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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
(Mark One)
(X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1999
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
FECHTOR, DETWILER, MITCHELL & CO.
(Exact name of registrant as specified in its charter)
Delaware 95-2627415
----------------------------- -----------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
225 Franklin Street
Boston, MA 02110
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(Address of principal executive (Zip Code)
offices)
Registrant's telephone number, including area code (617) 451-0100
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which it is registered
Common Stock NASDAQ
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, Par Value $.01 Per Share
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
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
The aggregate market value of the voting stock held by non-affiliates of the
registrant as of March 8, 2000 was approximately $9,701,926 representing
approximately 6,605,342 common shares.
APPLICABLE ONLY TO CORPORATE REGISTRANTS:
On March 29, 2000, the registrant had 12,916,451 shares of common stock,
$0.01 par value, issued and 12,781,251 shares of common stock outstanding.
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PART I
Item 1. Description of Business
General
On August 30, 1999, Fechtor, Detwiler & Co. combined with JMC Group, Inc. to
form Fechtor, Detwiler, Mitchell & Co. (the "Company"). The consolidated
financial statements of Fechtor, Detwiler, Mitchell & Co. include its two
operating subsidiaries: Fechtor, Detwiler & Co., Inc., an investment banking
and brokerage company headquartered in Boston, MA, and James Mitchell & Co., a
financial services company located in San Diego, CA. For accounting purposes,
JMC Group, Inc. is the acquired firm and is included in the 1999 financial
statements beginning September 1, 1999. Financial data for periods prior to
1999 represent that of Fechtor, Detwiler & Co., Inc.
Fechtor, Detwiler & Co., Inc.
Fechtor, Detwiler & Co., Inc. ("Fechtor Detwiler" or the "Firm") is a New
England regional securities brokerage and investment banking firm
headquartered in Boston, Massachusetts. The Firm was founded in 1962 as a sole
proprietorship and was incorporated in 1971. Fechtor Detwiler currently has
one office in Massachusetts and three offices in Connecticut. The Firm's
business activities include institutional and retail securities brokerage,
trading in equity securities as a market maker, focused equity research,
participation in the underwriting of corporate equity securities (including
primary public offerings and underwritten secondary offerings), private
placements, merger and acquisition activities and corporate advisory services.
Fechtor Detwiler's principal emphasis for research, market-making activities
and investment banking is on companies with capitalizations of less than $1
billion, which are usually, but not always, traded in the NASDAQ market
system. Institutional sales are conducted from the Boston office and retail
sales are conducted through registered private client representatives in all
four offices. Investment banking and trading activities are conducted from the
Boston office.
Retail Brokerage
Revenues from retail brokerage activities are generated primarily through
customer purchases and sales of equity securities. The Firm also executes
orders for bonds, the purchase of mutual funds and other securities.
Commissions are charged on both listed and over-the-counter agency
transactions. When Fechtor Detwiler executes over-the-counter transactions as
a dealer, it charges a markup or markdown in lieu of commissions.
Retail commissions are charged in accordance with a commission schedule
comparable to full-service retail brokerage firms. Commission discounts may be
granted on certain transactions. The Firm does not attempt to compete with the
commission rates charged by brokerage firms generally referred to as "discount
brokers." The largest portion of Fechtor Detwiler's retail clients are
individuals who reside in the northeastern United States. The Firm is not
dependent on any single client for its revenues.
Fechtor Detwiler provides margin accounts which allow the customer to pay
less than the full cost of securities purchased, with the balance provided by
the Firm as a loan secured by the securities purchased. Margin loans are
subject to the requirements of the Board of Governors of the Federal Reserve
System and Fechtor Detwiler's internal policies. In permitting customers to
purchase securities on margin, Fechtor Detwiler bears the risk of a market
decline which could reduce the value of its collateral below customers'
indebtedness.
In addition to securities brokerage and margin lending services, the Firm
also provides its retail clients specialized financial services including
equity research, individual retirement accounts and money market products.
Institutional Brokerage
Fechtor Detwiler executes securities transactions for institutional
investors such as investment partnerships, mutual funds, insurance companies,
and pension and profit sharing plans. Institutional investors normally
2
purchase and sell securities in large quantities which require special
marketing and trading expertise. Fechtor Detwiler believes that a significant
portion of its institutional brokerage commissions are received as a
consequence of providing such institutions with research it develops from
industry channels as well as research on specific equity issuers. The Firm
provides its institutional brokerage services to a nationwide client base.
Transactions for institutional investors are executed with the Firm acting
as agent or as principal with commissions negotiated with its institutional
customers.
Market-Making and Principal Transactions
Fechtor Detwiler actively engages in trading as principal in various phases
of the over-the-counter securities business. To facilitate trading by its
customers, the Firm buys, sells and maintains inventories of certain common
stocks in order to "make markets" in those securities. Revenues from principal
transactions, which include trading profits or losses and sales credits,
depend upon the general trend of prices, the level of activity in the
securities markets, the skill of employees engaged in market-making and the
size of the inventories. Trading as principal requires the commitment of
capital and creates an opportunity for profit and the risk of loss due to
market fluctuations.
In executing customers' orders to buy or sell NASDAQ stocks in which the
Firm makes a market, a security may be sold to, or purchased from, its
customers at a competitive price, plus or minus a mark-up or mark-down.
Alternatively, Fechtor Detwiler may act as an agent and execute a customer's
purchase or sell order with another broker-dealer which acts as a market-
maker, at the best inter-dealer market price, in which case a commission is
charged.
Investment Banking
Fechtor Detwiler participates in both public offerings and private corporate
placements as a manager or as a member of an underwriting syndicate or selling
group. Corporate offerings principally involve common stock or other equity
securities issued by corporations. Fechtor Detwiler markets private offerings
of corporate securities and provides valuation and financial consulting
services for mergers, acquisitions, stock option issuances and other corporate
purposes.
Underwriting activities, together with its selling group participation, are
an important source of securities for distribution to its clients because of
the availability of a large amount of securities for distribution and fees
earned in connection with such offerings.
Participation in an underwriting syndicate or selling group involves both
economic and regulatory risks. An underwriting participant may incur losses if
it is unable to resell the securities it is committed to purchase, or if it is
forced to liquidate its commitment at less than the agreed purchase price. In
addition, under federal securities laws, other statutes and court decisions,
an underwriting participant or selling group member may be subject to
substantial liability for material misstatements or omissions in prospectuses
and other communications with respect to such offerings.
Merchant Banking
The Company has recently engaged in merchant banking activities to include
equity investments in private placements as well as direct equity investments.
Investment considerations will include those perceived to be strategic for the
firm or where a sound investment opportunity exists. All merchant banking
investments presented for consideration are reviewed and approved for funding
by the operating committee of the Company.
Research Services
Fechtor Detwiler's research activities are focused on industry channels of
distribution and on individual companies with particular emphasis on companies
with capitalization of less than $1 billion. The Firm conducts research on
many companies which may not be covered by research analysts at other firms.
Fechtor Detwiler believes these companies may have potential for significant
growth. Research services are very important to the revenue-generating
activities of the Firm, including institutional and retail brokerage, market
making, and investment banking activities.
3
Operations
Fechtor Detwiler clears its own securities transactions utilizing a
brokerage accounting system provided by a third-party service bureau. Customer
transactions are recorded daily on a settlement date basis; generally three
business days after the trade date for equity and debt transactions and one
business day after the trade date for option transactions. The Firm's
compliance department monitors customer transactions to ensure they are
conducted in accordance with applicable laws, rules, regulations and internal
policies. Periodic reviews of internal controls are conducted and
administrative and operations personnel meet frequently to review operational
conditions.
James Mitchell & Co.
James Mitchell & Co. ("JMC") was founded in 1983 and is located in San
Diego, California. Historically, JMC provided annuity, insurance and mutual
fund sales and support services through financial institutions and the related
servicing of products previously sold through its subsidiaries which were
structured marketing organizations that sold tax-advantaged annuities,
insurance products and mutual funds to customers of financial institutions.
JMC earns fees based on the accumulated asset value of the client accounts
being serviced. JMC also solicits existing customers to replace older products
having lower rates of return with sales of new products having more
competitive returns. During 1999, the average monthly accumulated value of
assets serviced by JMC was approximately $225 million.
Competition
The Company is engaged in the highly competitive securities brokerage and
financial services businesses competing with regional securities brokerage
firms, large national and international securities firms, and discount
brokerage firms. To an increasing degree, the Company also competes for
various segments of the financial service business or with other institutions
such as commercial banks, mutual fund companies and investment advisory and
financial planning firms. Legal and regulatory changes may allow commercial
banks and their holding companies to compete more directly in the brokerage
and investment banking businesses which will increase competition for all
brokerage firms. In addition to the competition for retail investment
business, there is substantial competition among firms in the securities
industry to attract and retain experienced and productive client
representatives.
Large competitors are able to advertise their products and services on a
national or regional basis and have a far greater number and variety of
distribution outlets for their products. Discount brokerage firms market their
services through aggressive pricing and promotional efforts. Most competitors
have much more extensive investment banking activities and, therefore, possess
a securities distribution advantage.
Recent rapid advancements in computing and communications technology are
substantially changing the means by which financial services are delivered.
These changes are providing consumers with more direct access to a wide
variety of financial and investment services, including market information and
on-line trading and account information. Advancements in technology also
create demand for more sophisticated levels of client services which may
entail considerable cost without an offsetting source of revenue. Although the
Company is committed to utilizing technological advancements to provide a high
level of client service, many of its competitors have far greater
technological resources at their disposal.
Regulation
The securities industry in the United States is subject to extensive
regulation under Federal and state laws. The Securities and Exchange
Commission ("SEC") is the Federal agency charged with administration of the
Federal securities laws. Much of the regulation of broker-dealers, however,
has been delegated to self-regulatory organizations, principally the NASD and
the national securities exchanges. These self-regulatory organizations adopt
rules (which are subject to approval by the SEC) which govern the industry.
4
Additional legislation, changes in rules promulgated by the SEC and by self-
regulatory organizations, or changes in interpretations or enforcement of
existing laws and rules, often affect directly the method of operation and
profitability of broker-dealers. The SEC and the self-regulatory organizations
may conduct administrative proceedings which can result in censure, fines,
suspension or expulsion of a broker-dealer, its officers and employees. The
principal purpose of regulation and discipline of broker-dealers is the
protection of clients and the securities markets rather than the protection of
creditors or stockholders of broker-dealers.
One of the most important regulations with which Fechtor Detwiler must
continually comply is SEC Rule 15c3-1, which requires all broker-dealers to
maintain a minimum amount of net capital. These rules, under the alternative
method, prohibit a broker or dealer from engaging in any securities
transactions at a time when its net capital is less than 2% of aggregate debit
items arising from customer transactions. In addition, restrictions may be
imposed on the operations of a broker or dealer if its net capital is less
than 5% of aggregate debit items. At December 31, 1999, Fechtor Detwiler's net
capital exceeded its reserve requirement.
The laws, rules and regulations of the various federal, state and other
regulatory bodies to which the businesses of the Company are subject to are
constantly changing. While the management believes that it is currently in
compliance in all material respects with the laws, rules and regulations
applicable to its businesses, it cannot predict what effect any changes of
such laws or regulations might have.
Employees
As of March 21, 2000, the Company had 68 employees; none of whom are covered
by, or parties to, a collective bargaining agreement. The success of Fechtor,
Detwiler, Mitchell & Co. is highly dependent upon its continuing ability to
hire, train and retain qualified staff. Management considers relations with
its employees to be good.
Item 2. Properties
Fechtor, Detwiler, Mitchell & Co. and Fechtor, Detwiler & Co., Inc. use
office space at 225 Franklin Street, Boston, Massachusetts. The lease for this
space, which contains approximately 15,000 square feet, expires in 2007. The
three branch operations for Fechtor Detwiler located in Connecticut are also
leased.
James Mitchell & Co. uses office space at 9710 Scranton Road, Suite 100, San
Diego, California. The lease for this space, which contains approximately
2,500 square feet, expires in 2002.
Management believes its existing facilities are adequate for near-term
needs.
Item 3. Legal Proceedings
The Company's subsidiary, JMC Investment Services, Inc., a broker-dealer,
("JMCI"), is a defendant in an NASD arbitration regarding the sale of a real
estate limited partnership to a client in 1992 by Spear Rees & Co.
(predecessor to JMCI). Management does not believe that such proceeding will
have a material adverse effect on the Company's financial condition or results
of operations.
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.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of security holders during the fourth
quarter of the fiscal year ended December 31, 1999.
5
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
The Common Stock of Fechtor, Detwiler, Mitchell & Co. (the "Company") is
principally traded in the NASDAQ SmallCap Market ("SCM") under the symbol
FEDM. At March 8, 2000, there were approximately 267 shareholders of record
with approximately 868 beneficial owners. Thirteen broker-dealers are
presently market makers in the Company's common stock on the NASDAQ SCM. The
Company is also listed on the Pacific Exchange ("PCX") under the symbol FDM,
but the trading volume in the Company's common stock on the PCX is not
material.
The following table reflects the high and low sales prices of the Company's
common stock in the NASDAQ markets:
Sales Price
-------------
High Low
------ ------
1999
----
First Quarter............................................... $1.375 $0.750
Second Quarter.............................................. $2.063 $0.844
Third Quarter............................................... $2.000 $0.813
Fourth Quarter.............................................. $1.625 $0.438
1998
----
First Quarter............................................... $1.875 $0.656
Second Quarter.............................................. $1.438 $0.906
Third Quarter............................................... $1.219 $0.500
Fourth Quarter.............................................. $1.250 $0.500
No dividends were paid by the Company during 1999. Future dividends, if any,
will be determined by the Board of Directors based upon profitability, cash
availability and other considerations as deemed appropriate.
Item 6. Selected Financial Data
1999 1998 1997 1996 1995
Years Ended December 31: ----------- ----------- ----------- ----------- -----------
Total revenues......... $15,154,363 $12,079,027 $12,118,371 $ 9,820,236 $ 9,612,492
Total expenses before
settlement and merger
costs................. 14,254,240 12,045,254 12,092,641 9,782,427 9,526,845
Settlement and merger
costs.................. 2,136,931 -- -- -- --
----------- ----------- ----------- ----------- -----------
Income (loss) before
income taxes.......... (1,236,808) 33,773 25,730 37,809 85,647
Income tax (expense)
benefit................ 387,582 (25,792) (21,183) (17,150) (21,230)
----------- ----------- ----------- ----------- -----------
Net income (loss)...... $ (849,226) $ 7,981 $ 4,547 $ 20,659 $ 64,417
=========== =========== =========== =========== ===========
Net income (loss) per
share:
Basic................. $ (0.10) $ 0.00 $ 0.00 $ 0.00 $ 0.01
=========== =========== =========== =========== ===========
Diluted............... $ (0.10) $ 0.00 $ 0.00 $ 0.00 $ 0.01
=========== =========== =========== =========== ===========
Weighted average shares
outstanding........... 8,696,355 6,600,000 6,600,000 6,600,000 6,600,000
=========== =========== =========== =========== ===========
At December 31:
Total assets........... $17,842,355 $10,546,820 $11,371,688 $15,151,057 $14,391,318
Total liabilities...... 9,497,442 8,382,053 9,214,902 12,998,820 12,259,740
Stockholders' equity... 8,344,913 2,164,767 2,156,786 2,152,237 2,131,578
6
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
General
On August 30, 1999, effective September 1, 1999 for accounting purposes,
Fechtor, Detwiler & Co., Inc. (Fechtor Detwiler) sold its operations to JMC
Group, Inc. ("JMCG") and JMCG became the surviving corporation (the "Merger").
Subsequently, JMCG was renamed Fechtor, Detwiler, Mitchell & Co. (the
"Company") and its NASDAQ trading symbol was changed to FEDM. The former
shareholders of Fechtor Detwiler received 6,600,000 common shares of JMCG
representing 52% of the then outstanding common shares at the Merger date. The
shareholder's of JMCG converted 6,166,451 shares to an equal number of shares
of the Company.
The Merger was accounted as a purchase of JMCG by Fechtor Detwiler in a
reverse acquisition. The assets and liabilities of JMCG at the Merger date
were adjusted to their estimated fair values based upon purchase price
allocations. The assets and liabilities of Fechtor Detwiler are reported at
their historical cost basis. In a reverse acquisition, the accounting
treatment differs from the legal form of the transaction, as the continuing
legal parent company (JMCG) is not the acquiror and the historical financial
statements of JMCG become those of Fechtor Detwiler, the accounting acquiror.
Consequently, the presentation of the Company's consolidated financial
statements prior to September 1, 1999 reflects the financial statements of
Fechtor Detwiler. In addition, for periods prior to September 1, 1999,
stockholders' equity of Fechtor Detwiler has been restated retroactively to
reflect the par value of the 6,600,000 common shares received by Fechtor
Detwiler.
Fechtor, Detwiler, Mitchell & Co. is the holding company for its two
operating subsidiaries; Fechtor, Detwiler & Co., Inc., an investment banking
and brokerage firm headquartered in Boston, Massachusetts and James Mitchell &
Co., ("JMC") a financial services company located in San Diego, California.
Statement of Operations for 1999 Compared to 1998
For the year ended December 31, 1999, Fechtor, Detwiler, Mitchell & Co.
reported a net loss of $849,000, or $0.10 per share--basic and diluted,
compared to net income of $8,000 for the year ended December 31, 1998. Results
for 1999 include settlement and merger costs of $2,137,000 and merger related
non-cash compensation expense of $850,000.
Pro forma net income without the settlement and merger costs and non-cash
compensation expense was $1,015,000, or $0.08 per share--diluted, for 1999
compared to $588,000, or $0.05 per share--diluted, for 1998, assuming JMCG was
acquired effective January 1, 1998. Revenues on the same pro forma basis for
1999 were $15,892,000 compared to $14,102,000 for 1998.
Revenues of $15,154,000 for 1999 increased $3,075,000 from revenues of
$12,079,000 for 1998 primarily reflecting increased commission and principal
transaction revenues and revenues from JMCG partially offset by lower
investment banking revenues.
Compensation and benefits of $9,543,000 for 1999 increased $2,044,000
compared to 1998 due to higher variable compensation from the increase in
revenues for 1999, $850,000 of merger related non-cash compensation expense
and to a lesser degree compensation and benefits expense of JMCG for the four-
month period ended December 1999.
General and administrative expenses of $1,641,000 for 1999 increased
$209,000 compared to 1998 from higher professional fees and expenses of JMCG
for the four month period ended December 31, 1999.
Occupancy, communications and systems expense of $1,154,000 for 1999
decreased $195,000 from 1998 due to reduced rent expense for branch offices.
7
Interest expense of $390,000 for 1999 increased $104,000 from 1998 due to
higher average notes payable balances and interest rates associated with
customer margin accounts.
Settlement and merger costs of $2,137,000 for 1999 include costs associated
with the resolution of several pending claims, professional fees and other
costs incurred to complete the Merger.
Income tax benefit of $388,000 for 1999 results from tax benefits associated
with the loss before income taxes after consideration of non-deductible merger
related costs.
Statement of Operations for 1998 Compared to 1997
For the year ended December 31, 1998, the Company reported net income of
$8,000 compared to net income of $5,000 for 1997.
Revenues of $12,079,000 for 1998 decreased slightly from $12,118,000 for
1997 due primarily to lower investment banking revenues.
Compensation and benefits of $7,499,000 for 1998 decreased $142,000 compared
to 1997 due to reduced commission expense on lower 1998 revenues and lower
variable compensation expense.
Occupancy, communications and systems of $1,349,000 for 1998 increased
$69,000 from 1997 due to higher rent expense.
Interest expense of $286,000 for 1998 decreased $117,000 from 1997
reflecting lower average notes payable balances.
Capital Resources and Liquidity
The Company finances its activities primarily from cash generated by
operations and borrowings from its lines of credit. At December 31, 1999, the
Company had assets of $18 million which primarily consisted of cash or assets
readily convertible into cash, principally receivables due from customers.
Cash and cash equivalents at December 31, 1999 of $1,273,000 increased
$699,000 from December 31, 1998. Cash received from the Merger on September 1,
1999 was $4,600,000. On November 17, 1999, notes payable were reduced by
$4,000,000 using the acquired cash.
Fechtor Detwiler has two available lines of credit totaling $10,000,000 with
$3,000,000 outstanding at December 31, 1999. In February 2000, each line of
credit was increased from $5,000,000 to $10,000,000.
On November 16, 1999, the Board of Directors approved a plan to repurchase
up to one million shares of common stock in either open market or privately
negotiated transactions. The timing and number of share repurchases are
determined at management's discretion. At December 31, 1999, 135,200 shares
had been repurchased at a cost of $137,079.
Year 2000 Compliance
The Company did not experience any difficulties related to the Year 2000
problem on December 31, 1999 and management is not aware of any such
difficulties since that date. Operations have not, to date, been adversely
affected by any difficulties experienced by any of our suppliers or customers
in connection with the Year 2000 problem. The Company's Year 2000 Compliance
Plan also addressed issues related to the date February 29, 2000 and
management will continue to monitor our systems for potential difficulties for
the remainder of calendar year 2000. Costs to implement the Year 2000 plan
were not material to the Company.
8
Item 7a. Quantitative and Qualitative Disclosures about Market Risk.
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 Fechtor, 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 Fechtor, Detwiler, Mitchell & Co. and include
conditions affecting revenues, reliance on key personnel, competition, and
regulatory and legal matters.
Conditions Affecting Revenues. Revenues, cash flows and earnings of the
Company may be adversely affected by volatility in the financial markets and
fluctuating economic and political conditions which could produce lower
commissions, and lower trading or investment banking revenues, or by a decline
in client account balances resulting from changing industry or economic
conditions or the performance of the capital markets.
Reliance on Key Personnel. The departure of key personnel, such as skilled
institutional and retail brokers, traders, research analysts or employees
responsible for significant client relationships, could have a material
adverse effect on the results of operations of the Company.
Competition. The Company may experience losses in client account balances
due to the highly competitive nature of its business, the performance of
client accounts compared to the performance of the market generally, the
abilities and reputations of the Company and its ability to attract new client
accounts and retain existing client relationships and changes in the brokerage
business such as the growth of internet security trading and information
availability.
Regulatory and Legal Factors. The Company's business may be affected by
developments or changes in the regulation, legal proceedings and claims
arising from the conduct of its businesses.
9
Item 8. Financial Statements and Supplementary Data
FECHTOR, DETWILER, MITCHELL & CO.
CONSOLIDATED STATEMENT OF FINANCIAL CONDITION
At December 31, 1999 and 1998
1999 1998
----------- -----------
ASSETS
Cash and cash equivalents............................. $ 1,272,826 $ 573,633
Deposits with clearing organizations.................. 352,831 304,459
Receivables from brokers, dealers and clearing
organizations........................................ 1,019,614 3,884
Due from customers.................................... 11,958,104 8,079,811
Securities borrowed................................... 71,200 815,650
Non-marketable securities, at cost.................... 1,000,000 --
Intangible assets, net................................ 129,385 --
Fixed assets, net..................................... 461,467 262,278
Other................................................. 1,576,928 507,105
----------- -----------
Total Assets...................................... $17,842,355 $10,546,820
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Notes payable........................................ $ 3,000,000 $ 3,800,000
Due to customers..................................... 4,218,969 3,312,857
Accounts payable and accrued liabilities............. 2,278,473 1,269,196
----------- -----------
Total Liabilities................................. 9,497,442 8,382,053
----------- -----------
Committments and Contingencies (note 8)
Stockholders' Equity:
Preferred stock, no par value; 5,000,000 shares au-
thorized, none issued............................... -- --
Common stock, $0.01 par value; 20,000,000 shares au-
thorized;
12,916,451 shares in 1999 and 6,600,000 shares in
1998................................................ 129,165 66,000
Paid-in-capital...................................... 7,103,286 --
Retained earnings.................................... 1,249,541 2,098,767
Less treasury stock, at cost; 135,200 shares held in
treasury............................................ (137,079) --
----------- -----------
Total Stockholders' Equity........................ 8,344,913 2,164,767
----------- -----------
Total Liabilities and Stockholders' Equity........ $17,842,355 $10,546,820
=========== ===========
See Accompanying Notes to Consolidated Financial Statements.
10
FECHTOR, DETWILER, MITCHELL & CO.
CONSOLIDATED STATEMENT OF OPERATIONS
For the Years Ended December 31, 1999, 1998 and 1997
1999 1998 1997
----------- ----------- -----------
Revenues:
Commissions.......................... $ 8,078,222 $ 5,689,697 $ 5,540,987
Principal transactions............... 5,501,075 4,531,095 4,264,943
Investment banking................... 246,497 918,999 1,155,265
Interest............................. 930,701 579,343 765,262
Other................................ 397,868 359,893 391,914
----------- ----------- -----------
Total revenues..................... 15,154,363 12,079,027 12,118,371
----------- ----------- -----------
Expenses:
Compensation and benefits............ 9,542,983 7,499,403 7,641,575
General and administrative........... 1,641,036 1,431,920 1,654,287
Floor brokerage, clearing and
commissions......................... 1,516,604 1,479,173 1,114,111
Occupancy, communications and
systems............................. 1,153,904 1,348,541 1,279,303
Interest............................. 390,088 286,217 403,365
Amortization of intangibles.......... 9,625 -- --
Settlement and merger ............... 2,136,931 -- --
----------- ----------- -----------
Total expenses..................... 16,391,171 12,045,254 12,092,641
----------- ----------- -----------
Income (loss) before income taxes.. (1,236,808) 33,773 25,730
Income tax (expense) benefit......... 387,582 (25,792) (21,183)
----------- ----------- -----------
Net income (loss) ................. $ (849,226) $ 7,981 $ 4,547
=========== =========== ===========
Net income (loss) per share--basic and
diluted............................... $ (0.10) $ 0.00 $ 0.00
=========== =========== ===========
Weighted average shares outstanding.... 8,696,355 6,600,000 6,600,000
=========== =========== ===========
See Accompanying Notes to Consolidated Financial Statements.
11
FECHTOR, DETWILER, MITCHELL & CO.
CONSOLIDATED STATEMENT OF CHANGES IN
STOCKHOLDERS' EQUITY
For the Years Ended December 31, 1999, 1998 and 1997
Common Stock
-------------------- Paid-in Retained Treasury
Shares Amount Capital Earnings Stock Total
---------- -------- ---------- ---------- --------- ----------
Balance at January 1,
1997................... 6,600,000 $ 66,000 $ -- $2,086,239 $ -- $2,152,239
Net income............. -- -- -- 4,547 -- 4,547
---------- -------- ---------- ---------- --------- ----------
Balance at December 31,
1997................... 6,600,000 66,000 -- 2,090,786 -- 2,156,786
Net income............. -- -- -- 7,981 -- 7,981
---------- -------- ---------- ---------- --------- ----------
Balance at December 31,
1998................... 6,600,000 66,000 -- 2,098,767 -- 2,164,767
Common stock from
acquisition........... 6,166,451 61,665 6,104,786 -- -- 6,166,451
Issuance of common
stock--other.......... 150,000 1,500 148,500 -- -- 150,000
Capital contribution... -- -- 850,000 -- -- 850,000
Purchase of treasury
stock................. (135,200) -- -- -- (137,079) (137,079)
Net loss............... -- -- -- (849,226) -- (849,226)
---------- -------- ---------- ---------- --------- ----------
Balance at December 31,
1999................... 12,781,251 $129,165 $7,103,286 $1,249,541 $(137,079) $8,344,913
========== ======== ========== ========== ========= ==========
See Accompanying Notes to Consolidated Financial Statements.
12
FECHTOR, DETWILER, MITCHELL & CO.
CONSOLIDATED STATEMENT OF CASH FLOWS
For the Years Ended December 31, 1999, 1998 and 1997
1999 1998 1997
----------- ----------- -----------
Cash Flows from Operating Activities:
Net income (loss)..................... $ (849,226) $ 7,981 $ 4,547
Adjustments to reconcile net income
(loss) to net cash
provided by (used in) operating
activities:
Depreciation and amortization....... 116,676 124,491 147,790
Amortization of intangibles......... 9,625 -- --
Non-cash compensation expense....... 850,000 -- --
Changes in:
Deposits with clearing
organizations.................... (48,372) (6,637) 43,536
Receivables from brokers, dealers
and clearing organizations....... (936,375) 8,826 1,800,599
Due from customers................ (3,878,293) 921,486 1,153,501
Securities owned.................. -- -- 118,146
Securities borrowed............... 744,450 (234,820) 1,149,570
Other assets...................... (370,962) 127,595 (330,448)
Due to customers.................. 906,112 1,950,414 (2,486,222)
Accounts payable and accrued
liabilities...................... 780,654 394,775 (181,702)
----------- ----------- -----------
Net cash provided by (used in)
operating activities........... (2,675,711) 3,294,111 1,419,317
----------- ----------- -----------
Cash Flows from Investing Activities:
Cash acquired from merger.............. 4,613,147 -- --
Loans to employees..................... -- -- (159,714)
Capital expenditures................... (301,164) (94,941) (225,081)
----------- ----------- -----------
Net cash provided by (used in)
investing activities........... 4,311,983 (94,941) (384,795)
----------- ----------- -----------
Cash Flows from Financing Activities:
Decrease in notes payable.............. (800,000) (3,200,000) (1,116,000)
Purchase of treasury stock............. (137,079) -- --
----------- ----------- -----------
Net cash used in financing
activities..................... (937,079) (3,200,000) (1,116,000)
----------- ----------- -----------
Net increase (decrease) in
cash........................... 699,193 (830) (81,478)
Cash at beginning of year............... 573,633 574,463 655,941
----------- ----------- -----------
Cash at end of year..................... $ 1,272,826 $ 573,633 $ 574,463
=========== =========== ===========
Interest expense....................... $ 384,522 $ 286,215 $ 348,213
=========== =========== ===========
Income taxes........................... $ 21,019 $ 35,620 $ 10,283
=========== =========== ===========
Cash Payments:
Increase in intangible assets.......... $ 139,010 $ -- $ --
=========== =========== ===========
Increase in common stock............... $ 63,165 $ -- $ --
=========== =========== ===========
Increase in paid-in-capital............ $ 7,103,286 $ -- $ --
=========== =========== ===========
Supplemental Disclosure of Non-cash Transactions:
See Accompanying Notes to Consolidated Financial Statements.
13
FECHTOR, DETWILER, MITCHELL & CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Organization
On August 30, 1999, effective September 1, 1999 for accounting purposes,
Fechtor, Detwiler & Co., Inc. (Fechtor Detwiler) sold its operations to JMC
Group, Inc. ("JMCG") and JMCG became the surviving corporation (the "Merger").
Subsequently, JMCG was renamed Fechtor, Detwiler, Mitchell & Co. (the
"Company") and its NASDAQ trading symbol was changed to FEDM. The former
shareholders of Fechtor Detwiler received 6,600,000 common shares of JMCG
representing 52% of the then outstanding common shares at the Merger date. The
shareholder's of JMCG converted 6,166,451 shares to an equal number of shares
of the Company.
The Merger was accounted as a purchase of JMCG by Fechtor Detwiler in a
reverse acquisition. The assets and liabilities of JMCG at the Merger date
were adjusted to their estimated fair values based upon purchase price
allocations. The assets and liabilities of Fechtor Detwiler are reported at
their historical cost basis. In a reverse acquisition, the accounting
treatment differs from the legal form of the transaction, as the continuing
legal parent company (JMCG) is not the acquiror and the historical financial
statements of JMCG become those of Fechtor Detwiler; the accounting acquiror.
Consequently, the presentation of the Company's consolidated financial
statements prior to September 1, 1999 reflects the financial statements of
Fechtor Detwiler. In addition, for periods prior to September 1, 1999,
stockholders' equity of Fechtor Detwiler has been restated retroactively to
reflect the par value of the 6,600,000 common shares received by Fechtor
Detwiler.
Fechtor, Detwiler, Mitchell & Co. is the holding company for its two
operating subsidiaries; Fechtor, Detwiler & Co., Inc., an investment banking
and brokerage firm headquartered in Boston, Massachusetts and James Mitchell &
Co., ("JMC") a financial services company located in San Diego, California.
Note 2. Summary of Significant Accounting Policies
Basis of Presentation--The consolidated financial statements of Fechtor,
Detwiler, Mitchell & Co. have been prepared in accordance with generally
accepted accounting principles and the rules and regulations of the Securities
and Exchange Commission.
Principles of Consolidation--The consolidated financial statements of
Fechtor, Detwiler, Mitchell & Co. include the accounts of its wholly-owned
subsidiaries. All material intercompany transactions have been eliminated in
consolidation.
Commissions--Commission revenue relates to institutional and retail
brokerage activities for the purchase and sale of securities. Commissions are
charged on both listed and over-the-counter agency transactions.
Principal Transactions--Principal transaction revenue primarily represents
amounts earned from executing transactions on behalf of customers, or for its
own account, in securities for which Fechtor Detwiler acts as a market maker.
Investment Banking--Investment banking revenue includes fees, net of
expenses, arising from securities offerings in which Fechtor Detwiler acts as
an underwriter, agent or financial advisor.
Annuity and Insurance Sales--Annuity and insurance sales commission revenue
is reported as a component of other revenues, net of chargebacks. Asset-based
fee revenues are based upon the average accumulated value of assets in force.
14
FECHTOR, DETWILER, MITCHELL & CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
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 trade date.
Securities transactions for customers are reported on the settlement date.
Commission revenues and expenses are recorded on the trade date.
Securities--Securities owned, or securities sold, not yet purchased, are
stated at market value. Non- marketable securities are stated at cost.
Fixed Assets--Fixed assets are stated at cost with depreciation and
amortization expense recorded using the straight line method over three to
seven years.
Income Taxes--Income tax liabilities or assets are recorded through charges
or credits to the current tax provision for the estimated taxes payable or
refundable for the current year. Deferred tax assets and liabilities are
recorded for future tax consequences attributable to differences between the
financial statement carrying amounts of assets and liabilities and their
respective tax bases. Deferred tax assets and liabilities are measured using
enacted tax rates. A deferred tax valuation allowance is established if it is
more likely than not that all or a portion of the deferred tax assets will not
be realized.
Cash Equivalents--Cash equivalents include instruments with an original
maturity of three months or less.
Interest--Interest revenue represents earnings on client margin accounts.
Fair Value of Financial Instruments--The carrying amount of receivables,
payables, and securities owned and securities sold, not yet purchased are
reported in the statement of financial condition at fair value.
Net Capital Requirements--Certain subsidiaries of the Company are subject to
broker-dealer net capital requirements. At December 31, 1999, each broker-
dealer subsidiary was in compliance with its net capital requirement.
Recent Accounting Pronouncements--In June 1999, the Financial Accounting
Standards Board ("FASB") issued Statement of Financial Accounting Standards
("SFAS") 137, "Deferral of the Effective Date of SFAS 133." SFAS 133,
"Accounting for Derivative Instruments and Hedging Activities" was issued in
June 1998. SFAS 137 defers the effective date for SFAS 133 for all fiscal
quarters of all fiscal years beginning after June 15, 2000. The Company will
adopt SFAS 133 as amended by SFAS 137 during 2000 as required, and has not yet
determined whether its implementation will have a material impact on the
Company's financial condition, results of operations or cash flows.
During 1999, the Company adopted SFAS No. 131, "Disclosures About Segments
of An Enterprise and Related Information." SFAS No. 131 requires the Company
to use the "management approach" in disclosing segment information. The
Company conducts its business predominantly within one industry segment,
retail and institutional brokerage, which includes the Company's retail and
institutional brokerage activities and investment banking services, for all
periods presented. Management assesses performance and measures the results on
a single segment basis. The single segment generated revenue predominantly
from the United States for all periods presented.
Reclassifications--Certain amounts in prior year financial statements have
been reclassified to conform with the 1999 presentation.
Use of Estimates--The preparation of the Company's financial statements in
conformity with generally accepted accounting principles 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.
15
FECHTOR, DETWILER, MITCHELL & CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Note 3. Acquisition of JMC Group, Inc.
The acquisition of JMCG was accounted for as a purchase and, accordingly,
the purchase price and related acquisition costs have been allocated to the
acquired assets and liabilities based upon their fair market values. The
excess of the purchase price over the fair value of the tangible assets
acquired and the liabilities assumed was allocated to intangible assets. The
consolidated financial statements include the results of operations of JMCG
since September 1, 1999; the date of the acquisition.
Pro forma consolidated financial data shown below, for the years ended
December 31, 1999 and 1998, respectively, gives effect to the Merger as if it
had occurred on January 1, 1998. Pro forma adjustments include settlement and
merger costs, compensation expense and amortization of intangible assets. The
pro forma data does not necessarily reflect the results of operations that
would have been obtained had the Merger occurred on the assumed date, nor is
the data necessarily indicative of the results of the combined entities that
may be achieved for any future period.
1999 1998
Pro Forma Pro Forma
------------ -----------
(unaudited)
Revenues (1)....................................... $ 15,892,000 $14,102,000
============ ===========
Net income (2)(3).................................. $ 1,015,000 $ 588,000
============ ===========
Net income per share--diluted...................... $ 0.08 $ 0.05
============ ===========
Notes:
--------
(1) Includes JMCG revenues of $988,000 and $1,669,000 for 1999 and 1998,
respectively.
(2) Excludes settlement and merger costs, net of tax benefit, of $1,389,000
for 1999.
(3) Excludes non-cash compensation expense, net of tax benefit, of $510,000
for 1999.
Effective September 1, 1999, Fechtor Detwiler became a wholly-owned
subsidiary of the Company from the issuance of 6,600,000 shares of common
stock to the former owners of Fechtor Detwiler. Additionally, options granted
prior to the Merger by the principals of Fechtor, Detwiler & Co., Inc., that
became effective upon completion of the Merger, increased paid-in capital by
$850,000.
Note 4. Earnings Per Share
Basic and diluted net income (loss) per share and weighted average shares
outstanding at December 31 follows:
1999 1998 1997
--------- --------- ---------
Net income (loss)................................. $(849,226) $ 7,981 $ 4,547
========= ========= =========
Net income (loss) per share:
Basic............................................ $ (0.10) $ 0.00 $ 0.00
========= ========= =========
Diluted.......................................... $ (0.10) $ 0.00 $ 0.00
========= ========= =========
Weighted average shares outstanding:
Basic............................................ 8,696,355 6,600,000 6,600,000
Incremental shares assumed outstanding from
exercise of stock options...................... -- -- --
--------- --------- ---------
Diluted.......................................... 8,696,355 6,600,000 6,600,000
========= ========= =========
16
FECHTOR, DETWILER, MITCHELL & CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Note 5. Fixed Assets
Fixed assets consisted of the following at December 31:
1999 1998
----------- ---------
Furniture and equipment................................. $ 1,712,080 $ 912,133
Leasehold improvements.................................. 29,247 28,246
----------- ---------
1,741,327 940,379
Less accumulated depreciation and amortization.......... (1,279,860) (678,101)
----------- ---------
$ 461,467 $ 262,278
=========== =========
The Company leases office space under noncancelable leases expiring through
2007. Future minimum annual lease payments at December 31, 1999 follow:
2000....................................................... $ 566,000
2001....................................................... 553,000
2002....................................................... 532,500
2003....................................................... 555,000
2004....................................................... 555,000
Thereafter................................................. 1,387,500
----------
$4,149,000
==========
Rent expense was $660,000, $801,000 and $672,000 for the years ended
December 31, 1999, 1998 and 1997, respectively.
Note 6. Notes Payable
Fechtor Detwiler has two revolving line-of-credit facilities each with a
$5,000,000 facility which are due on demand. Total borrowings were $3,000,000
at December 31, 1999. Interest on the first facility is based on the federal
funds rate plus 1.10%, and interest on the second facility is based on the
federal funds rate plus 1.25%. Advances are collateralized by $4,400,000 of
securities held in customer margin accounts.
Note 7. Income Taxes
The provision (benefit) for income taxes is allocated as follows:
1999
---------
Benefit--Deferred............................................. $(387,582)
=========
Actual income tax benefit differs from the amount "expected" computed using
the statutory federal tax rate of 34% as follows:
1999
---------
Expected income tax benefit using statutory rate.............. $(420,515)
Effects of:
State income taxes, net of Federal tax benefit.............. (74,000)
Merger related expenses..................................... 95,000
Other....................................................... 11,933
---------
$(387,582)
=========
17
FECHTOR, DETWILER, MITCHELL & CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
At December 31, 1999, the components of the deferred tax asset are as
follows:
1999
--------
Compensation..................................................... $404,000
Net operating loss............................................... 73,000
Fixed assets..................................................... 38,000
Accrued liabilities.............................................. 14,000
--------
$529,000
========
Income tax expense for the years ended December 31, 1998 and 1997 follows:
1998 1997
------- -------
Current:
Federal.................................................. $14,780 $12,081
State.................................................... 11,012 9,102
------- -------
$25,792 $21,183
======= =======
For 1998 and 1997, the difference between the provision for taxes on income
and expected taxes on income at statutory rates results primarily from
nondeductible expenses. Further, deferred taxes resulting from temporary
differences between the financial statement and the tax basis of assets and
liabilities are not material.
Note 8. Commitments and 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.
Included in other assets is a $272,000 treasury security pledged as
collateral for a letter of credit.
Note 9. Stockholders' Equity
A summary of stock options outstanding at December 31, 1999 follows:
1999
-------------------
Weighted
Average
Exercise
Shares Price
--------- --------
Options assumed in business combination at September 1,
1999..................................................... 367,400 $1.26
Granted.................................................. 712,000 1.00
Forfeited................................................ (27,000) 3.84
--------- -----
Outstanding at December 31, 1999.......................... 1,052,400 $1.59
========= =====
Options exercisable at December 31, 1999.................. 316,400 $1.20
========= =====
Weighted average fair value of options granted per share
during the period........................................ $0.82
=====
18
FECHTOR, DETWILER, MITCHELL & CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Of the 712,000 options granted in 1999, options granted under the Executive
Plan were 337,000 and options granted under the Employee Plan were 375,000.
Options outstanding at December 31, 1999 are exercisable as follows: 316,400
options in 1999, 246,838 in 2000, 231,833 in 2001, 244,829 in 2002 and 12,500
in 2003. At December 31, 1999, 63,000 and 222,500 options were available for
future grants under the 1993 Executive and Employee Plans, respectively.
A summary of stock options outstanding and exercisable at December 31, 1999
follows:
Options
Options Outstanding Exercisable
---------------------------- ----------------
Weighted
Average Weighted Weighted
Remaining Average Average
Life In Exercise Exercise
Range of Exercise Prices Shares Years Price Shares Price
- ------------------------ --------- --------- -------- ------- --------
$0.50-$0.74...................... 27,600 5.65 $0.66 19,600 $ 0.65
$0.75-$0.99...................... 540,800 6.88 $0.95 32,800 $ 0.83
$1.00-$1.24...................... 306,000 8.37 $1.06 106,000 $ 1.12
$1.25-$1.49...................... 142,000 6.06 $1.36 142,000 $ 1.36
$1.50-$1.74...................... 24,000 5.00 $1.66 12,000 $ 1.69
$1.75-$2.00...................... 12,000 5.00 $1.88 4,000 $ 1.88
--------- -------
1,052,400 316,400
========= =======
The Company has adopted the disclosure-only provisions for the accounting
for stock-based compensation. Accordingly, no compensation cost has been
recognized for its stock option plans. In 1993, the Company adopted the 1993
Executive Stock Option Plan (the "Executive Plan") pursuant to which options
to purchase an aggregate of 750,000 shares of common stock may be granted and
the 1993 Employee Stock Option Plan (the "Employee Plan") pursuant to which
options to purchase an aggregate of 750,000 shares of common stock may be
granted (collectively, the "1993 Plans"). Under the 1993 Plans, incentive or
non-qualified stock options may be granted. Had compensation for the Company's
stock option plans been determined based on the fair market value at the grant
date for awards in 1999, net loss and net loss per share would be as follows:
1999
-----------
Net loss:
As reported .............................................. $ (849,000)
Pro forma................................................. $(1,198,000)
Net loss per share:
As reported .............................................. $ (0.10)
Pro forma................................................. $ (0.14)
The fair value of options granted during 1999 are estimated to be
approximately $582,000, on the date of grant using the Black-Scholes option-
pricing model. Fair value was determined using the following weighted average
assumptions:
1999
-------
Dividend yield rate................................................ 0%
Volatility rate.................................................... 71%
Risk free interest rate............................................ 5.69%
Expected lives..................................................... 3 years
The Company adopted a stock option plan of Fechtor Detwiler in connection
with the Merger. The plan provided for the issuance of 600,000 options,
granted to certain employees by the founding partners of Fechtor
19
FECHTOR, DETWILER, MITCHELL & CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Detwiler, to acquire common shares of Fechtor Detwiler prior to the Merger. In
September 1999, the Company recorded compensation expense of $850,000, and a
$340,000 tax benefit, reflecting the recognition of the value of the options
granted between the exercise price of $0.10 per share and the value of the
common stock of the Company at the Merger date. At December 31, 1999, 600,000
common shares of the Company have been placed in a trust, by the former
shareholders of Fechtor Detwiler. The founding partners of Fechtor Detwiler
will reimburse the Company with an equivalent number of shares from the trust,
based on the number of options exercised.
The Company adopted the former JMCG 401 (k) retirement savings plan in the
fourth quarter of 1999 covering substantially all employees. Matching Company
contributions of up to 3%, subject to the maximum allowed annual employee
contribution, are made in the form of Company stock purchased on the open
market. Company contributions for 1999 were not material.
Note 10. Shareholder Rights Plan
The Company has a Shareholder Rights Plan (the "Plan") which provides for a
dividend of one common stock purchase right (one "Right") for each outstanding
share of common stock of the Company. Each Right entitles the stockholder to
purchase one share of common stock at $30.00 per share, subject to adjustment.
The Plan was amended on February 20, 2000 extending the expiration date to
February 21, 2010.
Generally, Rights may be exercised ten days after any person or group
("Acquirer") obtains beneficial ownership of 20% of the outstanding common
shares, or ten days after an Acquirer announces a tender offer or other
business combination, unless such tender offer or acquisition is made with the
approval of the Board of Directors. The Board of Directors may effect the
redemption of the Rights at any time before the Rights become exercisable at a
nominal price payable in cash and/or shares of common stock.
Under certain circumstances, including the acquisition of 25% of the
Company's common stock and the occurrence of certain "self-dealing
transactions" by an Acquirer or certain other 20% holders, all Rights holders
except the Acquirer may purchase the Company's common stock at approximately
50% of the prevailing market price. Similarly, if the Company is acquired in a
merger after the acquisition of specified percentages of the voting power of
the Company, and the Acquirer is the resultant corporation, the Rights holders
with the exception of the Acquirer, may purchase the Acquirer's shares at a
similar discount.
Note 11. Stock Repurchase Plan
On November 16, 1999, the Board of Directors approved a plan to repurchase
up to one million shares of common stock of the Company in either open market
or privately negotiated transactions. The timing and number of the share
purchases are determined at management's discretion. At December 31, 1999,
135,200 shares had been repurchased, at a cost of $137,079, and are held in
treasury.
Note 12. Concentrations of Credit Risk and Off-balance Sheet Credit Risk
The Company borrows securities from other brokers and provides cash to the
other brokers representing approximately 105% of the market value of
securities borrowed. Deposits for securities borrowed are held in escrow at a
national brokerage firm at December 31, 1999.
Certain customer transactions involve the sale of securities not yet
purchased. Such transactions may expose the Company to off-balance sheet risk
in the event that collateral provided is not sufficient to cover losses that
customers may incur upon market fluctuations. In the event that the customer
fails to satisfy its obligations, the Company may be required to purchase or
sell such securities at prevailing market prices in order to fulfill the
customer's obligations.
Unpaid customer securities are pledged as collateral for bank borrowings and
to satisfy margin deposits of clearing organizations under contracts with
these organizations. In the event that such party is unable to return customer
securities pledged as collateral, the Company may be exposed to the risk of
acquiring the securities at prevailing market prices.
20
FECHTOR, DETWILER, MITCHELL & CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Customer transactions are recorded on a settlement-date basis, which is
generally three business days after the trade date. The Company is therefore
exposed to risk of loss on these transactions in the event of the customer's
or broker's inability to meet the terms of their contracts, in which case the
Company may have to purchase or sell securities at prevailing market prices.
Settlement of these transactions in the unlikely event the customer or other
brokers are unable to meet the terms of their contracts is not expected to
have a significant effect on the financial condition of the Company.
Securities not received or delivered at the settlement date result in failed
trades. Should the other party to these transactions be unable to fulfill its
obligations, the Company may be required to purchase or sell these securities
at prevailing market prices. Securities sold, not yet purchased are subject to
the risk that the market value of such securities will increase, and may not
be able to cover the position.
Note 13. Selected Quarterly Financial Data (unaudited)
1999
------------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter(1) Quarter
---------- ---------- ----------- -----------
Revenues.................... $3,766,885 $4,099,989 $ 3,014,396 $ 4,273,093
---------- ---------- ----------- -----------
Expenses:
Compensation and benefits... 2,405,303 2,109,632 2,514,149 2,513,899
Other expenses.............. 1,065,546 1,287,389 1,102,526 1,255,796
Settlement and merger
costs...................... -- 393,815 1,495,199 247,917
---------- ---------- ----------- -----------
3,470,849 3,790,836 5,111,874 4,017,612
---------- ---------- ----------- -----------
Income (loss) before income
taxes...................... 296,036 309,153 (2,097,478) 255,481
Income tax (expense)
benefit.................... (133,216) (131,783) 708,126 (55,545)
---------- ---------- ----------- -----------
Net income (loss)........... $ 162,820 $ 177,370 $(1,389,352) $ 199,936
========== ========== =========== ===========
Net income (loss) per
share--diluted............. $ 0.02 $ 0.02 $ (0.16) $ 0.02
========== ========== =========== ===========
Weighted average shares
outstanding--diluted....... 6,600,000 6,600,000 8,705,484 12,879,938
========== ========== =========== ===========
Note (1)--Results for the quarter ended September 30, 1999 have been
restated to reflect non-cash compensation expense, net of tax benefit, of
$510,000 accompanied by an $850,000 increase in paid-in-capital. These
adjustments result from stock options granted prior to the Merger by the
principals of Fechtor, Detwiler & Co., Inc. that became effective upon
completion of the Merger.
1998
------------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
---------- ---------- ----------- -----------
Revenues.................... $2,921,948 $2,809,641 $ 2,836,958 $ 3,510,480
---------- ---------- ----------- -----------
Expenses:
Compensation and benefits... 1,827,168 1,507,224 1,743,127 2,421,884
Other expenses.............. 1,146,923 1,249,362 1,076,416 1,073,150
---------- ---------- ----------- -----------
2,974,091 2,756,586 2,819,543 3,495,034
---------- ---------- ----------- -----------
Income (loss) before income
taxes...................... (52,143) 53,055 17,415 15,446
Income tax (expense)
benefit.................... 16,105 (16,515) (7,837) (17,545)
---------- ---------- ----------- -----------
Net income (loss)........... $ (36,038) $ 36,540 $ 9,578 $ (2,099)
========== ========== =========== ===========
Net income (loss) per
share--diluted............. $ 0.00 $ 0.00 $ 0.00 $ 0.00
========== ========== =========== ===========
Weighted average shares
outstanding--diluted....... 6,600,000 6,600,000 6,600,000 6,600,000
========== ========== =========== ===========
21
INDEPENDENT AUDITORS' REPORT
We have audited the accompanying consolidated statement of financial
condition of Fechtor, Detwiler, Mitchell & Co. and subsidiaries as of December
31, 1999, and the related consolidated statements of operations, changes in
stockholders' equity, and cash flows for the year then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Fechtor, Detwiler,
Mitchell & Co. and subsidiaries at December 31, 1999, and the results of their
operations and their cash flows for the year then ended in conformity with
generally accepted accounting principles.
/s/ Deloitte & Touche LLP
Boston, Massachusetts
March 9, 2000
22
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
We have audited the statements of financial condition of Fechtor, Detwiler &
Co., Inc. as of December 31, 1998 and 1997, and the related statements of
operations, changes in stockholders' equity, and cash flows for the years then
ended. These financial statements, not separately presented herein, are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting amounts and disclosures in the financial statements. An audit also
includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Fechtor, Detwiler & Co.,
Inc. at December 31, 1998 and 1997, and the results of its operations and its
cash flows for the years then ended, in conformity with generally accepted
accounting principles.
/s/ Arthur Andersen LLP
Boston, Massachusetts
February 10, 1999
23
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
Not applicable.
24
PART III
Item 10. Directors and Executive Officers of the Registrant
Information with respect to Directors and Executive Officers of the Company
can be found under the heading captioned "Board of Directors and Officers of
Fechtor, Detwiler, Mitchell & Co." and "Compliance with Section 16(a) of the
Securities Exchange Act of 1934" appearing in the Company's 2000 proxy
statement and is incorporated herein by reference.
Item 11. Executive Compensation
Information with respect to Executive Compensation can be found under the
heading captioned "Executive Compensation" appearing in the Company's 2000
proxy statement and is incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management
Information with respect to security ownership may be found under the
heading captioned "Security Ownership of Certain Beneficial Owners and
Management" appearing in the Company's 2000 proxy statement and is
incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions
Information with respect to this item may be found under the heading
"Compensation Committee and Insider Participation and Certain Relationships
and Related Transactions" appearing in the Company's 2000 proxy statement and
is incorporated herein by reference.
25
PART IV
Item 14. Exhibits, Financial Statements, Schedules, and Reports on Form 8-K
(a)(3) The following exhibits are filed herewith:
3.1 Certificate of Incorporation of the Registrant.(1)
3.2 Certificate of Amendment of Certificate of Incorporation of the
Registrant.(1)
3.3 By-laws of the Registrant.(1)
4.1 Shareholder Rights Agreement, dated as of February 21, 1990, between
Spear Financial Services, Inc. and First Interstate Bank, Ltd., as
Rights Agent, as amended effective, July 16, 1992.(1)
4.11 Amendment No. 2 to Shareholder Rights Agreement, dated February 20,
2000, extending the expiration date of the Shareholder Rights
Agreement to February 21, 2010.(5)
10.1 JMC Group, Inc. 1993 Employee Stock Option Plan.(2)(7)
10.2 JMC Group, Inc. 1993 Employee Stock Option Plan.(3)(7)
10.3 Employment Agreement with James K. Mitchell dated as of January 1,
1998.(4)(7)
10.4 Agreement and Plan of Merger dated June 30, 1999 among Fechtor,
Detwiler & Co., Inc., JMC Merger, Inc. and JMC Group, Inc.(6)
10.5 1999 Special Stock Option Plan for Fechtor, Detwiler & Co., Inc. dated
August 30, 1999 which was assumed by Fechtor, Detwiler, Mitchell & Co.
after the Merger.(7)
10.6 2000 Omnibus Equity Incentive Plan adopted by the Board of Directors
on February 28, 2000 to be voted on at the Annual Meeting of
Stockholders on or about May 22, 2000.(7)
22 Subsidiaries of the Registrant.
23.1 Consent of Deloitte & Touche LLP.
23.2 Consent of Arthur Andersen LLP.
27 Financial Data Schedule.
(b) No current reports on Form 8-K were filed by the Company during the
fourth quarter for the fiscal year ended December 31, 1999.
- --------
(1) Filed as an Exhibit to the Registrant's Form 10-K for the fiscal year
ended December 31, 1993.
(2) Filed as an Exhibit to the Registrant's Form S-8 Registration
Statement No. 33-74842 filed with the SEC on February 7, 1994.
(3) Filed as an Exhibit to the Registrant's Form S-8 Registration
Statement No. 33-74840 filed with the SEC on February 7, 1994.
(4) Filed as an Exhibit to the Registrant's Form 10-K for the fiscal year
ended December 31, 1997.
(5) Filed as an Exhibit to the Registrant's Form 8-K dated March 24, 2000.
(6) Filed as an Exhibit to Registrant's Definitive Proxy Statement dated
August 5, 1999.
(7) Management contract or compensatory plan or arrangement.
26
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.
Signature Title Date
--------- ----- ----
/s/ James Mitchell Chairman, President and March 30, 2000
______________________________________ Director
James Mitchell
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities on March 30, 2000.
Signature Title Date
--------- ----- ----
/s/ James Mitchell Chairman, President and March 30, 2000
______________________________________ Director
James Mitchell
/s/ Stephen Martino Chief Financial Officer March 30, 2000
______________________________________ and Principal Accounting
Stephen Martino Officer
/s/ Edward Baran Director March 30, 2000
______________________________________
Edward Baran
/s/ Barton Beek Director March 30, 2000
______________________________________
Barton Beek
/s/ Andrew Detwiler Director March 30, 2000
______________________________________
Andrew Detwiler
/s/ Richard Fechtor Chief Executive Officer March 30, 2000
______________________________________ and Director
Richard Fechtor
/s/ Edward Hughes Chief Operating Officer March 30, 2000
______________________________________ and Director
Edward Hughes
/s/ Frank Jenkins Director March 30, 2000
______________________________________
Frank Jenkins
/s/ Robert Sharp Director March 30, 2000
______________________________________
Robert Sharp
27