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, 2001
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
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(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)
225 Franklin Street, Boston, MA 02110
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(Address of principal executive offices) (Zip Code)
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 registered
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Common Stock Pacific Exchange
Securities registered pursuant to Section 12(g) of the Act:
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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 the 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, based upon the closing sale price of the common stock on March 1,
2002, as reported on the Nasdaq SmallCap Market, was approximately $1,858,080.
Shares of common stock held by each officer and director of the registrant and
by each person who owns 5% or more of the registrant's outstanding common stock
have been excluded in that such persons may be deemed to be affiliates. This
determination of affiliate status is not necessarily a conclusive determination
for other purposes.
(APPLICABLE ONLY TO CORPORATE REGISTRANTS)
As of March 1, 2002, the registrant had 2,652,357 shares of common stock,
$0.01 par value, issued and outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Proxy Statement for the Annual Meeting of
Stockholders which is presently expected to be held on May 20, 2002, which Proxy
Statement is expected to be filed with the Securities and Exchange Commission on
or before April 22, 2002 and is referred to herein as the "Proxy Statement," are
incorporated herein by reference into Part III hereof as provided in such Part.
DETWILER, MITCHELL & CO.
INDEX TO FORM 10-K
Page
----
PART I.
Item 1. Business ................................................................................. 3
Item 2. Properties ............................................................................... 7
Item 3. Legal Proceedings ........................................................................ 8
Item 4. Submission of Matters to a Vote of Security Holders ...................................... 8
PART II.
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters .................... 9
Item 6. Selected Financial Data .................................................................. 10
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations .... 11
Item 7a. Quantitative and Qualitative Disclosures About Market Risk ............................... 16
Item 8. Financial Statements and Supplementary Data .............................................. 17
Consolidated Statement of Financial Condition at
December 31, 2001 and December 31, 2000 .......................................... 17
Consolidated Statement of Operations for the years ended
December 31, 2001, 2000 and 1999 ................................................. 18
Consolidated Statement of Changes in Stockholders' Equity for the years ended
December 31, 2001, 2000 and 1999 ................................................. 19
Consolidated Statement of Cash Flows for the years ended
December 31, 2001, 2000 and 1999 ................................................. 20
Notes to Consolidated Financial Statements ........................................... 21
Independent Accountant's Reports ..................................................... 32
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure ..... 34
PART III.
Item 10. Directors and Executive Officers of the Registrant ....................................... 34
Item 11. Executive Compensation ................................................................... 34
Item 12. Security Ownership of Certain Beneficial Owners and Management ........................... 34
Item 13. Certain Relationships and Related Transactions ........................................... 34
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K ......................... 35
Signatures ............................................................................................... 37
2
PART I
Item 1. Description of Business
General
Detwiler, Mitchell & Co. is the holding company for its four principal
operating subsidiaries: Fechtor, Detwiler & Co., Inc., an investment banking and
brokerage company headquartered in Boston, MA; K. & S., Inc. ("K&S"), a
specialist firm with operations on the Boston Stock Exchange; James Mitchell &
Co., a financial services company located in San Diego, CA; and Detwiler,
Mitchell & Co. (UK) Limited ("DMC UK"), an institutional sales and investment
banking firm headquartered in London, England.
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 two offices in
Massachusetts and three offices in Connecticut. The Firm's business activities
include focused equity research, institutional and retail securities brokerage,
trading in equity securities as a market maker, and investment banking
activities. Institutional sales are conducted from the Boston office and retail
sales are conducted through registered private client representatives in all
five offices of Fechtor Detwiler. Trading and investment banking activities are
conducted from the Boston office.
Research Services
Fechtor Detwiler's research activities are focused on industry channels of
distribution and on individual companies. The Firm conducts research on
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.
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 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. The Firm
provides its institutional brokerage services to an international client base.
Transactions for institutional investors are executed with the Firm acting
as agent with commissions negotiated with its institutional customers.
Retail Brokerage
Revenues from retail brokerage activities are generated primarily through
customer purchases and sales of equity securities. The Firm also processes
orders for bonds, and the purchase and sale 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 a significant portion of its revenues.
3
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 as well as 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.
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 advisory
services for mergers, acquisitions and other corporate purposes.
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 from time to time may engage in merchant banking activities
to include equity investments in private placements as well as direct equity
investments. Investment opportunities considered attractive will include those
perceived to be strategic or where a sound investment opportunity exists.
Operations
During fiscal 2001, Fechtor Detwiler cleared its own securities
transactions utilizing a brokerage accounting system provided by a third-party
service bureau. In a self-clearing mode, 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.
DMC Financial Services
In October 2001, Fechtor Detwiler began to operate an independent
representative program through a newly created division called DMC Financial
Services. DMC Financial Services allows independent representatives to process
securities, mutual funds and insurance products through Fechtor Detwiler (as
broker) and James Mitchell & Co.'s subsidiaries in exchange for a percentage of
commissions and other fees.
Change from a Self-Clearing to a Fully Disclosed Broker Dealer
In February 2002, Fechtor Detwiler engaged National Financial Services
LLC ("NFS"), a wholly owned subsidiary of Fidelity Investments, to clear
customer transactions on a fully disclosed basis. Effective on or about April
26, 2002, customer accounts and related transactions of the Firm will be
processed by NFS. Accordingly, Fechtor Detwiler will no longer be a
self-clearing broker dealer and will no longer hold funds on behalf of its
customers. As a result, the NASD minimum net capital requirement will be reduced
to $100,000, from the current requirement of $250,000, upon completion of the
conversion. However, Fechtor Detwiler has agreed with NFS to maintain regulatory
net capital of $500,000 through December 31, 2002, increasing to $750,000
through June 30,
4
2003, and $1,000,000 on July 1, 2003 and beyond. Additionally, the Firm has
agreed with NFS to maintain a $250,000 escrow clearing deposit until July 2003
when it will then be reduced to $100,000.
Management's decision to change from a self-clearing broker dealer to a
fully disclosed broker dealer was based upon several factors. Most significant
were the competitive environment of the securities industry, expanded products
and services the Firm will be able to offer its customers, business risks
associated with remaining a self-clearing broker dealer, increased insurance
coverage for customer accounts, and the ability to retain and hire competent
retail broker and financial planning sales professionals because of enhanced
products and services offered by NFS. Additionally, the net operating costs of
the Firm are not expected to increase significantly when the conversion from a
self-clearing broker dealer to a fully disclosed broker dealer has been
completed.
The aforementioned actions will have a significant impact on Fechtor
Detwiler's balance sheet and liquidity. Upon conversion, NFS will pay Fechtor
Detwiler for balances due from customers, securities borrowed, and receivables
from brokers, dealers and clearing organizations. Conversely, Fechtor Detwiler
will pay NFS for assuming its liabilities due to customers, and payables to
brokers, dealers and clearing organizations. Fechtor Detwiler will use the net
proceeds received from NFS to fully pay off advances under its lines of credit.
After conversion, balances in receivables and payables to brokers, dealers and
clearing organizations will no longer be necessary and certain clearing deposits
with the National Securities Clearing Corporation ("NSCC") and Deposit Trust Co.
("DTC") will be returned. Furthermore, Fechtor Detwiler's lines of credit will
terminate. Thus, liquidity of Fechtor Detwiler will be enhanced from increases
in cash made available from the transfer of due from customer balances and
securities borrowed to NFS and the return of certain clearing deposits from both
the NSCC and DTC.
James Mitchell & Co.
James Mitchell & Co. and its subsidiaries, JMC Financial Corporation
and JMC Insurance Services Corporation (collectively, "JMC") were founded in
1983 and are located in San Diego, California. JMC provides annuity, insurance
and mutual fund sales and support services for certain financial institutions
and life insurance companies and the related servicing of tax-advantaged
annuities, insurance products and mutual funds.
JMC earns fees based on the accumulated asset value of the accounts
being serviced. JMC also earns commissions and fees from new product sales and
from providing back office services for DMC Financial Services, which is the
correspondent representative program of Fechtor Detwiler.
K.& S., Inc.
K&S was acquired effective January 1, 2001. K&S is one of the largest
independently owned specialist operations on the Boston Stock Exchange and was
formed 23 years ago. The Company determined in early 2002 that K&S will no
longer pursue the trading of NASDAQ securities due to outside technical
difficulties causing delays in receiving meaningful order flow and market
uncertainties for this line of business.
Detwiler, Mitchell & Co.(UK)Limited
DMC UK commenced operations on July 30, 2001 and conducts institutional
sales and investment banking activities throughout the UK and Europe. DMC UK
professionals have significant international investment experience and
specialize in the alternative energy industry; principally fuel cell technology
companies. The DMC UK staff also assists the Fechtor Detwiler research
department in the gathering of information for research reports related to fuel
cell companies.
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 services business with other institutions such as commercial
banks, mutual fund companies and investment advisory and financial planning
firms. In addition to the competition for retail investment business, there is
substantial
5
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. Such other
competitors generally have more extensive investment banking activities and,
therefore, possess a securities distribution advantage.
Advancements in computing and communications technology are
substantially changing the means by which financial services are delivered.
These changes provide 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 and regional securities exchanges. These self-regulatory organizations
adopt rules (which are subject to approval by the SEC) which govern the
industry.
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 the broker-dealer
subsidiaries of the Company 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, 2001, the net
capital of Fechtor Detwiler, JMC Financial Corporation and JMC Investment
Services exceeded their respective minimum reserve requirements of $250,000,
$5,000 and $5,000 by $885,000, $62,000 and $2,000, respectively.
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.
Strategic Outlook
During 2001, the Company continued its efforts to identify revenue
enhancement opportunities and cost reductions, while ensuring clients continue
to receive the quality service and research information they expect. Market
conditions, however, were difficult. As a result, revenues from commissions and
principal transactions decreased sharply due to a lack of client volume.
Decimalization reduced the level of trading profits at both Fechtor Detwiler and
K&S from levels experienced prior to April 1, 2001. With respect to DMC UK, the
regulatory approval process was significantly longer than anticipated resulting
in the occurrence of greater than expected start-up and operating costs.
Additionally, when licensing was approved by the UK regulatory authority, the
significantly weakened global financial markets greatly diminished initial
revenue generation opportunities for this startup venture. At Fechtor Detwiler,
retail commissions and associated interest revenue on customer margin accounts
were lower due to diminished transaction
6
volumes and balances. Finally, demand for investment banking products and
services was almost non-existent. Increases in institutional sales, however,
were achieved from the strength of the Company's "Channel Notes" research
information on the semiconductor equipment manufacturing, semiconductor
microprocessor and memory, and networking industries.
For some period of time, the Compensation Committee of the Board of
Directors and an industry consultant have been addressing the compensation plan
of each revenue production department to ensure the interests of employees and
stockholders were aligned. Effective December 1, 2001, a new compensation plan
was implemented for institutional sales, research and trading professionals
which management believes aligns total compensation with the interests of
stockholders and is more consistent with changing industry standards as
described below.
In October 2001, the Managing Director of Research of Fechtor Detwiler
was asked to resign. Shortly thereafter, Andrew Detwiler, Director and President
of the Company and Director and CEO of Fechtor Detwiler, and several members of
the institutional sales, research and trading departments resigned.
Subsequently, there was an adverse impact on revenues and earnings. However, the
aforementioned personnel changes have allowed Fechtor Detwiler to hire three
highly skilled research analysts, which has expanded and enhanced its research
industry coverage, and one institutional sales representative. Additionally, the
weaknesses in the financial services and technology industries have made
available competent candidates, which the Company believes has and will continue
to facilitate hiring skilled professionals.
Management continues to identify revenue enhancement and cost reduction
opportunities. On October 9, 2001, an independent brokerage initiative was
begun, DMC Financial Services, with the addition of 26 non-salaried financial
planners, all independent contractors. Fechtor Detwiler receives a portion of
their commission revenues and other fees to process equity trades, mutual fund
trades and annuity sales. DMC UK has begun to generate agency commissions and
investment banking revenues using its alternative energy industry research
information, client relationships and the "Channel Research" notes provided by
Fechtor Detwiler.
The new compensation plan was implemented at Fechtor Detwiler December
1, 2001 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 will be shared by
employees and the Firm; employees will be paid a guaranteed salary; bonuses
earned in excess of the guaranteed salary will be 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, all 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.
Employees
At December 31, 2001, the Company had 56 employees, none of whom are
covered by, or parties to, a collective bargaining agreement. The success of
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
Both the Company and Fechtor Detwiler 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. DMC UK leases office space at 117 Houndsditch, London, UK EC3.
The underlease for this space, which contains approximately 2,100 square feet,
expires in 2016 with an option to terminate the lease in 2006. Management
believes its existing facilities are adequate for near-term needs.
7
Item 3. Legal Proceedings
Seven former employees of Fechtor Detwiler filed a NASD arbitration
against Fechtor Detwiler in November 2001. The dispute involves a former
Managing Director of Research and Senior Institutional Salesperson of Fechtor
Detwiler, who was asked to resign by the Company in October 2001. Immediately
after the individual resigned, six other employees, the other six claimants in
the arbitration along with the former Managing Director, then resigned.
Claimants have filed this arbitration concerning their employment, alleging that
the Company made misrepresentations to them about the terms and conditions of
their employment, that they were, or constructively were, wrongfully terminated,
and that the Company has made defamatory statements about them. The claim seeks
injunctive relief and actual and punitive damages in millions of dollars of
alleged but unspecified lost compensation.
Subsequently, on December 17, 2001, the Company counterclaimed and
filed a federal action seeking injunctive relief that has been stayed pending
the arbitration. The Company intends to defend itself against the former
employees' claims and to pursue its counterclaims vigorously.
The Company believes that the arbitration claims by the seven former
employees are without merit, that the alleged damages are unsubstantiated, and
that their filing the arbitration was intended as a preemptive tactic after
Fechtor Detwiler indicated to the former employees that it intended to protect
its proprietary rights, if necessary. Fechtor Detwiler has answered denying any
liability whatsoever to the former employees, and asserted counterclaims.
Certain of the former employees involved in the arbitration proceeding
are working for competing ventures, Blackfin Research Co., Inc. and Avian
Securities, Inc. The Company has asserted counterclaims against the former
employees, Blackfin and Avian for breach of the duty of loyalty, trademark
infringement and misappropriation of the Company's proprietary information,
including the Company's customer lists. The Company seeks preliminary injunctive
relief and damages for the former employees' trademark infringement and
misappropriation.
The Company from time to time is subject to other 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 year ended December 31, 2001.
8
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
The common stock of Detwiler, Mitchell & Co. (the "Company") is
principally traded in the NASDAQ SmallCap Market ("SCM") under the symbol DMCO.
At March 14, 2002, there were approximately 225 shareholders of record with
approximately 703 beneficial owners. Four 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 DEM, 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 market:
Sales Price Sales Price
------------------- --------------------
High Low High Low
------------------- --------------------
2001 2000
--------------- -------------------
First Quarter $4.500 $1.125 First Quarter $7.500 $4.000
Second Quarter $3.750 $2.000 Second Quarter $6.376 $2.752
Third Quarter $3.250 $1.000 Third Quarter $5.252 $2.876
Fourth Quarter $2.900 $0.810 Fourth Quarter $4.624 $2.252
No dividends were paid by the Company during 2001. Dividends, if any,
will be determined by the Board of Directors based upon profitability, cash
availability and other considerations as deemed appropriate.
9
Item 6. Selected Financial Data
Years Ended December 31: 2001 2000 1999 1998 1997
------------ ------------ ------------ ------------ ------------
Total revenues $ 18,652,022 $ 20,405,980 $ 15,154,363 $ 12,079,027 $ 12,118,371
Total expenses before
settlement and merger costs 19,734,003 19,268,890 14,254,240 12,045,254 12,092,641
Settlement and merger costs - - 2,136,931 - -
------------ ------------ ------------ ------------ ------------
Total expenses 19,734,003 19,268,890 16,391,171 12,045,254 12,092,641
Income (loss) before
income taxes (1,081,981) 1,137,090 (1,236,808) 33,773 25,730
Income tax (expense) benefit (336,992) (509,335) 387,582 (25,792) (21,183)
------------ ------------ ------------ ------------ ------------
Net income (loss) $ (1,418,973) $ 627,755 $ (849,226) $ 7,981 $ 4,547
============ ============ ============ ============ ============
Net income (loss) per share:
Basic $ (0.54) $ 0.22 $ (0.39) $ - $ -
============ ============ ============ ============ ============
Diluted $ (0.54) $ 0.21 $ (0.39) $ - $ -
============ ============ ============ ============ ============
Weighted average shares
outstanding:
Basic 2,606,524 2,898,723 2,174,089 1,650,000 1,650,000
============ ============ ============ ============ ============
Diluted 2,610,690 2,923,580 2,174,089 1,650,000 1,650,000
============ ============ ============ ============ ============
At December 31: 2001 2000 1999 1998 1997
------------ ------------ ------------ ------------ ------------
Total assets $ 10,714,842 $ 13,342,796 $ 17,842,355 $ 10,546,820 $ 11,371,688
Total liabilities 5,501,009 6,784,334 9,497,442 8,382,053 9,214,902
Total stockholders' equity 5,213,833 6,558,462 8,344,913 2,164,767 2,156,786
10
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
General
Detwiler, Mitchell & Co. is the holding company for its four principal
operating subsidiaries, Fechtor, Detwiler & Co., Inc., an investment banking and
brokerage company headquartered in Boston, MA; K. & S., Inc. ("K&S"), a
specialist firm with operations on the Boston Stock Exchange; James Mitchell &
Co., a financial services company located in San Diego, CA; and Detwiler,
Mitchell & Co. (UK) Limited ("DMC UK"), an institutional sales and investment
banking firm headquartered in London, England.
Statement of Operations for 2001 Compared to 2000
Net loss was $1,419,000 or $0.54 per share - basic and diluted, on
2,607,000 basic and 2,611,000 diluted weighted average shares outstanding, for
the year ended December 31, 2001. Net income was $628,000 or $0.22 per share -
basic and $0.21 per share diluted, on 2,899,000 basic and 2,924,000 diluted
weighted average shares outstanding, for the year ended December 31, 2000.
The net loss for 2001 includes $852,000 of non-cash write-downs and
adjustments consisting of a $400,000 reserve against a deferred income tax
receivable, a $310,000 write-down of a non-marketable merchant banking
investment and $142,000 of write-offs, primarily related to impaired purchased
servicing rights. Net income for 2000 includes a write-down of $600,000, after
income tax benefit of $400,000, from the impairment of a non-marketable
investment.
Total revenues for the year ended December 31, 2001 were $18,652,000 a
decrease of $1,754,000 or 9%, compared to $20,406,000 for 2000. The decrease in
revenues for 2001 primarily results from lower total commission and principal
transaction revenues of $2,396,000 at Fechtor Detwiler, decreased commission
revenues of $613,000 at JMC and reduced interest income of $567,000 and lower
gains on investments of $599,000 at Fechtor Detwiler. Such decreases were
partially offset by $2,486,000 of principal transaction revenues at K&S and
commission revenues of $90,000 at DMC UK.
Commission revenues for the year ended December 31, 2001 were
$12,450,000, an increase of $454,000 compared to last year primarily due to
higher institutional commissions from channel research information. Such
increases were partially offset by lower retail commissions at Fechtor Detwiler
and lower annuity sales commissions at JMC due to market conditions.
Principal transaction revenues for the year ended December 31, 2001
were $4,873,000, a decrease of $962,000, or 17% compared to last year. The
decrease primarily results from a decrease of $3,453,000 in principal
transaction revenues at Fechtor Detwiler from reduced customer trading
activities partially offset by $2,486,000 of principal transaction revenues at
K&S which was acquired effective January 1, 2001.
Investment banking revenues for the year ended December 31, 2001 were
$905,000, a decrease of $176,000 compared to last year due primarily to market
factors.
Realized and unrealized gains (losses) on investments, net were
$(283,000) compared to $317,000 in 2000. Results for 2001 include a write-down
of $310,000 reflecting the decrease in fair value of a non-marketable merchant
banking investment, partially offset by $32,000 of unrealized gains. Results for
2000 included an unrealized gain of $210,000 on the same non-marketable merchant
banking investment.
Interest income for the year ended December 31, 2001 was $353,000, a
decrease of $557,000 compared to last year due to significantly reduced customer
margin account balances, lower cash in banks and lower interest rates.
Compensation and benefits expense of $11,554,000 for the year ended
December 31, 2001 decreased $684,000 compared to last year principally due to
lower principal transaction revenues at Fechtor Detwiler, partially offset by
compensation and benefits expense in 2001 at K&S and DMC UK.
11
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations (Continued)
Statement of Operations for 2001 Compared to 2000 (Continued)
General and administrative expense of $2,713,000 for the year ended
December 31, 2001 increased $325,000 compared to last year due primarily to
expenses incurred at K&S and DMC UK.
Occupancy, communications and systems expense of $1,508,000 increased
$380,000 compared to last year due primarily to costs at DMC UK and K&S as well
as trading system enhancements at Fechtor Detwiler.
Execution costs of $3,824,000 for the year ended December 31, 2001
increased $1,542,000 compared to last year due primarily to execution costs at
K&S, partially offset by lower execution costs at Fechtor Detwiler due to lower
principal transaction revenues and lower execution costs from the
internalization of trading services.
Interest expense of $57,000 for the year ended December 31, 2001
decreased $168,000 compared to the last year due to lower average notes payable
balances from reduced customer margin accounts and lower interest rates.
Partially offsetting the decrease in interest expense is interest on the
$300,000 of promissory notes issued in connection with the K&S acquisition.
Income tax expense of $337,000 for 2001 primarily results from the
establishment of a $400,000 reserve against previously recorded deferred income
taxes receivable, the reversal of an $80,000 deferred income tax payable from an
unrealized gain on a non-marketable merchant banking investment previously
recorded in 2000 and nominal state income tax benefit. Income tax expense of
$509,000 for 2000 results from tax expense on income before income taxes.
Statement of Operations for 2000 Compared to 1999
Net income of $628,000 or $0.22 per share - basic and $0.21 per share -
diluted, on 2,899,000 basic and 2,924,000 diluted weighted average shares
outstanding, for the year ended December 31, 2000 compared to net loss of
$849,000 or $0.39 per share - basic and diluted, on 2,174,000 basic and diluted
weighted average shares outstanding, for the year ended December 31, 1999. Net
income includes a write-down of $600,000, after income tax benefit of $400,000,
from the impairment of a non-marketable investment for the year ended December
31, 2000. The net loss for 1999 includes settlement and merger costs of
$2,137,000 and non-cash compensation expense of $850,000.
Total revenues for the year ended December 31, 2000 were $20,406,000 an
increase of $5,252,000 or 35%, compared to $15,154,000 for 1999. The increase
primarily results from increased commissions and principal transaction revenues
from broker-dealer operations for 2000 compared to 1999. Additionally, twelve
months of revenues of James Mitchell & Co. are included in 2000 compared to four
months of revenues reported for 1999 reflecting the September 1, 1999 Merger
date.
Commission revenues for the year ended December 31, 2000 were
$11,996,000, an increase of $3,918,000 compared to 1999 primarily due to higher
institutional and retail commissions.
Principal transaction revenues for the year ended December 31, 2000
were $5,835,000, an increase of $334,000 compared to 1999. The increase results
from higher principal transaction revenues at Fechtor Detwiler from increased
client trading activities.
Investment banking revenues for the year ended December 31, 2000 were
$881,000, an increase of $634,000 compared to 1999 due primarily to increased
investment banking activity during 2000.
Interest income for the year ended December 31, 2000 was $911,000, a
decrease of $20,000 compared to 1999 due to slightly reduced customer margin
account balances and lower interest rates.
12
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations (Continued)
Statement of Operations for 2000 Compared to 1999 (Continued)
Compensation and benefits expense of $12,239,000 for the year ended
December 31, 2000 increased $2,696,000 compared to 1999 due to variable
commissions paid on higher transaction volume at Fechtor Detwiler and a full
year of compensation and benefit expenses of James Mitchell & Co. Compensation
and benefits expense for 1999 includes a non-recurring, non-cash compensation
expense of $850,000 related to the Merger.
Occupancy, communications and systems expense of $1,128,000 decreased
$25,000 compared to 1999 due primarily to a slight reduction of space at Fechtor
Detwiler.
General and administrative expense of $2,388,000 for the year ended
December 31, 2000 increased $747,000 compared to 1999 due to a full year of
expenses of James Mitchell & Co. recorded in 2000.
Execution costs of $2,282,000 for the year ended December 31, 2000
increased $766,000 compared to 1999 due primarily to increased execution costs
transaction-based commission revenues paid to other broker-dealers.
Interest expense of $225,000 for the year ended December 31, 2000
decreased $165,000 compared to 1999 due to lower average notes payable balances
from reduced customer margin accounts.
Income tax expense of $509,000 for 2000 results from tax expense on
income before income taxes. Income tax benefit of $388,000 is for 1999 results
from tax benefits on the loss before income taxes after adjustments of
non-deductible expenses.
The investment of $1,000,000 in OptiMark was written off during 2000,
representing a net adjustment of $600,000 after income tax benefit, based upon
information received indicating impairment of the investment.
Capital Resources and Liquidity
The Company finances its activities primarily from cash generated by
operations and stockholders' equity. Cash and cash equivalents at December 31,
2001 of $1,135,000 decreased $1,602,000 from December 31, 2000 primarily due to
costs incurred for the acquisition of K&S and start-up costs and operating
losses at DMC UK. At December 31, 2001, cash and cash equivalents included
$746,000 of restricted funds consisting of clearing deposits with The Boston
Stock Exchange and The Securities and Futures Authority.
Fechtor Detwiler has two revolving line of credit facilities which are
collateralized by securities in customer margin accounts. The maximum borrowings
of the combined facilities are $15,000,000 and repayment of each facility is
based on the underlying collateral. There were $1,800,000 of advances under such
lines of credit at December 31, 2001.
On January 25, 2001, the Company acquired K. & S., Inc., a specialist
firm with operations at the Boston Stock Exchange effective January 1, 2001. The
Company financed the acquisition with $1.2 million in cash (net of cash
acquired), 25,000 in shares of common stock valued at $62,500 and a note payable
of $300,000. The note payable earns interest at the prime rate and is due in two
equal installments, of which $150,000 was paid in January 2002 and the balance
is due in January 2003. K&S will no longer pursue the trading of NASDAQ
securities due to outside technical difficulties causing delays in receiving
meaningful order flow and market uncertainties for this line of business.
DMC UK received approval to operate in the UK on July 30, 2001.
Accordingly, its institutional sales and investment banking activities began on
August 1, 2001. Net loss of DMC UK for 2001 was $672,000 and includes $416,000
in total expenses for the seven-month regulatory approval and the start-up phase
of the UK operations prior to the commencement of operations.
13
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations (Continued)
Capital Resources and Liquidity (Continued)
Additionally, as discussed below, National Financial Services LLC
("NFS"), a wholly owned subsidiary of Fidelity Investments, has been engaged to
clear customer transactions on a fully disclosed basis. Upon completion of this
conversion, the Company expects to enhance its liquidity and working capital.
However, the Company will terminate its lines of credit at the time of
conversion and will no longer have access to such lines of credit for working
capital purposes.
Change from a Self-Clearing to a Fully Disclosed Broker Dealer
In February 2002, Fechtor Detwiler engaged National Financial Services
LLC ("NFS"), a wholly owned subsidiary of Fidelity Investments, to clear
customer transactions on a fully disclosed basis. Effective on or about April
26, 2002, customer accounts and related transactions of the Firm will be
processed by NFS. Accordingly, Fechtor Detwiler will no longer be a
self-clearing broker dealer and will no longer hold funds on behalf of its
customers. As a result, the NASD minimum net capital requirement will be reduced
to $100,000, from the current requirement of $250,000, upon completion of the
conversion. However, Fechtor Detwiler has agreed with NFS to maintain regulatory
net capital of $500,000 through December 31, 2002, increasing to $750,000
through June 30, 2003, and $1,000,000 on July 1, 2003 and beyond. Additionally,
the Firm has agreed with NFS to maintain a $250,000 escrow clearing deposit
until July 2003 when it will then be reduced to $100,000.
Management's decision to change from a self-clearing broker dealer to a
fully disclosed broker dealer was based upon several factors. Most significant
were the competitive environment of the securities industry, expanded products
and services the Firm will be able to offer its customers, business risks
associated with remaining a self-clearing broker dealer, increased insurance
coverage for customer accounts, and the ability to retain and hire competent
retail broker and financial planning sales professionals because of enhanced
products and services offered by NFS. Additionally, the net operating costs of
the Firm are not expected to increase significantly when the conversion from a
self-clearing broker dealer to a fully disclosed broker dealer has been
completed.
The aforementioned actions will have a significant impact on Fechtor
Detwiler's balance sheet and liquidity. Upon conversion, NFS will pay Fechtor
Detwiler for balances due from customers, securities borrowed, and receivables
from brokers, dealers and clearing organizations. Conversely, Fechtor Detwiler
will pay NFS for assuming its liabilities due to customers, and payables to
brokers, dealers and clearing organizations. Fechtor Detwiler will use the net
proceeds received from NFS to fully pay off advances under its lines of credit.
After conversion, balances in receivables and payables to brokers, dealers and
clearing organizations will no longer be necessary and certain clearing deposits
with the National Securities Clearing Corporation ("NSCC") and Deposit Trust Co.
("DTC") will be returned. Furthermore, Fechtor Detwiler's lines of credit will
terminate. Thus, liquidity of Fechtor Detwiler will be enhanced from increases
in cash made available from the transfer of due from customer balances and
securities borrowed to NFS and the return of certain clearing deposits from both
the NSCC and DTC.
Cautionary Statement for Purposes of the "Safe Harbor" Provisions of the Private
Securities Litigation Reform Act
Any statements in this report that are not historical facts are
intended to fall within the safe harbor for forward-looking statements provided
by the Private Securities Litigation Reform Act of 1995. These statements may be
identified by such forward-looking terminology as "expect", "look", "believe",
"anticipate", "may", "will" or similar statements or variations of such terms.
Any forward-looking statements should be considered in light of the risks and
uncertainties associated with Detwiler, Mitchell & Co. and its businesses,
economic and market conditions prevailing from time to time, and the application
and interpretation of Federal and state tax laws and regulations, all of which
are subject to material changes and which may cause actual results to vary
materially from what had been anticipated. Certain factors that affect Detwiler,
Mitchell & Co. include conditions affecting revenues, reliance on key personnel,
competition, and regulatory and legal matters as follows:
14
Item 7. 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)
Conditions Affecting Revenues. Revenues, cash flows and earnings of the
Company may be adversely affected by volatility in the financial markets and
fluctuating economic and political conditions which could produce lower
commissions, and lower trading or investment banking revenues, or by a decline
in client account balances resulting from changing industry or economic
conditions or the performance of the capital markets.
Reliance on Key Personnel. The departure of key personnel, such as
skilled institutional and retail brokers, traders, research analysts or
employees responsible for significant client relationships, could have a
material adverse effect on the results of operations of the Company.
Competition. The Company may experience losses in client account
balances due to the highly competitive nature of its business, the performance
of client accounts compared to the performance of the market generally, the
abilities and reputations of the Company and its ability to attract new client
accounts and retain existing client relationships and changes in the brokerage
business such as the growth of internet security trading and information
availability.
Regulatory and Legal Factors. The Company's business may be affected by
developments or changes in applicable regulations, as well as by legal
proceedings and claims arising from the conduct of its businesses.
Strategic Outlook
During 2001, the Company continued its efforts to identify revenue
enhancement opportunities and cost reductions, while ensuring clients continue
to receive the quality service and research information they expect. Market
conditions, however, were difficult. As a result, revenues from commissions and
principal transactions decreased sharply due to a lack of client volume.
Decimalization reduced the level of trading profits at both Fechtor Detwiler and
K&S from levels experienced prior to April 1, 2001. With respect to DMC UK, the
regulatory approval process was significantly longer than anticipated resulting
in the occurrence of greater than expected start-up and operating costs.
Additionally, when licensing was approved by the UK regulatory authority, the
significantly weakened global financial markets greatly diminished initial
revenue generation opportunities for this startup venture. At Fechtor Detwiler,
retail commissions and associated interest revenue on customer margin accounts
were lower due to diminished transaction volumes and balances. Finally, demand
for investment banking products and services was almost non-existent. Increases
in institutional sales, however, were achieved from the strength of the
Company's "Channel Notes" research information on the semiconductor equipment
manufacturing, semiconductor microprocessor and memory, and networking
industries.
For some period of time, the Compensation Committee of the Board of
Directors and an industry consultant have been addressing the compensation plan
of each revenue production department to ensure the interests of employees and
stockholders were aligned. Effective December 1, 2001, a new compensation plan
was implemented for institutional sales, research and trading professionals
which management believes aligns total compensation with the interests of
stockholders and is more consistent with changing industry standards as
described below.
In October 2001, the Managing Director of Research of Fechtor Detwiler
was asked to resign. Shortly thereafter, Andrew Detwiler, Director and President
of the Company and Director and CEO of Fechtor Detwiler, and several members of
the institutional sales, research and trading departments resigned.
Subsequently, there was an adverse impact on revenues and earnings. However, the
aforementioned personnel changes have allowed Fechtor Detwiler to hire three
highly skilled research analysts, which has expanded and enhanced its research
industry coverage, and one institutional sales representative. Additionally, the
weaknesses in the financial services and technology industries have made
available competent candidates, which the Company believes has and will continue
to facilitate hiring skilled professionals.
15
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations (Continued)
Strategic Outlook (Continued)
Management continues to identify revenue enhancement and cost reduction
opportunities. On October 9, 2001, an independent brokerage initiative was
begun, DMC Financial Services, with the addition of 26 non-salaried financial
planners, all independent contractors. Fechtor Detwiler receives a portion of
their commission revenues and other fees to process equity trades, mutual fund
trades and annuity sales. DMC UK has begun to generate agency commissions and
investment banking revenues using its alternative energy industry research
information, client relationships and the "Channel Research" notes provided by
Fechtor Detwiler.
The new compensation plan was implemented at Fechtor Detwiler December
1, 2001 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 will be shared by
employees and the Firm; employees will be paid a guaranteed salary; bonuses
earned in excess of the guaranteed salary will be 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, all 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.
Recent Accounting Developments
In July 2001, the Financial Accounting Standards Board issued SFAS No.
141, "Business Combinations" and SFAS No. 142, "Goodwill and Intangible Assets."
SFAS No. 141 requires that all business combinations initiated after September
30, 2001 be accounted for using the purchase method of accounting, and prohibits
the use of the pooling-of-interests method for such transactions. The new
standard also requires identified intangible assets acquired in a business
combination to be recognized as an asset apart from goodwill if they meet
certain criteria.
SFAS No. 142 applies to all goodwill and identified intangible assets
acquired in a business combination. Under the new standard, all goodwill,
including that acquired before initial application of the standard, should not
be amortized but should be tested for impairment at least annually. Identified
intangible assets should be amortized over their useful lives and reviewed for
impairment in accordance with SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of." Within six
months of initial application of the new standard, a transitional impairment
test must be performed on all goodwill. Any impairment loss recognized as a
result of the transitional impairment test should be reported as a change in
accounting principle. In addition to the transitional impairment test, the
required annual impairment test should be performed in the year of adoption of
the standard.
The new standard is effective for fiscal years beginning after December
15, 2001, and must be adopted as of the beginning of a fiscal year. Retroactive
application is not permitted. The Company adopted the new standard on January 1,
2002, and ceased the amortization of its intangible assets ("goodwill"), which
totaled $78,000 for the year ended December 31, 2001. The Company is currently
evaluating the potential impact of the standard's transitional impairment test
on its financial position and results of operations.
SFAS No. 143 "Accounting for Asset Retirement Obligations" (SFAS No.
143) was issued in June 2001 and requires the fair value of a liability for an
asset retirement obligation to be recorded in the period in which it is
incurred. The associated asset retirement costs must be capitalized as part of
the carrying amount of the long-lived asset. The standard is effective for
fiscal years beginning after June 15, 2002. SFAS No. 144 "Accounting for the
Impairment or Disposal of Long-Lived Assets"(SFAS No. 144) was issued in August
2001 and addresses financial accounting and reporting for the impairment or
disposal of long-lived assets. SFAS No. 144 is effective for financial
statements issued for fiscal years beginning after December 15, 2001. The
Company is currently evaluating the impact SFAS No. 143 and SFAS No. 144, if
any, have on its financial position and results of operations
Item 7a. Quantitative and Qualitative Disclosures about Market Risk.
Not Applicable.
16
Item 8. Financial Statements and Supplementary Data
DETWILER, MITCHELL & CO.
CONSOLIDATED STATEMENT OF FINANCIAL CONDITION
At December 31
2001 2000
---------------- ----------------
ASSETS
Cash and cash equivalents $ 1,135,218 $ 2,737,434
Deposits with clearing organizations 268,604 415,194
Receivables from brokers, dealers and clearing organizations 15,093 535,836
Due from customers 5,038,833 3,598,699
Securities borrowed 445,400 3,279,900
Marketable investments, at fair value 31,995 15,681
Non-marketable investments, at fair value 250,000 510,000
Fixed assets, net 565,933 437,850
Intangible assets, net 1,567,885 123,385
Other 1,395,881 1,688,817
---------------- ----------------
Total Assets $ 10,714,842 $ 13,342,796
================ ================
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Notes payable $ 2,100,000 $ -
Payable to brokers, dealers and clearing organizations 1,410,829 117,811
Due to customers 929,737 4,035,739
Salary and commissions payable 314,258 1,329,837
Accounts payable and accrued liabilities 746,185 1,300,947
---------------- ----------------
Total Liabilities 5,501,009 6,784,334
---------------- ----------------
Contingencies (note 10)
Stockholders' Equity:
Preferred stock, no par value; 5,000,000 shares authorized,
none issued - -
Common stock, $0.01 par value; 20,000,000 shares authorized;
2,652,357 and 2,589,313 shares outstanding
at December 31, 2001 and 2000 26,523 25,893
Paid-in-capital 4,728,987 4,655,273
Retained earnings 458,323 1,877,296
---------------- ----------------
Total Stockholders' Equity 5,213,833 6,558,462
---------------- ----------------
Total Liabilities and Stockholders' Equity $ 10,714,842 $ 13,342,796
================ ================
See Accompanying Notes to Consolidated Financial Statements.
17
DETWILER, MITCHELL & CO.
CONSOLIDATED STATEMENT OF OPERATIONS
For the Years Ended December 31
2001 2000 1999
------------------ ---------------- -----------------
Revenues:
Commissions $ 12,449,675 $ 11,995,968 $ 8,078,222
Principal transactions 4,872,853 5,835,285 5,501,075
Investment banking 905,131 880,977 246,497
Realized and unrealized gains (losses) on
investments; net (282,550) 316,529 -
Interest 358,305 910,652 930,701
Other 348,608 466,569 397,868
------------------ ---------------- -----------------
Total revenues 18,652,022 20,405,980 15,154,363
------------------ ---------------- -----------------
Expenses:
Compensation and benefits 11,554,396 12,238,521 9,542,983
General and administrative 2,713,123 2,388,433 1,641,036
Execution costs 3,823,939 2,282,339 1,516,604
Occupancy, communications and systems 1,507,887 1,128,162 1,153,904
Interest 56,658 225,435 390,088
Amortization of intangibles 78,000 6,000 9,625
Impairment of non-marketable investment - 1,000,000 -
Settlement and merger - - 2,136,931
------------------ ---------------- -----------------
Total expenses 19,734,003 19,268,890 16,391,171
------------------ ---------------- -----------------
Income (loss) before income taxes (1,081,981) 1,137,090 (1,236,808)
Income tax (expense) benefit (336,992) (509,335) 387,582
------------------ ---------------- -----------------
Net income (loss) $ (1,418,973) $ 627,755 $ (849,226)
================== ================ =================
Net income (loss) per share--basic $ (0.54) $ 0.22 $ (0.39)
================== ================ =================
Net income (loss) per share--diluted $ (0.54) $ 0.21 $ (0.39)
================== ================ =================
Weighted average shares outstanding:
Basic 2,606,524 2,898,723 2,174,089
================== ================ =================
Diluted 2,610,690 2,923,580 2,174,089
================== ================ =================
See Accompanying Notes to Consolidated Financial Statements.
18
DETWILER, MITCHELL & CO.
CONSOLIDATED STATEMENT OF CHANGES IN
STOCKHOLDERS' EQUITY
For the Years Ended December 31
Common Stock Paid-in Retained Treasury
--------------------------
Shares Amount Capital Earnings Stock Total
----------- ----------- ----------- ----------- ----------- -----------
December 31, 1998 1,650,000 $ 16,500 $ 49,500 $ 2,098,767 $ - $ 2,164,767
Common stock
from acquisition 1,541,613 15,416 6,151,035 - - 6,166,451
Issuance of common stock 37,500 375 149,625 - - 150,000
Capital contribution - - 850,000 - - 850,000
Purchase of treasury stock (33,800) - - - (137,079) (137,079)
Net loss - - - (849,226) - (849,226)
----------- ----------- ----------- ----------- ----------- -----------
December 31, 1999 3,195,313 32,291 7,200,160 1,249,541 (137,079) 8,344,913
Issuance of common stock 6,000 60 22,440 - - 22,500
Retirement of treasury stock - (338) (136,741) - 137,079 -
Purchase and retirement
of treasury stock (612,000) (6,120) (2,430,586) - - (2,436,706)
Net income - - - 627,755 - 627,755
----------- ----------- ----------- ----------- ----------- -----------
December 31, 2000 2,589,313 25,893 4,655,273 1,877,296 - 6,558,462
Issuance of common stock 75,044 750 111,750 - - 112,500
Purchase and retirement
of treasury stock (12,000) (120) (38,036) - - (38,156)
Net loss - - - (1,418,973) - (1,418,973)
----------- ----------- ----------- ----------- ----------- -----------
December 31, 2001 2,652,357 $ 26,523 $ 4,728,987 $ 458,323 $ - $ 5,213,833
=========== =========== =========== =========== =========== ===========
See Accompanying Notes to Consolidated Financial Statements.
19
DETWILER, MITCHELL & CO.
CONSOLIDATED STATEMENT OF CASH FLOWS
For the Years Ended December 31
2001 2000 1999
----------- ----------- ----------
Cash Flows from Operating Activities:
Net income (loss) $(1,418,973) $ 627,755 $ (849,226)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization 210,408 229,520 116,676
Realized and unrealized gains on investments, net 278,005 (316,529) -
Impairment of non-marketable investments - 1,000,000 -
Amortization of intangibles 78,000 6,000 9,625
Non-cash compensation expense - - 850,000
Changes in:
Deposits with clearing organizations 146,590 (65,735) (48,372)
Receivables from brokers, dealers and clearing organizations 520,743 483,778 (936,375)
Due from customers (1,440,134) 8,359,405 (3,878,293)
Securities borrowed 2,834,500 (3,208,700) 744,450
Other assets 332,936 (111,889) (370,962)
Payables to brokers, dealers and clearing organizations 1,293,018 - -
Due to customers (3,106,002) (172,535) 906,112
Salaries and commissions payable (1,015,579) - -
Accounts payable and accrued liabilities and other (554,762) 459,427 780,654
----------- ----------- -----------
Net cash provided by (used in) operating activities (1,841,250) 7,290,497 (2,675,711)
----------- ----------- -----------
Cash Flows from Investing Activities:
Purchase of investment securities (50,000) (427,765) -
Proceeds from sale of investment securities 15,681 221,985 -
Capital expenditures (338,491) (205,903) (301,164)
Cash acquired from merger - - 4,613,147
----------- ----------- -----------
Net cash provided by (used in) investing activities (372,810) (411,683) 4,311,983
----------- ----------- -----------
Cash Flows from Financing Activities:
Acquisition of K&S, net of cash acquired (1,200,000) - -
Increase (decrease) in notes payable 1,800,000 (3,000,000) (800,000)
Issuance of common stock 50,000 - -
Proceeds from exercise of common stock options - 22,500 -
Purchase and retirement of treasury stock (38,156) (2,436,706) (137,079)
----------- ----------- -----------
Net cash provided by (used in) financing activities 611,844 (5,414,206) (937,079)
----------- ----------- -----------
Net increase (decrease) in cash (1,602,216) 1,464,608 699,193
Cash and cash equivalents at beginning of year 2,737,434 1,272,826 573,633
----------- ----------- -----------
Cash and cash equivalents at end of year $ 1,135,218 $ 2,737,434 $ 1,272,826
=========== =========== ===========
Cash Payments:
Interest expense $ 56,658 $ 216,231 $ 384,522
=========== =========== ===========
Income taxes $ 574,130 $ 314,000 $ 21,019
=========== =========== ===========
Supplemental Disclosure of Non-Cash Transactions:
Increase in intangible assets, net $ 22,500 $ - $ 139,010
=========== =========== ===========
Increase in other assets $ 40,000 $ - $ -
=========== =========== ===========
Increase in notes payable $ 300,000 $ - $ -
=========== =========== ===========
Increase in common stock $ 750 $ - $ 63,165
=========== =========== ===========
Increase in paid-in-capital $ 111,750 $ - $ 7,103,286
=========== =========== ===========
See Accompanying Notes to Consolidated Financial Statements.
20
DETWILER, MITCHELL & CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Organization
Detwiler, Mitchell & Co. is the holding company for its four principal
operating subsidiaries, Fechtor, Detwiler & Co., Inc., an investment banking and
brokerage company headquartered in Boston, MA; K. & S., Inc. ("K&S"), a
specialist firm with operations on the Boston Stock Exchange; James Mitchell &
Co., a financial services company located in San Diego, CA; and Detwiler,
Mitchell & Co. (UK) Limited ("DMC UK"), an institutional sales and investment
banking firm headquartered in London, England.
Note 2. Summary of Significant Accounting Policies
Basis of Presentation -- The consolidated financial statements of
Detwiler, Mitchell & Co. have been prepared in accordance with the rules and
regulations of the Securities and Exchange Commission and generally accepted
accounting principles. In the opinion of management, all adjustments, consisting
only of normal recurring accruals, have been made to present fairly the
financial statements of the Company.
Principles of Consolidation -- The consolidated financial statements of
Detwiler, Mitchell & Co. include the accounts of its wholly owned subsidiaries.
All material intercompany transactions have been eliminated in consolidation.
Marketable and Non-Marketable Investments -- The Company may receive,
as additional consideration for the performance of investment banking services,
warrants to acquire an equity interest in firms or may lend to or make direct
equity investments in companies through its merchant banking activities.
Marketable and non-marketable investments are recorded at fair value and result
in the recognition of unrealized gains or losses due to changes in their fair
value. Realized gains and losses are recognized when the investment is sold.
Fair Value of Other Financial Instruments -- The carrying amount of
receivables, payables, and securities owned and securities sold, not yet
purchased are reported in the statement of financial condition at fair value.
Securities Transactions -- Proprietary securities transactions in
regular way trades are recorded on the settlement date (normally the third
business day following the trade date) which is not materially different from
the trade date. Securities transactions for customers are reported on the
settlement date. Commission revenues and expenses are recorded on the trade
date.
Principal Transactions -- Principal transactions revenues primarily
represent amounts earned from executing transactions on behalf of customers in
securities for which the Company acts as a market maker.
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.
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.
21
DETWILER, MITCHELL & CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 3. Net Capital Requirement
The Company's primary 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 that minimum net capital be the
greater of $250,000 or 2% of the aggregate debit items arising from customer
transactions.
At December 31, 2001, Fechtor Detwiler's net capital of $1,135,000 was
$885,000 in excess of the minimum net capital requirement of $250,000. At
December 31, 2001, Fechtor Detwiler's ratio of aggregate indebtedness to net
capital was 5.18 to 1.00.
Note 4. Earnings Per Share
Basic and diluted net income (loss) per share and weighted average
shares outstanding at December 31 follows:
2001 2000 1999
----------------- --------------- ----------------
Net income (loss) $ (1,418,973) $ 627,755 $ (849,226)
================= =============== ================
Net income (loss) per share:
Basic $ (0.54) $ 0.22 $ (0.39)
================= =============== ================
Diluted $ (0.54) $ 0.21 $ (0.39)
================= =============== ================
Weighted average shares outstanding:
Basic 2,606,524 2,898,723 2,174,089
Incremental shares assumed outstanding
from exercise of stock options 4,166 24,857 -
----------------- --------------- ----------------
Diluted 2,610,690 2,923,580 2,174,089
================= =============== ================
Note 5. Change from a Self-Clearing to a Fully Disclosed Broker Dealer
(Unaudited)
In February 2002, Fechtor Detwiler engaged National Financial Services
LLC ("NFS"), a wholly owned subsidiary of Fidelity Investments, to clear
customer transactions on a fully disclosed basis. Effective on or about April
26, 2002, customer accounts and related transactions of the Firm will be
processed by NFS. Accordingly, Fechtor Detwiler will no longer be a
self-clearing broker dealer and will no longer hold funds on behalf of its
customers. As a result, the NASD minimum net capital requirement will be reduced
to $100,000, from the current requirement of $250,000, upon completion of the
conversion. However, Fechtor Detwiler has agreed with NFS to maintain regulatory
net capital of $500,000 through December 31, 2002, increasing to $750,000
through June 30, 2003, and $1,000,000 on July 1, 2003 and beyond. Additionally,
the Firm has agreed with NFS to maintain a $250,000 escrow clearing deposit
until July 2003 when it will then be reduced to $100,000.
Management's decision to change from a self-clearing broker dealer to a
fully disclosed broker dealer was based upon several factors. Most significant
were the competitive environment of the securities industry, expanded products
and services the Firm will be able to offer its customers, business risks
associated with remaining a self-clearing broker dealer, increased insurance
coverage for customer accounts, and the ability to retain and hire competent
retail broker and financial planning sales professionals because of enhanced
products and services offered by NFS. Additionally, the net operating costs of
the Firm are not expected to increase significantly when the conversion from a
self-clearing broker dealer to a fully disclosed broker dealer has been
completed.
22
DETWILER, MITCHELL & CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 5. Change from a Self-Clearing to a Fully Disclosed Broker Dealer
(Unaudited) (Continued)
The aforementioned actions will have a significant impact on Fechtor
Detwiler's balance sheet and liquidity. Upon conversion, NFS will pay Fechtor
Detwiler for balances due from customers, securities borrowed, and receivables
from brokers, dealers and clearing organizations. Conversely, Fechtor Detwiler
will pay NFS for assuming its liabilities due to customers, and payables to
brokers, dealers and clearing organizations. Fechtor Detwiler will use the net
proceeds received from NFS to fully pay off advances under its lines of credit.
After conversion, balances in receivables and payables to brokers, dealers and
clearing organizations will no longer be necessary and certain clearing deposits
with the National Securities Clearing Corporation ("NSCC") and Deposit Trust Co.
("DTC") will be returned. Furthermore, Fechtor Detwiler's lines of credit will
terminate. Thus, liquidity of Fechtor Detwiler will be enhanced from increases
in cash made available from the transfer of due from customer balances and
securities borrowed to NFS and the return of certain clearing deposits from both
the NSCC and DTC.
Note 6. Marketable and Non-Marketable Investments
An unrealized loss of $310,000 was recorded in 2001 reflecting the
write-down of a non-marketable merchant banking investment. Partially offsetting
such losses was a $32,000 unrealized gain from common shares received from the
demutualization of two employee benefit services provider firms in 2001.
Realized and unrealized gains of $317,000 for the year ended December 31, 2000
were comprised of a realized gain of $114,000 and an unrealized gain of $203,000
on the same non-marketable merchant banking investment. Unrealized gains
(losses) are based on the underlying estimated fair value of the respective
investments.
The $1,000,000 investment in OptiMark Technologies, Inc. was
written-off in 2000 representing a net charge to operations of $600,000 after
recording a $400,000 deferred income tax benefit. The impairment loss was
recorded based upon information received throughout 2000, indicating impairment
of such investment. In 2001, a deferred income tax valuation allowance was
established for the deferred income tax benefit recorded in 2001.
Note 7. Fixed Assets
Fixed assets consisted of the following at December 31:
2001 2000
----------------- -----------------
Furniture and equipment $ 926,751 $ 642,203
Leasehold improvements 82,420 29,507
----------------- -----------------
1,009,171 671,710
Less accumulated depreciation and amortization (443,238) (233,860)
----------------- -----------------
$ 565,933 $ 437,850
================= =================
Office space is leased under noncancelable leases expiring through
2007. Future minimum annual lease payments at December 31, 2001 follow:
2002 $ 674,500
2003 697,000
2004 697,000
2005 697,000
2006 697,000
Thereafter 277,500
-----------------
$ 3,740,000
=================
Rent expense was $689,000, $630,000 and $660,000 for the years ended
December 31, 2001, 2000 and 1999, respectively.
23
DETWILER, MITCHELL & CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 8. Notes Payable
Fechtor Detwiler has two revolving line-of-credit facilities totaling
$15,000,000, are due on demand, and are collateralized by certain securities
held in customer margin accounts. 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 under these facilities were
$1,800,000 and $0 at December 31, 2001 and 2000, respectively. Repayment of
advances under the facilities are based on the underlying collateral.
Note 9. Income Taxes
Actual income tax (expense) benefit differs from the amount "expected"
computed using the statutory Federal tax rate for the years ended December 31 as
follows:
2001 2000
--------------- ---------------
Expected income tax (expense) benefit using
statutory rate of 34% $ 367,874 $ (386,610)
Effects of:
Valuation allowances (633,884) -
Meals and other (33,597) (51,429)
Non-deductible amortization of intangible assets (26,520) -
UK rate differential (25,850) -
State income taxes, net of Federal tax benefit 14,985 (71,296)
--------------- ---------------
$ (336,992) $ (509,335)
=============== ===============
The difference between the provision for taxes on income and expected
taxes on income at statutory rates primarily results from certain nondeductible
expenses and the establishment of a deferred tax valuation allowance.
Components of the deferred tax asset at December 31 are as follows:
2001 2000
--------------- ---------------
Impairment of investment $ 400,000 $ 400,000
Compensation 340,000 340,000
Foreign subsidiary loss 193,884 -
Unrealized gain (loss) on investments 44,673 (81,145)
Fixed assets 38,244 14,950
Accrued liabilities 31,600 14,400
Net operating loss - 1,155
--------------- ---------------
Subtotal 1,048,401 689,360
Valuation allowances (633,884) -
--------------- ---------------
$ 414,517 $ 689,360
=============== ===============
The deferred tax asset for compensation is related to stock options
granted in 1999. If, at the time of exercise, the stock's fair market value is
less than the fair market value on the grant date, the asset may not be fully
realized.
24
DETWILER, MITCHELL & CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 9. Income Taxes (Continued)
Income tax (expense) benefit for the years ended December 31 follows:
2001 2000 1999
---------------- ---------------- ------------------
Current:
Federal $ (20,012) $ (520,231) $ -
State (6,798) (148,864) -
Deferred 323,702 159,760 387,582
Valuation allowances (633,884) - -
---------------- ---------------- ------------------
$ (336,992) $ (509,335) $ 387,582
================ ================ ==================
Note 10. Contingencies
Legal Proceedings
Seven former employees of Fechtor Detwiler filed a NASD arbitration
against Fechtor Detwiler in November 2001. The dispute involves a former
Managing Director of Research and Senior Institutional Salesperson of Fechtor
Detwiler, who was asked to resign by the Company in October 2001. Immediately
after the individual resigned, six other employees, the other six claimants in
the arbitration along with the former Managing Director, then resigned.
Claimants have filed this arbitration concerning their employment, alleging that
the Company made misrepresentations to them about the terms and conditions of
their employment, that they were, or constructively were, wrongfully terminated,
and that the Company has made defamatory statements about them. The claim seeks
injunctive relief and actual and punitive damages in millions of dollars of
alleged but unspecified lost compensation.
Subsequently, on December 17, 2001, the Company counterclaimed and
filed a federal action seeking injunctive relief that has been stayed pending
the arbitration. The Company intends to defend itself against the former
employees' claims and to pursue its counterclaims vigorously.
The Company believes that the arbitration claims by the seven former
employees are without merit, that the alleged damages are unsubstantiated, and
that their filing the arbitration was intended as a preemptive tactic after
Fechtor Detwiler indicated to the former employees that it intended to protect
its proprietary rights, if necessary. Fechtor Detwiler has answered denying any
liability whatsoever to the former employees, and asserted counterclaims.
Certain of the former employees involved in the arbitration proceeding
are working for competing ventures, Blackfin Research Co., Inc. and Avian
Securities, Inc. The Company has asserted counterclaims against the former
employees, Blackfin and Avian for breach of the duty of loyalty, trademark
infringement and misappropriation of the Company's proprietary information,
including the Company's customer lists. The Company seeks preliminary injunctive
relief and damages for the former employees' trademark infringement and
misappropriation.
The Company from time to time is subject to other 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.
Pledged Asset
Included in other assets at December 31, 2001 is a $283,000 treasury
security pledged as collateral for a letter of credit. The secured party does
not have the right to sell or repledge the security.
25
DETWILER, MITCHELL & CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 11. Stockholders' Equity
Reverse Split of the Common Stock
The stockholders of the Company approved a one-for-four reverse split
("Reverse Split") of the common stock on March 26, 2001. The Reverse Split
replaced existing shares with approximately 2,611,813 new shares. The Reverse
Split did not change the number of authorized shares of common stock. The total
number of shares of common stock issuable upon exercise of outstanding options
to acquire such shares, and the exercise price of such options, as well as all
calculations of earnings per share and weighted average shares and all
references to common stock have been adjusted retroactively to reflect the
Reverse Split.
Common Stock Repurchases
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, 2001,
a total of 183,200 shares had been repurchased since November 1999, at a cost of
$199,941 and such shares were retired. During 2001, 12,000 shares were
repurchased at a cost of $38,156. During 2000, the Company purchased, at market
value, 603,000 common shares from Richard Fechtor, former Chief Executive
Officer of the Company, at a total cost of $2,412,000. The purchase and
retirement of such common shares represented the entire equity interest of Mr.
Fechtor at that time. Purchases of Mr. Fechtor's common shares were approved by
the Board of Directors and were outside of the common stock repurchase plan
discussed above.
Stock Options
In 2000, the Company adopted the 2000 Omnibus Equity Incentive Plan
(the "2000 Plan") pursuant to which options to purchase an aggregate of 375,000
shares of common stock may be granted. The Company may grant options on its
common stock, stock appreciation rights, "phantom" stock and restricted stock in
an aggregate total initial amount of 375,000 shares. The total aggregate grant
amount automatically increases on January 1 of each year by the lesser of 37,500
shares, 10% of outstanding common stock, or an amount determined by the Board of
Directors. The Company had no grants of stock appreciation rights, "phantom"
stock or restricted stock during 2001 or 2000. In 1993, the Company adopted the
1993 Executive Stock Option Plan (the "Executive Plan") pursuant to which
options to purchase an aggregate of 187,500 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 187,500 shares of common stock may
be granted (collectively, the "1993 Plans"). The 1993 Plans were canceled on May
22, 2000.
26
DETWILER, MITCHELL & CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 11. Stockholders' Equity (Continued)
A summary of stock options outstanding at December 31 follows:
Weighted Average
Shares Exercise Price
------------------- ---------------------
Options assumed in business combination at
September 1, 1999 91,850 $5.04
Granted 178,000 $4.00
Forfeited (6,750) $8.64
-------------------
Outstanding at December 31, 1999 263,100 $4.24
Granted 370,500 $3.16
Forfeited (5,500) $5.44
Exercised (6,000) $3.76
-------------------
Outstanding at December 31, 2000 622,100 $3.60
Granted 532,667 $1.30
Forfeited (133,666) $3.79
Exercised - -
-------------------
Outstanding at December 31, 2001 1,021,101 $2.38
===================
Weighted average fair value of options granted during 2001 was $0.52
per share.
Of the 532,667 options granted in 2001, 243,500 options were granted
under the 2000 Plan. Options to purchase up to 289,167 shares of common stock,
of which none were granted under any plan, were granted to key individuals.
Options outstanding at December 31, 2001 are exercisable as follows: 388,270
currently exercisable, 192,917 in 2002, 156,499 in 2003, 70,915 in 2004 and
212,500 in 2005. At December 31, 2001, 159,750 options are available for future
grants under the 2000 Plan (subject to the automatic increase noted above).
The Company has granted stock options to purchase up to 1,463,333
shares of common stock pursuant to stockholder approval. These options are to be
submitted to the Company's stockholders at the 2002 Annual Meeting, and will not
be considered "issued" until such approval is received.
A summary of stock options outstanding and exercisable at December 31,
2001 follows:
Options Outstanding Options Exercisable
-----------------------------------------------------------------------------------
Weighted
Average Weighted Weighted
Remaining Average Average
Range of Life In Exercise Exercise
Exercise Price Shares Years Price Shares Price
------------------ -------------- -------------- -------------- ------------ --------------
$1.00-$1.99 431,667 5 $ 1.01 183,334 $ 1.01
$2.00-$2.99 345,650 5 $ 2.68 16,400 $ 2.75
$3.00-$3.99 103,867 4 $ 3.76 74,951 $ 3.71
$4.00-$4.99 78,000 6 $ 4.23 59,250 $ 4.27
$5.00-$5.99 51,667 2 $ 5.32 47,918 $ 5.34
$6.00-$6.99 7,250 6 $ 6.21 3,417 $ 6.29
$7.00-$7.99 3,000 1 $ 7.50 3,000 $ 7.50
-------------- ------------
1,021,101 388,270
============== ============
27
DETWILER, MITCHELL & CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 11. Stockholders' Equity (Continued)
Stock Options (Continued)
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 2000. Had compensation for the
Company's stock option plans been determined based on the fair market value at
the grant date for awards in 2001 and 2000, net income (loss) and net income
(loss) per share would be as follows:
2001 2000
----------------- -----------------
Net income (loss):
As reported $ (1,418,973) $ 627,755
Pro forma $ (1,581,079) $ 199,827
Net income (loss) per share:
As reported $ (0.54) $ 0.21
Pro forma $ (0.61) $ 0.07
The fair value of options granted during 2001 and 2000 are estimated to
be approximately $162,106 and $427,928, respectively, on the date of grant using
the Black-Scholes option-pricing model. Fair value was determined using the
following weighted average assumptions:
2001 2000
----------- ------------
Dividend yield rate 0% 0%
Volatility rate 149% 117%
Risk free interest rate 1.33% 5.69%
Expected lives 2 years 4 years
The Company adopted a stock option plan of Fechtor Detwiler in
connection with the Merger. The plan provided for the issuance of 150,000
options, granted to certain employees by the founding partners of Fechtor
Detwiler, to acquire common shares of Fechtor Detwiler prior to the Merger. In
September 1999, the Company recorded 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 $0.40 per share and the value of the
common stock of the Company at the Merger date. At December 31, 1999, 150,000
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 has a 401(k) retirement savings plan 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.
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 expires on February 21, 2010.
28
DETWILER, MITCHELL & CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 11. Stockholders' Equity (Continued)
Shareholder Rights Plan (Continued)
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 affect 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 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, 2001.
The Company's customer securities activities are transacted on either a
cash or margin basis. In margin transactions, the Company extends credit to its
customers, subject to various regulatory and internal margin requirements,
collateralized by cash and securities in the customers' accounts. In connection
with these activities, the Company executes and clears customer transactions
involving the sale of securities not yet purchased, substantially all of which
are transacted on a margin basis subject to individual exchange regulations.
Such transaction may expose the Company to significant off-balance sheet risk in
the event margin requirements are not sufficient to fully cover losses that
customers may incur. In the event the customer fails to satisfy its obligations,
the Company may be required to purchase or sell financial instruments at
prevailing market prices to fulfill the customer's obligations. The Company
seeks to control the risks associated with its customer activities by requiring
customers to maintain margin collateral in compliance with various regulatory
and internal guidelines. The Company monitors required margin levels and,
pursuant to such guidelines, requires the customer to deposit additional
collateral to reduce positions when necessary.
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.
29
DETWILER, MITCHELL & CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 12. Concentrations of Credit Risk and Off-Balance Sheet Credit Risk
(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. Acquisition of K. & S., Inc.
On January 24, 2001 the Company acquired K.& S.,Inc., a specialist firm
with operations at the Boston Stock Exchange effective January 1, 2001. K.& S.,
Inc. is one of the largest independently owned specialist operations on the
Boston Stock Exchange and was formed 28 years ago. The Company has accounted for
this transaction under the purchase method of accounting. The purchase price was
$1,562,500 (net of cash acquired) and was comprised of $1.2 million cash, a
$300,000 note payable and 25,000 shares of the Company's common stock with a
value of $62,500. The excess of purchase price over tangible assets acquired was
approximately $1,500,000 and has been recorded by the Company as intangible
assets ("goodwill").
30
DETWILER, MITCHELL & CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 14. Selected Quarterly Financial Data (Unaudited)
2001
-------------------------------------------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
------------------ ---------------- ---------------- ----------------
Revenues $ 6,480,433 $ 5,248,063 $ 4,005,061 $ 2,918,465
------------------ ---------------- ---------------- ----------------
Expenses:
Compensation and benefits 3,835,910 3,341,604 2,254,922 2,121,960
Other expenses 2,416,821 2,072,089 1,885,647 1,805,050
------------------ ---------------- ---------------- ----------------
Total Expenses 6,252,731 5,413,693 4,140,569 3,927,010
------------------ ---------------- ---------------- ----------------
Income (loss) before income taxes 227,702 (165,630) (135,508) (1,008,545)
Income tax (expense) benefit (88,215) 61,464 (37,392) (272,849)
------------------ ---------------- ---------------- ----------------
Net income $ 139,487 $ (104,166) $ (172,900) $ (1,281,394)
================== ================ ================ ================
Net income (loss) per share:
Basic $ 0.05 $ (0.04) $ (0.07) $ (0.49)
================== ================ ================ ================
Diluted $ 0.05 $ (0.04) $ (0.07) $ (0.49)
================== ================ ================ ================
Weighted average shares
outstanding:
Basic 2,609,146 2,602,313 2,604,591 2,612,322
================== ================ ================ ================
Diluted 2,646,910 2,608,751 2,607,402 2,627,465
================== ================ ================ ================
2000
--------------------------------------------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
------------------- ----------------- ---------------- -----------------
Revenues $ 5,925,519 $ 4,485,264 $ 4,522,505 $ 5,472,692
------------------- ----------------- ---------------- -----------------
Expenses:
Compensation and benefits 3,602,586 2,552,492 2,723,358 3,360,085
Other expenses 2,048,319 1,484,780 1,546,775 1,950,495
Settlement and merger costs - - - -
------------------- ----------------- ---------------- -----------------
Total Expenses 5,650,905 4,037,272 4,070,133 5,310,580
------------------- ----------------- ---------------- -----------------
Income (loss) before income taxes 274,614 447,992 252,372 162,112
Income tax (expense) benefit (109,845) (233,691) (100,949) (64,850)
------------------- ----------------- ---------------- -----------------
Net income (loss) $ 164,769 $ 214,301 $ 151,423 $ 97,262
=================== ================= ================ =================
Net income (loss) per share:
Basic $ 0.05 $ 0.07 $ 0.06 $ 0.04
=================== ================= ================ =================
Diluted $ 0.05 $ 0.07 $ 0.06 $ 0.04
Weighted average shares =================== ================= ================ =================
outstanding--
Basic 3,195,313 3,080,618 2,720,375 2,595,587
=================== ================= ================ =================
Diluted 3,268,895 3,080,618 2,725,707 2,602,247
=================== ================= ================ =================
31
Report of Independent Accountants
To the Board of Directors and Shareholders of
Detwiler, Mitchell & Co.
In our opinion, the accompanying consolidated statement of financial condition
and the related consolidated statements of operations, changes in stockholders'
equity, and cash flows present fairly, in all material respects, the financial
position of Detwiler, Mitchell & Co. and its subsidiaries at December 31, 2001
and 2000 and the results of their operations and their cash flows for the years
then ended in conformity with accounting principles generally accepted in the
United States of America. 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 audits. We conducted our audits of these
statements in accordance with auditing standards generally accepted in the
United States of America, which require that we plan and perform the audits 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, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
/s/ PricewaterhouseCoopers LLP
Boston, Massachusetts
February 27, 2002
32
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of Detwiler, Mitchell & Co.
(formerly Fechtor, Detwiler, Mitchell & Co.)
We have audited the accompanying consolidated statements of operations,
changes in stockholders' equity, and cash flows of Detwiler, Mitchell & Co.
(formerly Fechtor, Detwiler, Mitchell & Co.) (the "Company") for the year ended
December 31, 1999. 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 auditing standards generally
accepted in the United States of America. 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 consolidated financial statements referred to above
present fairly, in all material respects, Detwiler, Mitchell & Co.'s results of
operations and their cash flows for the year ended December 31, 1999 in
conformity with accounting principles generally accepted in the United States of
America.
/s/ DELOITTE & TOUCHE LLP
Boston, Massachusetts
March 9, 2000
33
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
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 Detwiler, Mitchell & Co." and "Compliance with Section 16(a) of the
Securities Exchange Act of 1934" appearing in the Company's 2002 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 2002
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 2002 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 2002 proxy statement and is
incorporated herein by reference.
34
PART IV
Item 14. Exhibits, Financial Statements, Schedules, and Reports on Form 8-K
(a)(3) The following exhibits:
3.1 Certificate of Incorporation of the Registrant.(1)
3.2 Certificate of Amendment of Certificate of Incorporation of the
Registrant.(1)
3.21 Certificate of Amendment of Certificate of Incorporation of the
Registrant.(10)
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 Executive 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) (8)
10.6 2000 Omnibus Equity Incentive Plan. (7) (8)
10.7 Employment Agreement with James K. Mitchell dated as of January 1, 2001.
(9)
10.8 Employment Agreement with Kenneth M. King effective January 1, 2001. (9)
10.9 Purchase Agreement by and between Fechtor, Detwiler, Mitchell & Co. and K.
& S., Inc. (9)
10.10 Stock Option Agreements by and between Fechtor, Detwiler, Mitchell & Co.
and George Simpkins, Philip Routledge and Dena Morrison. (9)
10.11 Form of Stock Option Agreements, authorized as of November 14, 2001,
subject to approval by stockholders at next Annual Meeting of Stockholders. (11)
10.12 Letter of Engagement between Detwiler, Mitchell & Co. and Erwin, Graves &
Associates dated October 1, 2001. (11)
22 Subsidiaries of the Registrant. (11)
23.1 Consent of PricewaterhouseCoopers LLP. (11)
23.2 Consent of Deloitte & Touche LLP. (11)
35
Item 14. Exhibits, Financial Statements, Schedules, and Reports on Form 8-K
(Continued)
(b) Reports on Form 8-K.
(1) On October 18, 2001, the Company filed a Form 8-K regarding
the October 17, 2001 announcement that Andrew Detwiler
resigned as President and Director of the Company and Chief
Executive Officer and Director of the Company's subsidiary,
Fechtor, Detwiler & Co., Inc. effective October 12, 2001.
Notes:
- ------
(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.
(8) Filed as an Exhibit to the Registrant's Form 10-K for the fiscal year
ended December 31, 1999.
(9) Filed as an Exhibit to the Registrant's Form 10-K for the fiscal year
ended December 31, 2000.
(10) Filed as an Exhibit to the Registrant's Form 8-K filed on March 30,
2001.
(11) Filed herewith.
36
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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, Chief Executive Officer March 15, 2002
- ------------------------------------ and 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 the dates indicated.
Signature Title Date
--------- ----- ----
/s/James Mitchell Chairman, Chief Executive Officer March 15, 2002
- ------------------------------------ and Director
James Mitchell
/s/Stephen Martino Chief Financial Officer and March 15, 2002
- ------------------------------------ Principal Accounting Officer
Stephen Martino
/s/Edward Baran Director March 15, 2002
- ------------------------------------
Edward Baran
/s/Barton Beek Director March 15, 2002
- ------------------------------------
Barton Beek
/s/Robert Detwiler Director and President March 15, 2002
- ------------------------------------
Robert Detwiler
/s/James Graves Director and Vice Chairman March 15, 2002
- ------------------------------------
James Graves
/s/Edward Hughes Chief Operating Officer and March 15, 2002
- ------------------------------------ Director
Edward Hughes
/s/Frank Jenkins Director March 15, 2002
- ------------------------------------
Frank Jenkins
/s/Robert Sharp Director March 15, 2002
- ------------------------------------
Robert Sharp
37