SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 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
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Commission File No. 0-6729
FIRST MONTAUK FINANCIAL CORP.
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(Exact name of registrant as specified in its charter)
New Jersey 22-1737915
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
Parkway 109 Office Center, 328 Newman Springs Rd., Red Bank, NJ 07701
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (732) 842-4700
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Former name, former address and former fiscal year, if changed since last
report.
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
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8,787,885 Common Shares, no par value, were outstanding as of May 21, 2001.
Page 1 of 10
FIRST MONTAUK FINANCIAL CORP.
FORM 10-Q
MARCH 31, 2001
INDEX
Page
PART I. FINANCIAL INFORMATION:
Item 1. Financial Statements
Consolidated Statements of Financial Condition
as of March 31, 2001 and December 31, 2000 .................... 3
Consolidated Statements of Income for the
Three Months Ended March 31, 2001 and 2000 .................... 4
Consolidated Statements of Cash Flows for the
Three Months Ended March 31, 2001 and 2000 ................... 5
Notes to Financial Statements ................................ 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations ..................... 7-8
PART II. OTHER INFORMATION:
Item 5. Other Information....................................... 9
Item 6. Exhibits and Reports on Form 8-K........................ 9
Signatures ...................................................... 10
FIRST MONTAUK FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
March 31, December 31,
2001 2000
ASSETS
Cash and cash equivalents $ 2,149,973 $ 3,701,010
Due from clearing firms 3,801,785 2,405,666
Commissions receivable 54,980 39,200
Trading and investment account securities 1,821,212 3,975,309
Employee and broker receivables 1,749,715 1,609,666
Global leases receivable 75,193 174,661
Notes receivable - 18,000
Due from officers 165,810 175,068
Property and equipment - net 2,148,028 2,304,533
Deferred income taxes - net 2,061,258 1,721,262
Other assets 1,662,400 788,688
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Total assets $ 15,690,354 $ 16,913,063
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LIABILITIES AND STOCKHOLDERS' EQUITY
Deferred income $ 3,833,333 $ 3,933,333
Securities sold, but not yet purchased, at market 465,799 386,459
Notes payable 447,811 559,179
Commissions payable 1,718,413 1,637,733
Accounts payable 427,345 450,974
Accrued expenses 425,680 840,578
Income taxes payable 233,490 875,786
Other liabilities 1,066,743 519,630
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Total liabilities 8,618,614 9,203,672
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Temporary equity - stock subject to redemption 6,500 6,500
Commitments and contingencies (See Notes)
Stockholders' equity
Preferred Stock, 4,375,000 shares authorized, $.10 par
value, no shares issued and outstanding
respectively; stated at liquidation value - -
Series A Convertible Preferred Stock, 625,000 shares
authorized, $.10 par value, 331,190 and 349,511 shares
issued and outstanding, respectively; liquidation
preference: $1,655,950 33,119 34,951
Common Stock, no par value, 30,000,000 shares
authorized, 8,859,035 and 9,309,309 shares issued,
8,787,885 and 8,822,409 outstanding, respectively 3,578,207 4,063,397
Additional paid-in capital 4,317,250 4,253,765
Retained earnings (411,997) 230,921
Less: Deferred compensation (380,806) (393,120)
Less: Treasury stock (70,533) (487,023)
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Total stockholders' equity 7,065,240 7,702,891
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Total liabilities and stockholders' equity $ 15,690,354 $ 16,913,063
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See notes to financial statements.
FIRST MONTAUK FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (LOSS)
Three months ended March 31,
2001 2000
Revenues:
Commissions $ 8,769,627 $ 16,964,578
Principal transactions 1,801,455 5,437,252
Investment banking 35,247 1,231,177
Interest and other income 1,106,218 853,899
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11,712,547 24,486,906
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Expenses:
Commissions, employee compensation and benefits 9,519,235 17,582,502
Clearing and floor brokerage 857,831 1,395,130
Communications and occupancy 677,900 711,557
Legal matters and related costs 348,625 232,505
Other operating expenses 1,224,284 1,358,642
Interest 41,740 47,944
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12,669,615 21,328,280
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Income (loss) before income taxes (957,068) 3,158,626
Income taxes (tax benefit) (337,616) 1,270,306
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Net income (loss) $ (619,452) $ 1,888,320
============== ==============
Net income (loss) available to common stockholders $ (642,918) $ 1,862,781
============== ==============
Per share of Common Stock:
Basic $ (0.07) $ 0.19
============== ==============
Diluted $ (0.07) $ 0.17
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Number of common shares used in
basic income (loss) per share 8,779,933 9,718,651
============== ==============
Number of common shares used in
diluted income (loss) per share 8,779,933 11,524,388
============== ==============
See notes to financial statements.
FIRST MONTAUK FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Three months ended March 31,
2001 2000
INCREASE (DECREASE) IN CASH
Cash flows from operating activities:
Net income (loss) $ (619,452) $ 1,888,320
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Adjustments to reconcile net income (loss) to net cash
used in operating activities:
Common stock issued with guaranteed selling price
Tax benefit related to exercise of stock options
Depreciation 154,717 140,345
Amortization 81,634 76,160
Reserves and allowances 200,000 346,145
Increase (decrease) in cash attributable to
changes in assets and liabilities
Due from clearing firm (1,396,119) (2,661,086)
Trading and investment account securities 2,154,097 (3,811,008)
Commissions receivable (15,780) 137,857
Due from officers 9,258 1,886
Employee and broker receivables (140,049) (35,806)
Other assets (267,517) (216,294)
Deferred income taxes (339,996) (185,628)
Securities sold but not yet purchased 79,340 1,617,365
Commissions payable 80,680 1,538,920
Income taxes payable (642,296) 881,598
Accounts payable (23,625) 667,600
Accrued expenses (414,898) 179,771
Deferred income (100,000) -
Other liabilities (109,501) 141,208
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Total adjustments (690,055) (1,180,967)
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Net cash provided by (used in) operating activities (1,309,507) 707,353
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Cash flows from investing activities:
Collection of notes receivable 18,000 2,006
Collection of Global leases receivable 99,468 161,529
Additions to property and equipment (115,322) (442,950)
Dispositions of property and equipment - 8,523
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Net cash provided by (used in) investing activities 2,146 (270,892)
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Cash flows from financing activities:
Payment of notes payable (117,204) (106,788)
Payments of capital lease (32,473) (29,619)
Exercise of stock options - 18,260
Payment toward purchase of treasury stock (70,533) (569,218)
Payment of preferred stock dividend (23,466) (25,539)
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Net cash used in financing activities (243,676) (712,904)
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Net decrease in cash and cash equivalents (1,551,037) (276,443)
Cash and cash equivalents at beginning of period 3,701,010 686,980
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Cash and cash equivalents at end of period 2,149,973 410,537
============== ==============
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 41,740 $ 47,944
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Income taxes $ 877,435 $ 574,285
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Property and equipment financed under capital leases $ 662,290 $ -
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See notes to financial statements.
FIRST MONTAUK FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - MANAGEMENT REPRESENTATION
The accompanying financial statements are unaudited for the interim period,
but include all adjustments (consisting only of normal recurring accruals) which
management considers necessary for the fair presentation of results at March 31,
2001 and 2000. The preparation of financial statements in conformity with GAAP
requires the Company to make estimates and assumptions that affect the reported
amounts of revenues and expenses during the reporting period. Actual results
could vary from these estimates. These financial statements should be read in
conjunction with the Company's Annual Report at, and for the year ended December
31, 2000, as filed with the Securities and Exchange Commission on Form 10-K.
The results reflected for the three-month period ended March 31, 2001, are
not necessarily indicative of the results for the entire fiscal year to end on
December 31, 2001.
NOTE 2 - EARNINGS PER SHARE
Basic EPS is computed by dividing net income by the weighted-average number
of common shares outstanding for the period. Diluted EPS reflects the potential
dilution from the exercise of stock options and the deemed conversion of
preferred stock and convertible debt.
NOTE 3 - SHARE REPURCHASE
During the quarter ended March 31, 2001, the Company repurchased 74,150
shares of its common stock for $70,533 under a share repurchase program
authorized by the board of directors.
NOTE 4 - PREFERRED STOCK
During the quarter ended March 31, 2001, a total of 18,321 shares of Series
A Preferred Stock were converted into 36,642 shares of common stock.
NOTE 5 - SALE/LEASEBACK
During the quarter ended March 31, 2001, the Company entered into two
capital leases under a sale/leaseback financing with a leasing company. The sale
of the fixed assets resulted in a gain of approximately $45,000, which has been
deferred and will be amortized over the related lease terms. The leases,
totaling $662,000, are together payable in 36 monthly installments of $21,000
and an additional 12 installments of $3,900. In April 2001, the Company received
net proceeds of $625,000 from the sale of the fixed assets.
NOTE 6 - AMENDED AND RESTATED FISERV FINANCIAL AGREEMENT
In May 2000, the Company's broker-dealer subsidiary ("FMSC") entered into a
ten year clearing agreement with Fiserv Securities, Inc. ("Fiserv"). In
connection with the clearing agreement, FMSC and Fiserv also entered into a
financial agreement under which Fiserv was to provide cash advances to FMSC
under certain terms and conditions. Upon the conversion of FMSC's accounts to
Fiserv in November 2000, it received the initial cash advance of $4,000,000. As
of February 1, 2001, the Company and FMSC amended and restated the financial
agreement with Fiserv. Under the restated terms, the Company, rather than FMSC,
will be the recipient of any additional cash advances payable under the
financial agreement. The Company has further assumed FMSC's obligation with
respect to the initial payment received in November 2000, and will be solely
responsible for any performance and early termination penalties. In
consideration of FMSC's release from its obligations under the financial
agreement and to secure Fiserv's interest, the Company has granted to Fiserv a
first priority lien in all of the outstanding shares of FMSC that it owns.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operations
The first quarter of fiscal 2001 was a difficult period for the financial
services industry as the Nasdaq composite declined 25.5 percent from its close
on December 31, 2000. The Dow Jones Industrial Average declined 8.4 percent
during this same period. As a result of these declines, and the slumping
securities markets in general, the Company reported a net loss of $643,000 or
($.07) per basic and diluted share for the quarter ended March 31, 2001 (the
"2001 period"). This was in stark contrast to the results achieved during the
first quarter of 2000, when the Company achieved its most profitable period in
its history, with earnings of $1,863,000, or $.19 and $.17 per basic and diluted
share respectively.
Revenues declined in nearly every business segment, dropping more than 50%
to $11,713,000, from record revenues of $24,487,000 in the first quarter of
2000. The decrease was primarily due to the weaker overall markets in 2001
compared with the extraordinarily strong markets during the same period last
year.
Gains from proprietary trading and market-making activities experienced a
substantial decline of 67%, falling from $5,437,000 in 2000 to $1,801,000 during
the 2001 period.
Commission revenues from the sale of listed and over-the-counter
securities, mutual funds, insurance products, fees from managed accounts and
other agency transactions decreased to $8,770,000 (75% of total revenues) during
the 2001 period as compared to $16,965,000 (69% of total revenues) in the 2000
period. The reduction in agency equity transaction volume contributed to the
overall decrease in revenues for the first quarter of 2001. However, revenues
from insurance-related products increased by $884,000, a 78% increase over the
2000 period. Through training, education and marketing, the Company has
succeeded in increasing its insurance sales efforts with its existing base of
financial professionals.
Another consequence of the market slowdown was the Company's substantial
decline in investment banking revenues. For the 2001 period these revenues were
$35,000 as compared to $1,231,000 during the first quarter of 2000 when the
Company completed the underwriting of an initial public offering.
As expected with the decline in revenues, expenses also declined. Total
expenses decreased $8,659,000, or 41%, to $12,670,000 in the 2001 period from
$21,328,000 in the 2000 period. The largest component of this decrease was
commission expense. Commission expense decreased by 52%, or $7,985,000, to
$7,313,000 in the 2001 period from $15,298,000 during the 2000 period. This
decrease is consistent with the dramatic decrease in overall revenues.
Although revenue decreased, employee compensation and employee benefits
increased $167,000, or 8%, to $2,206,000 in the 2001 period as compared to
$2,040,000 in the 2000 period. This category includes salaries, payroll taxes
and fringe benefits for salaried employees. The quarter to quarter increase is
attributable to the hiring of additional management and support staff for
various departments, primarily in sales and recruiting. The Company has
benefited from the hiring of additional sales and recruiting personnel by
increasing the sales force by approximately 90 registered representatives thus
far this fiscal year. In order to properly manage the anticipated increase in
volume resulting from these additions, the Company also added employees to its
compliance, mutual fund and insurance departments and equity order desk.
Clearing costs decreased in 2001 to $858,000 largely due to the reduction
in transaction volume. Some transactions, such as options and bonds, have a
higher execution and clearing cost than others. The Company has recently entered
into a new clearing agreement with Fiserv Securities, Inc. (Fiserv). (See
"Liquidity and Capital Resources").
Communications and occupancy costs were $678,000 (6% of total revenues) for
the 2001 period as compared to $712,000 (3% of total revenues) for the 2000
period. It is anticipated that occupancy costs will increase as a result of the
opening of two new branch offices in fiscal 2001. One new office commenced
operations in April 2001 when the Company entered into a lease assignment and
assumption agreement for a 3-year lease in Boca Raton, Florida at a monthly rent
of $7,400. The Company anticipates entering into a 3-year sublease agreement for
a corporate branch office scheduled to open in New York City beginning June
2001. The monthly rent for this office is $16,000.
Legal matters and related costs during the 2001 period were $349,000 as
compared to $232,000 for the same period in 2000. The majority of these expenses
were attributable to defense costs involving various customer arbitrations and
litigations related to its securities business. FMSC is a defendant or
co-defendant in various legal proceedings incidental to its securities business.
FMSC is contesting the allegations of these claims and believes that there are
meritorious defenses in each case. In view of the inherent difficulty of
predicting the outcome of litigation, management is unable to derive a
meaningful estimate of the amount or range of possible loss that may arise out
of pending legal proceedings.
Other operating expenses decreased to $1,224,000 (10% of total revenues) in
2001 from $1,359,000 (6% of total revenues) in 2000. Lower advertising and
marketing costs and bad debt expense was offset in part by one-time charges
related to the clearing firm conversion of $147,000.
The income tax provision for the 2000 period was computed at a combined
effective rate of 40%. For the 2001 period, the income tax benefit of 35%
includes a tax valuation allowance against deferred tax benefits relating to
current period compensation charges and net operating losses because their
realization is uncertain.
Liquidity and Capital Resources
As with most financial firms, the Company maintains a highly liquid balance
sheet with 50% of the Company's assets consisting of cash, securities owned, and
receivables from the Company's clearing firm and other broker-dealers.
Market-making and other securities dealer activities require the Company to
carry significant levels of securities inventory in order to meet customer and
internal trading needs. The balances in the Company's cash, inventory and
clearing firm accounts can and do fluctuate significantly from day to day,
depending on market conditions, daily trading activity, and investment
opportunities. The Company monitors these accounts on a daily basis in order to
ensure compliance with regulatory capital requirements and to preserve
liquidity.
Cash and cash equivalents decreased during the first quarter of 2001 by
$1,551,000, to $2,150,000. Net cash used by operating activities was $1,310,000
for the 2001 period, compared to cash provided by operations of $707,000 during
the 2000 period. Cash was affected by the net loss of $619,000, as well as
increases in the amount due from clearing firm, employee and broker receivables
and deferred income taxes of $1,396,000, $340,000 and $140,000 respectively.
Decreases in income taxes payable, accrued expenses and other liabilities
totaling $1,166,000 also contributed to the decrease in cash. These outflows
were partially offset by decreases in long inventory positions of $2,154,000 and
non-cash adjustments of $436,000. Non-cash adjustments consisted of depreciation
charges, amortization of stock option compensation, non-cash losses and loan
reserves.
Investing activities provided cash of $2,000 during the first quarter of
2001. Additions to capital expenditures consumed 115,000 while the collection of
notes and Global leases receivable contributed cash of $117,000. The Company
projects expenditures for technology and other capital needs to be approximately
$300,000 for the remainder of fiscal 2001.
Financing activities used cash of $244,000 during the 2001 period. A total
of $71,000 was used to repurchase 74,150 of the Company's outstanding shares
pursuant to a stock repurchase program authorized by the board of directors in
August 1999. In addition, the Company made notes and capital lease repayments of
$150,000 and dividend payments to preferred stockholders of $23,000. During the
quarter ended March 31, 2001, the Company entered into two capital leases under
a sale/leaseback financing with a leasing company. The sale of the fixed assets
resulted in a gain of approximately $45,000, which has been deferred and will be
amortized over the related lease terms. The leases, totaling $662,000, are
together payable in 36 monthly installments of $21,000 and an additional 12
installments of $3,900. In April 2001, the Company received net proceeds of
$625,000 from the sale of the fixed assets.
In May 2000, the Company's broker-dealer subsidiary ("FMSC") entered into a
10-year clearing agreement with Fiserv Securities, Inc. ("Fiserv"). In
connection with the clearing agreement, FMSC and Fiserv also entered into a
financial agreement under which Fiserv was to provide cash advances to FMSC
under certain terms and conditions. Upon the conversion of FMSC's accounts to
Fiserv in November 2000, it received the initial cash advance of $4,000,000. As
of February 1, 2001, the Company and FMSC amended and restated the financial
agreement with Fiserv. Under the restated terms, the Company, rather than FMSC,
will be the recipient of any additional cash advances payable under the
financial agreement. It is anticipated that the Company will receive an
additional cash advance of $1,250,000 in November 2001, provided the Company
achieves certain performance criteria and subject to certain other conditions.
The Company has further assumed FMSC's obligation with respect to the initial
payment received in November 2000, and will be solely responsible for any
performance and early termination penalties.
PART II
OTHER INFORMATION
Item 5. Other Information.
In May 2000, the Company's broker-dealer subsidiary (FMSC) entered into a
ten year clearing agreement with Fiserv Securities, Inc. ("Fiserv"). In
connection with the clearing agreement, FMSC and Fiserv also entered into a
financial agreement under which Fiserv was to provide cash advances to FMSC
under certain terms and conditions. Upon the conversion of FMSC's accounts to
Fiserv in November 2000, it received the initial cash advance of $4,000,000. As
of February 1, 2001, the Company and FMSC amended and restated the financial
agreement with Fiserv. Under the restated terms, the Company, rather than FMSC,
will be the recipient of any additional cash advances payable under the
financial agreement. The Company has further assumed FMSC's obligation with
respect to the initial payment received in November 2000, and will be solely
responsible for any performance and early termination penalties. In
consideration of FMSC's release from its obligations under the financial
agreement and to secure Fiserv's interest, the Company has granted to Fiserv a
first priority lien in all of the outstanding shares of FMSC that it owns.
During the quarter ended March 31, 2001, the Company repurchased 74,150
shares of its common stock for $70,533 under a share repurchase program
authorized in 1999.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
None.
(b) Reports on Form 8-K
There were no reports on Form 8-K filed.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
FIRST MONTAUK FINANCIAL CORP.
(Registrant)
Dated: May 21, 2001 /s/ William J. Kurinsky
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William J. Kurinsky
Secretary/Treasurer
Chief Financial Officer and
Principal Accounting Officer
/s/ Herbert Kurinsky
-------------------------------
Herbert Kurinsky
President
FIRST MONTAUK FINANCIAL CORP.
COMPUTATION OF EARNINGS PER SHARE
Three months ended March 31,
2001 2000
Numerator:
Basic:
Net income (loss) $ (619,452) $ 1,888,320
Deductions:
Preferred stock dividends (23,466) (25,539)
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Net income (loss) for basic computation [A] (619,452) $ 1,862,781
========== ==========
Diluted:
Net income (loss) for basic computation (642,918) $ 1,862,781
Additions:
Preferred stock dividends -- 25,539
Interest on convertible debt, net of taxes -- 14,046
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Net income (loss) for diluted computation [B] $ (642,918) $ 1,902,366
========== ==========
Denominator:
Basic:
Weighted average common shares outstanding [C] 8,779,933 9,718,651
========== ==========
Diluted:
Weighted average common shares outstanding-basic 8,779,933 9,718,651
Additions:
Incremental shares from assumed conversion of
stock options and warrants using the treasury stock
method -- 381,452
Incremental shares from assumed conversion of
convertible debt and preferred stock using the
if-converted method -- 1,424,285
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Weighted average common and common equivalent
shares outstanding-diluted [D] 8,779,933 11,524,388
========== ===========
Per share:
Basic [A][C] $ (.07) $ 0.19
Diluted [B][D] $ (.07) $ 0.17