial data and have identified for the
registrant's auditors any material weaknesses in internal
controls; and
b) any fraud, whether or not material, that involves
management or other employees who have a significant role in
the registrant's internal controls; and
6. The registrant's other certifying officers and I have
indicated in this quarterly report whether or not there were
significant changes in internal controls or in other factors that
could significantly affect internal controls subsequent to the
date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material
weaknesses.
Date: November 8, 2002
/s/ Stephen D. Martino
- ----------------------------
Chief Financial Officer and
Principal Accounting Officer
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