____________________________________________________________________________
____________________________________________________________________________
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(MARK ONE)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2003
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 Identification No.)
incorporation or organization)
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 May 12, 2003, the registrant had 3,202,356 shares of
common stock, $0.01 par value, issued and outstanding.
____________________________________________________________________________
____________________________________________________________________________
<page>
DETWILER, MITCHELL & CO.
INDEX TO FORM 10-Q
PAGE
----
PART I. - FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statement of Financial Condition at
March 31, 2003 and December 31, 2002...............3
Consolidated Statement of Operations for the
three-month period ended March 31, 2003 and 2002...4
Consolidated Statement of Cash Flows for the
three-month period ended March 31, 2003 and 2002...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..................................14
Item 4. Disclosure Controls and Procedures..................14
PART II. - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K....................16
Signatures...................................................17
Certifications...............................................18
2 of 19
<page>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
DETWILER, MITCHELL & CO.
CONSOLIDATED STATEMENT OF FINANCIAL CONDITION
<table>
<caption>
MARCH 31, DECEMBER 31,
2003 2002
------------ -------------
(UNAUDITED)
ASSETS
<s> <c> <c>
Cash and cash equivalents $ 1,182,935 $ 1,243,655
Security deposits 199,679 199,679
Deposits with clearing organizations (Note 3) 256,000 256,000
Commissions, current income taxes and other receivables 973,439 1,027,377
Non-marketable investments, at fair value 110,000 110,000
Deferred income taxes, net (Note 8) 61,200 190,000
Fixed assets, net 387,458 389,374
Prepaid expenses and other 298,186 339,105
Goodwill (Note 9) 117,385 117,385
------------ ------------
Total Assets $ 3,586,282 $ 3,872,575
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Note payable $ 49,516 $ 99,032
Salaries and commissions payable (Note 6) 665,054 621,200
Accounts payable and accrued liabilities 306,061 379,400
------------ ------------
Total Liabilities 1,020,631 1,099,632
------------ ------------
Contingencies (Notes 5 and 10)
Stockholders' Equity (Notes 3, 7, 8 and 11):
Preferred stock, no par value; 5,000,000 shares
authorized, none issued - -
Common stock, $0.01 par value; 20,000,000 shares
authorized, 3,202,356 and 3,002,356 shares
outstanding at March 31, 2003 and
December 31, 2002, respectively 32,023 30,023
Paid-in-capital 5,401,487 5,177,487
Retained deficit (2,867,859) (2,434,567)
------------ ------------
Total Stockholders' Equity 2,565,651 2,772,943
------------ ------------
Total Liabilities and Stockholders' Equity $ 3,586,282 $ 3,872,575
============ ============
See Accompanying Notes to Consolidated Financial Statements.
3 of 19
</table>
<page>
<table>
<caption>
DETWILER, MITCHELL & CO.
CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31,
------------------------------------
2003 2002
-------------- --------------
(UNAUDITED)
<s> <c> <c>
REVENUES:
Commissions $ 2,281,188 $ 1,612,013
Principal transactions - 20,835
Investment banking - 162,102
Interest and fees 72,224 114,731
-------------- --------------
Total revenues 2,353,412 1,909,681
-------------- --------------
EXPENSES:
Compensation and benefits 1,560,685 1,378,516
General and administrative 535,746 526,442
Occupancy, communication and systems 396,748 393,123
Execution 171,246 157,460
Interest 1,986 31,054
-------------- --------------
Total expenses 2,666,411 2,486,595
-------------- --------------
Loss from continuing operations
before income taxes (312,999) (576,914)
Income tax (expense) benefit, net (Note 8) (120,293) 130,962
-------------- --------------
Loss from continuing operations (433,292) (445,952)
-------------- --------------
Discontinued operations:
Cumulative effect of change in
accounting principle (Note 9) - (1,150,500)
Loss from operations - (168,775)
Income tax benefit - 57,001
Loss from discontinued operations - (1,262,274)
-------------- --------------
Net loss $ (433,292) $ (1,708,226)
============== ==============
Net loss per share (Note 4):
Continuing operations:
Basic $ (0.14) $ (0.17)
Diluted $ (0.12) $ (0.17)
Discontinued operations:
Basic $ - $ (0.48)
Diluted $ - $ (0.47)
Weighted average shares outstanding:
Basic 3,171,245 2,652,357
Diluted 3,539,211 2,684,039
See Accompanying Notes to Consolidated Financial Statements.
4 of 19
</table>
<page>
<table>
<caption>
DETWILER, MITCHELL & CO.
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31,
------------------------------------
2003 2002
-------------- --------------
(UNAUDITED)
<s> <c> <c>
CASH FLOWS FROM OPERATING ACTIVITIES:
Loss from continuing operations $ (433,292) $ (445,952)
Loss from discontinued operations - (1,262,274)
Adjustments to reconcile net loss to net
cash provided by (used in) operating activities:
Depreciation and amortization 53,110 54,973
Impairment and reduction of goodwill - 1,150,500
Unrealized gain on non-marketable investment - (28,500)
Deferred income taxes 128,800 -
Changes in:
Commissions, current income taxes and other receivables 53,938 (174,615)
Deposits with clearing organizations - (389,000)
Due from customers - 3,002,063
Securities borrowed - 387,600
Prepaid expenses and other 40,919 (321,616)
Due to customers - (655,985)
Payables to brokers, dealers and clearing organizations - (1,406,133)
Salaries and commissions payable 43,854 63,657
Accounts payable and accrued liabilities (73,339) 33,299
-------------- --------------
Net cash provided by (used in) operating activities (186,010) 8,017
-------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of non-marketable investment - (25,000)
Proceeds from sales of marketable investments - 31,995
Capital expenditures (51,194) (5,869)
-------------- --------------
Net cash provided by (used in) investing activities (51,194) 1,126
-------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Decrease in note payable (49,516) (250,000)
Proceeds from sale of common stock 226,000 -
-------------- --------------
Net cash provided by (used in) financing activities 176,484 (250,000)
-------------- --------------
Net decrease in cash and cash equivalents (60,720) (240,857)
Cash and cash equivalents at beginning of period 1,243,655 1,135,218
-------------- --------------
Cash and cash equivalents at end of period $ 1,182,935 $ 894,361
============== ==============
Cash Payments:
Interest expense $ 1,986 $ 31,055
============== ==============
Income taxes $ - $ -
============== ==============
See Accompanying Notes to Consolidated Financial Statements.
5 of 19
</table>
<page>
DETWILER, MITCHELL & CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1. ORGANIZATION
Detwiler, Mitchell & Co. (the "Company") is the holding
company for its three principal operating subsidiaries: Fechtor,
Detwiler & Co., Inc., ("Fechtor Detwiler" or the "Firm") 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., the
Company's specialist firm, was sold on September 30, 2002 and is
reported as a discontinued operation.
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.
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.
Marketable and Non-Marketable Investments - 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 and payables are reported in the statement
of financial condition at fair value.
Salaries and Commissions Payable - Capital markets employees
are paid a guaranteed salary with bonuses payable for commissions
generated in excess of guaranteed salaries. Bonus payments are
deferred with 75% being paid annually and the remaining 25% paid
over a three-year vesting period beginning the following year.
Deferred bonuses will be forfeited by any employee upon
termination.
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 are recorded for future tax
consequences attributable to differences between the financial
statement carrying amounts of assets and their respective tax
bases. Deferred income tax assets are measured using enacted
income tax rates and 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
DETWILER, MITCHELL & CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
NOTE 3. REGULATORY NET CAPITAL
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
$100,000. At March 31, 2003, Fechtor Detwiler's net capital was
$795,000, which is $695,000 in excess of its minimum net capital
requirement of $100,000.
Fechtor Detwiler is a fully disclosed broker dealer with
National Financial Services LLC ("NFS"), a wholly owned
subsidiary of Fidelity Investments. Fechtor Detwiler has agreed
with NFS to maintain minimum net capital of $750,000 through June
30, 2003, and $1,000,000 thereafter. 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 per share data and weighted average common
shares outstanding follows:
<table>
<caption>
FOR THE THREE MONTHS
ENDED MARCH 31,
------------------------------
2003 2002
------------ --------------
<s> <c> <c>
Loss from:
Continuing operations $ (433,292) $ (445,952)
Discontinued operations - (1,262,274)
------------ --------------
Net loss $ (433,292) $ (1,708,226)
============ ==============
Net loss per share:
Basic
Continuing operations $ (0.14) $ (0.17)
============ ==============
Discontinued operations $ - $ (0.48)
============ ==============
Diluted
Continuing operations $ (0.12) $ (0.17)
============ ==============
Discontinued operations $ - $ (0.47)
============ ==============
Weighted average common
shares outstanding:
Basic 3,171,245 2,652,357
Incremental shares assumed outstanding
from exercise of stock options 367,966 31,682
------------ --------------
Diluted 3,539,211 2,684,039
============ ==============
</table>
7 of 19
<page>
DETWILER, MITCHELL & CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
NOTE 5. CONTINGENCIES
The Company from time to time is subject to legal
proceedings and claims which arise in the ordinary course of its
business. Management believes that resolution of these matters
will not have a material adverse effect on the Company's results
of operations or financial condition.
NOTE 6. SALARIES AND COMMISSIONS PAYABLE
Salaries and commissions payable at March 31, 2003 and
December 31, 2002 consisted of the following:
<table>
<caption>
2003 2002
-------- --------
<s> <c> <c>
Capital markets - short term $351,455 $209,997
Capital markets - long term 113,372 54,426
Retail and independent 141,966 284,217
Salaries 58,261 72,560
-------- --------
$665,054 $621,200
======== ========
</table>
Effective December 1, 2001, a new compensation plan was implemented at
Fechtor Detwiler with the following major provisions: payouts to
institutional salesmen, research analysts and traders decreased from a
combined 62% to 48% (a 23% reduction); execution costs and certain
direct sales expenses are shared by employees and the Firm; employees
are paid a guaranteed salary; bonuses earned in excess of the guaranteed
salary are deferred with 75% being paid annually on a staggered basis
(by department) and 25% paid over a three-year vesting period beginning the
following year. Deferred bonuses will be forfeited by any employee upon
termination. Additionally, several institutional salesmen, research
analysts, and trading employees executed an employment and non-compete
agreement with the Firm in consideration for significant stock option
grants and the aforementioned restructured compensation plan. Such plan
has increased working capital of the Company by reducing payouts and
deferring a portion of variable compensation. Accordingly, deferred
compensation totaling $726,000 and $547,000 is payable under the three-year
vesting provisions of the bonus plan at March 31, 2003 and December 31, 2002,
respectively. At March 31, 2003 and December 31, 2002, $113,372 and $54,426,
respectively, of such deferred compensation was amortized to compensation
expense in accordance with the vesting provisions of the bonus plan.
NOTE 7. STOCKHOLDERS' EQUITY
On January 16, 2003, the Company sold 200,000 newly issued
shares of common stock to Mr. James Graves, the Company's Vice
Chairman, in a private placement at a price of $1.13 per share
representing the closing price per share on that date.
NOTE 8. INCOME TAXES
In accordance with Statement of Financial Accounting
Standards No. 109, Accounting for Income Taxes, the Company
established a valuation reserve of $241,000 during the quarter
ended March 31, 2003, of which $128,800 related to the deferred income
tax asset recorded at December 31, 2002 and $112,000 related to the current
income tax benefit recorded for the quarter ended March 31, 2003.
The valuation reserve reflects the impact of the operating loss incurred
for the quarter ended March 31, 2003, as compared to the income from operations
reported by the Company for the quarter ended December 31, 2002,
charges incurred in April 2003 from the sale of the lease and
write-off of certain fixed assets by DMC UK in April 2003 and
early retirement compensation and benefits as further discussed
in Note 10, Subsequent Events, to the financial statements
included herein.
8 of 19
<page>
DETWILER, MITCHELL & CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
NOTE 8. INCOME TAXES (CONTINUED)
Under existing accounting rules, the Company may not record
income tax benefits from operating losses incurred in 2003 and
later periods until it is more likely than not that such tax
assets will be realized.
Additionally, in May 2003, certain employees are expected to
exercise stock options which will have the effect of charging-off
the related deferred income tax asset remaining at March 31,
2003.
NOTE 9. 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.
NOTE 10. SUBSEQUENT EVENTS
On April 3, 2003, the Company completed the sale and related
assignment of its long-term lease for London office space used by
DMC UK, paying approximately $300,000 to a third party to
complete the transaction. The Company will incur an additional
charge of approximately $90,000 for the write-off of certain
furniture, equipment and leasehold improvements and other related
costs in connection with the transaction. DMC UK will, however,
continue its institutional sales operations in the UK with a
single institutional sales employee.
In April 2003, the Company entered into a settlement
agreement with the defendant in a legal matter and received a
$100,000 settlement payment. The settlement payment will be
recorded by the Company as a reduction of legal expense in the
second quarter of 2003. Additionally, in April 2003, the
Company entered into a verbal settlement agreement with a
plaintiff in a legal matter, which resulted in a charge to legal
expense of $25,000 in April 2003.
In April 2003, the Company recorded a liability of $95,000
related to early retirement compensation and benefits.
NOTE 11. NASDAQ LISTING REQUIREMENTS
The Nasdaq SmallCap Market requires a company to maintain,
among other things, a minimum stockholders' equity of $2,500,000
to remain listed. As a result of the impact of the subsequent
events described in Note 10, total stockholders' equity at April
30, 2003 had declined by approximately $400,000 from $2,565,651
at March 31, 2003. Should the Company be unable to achieve and
maintain the minimum stockholders equity requirement, Nasdaq may
remove the Company from continued listing status and its common
shares would be traded on the Over the Counter Bulletin Board.
9 of 19
<page>
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., ("Fechtor Detwiler" or the "Firm") 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., the
Company's specialist firm, was sold on September 30, 2002 and is
reported as a discontinued operation.
STATEMENT OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 2003
COMPARED TO THE THREE MONTHS ENDED MARCH 31, 2002
Net loss for the three-month period ended March 31, 2003 was
$433,000 or $0.14 per share basic and $0.12 per share diluted on
3,171,000 basic and 3,539,000 diluted weighted average shares
outstanding. Net loss was $1,708,000 for the three-month period
ended March 31, 2002 or $0.65 per share - basic and $0.64 diluted
on 2,652,000 basic and 2,684,000 diluted weighted average shares
outstanding. Loss from continuing operations for the three-month
period ended March 31, 2002 was $446,000 or $0.17 basic and
diluted. Loss from discontinued operations for the three-month
period ended March 31, 2002 was $1,262,000 or $0.48 per share
basic and $0.47 per share diluted.
Total revenues of $2,353,000 for the three-month period
ended March 31, 2003 increased $443,000 or 23% compared to
revenues of $1,910,000 for the same period last year. The
increase primarily results from greater institutional commission
revenues, partially offset by lower retail revenues from adverse
market conditions and sharply reduced investment banking
revenues.
Commission revenues of $2,281,000 for the three-month period
ended March 31, 2003 increased $669,000 or 42% compared to the
same period last year primarily due to greater institutional
revenues, partially offset by sharply reduced investment banking
revenues, lower retail revenues from fewer retail sales
representatives and lower trading volumes and from adverse market
conditions.
The Company had no principal transaction revenues for the
three-month period ended March 31, 2003 compared to $21,000 the
same period last year. The decrease is principally due to the
cessation of market making activities.
The Company had no investment banking revenues for the three-
month period ended March 31, 2003 compared to $162,000 for the
same period last year. In 2003, the Company sharply reduced its
investment banking efforts due to market conditions.
Interest and fees of $72,000 for the three-month period
ended March 31, 2003 decreased $43,000 or 37% compared to the
same period last year due principally to reduced customer margin
account balances and the transfer of customer margin account
balances to NFS in April 2002.
Compensation and benefits expense of $1,561,000 for the
three-month period ended March 31, 2003 increased $182,000 or 13%
compared to the same period last year. The increase is primarily
due to increased commission payments, partially offset by reduced
investment banking compensation.
General and administrative expense of $536,000 for the three-
month period ended March 31, 2003 increased $10,000 or 2%
compared to the same period last year. The increase is primarily
due to increased legal and accounting fees and insurance premiums
partially offset by lower consulting costs.
Occupancy, communications and systems expense of $397,000
for the three-month period ended March 31, 2003 increased $4,000
compared to the same period last year primarily due to higher
telephone and other communications costs.
10 of 19
<page>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
STATEMENT OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 2003
COMPARED TO THE THREE MONTHS ENDED MARCH 31, 2002 (CONTINUED)
Execution costs of $171,000 for the three-month period ended
March 31, 2003 increased $14,000 or 9% compared to the same
period last year primarily due to trading costs associated with
increased commission revenues.
In the first quarter of 2002, a $1,151,000 transition
impairment adjustment was recorded against the intangible asset
that resulted from the acquisition of K&S in accordance with
Statement of Financial Accounting Standards No. 142, "Goodwill
and Other Intangible Assets."
Income tax expense, net was $120,293 for the three-month
period ended March 31, 2003 compared to an income tax benefit of
$188,000 for the same period last year. The income tax expense
in 2003 results from the establishment of a valuation reserve of
$128,800 on the deferred income tax asset at December 31, 2002.
The income tax benefit in 2002 results from the loss from
continuing and discontinued operations.
Additionally, the net loss for the quarter ended March 31,
2003 does not reflect any federal income tax benefit. Further,
should the Company report future pre-tax earnings, such earnings
will not result in any federal income tax expense until the net
operating loss carry-forwards of the Company have been exhausted.
Therefore, the financial statement impact of the aforementioned
income tax accounting will result in higher operating leverage of
future profitability.
CAPITAL RESOURCES AND LIQUIDITY
Cash and cash equivalents at March 31, 2003 was $1,183,000
compared to $1,244,000 at December 31, 2002. The decrease of
cash was primarily due to the loss incurred for the first quarter
of 2003. At March 31, 2003, cash and cash equivalents included a
$146,000 clearing deposit held on behalf of DMC UK, which will be
reduced to $60,000 in April 2003 thereby increasing available
working capital.
In January 2003, the Company sold 200,000 newly issued
common shares in a private placement to the Company's Vice
Chairman, Mr. James Graves, at $1.13 per share, increasing total
stockholders' equity by $226,000.
In April 2003, two significant events occurred with respect
to liquidity. The first event was the collection of a $381,000
current federal income tax receivable which significantly
enhanced the Company's cash balances. The second event was the
sale of the long term lease for office space used by DMC UK which
resulted in a cash expenditure and expense of approximately
$300,000 to a third party to complete the transaction. The sale
of the lease is expected to eliminate all recurring occupancy
costs in the UK and will save approximately $20,000 a month in
fixed occupancy and related charges at DMC UK.
In April 2003, the Company entered into a settlement
agreement with a defendant in a legal matter and received a
$100,000 settlement payment, which will be recorded by the
Company as a reduction of legal expense in the second quarter of
2003. Additionally, the Company entered into a settlement
agreement with a plaintiff in a legal matter, which resulted in a
charge to legal expense of $25,000 in April 2003.
In April 2003, the Company recorded a liability of $95,000
related to early retirement compensation and benefits.
The Company continues to explore 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. Further, there can be
no assurance that such capital will be available on favorable
terms, or will be available at all.
11 of 19
<page>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
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 further reduced or additional capital can be secured
during these uncertain financial market conditions.
Retail commission revenues have been negatively impacted by
the continued market uncertainty, now three years in length, and
the reduced head count of retail sales professionals. The
Company has repositioned 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.
SIGNIFICANT ACCOUNTING POLICIES
The Company's consolidated financial statements are prepared
in accordance with accounting principles generally accepted in
the United States of America, or "GAAP," and prevailing practices
within the financial services industry. The preparation of
consolidated financial statements requires management to make
judgments involving significant estimates and assumptions, in the
application of certain accounting policies, about the effects of
matters that are inherently uncertain. These estimates and
assumptions, which may materially affect the reported amounts of
certain assets, liabilities, revenues and expenses, are based on
information available as of the date of the financial statements,
and changes in this information over time could materially impact
amounts reported in the financial statements as a result of the
use of different estimates and assumptions. Certain accounting
policies, by definition, have a greater reliance on the use of
estimates and assumptions, and could produce results materially
different from those originally reported.
Based on the sensitivity of financial statement amounts to
the methods, estimates and assumptions underlying reported
amounts, the most significant accounting policies followed by the
Company have been identified by management as the determination
of the valuation of non-marketable investments, accounting for
goodwill and accounting for income taxes. These policies require
the most subjective or complex judgments, and as such could be
most subject to revision as new information becomes available.
The following is a brief description of our most significant
accounting policies. An understanding of the judgments
underlying these accounting policies is essential in order to
understand our reported financial condition and results of
operations. These significant accounting policies are discussed
in the Summary of Significant Accounting Policies section of this
discussion and analysis, as well as in Note 2 of the "Notes to
Consolidated Financial Statements" included in this Report.
ACCOUNTING FOR INCOME TAXES
The overall tax position of the Company is complex and
requires careful analysis to estimate the expected
realization of income tax assets. Realization of deferred
tax assets, including foreign tax credits, receivables from
carrybacks to prior taxable periods, levels of future
taxable income, and the achievement of tax planning
strategies. The determination of whether tax assets will be
realized involves estimates and assumptions about matters
that are inherently uncertain, and unanticipated events or
circumstances could cause actual results to differ from
these estimates. Management continually monitors and
evaluates the impact of current events and circumstances on
the estimates and assumptions used in the recognition of
deferred tax assets and the related tax positions.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
VALUATION OF NON-MARKETABLE INVESTMENTS
Investments in private companies are accounted for at
fair value. These investments do not trade on established
exchanges and, accordingly, their fair value is not readily
determinable. Accordingly, management judgment is involved
in the determination of the value of individual investments.
The estimates and assumptions used by management to evaluate
an investment's fair value are impacted by many factors.
These factors include the Company's financial condition,
its earnings capacity, prospects for development, as well as
the overall condition of the economy and its impact on the
capital markets. Gains and losses related to these
investments are recorded in the statement of operations.
ACCOUNTING FOR GOODWILL
On January 1, 2002, the Company adopted Statement of
Financial Accounting Standards, or "SFAS," No. 142,
"Goodwill and Other Intangible Assets." Under the new
standard, goodwill, including that acquired before initial
application of the standard, is no longer amortized but is
tested for impairment at least annually. Accordingly, on an
annual basis or as circumstances warrant, management reviews
goodwill and evaluates events or other developments that may
indicate impairment in the carrying amount. The evaluation
methodology for potential impairment is inherently complex
and involves significant management judgment in the use of
estimates and assumptions for determining the fair value of
a reporting unit. If the carrying amount of the reporting
unit exceeds the fair value, then the Company compares the
implied fair value of the goodwill to its carrying amount.
If the carrying amount of goodwill exceeds its implied fair
value, then an impairment loss is recognized.
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 and Other Costs. The Company has
experienced operating losses for six of the last seven fiscal
quarters and has recognized additional losses due to impairment
of goodwill, the decline in value of certain of the Company's
securities holdings and the sale of its long-term lease for
London office space used by DMC UK. These operating losses and
other charges have adversely affected the Company's cash
balances. Accordingly, management cannot predict when, or if,
the Company will return to long-term profitability.
Possible Need to Raise Additional Capital. The Company's
losses have significantly eroded its cash balances and the
Company may need to raise additional capital to finance its
operations. The Company raised $226,000 in capital in January
2003 and the Company believes it will have sufficient capital to
maintain operations through the end of the current fiscal year.
However, it may not be able to sustain additional losses over the
longer term. There can be no assurance that additional capital
will be available in future periods on favorable terms, or will
be available at all.
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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
(CONTINUED)
The Nasdaq SmallCap Market requires a company to maintain,
among other things, a minimum stockholders' equity of $2,500,000
to remain listed. As a result of the impact of the subsequent
events described in Note 10, total stockholders' equity at April
30, 2003 had declined by approximately $400,000 from $2,565,651
at March 31, 2003. Should the Company be unable to achieve and
maintain the minimum stockholders equity requirement, Nasdaq may
remove the Company from continued listing status and its common
shares would be traded on the Over the Counter Bulletin Board.
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 research analysts, institutional and retail
brokers, traders 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.
ITEM 4. DISCLOSURE CONTROLS AND PROCEDURES
Our management, including our Chief Executive Officer and
Chief Financial Officer, does not expect that our disclosure
controls or our internal controls will prevent all error and all
fraud. A control system, no matter how well conceived and
operated, can provide only reasonable, not absolute, assurance
that the objectives of the control system are met. Further, the
design of a control system must reflect the fact that there are
resource constraints, and the benefits of controls must be
considered relative to their costs. Because of the inherent
limitations in all control systems, no evaluation of controls can
provide absolute assurance that all control issues and instances
of fraud if any, within the Company have been detected. These
inherent limitations include the realities that judgments in
decision-making can be faulty, and that breakdowns can occur
because of simple error or mistake. Additionally, controls can
be circumvented by the individual acts of some persons, by
collusion of two or more people, or by management override of the
control. The design of any system of controls also is based in
part upon certain assumptions about the likelihood of future
events, and there can be no assurance that any design will
succeed in achieving its stated goals under all potential future
conditions; over time, control may become inadequate because of
changes in conditions, or the degree of compliance with the
policies or procedures may deteriorate. Because of the inherent
limitations in a cost-effective control system, misstatements due
to error or fraud may occur and not be detected.
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ITEM 4. DISCLOSURE CONTROLS AND PROCEDURES (CONTINUED)
The CEO/CFO evaluation of our disclosure controls and our
internal controls included a review of the controls' objectives
and design, the controls' implementation and the effect of the
controls on the information generated for use in this Quarterly
Report. In the course of the controls evaluation, we sought to
identify data errors, controls failures or acts of fraud and to
confirm that appropriate corrective action, including process
improvements, were being undertaken. This type of evaluation
will be done on a quarterly basis so that the conclusions
concerning controls effectiveness can be reported in our
Quarterly Reports on Form 10-Q and Annual Report on Form 10-K.
Consistent with our past practices, our internal controls are
also evaluated by personnel in our finance organization and by
our independent accountants in connection with their audit and
review activities. The overall goals of these various evaluation
activities are to monitor our disclosure controls and our
internal controls and to make modifications as necessary; our
intent in this regard is that the disclosure controls and the
internal controls will be maintained as dynamic systems that
change (including with improvements and corrections) as
conditions warrant.
Among other matters, we sought in our evaluation to
determine whether there were any "significant deficiencies" or
"material weaknesses" in the Company's internal controls, or
whether the Company had identified any acts of fraud involving
personnel who have a significant role in the Company's internal
controls. This information was important both for the controls
evaluation generally and because Items 5 and 6 in the Section 302
Certifications of the CEO and CFO require that the CEO and CFO
disclose that information to our Board's Audit Committee and to
our independent accountants and to report on related matters in
this section of the Quarterly Report.
Our review of our internal controls was made within the
context of the relevant professional auditing standards defining
"internal controls," "significant deficiencies," and "material
weaknesses." "Internal controls" are processes designed to
provide reasonable assurance that our transactions are properly
authorized, our assets are safeguarded against unauthorized or
improper use, and our transactions are properly recorded and
reported, all to permit the preparation of our financial
statements in conformity with generally accepted accounting
principles. "Significant deficiencies" are referred to as
"reportable conditions," or control issues that could have a
significant adverse effect on the ability to record, process,
summarize and report financial data in the financial statements.
A "material weakness" is a particularly serious reportable
condition where the internal control does not reduce to a
relatively low level the risk that misstatements caused by error
or fraud may occur in amounts that would be material in relation
to the financial statements and not be detected within a timely
period by employees in the normal course of performing their
assigned functions. As part of our internal controls procedures,
we also address other, less significant control matters that we
or our auditors identify, and we determine what revision or
improvement to make, if any, in accordance with our on-going
procedures.
CONCLUSIONS
Our CEO and CFO have, within 90 days of the date of this
report, reviewed our process of gathering, analyzing and
disclosing information that is required to be disclosed in our
periodic reports (and information that, while not required to be
disclosed, may bear upon the decision of management as to what
information is required to be disclosed) under the Exchange Act
of 1934, including information pertaining to the condition of,
and material developments with respect to, our business,
operations and finances. Based on this evaluation, our CEO and
CFO have concluded that our process provides for timely
collection and evaluation of information that may need to be
disclosed to investors.
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PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
a.) Exhibits.
None.
b.) Reports on Form 8-K
(1) On April 7, 2003, the Company filed a Form 8-K
reporting the sale of the lease of space occupied
by Detwiler, Mitchell & Co. (UK) Limited.
(2) On May 14, 2003, the Company filed a Form 8-K
reporting the issuance of a press release
containing the results of operations for the first
quarter ended March 31, 2003, as required by the
Sarbanes Oxley Act of 2002.
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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
May 14, 2003 /s/ James K. Mitchell
- ------------ -------------------------------------
Date James K. Mitchell
Chairman and Chief Executive Officer
May 14, 2003 /s/ Stephen D. Martino
- ------------ -------------------------------------
Date Stephen D. Martino
Chief Financial Officer and
Principal Accounting Officer
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CERTIFICATION
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 officer 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 officer 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 officer 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: May 14, 2003
/s/ James K. Mitchell
- ------------------------------------
Chairman and Chief Executive Officer
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CERTIFICATION
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 officer 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 officer 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 officer 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: May 14, 2003
/s/ Stephen D. Martino
- ------------------------------
Chief Financial Officer and
Principal Accounting Officer
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