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, 2002
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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8,625,284 Common Shares, no par value, were outstanding as of May 20, 2002.
Page 1 of 10
FIRST MONTAUK FINANCIAL CORP.
FORM 10-Q
MARCH 31, 2002
INDEX
Page
PART I. FINANCIAL INFORMATION:
Item 1. Financial Statements
Consolidated Statements of Financial Condition
as of March 31, 2002 and December 31, 2001.................. 3
Consolidated Statements of Loss for the
Three Months Ended March 31, 2002 and 2001.................. 4
Consolidated Statements of Cash Flows for the
Three Months Ended March 31, 2002 and 2001 ................. 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
3
FIRST MONTAUK FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
March 31, December 31,
2002 2001
ASSETS
Cash and cash equivalents $ 115,226 $ 1,779,554
Due from clearing firms 6,476,895 4,146,410
Trading and investment account securities 810,887 1,199,102
Employee and broker receivables 1,839,099 2,105,620
Due from officers 248,409 202,964
Property and equipment - net 1,548,216 1,631,801
Income tax refund receivable 1,069,442 1,069,442
Deferred income taxes - net 930,000 930,000
Other assets 1,228,827 1,162,669
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Total assets $ 14,267,001 $ 14,227,562
================= =================
LIABILITIES AND STOCKHOLDERS' EQUITY
Deferred income $ 4,636,604 $ 4,783,333
Securities sold, but not yet purchased, at market 1,108,832 245,078
Notes payable 180,402 277,376
Commissions payable 3,751,849 3,647,170
Accounts payable 490,717 490,842
Accrued expenses 1,174,699 1,434,885
Capital leases payable 494,546 542,210
Other liabilities 454,555 513,987
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Total liabilities 12,292,204 11,934,881
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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 331,190 shares
issued and outstanding, respectively; liquidation
preference: $1,655,590 and $1,655,590 33,119 33,119
Common Stock, no par value, 30,000,000 shares
authorized, 8,622,284 and 8,622,284 shares issued,
8,622,284 and 8,622,284 outstanding, respectively 3,434,642 3,434,642
Additional paid-in capital 3,950,544 3,950,542
Accumulated deficit (5,396,557) (5,076,055)
Less: Deferred compensation (53,451) (56,067)
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Total stockholders' equity 1,968,297 2,286,181
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Total liabilities and stockholders' equity $ 14,267,001 $ 14,227,562
================= =================
See notes to financial statements.
4
FIRST MONTAUK FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (LOSS)
Three months ended March 31,
2002 2001
Revenues:
Commissions $ 9,683,706 $ 8,769,627
Principal transactions 2,120,539 1,801,455
Investment banking 63,035 35,247
Interest and other income 881,188 1,106,218
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12,748,468 11,712,547
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Expenses:
Commissions, employee compensation and benefits 10,477,779 9,519,235
Clearing and floor brokerage 680,914 857,831
Communications and occupancy 676,285 677,900
Legal matters and related costs 267,156 348,625
Other operating expenses 909,090 1,224,284
Interest 32,906 41,740
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13,044,130 12,669,615
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Loss before income tax benefit (295,662) (957,068)
Income tax benefit - (337,616)
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Net loss $ (295,662) $ (619,452)
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Net loss applicable to common stockholders $ (320,502) $ (642,918)
================= =================
Per share of Common Stock:
Basic and diluted $ (0.04) $ (0.07)
================= =================
Number of common shares used in
basic and diluted loss per share 8,622,284 8,779,933
================= =================
See notes to financial statements.
5
FIRST MONTAUK FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Three months ended March 31,
2002 2001
INCREASE (DECREASE) IN CASH
Cash flows from operating activities:
Net loss $ (295,662) $ (619,452)
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Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 128,689 154,717
Amortization 4,852 81,634
Reserves and allowances - 200,000
Increase (decrease) in cash attributable to
changes in assets and liabilities
Due from clearing firm (2,330,485) (1,396,119)
Trading and investment account securities 388,215 2,154,097
Due from officers (45,445) 9,258
Employee and broker receivables 266,521 (140,049)
Deferred income taxes - (339,996)
Other assets (66,158) (183,829)
Deferred income (146,729) (100,000)
Securities sold but not yet purchased 863,754 79,340
Commissions payable 104,679 80,680
Accounts payable (123) (23,625)
Accrued expenses (260,186) (414,898)
Income taxes payable (7,111) (642,296)
Other liabilities (52,321) (109,501)
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Total adjustments (1,151,848) (590,587)
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Net cash used in operating activities (1,447,510) (1,210,039)
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Cash flows from investing activities:
Collection of notes receivable - 18,000
Additions to property and equipment (45,104) (115,322)
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Net cash used in investing activities (45,104) (97,322)
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Cash flows from financing activities:
Payment of notes payable (99,210) (117,204)
Payments of capital lease (47,664) (32,473)
Payment toward purchase of treasury stock - (70,533)
Payments of preferred stock dividends (24,840) (23,466)
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Net cash used in financing activities (171,714) (243,676)
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Net decrease in cash and cash equivalents (1,664,328) (1,551,037)
Cash and cash equivalents at beginning of period 1,779,554 3,701,010
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Cash and cash equivalents at end of period 115,226 2,149,973
================= =================
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 32,906 $ 41,740
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Income taxes $ 4,704 $ 877,435
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Noncash financing activity:
Property and equipment financed under capital leases $ - $ 662,290
================= =================
See notes to financial statements.
6
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,
2002 and 2001. 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, 2001, as filed with the Securities and Exchange Commission on Form 10-K.
The results reflected for the three-month period ended March 31, 2002, are
not necessarily indicative of the results for the entire fiscal year to end on
December 31, 2002.
NOTE 2 - EARNINGS PER SHARE
Basic and diluted EPS are computed by dividing net loss applicable to
common stockholders by the weighted-average number of common shares outstanding
for the period.
NOTE 3 - LEASE
In January 2002, the Company's broker-dealer subsidiary, First Montauk
Securities Corp. ("FMSC"), entered into a sublease for a new branch office in
New York City. Base rent is $17,700 per month through January 2004, increasing
to $18,800 through September 2006. FMSC will also be responsible for certain
operating expense and real estate tax escalations.
NOTE 4 - LEGAL MATTERS
FMSC is a respondent or co-respondent in various legal proceedings which
are incidental to its securities business. FMSC is contesting these claims and
believes that there are meritorious defenses in each case. After considering all
relevant facts, available insurance coverage and the advice of counsel,
management believes that significant adverse judgments against FMSC from pending
litigation could have a material impact on the Company's financial condition,
results of operations, and cash flows in any particular quarterly or annual
period, or in the aggregate. As of March 31, 2002, the Company has established a
$987,000 reserve for litigation costs that are probable and can be reasonably
estimated. The reserve is included in accrued liabilities. Management cannot
give assurance that this reserve will be adequate to absorb actual costs that
are subsequently incurred.
NOTE 5 - INCOME TAXES
For the 2002 period, the effective tax rate of 0% was lower than the
expected tax rate of approximately 37% due to an increase in the tax valuation
allowance to offset the benefits of the period's operating losses and other
temporary differences because management is uncertain as to their ultimate
realization. For the 2001 period, the income tax benefit of 35% included a tax
valuation allowance against deferred tax benefits relating to that period's
option compensation charges.
7
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operations
The result of operations for the quarter ended March 31, 2002 (the "2002
period") showed marked improvement over the same period in the prior year (the
"2001 period"), despite the continued investor uncertainty.
Total revenues for the 2002 period increased $1,035,000 from $11,713,000 in
the 2001 period to $12,748,000, a 9% increase. Revenues from commissions,
principal transactions and investment banking all increased while interest
revenues declined.
Commission revenue from the sale of listed and over-the-counter securities,
mutual funds, insurance products, fees from managed accounts and other agency
transactions increased $914,000, to $9,684,000 in the 2002 period, from
$8,770,000 in the 2001 period. As a percent of total revenues, commissions were
76% in the 2002 period, relatively unchanged from 75% in the 2001 period. Agency
trading and mutual funds posted increases of $839,000 and $709,000,
respectively, over the 2001 period to $6,191,000 and $1,464,000, respectively.
These increases were offset by a decrease in insurance commissions of $731,000,
from $2,015,000 in the 2001 period, to $1,284,000 in the 2002 period. The
increase in commission revenue is due largely to the success of the Company's
recruiting efforts over the past year. From March 31, 2001 to March 31, 2002,
the Company has added 51 branch offices and 137 registered representatives, of
which 29 offices and 43 registered representatives were added since December 31,
2001. The increase in mutual fund commissions was directly related to the
promotion of the 529 College Savings Plan created through new legislation in
October 1999. The mutual fund department invested a substantial amount of time
and resources to increase awareness of this investment vehicle through direct
mailers and radio advertisement. Revenues from insurance commissions decreased
due to the inclusion of commissions from the sale of certain variable annuities
by one of the Company's brokers in the 2001 period. The large commissions
generated from the sale of these annuities were a one-time occurrence and did
not occur again in the 2002 period. Insurance sales subsequently returned to
historic levels. In addition, growth in the advisory services area contributed
$102,000 to the net increase in commissions due to the roll out of new products
in this business segment.
Gains from proprietary trading and market-making activities experienced an
increase of $319,000, or 18%, to $2,121,000 in the 2002 period. The primary
components of the change were an increase in equity trading gains of $898,000,
offset by decreases in corporate bond trading gains of $181,000 and unrealized
gains of $311,000.
Interest income decreased $225,000 from $1,106,000 in the 2001 period to
$881,000 in the 2002. The Company receives a rebate from it's clearing firm
related to the amount of margin debits and cash credits carried by the Company's
customers. The drop in market value in many of the security positions held in
customer accounts directly impacted the amount of margin customers were able to
carry. Therefore, the reduction in margin debit balances adversely affected the
amount of interest rebated received from the clearing firm.
While total revenues increased 9%, expenses remained nearly flat, posting
only a 3% increase of $374,000, from $12,670,000 in the 2001 period, to
$13,044,000 in the 2002 period. The increase in compensation expenses were
offset by decreases in clearing expenses, litigation related expenses and other
miscellaneous expenses.
Compensation expense increased $959,000, or 10%, to $10,478,000 in the 2002
period, from $9,519,000 in the 2001 period. Salaries expense decreased $254,000,
or 2% from $1,789,000 in the 2001 period, to $1,535,000 in the 2002 period, due
to staff reductions implimented during the second half of 2001. Commission
expense increased 18%, or $1,341,000, from $7,326,000 (63% of total revenues) in
the 2001 period to $8,667,000 (68% of total revenues) in the 2002 period. The
dollar increase in commission expense is directly related to the dollar increase
in commission revenue.
Communication and occupancy expenses were essentially unchanged at $676,000
and $678,000, in the 2002 and 2001 periods, respectively. In January 2002, First
Montauk Securities Corp. ("FMSC") entered into a sublease for a new branch
office in New York City. Base rent is $17,700 per month through January 2004,
increasing to $18,800 through September 2006. FMSC will also be responsible for
certain operating expense and real estate tax escalations.
Legal matters and related costs decreased $82,000 from $349,000 in the 2001
period to $267,000 in the 2002 period, a 23% decrease. The 2001 expense included
approximately $88,000 of litigation costs associated with two related cases.
FMSC is a respondent or co-respondent in various legal proceedings, which are
incidental to its securities business. FMSC is contesting these claims and
believes that there are meritorious defenses in each case. After considering all
relevant facts, available insurance coverage and the advice of counsel,
management believes that significant adverse judgments against FMSC from pending
litigation could have a material impact on the Company's financial condition,
results of operations, and cash flows in any particular quarterly or annual
period, or in the aggregate. As of March 31, 2002, the Company has established a
$987,000 reserve for litigation costs that are probable and can be reasonably
estimated. The reserve is included in accrued liabilities. Management cannot
give assurance that this reserve will be adequate to absorb actual costs that
are subsequently incurred.
8
Other operating expenses decreased $315,000, from $1,224,000 in the 2001
period, to $909,000 in the 2002 period. Two line items cover the majority of
this decrease. Bad debt expense decreased 42%, or $104,000, from $246,000 in the
2001 period to $142,000 in the 2002 period. The 2001 bad debt expense included a
write-off of $200,000 related to payments previously made to a vendor for the
development of applications software. Costs related to the conversion to Fiserv
as the Company's clearing agent decreased $145,000 due to the completion of the
conversion in 2001.
For the 2002 period, the effective tax rate of 0% was lower than the
expected tax rate of approximately 37% due to an increase in the tax valuation
allowance to offset the benefits of the current period's operating losses and
other temporary differences because management is uncertain as to their ultimate
realization. For the 2001 period, the income tax benefit of 35% included a tax
valuation allowance against deferred tax benefits relating to that period's
option compensation charges.
Liquidity and Capital Resources
As with most financial firms, the Company maintains a highly liquid balance
sheet with 52% 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 2002 by
$1,664,000, to $115,000. Net cash used by operating activities was $1,448,000
for the 2002 period, compared to cash used by operations of $1,210,000 during
the 2001 period. Cash was affected by the net loss of $296,000, as well as
increases in the amount due from clearing firm, securities sold but not yet
purchased and commissions payable of $2,330,000, $864,000 and $105,000,
respectively. Decreases in long inventory positions, employee and broker
receivables, deferred income, accrued expenses and other liabilities totaling a
net of $188,000 offset the decrease in cash. Also helping to offset the decrease
in cash were non-cash adjustments of $134,000. Non-cash adjustments consisted of
depreciation charges and amortization of stock option compensation.
During the first quarter of 2002, the Company filed claims for federal
income tax refunds of $1,047,578. These refunds were received in April 2002.
Under a financial agreement with its clearing firm, the Company expects to
receive a cash advance of $1,250,000 in November 2002, provided it is in
compliance with the terms of the financial agreement, as defined. For financial
reporting purposes, such advance will be deferred and amortized on a
straight-line basis over the remaining term of the clearing agreement; however,
the advance will be subject to federal and state income taxes in 2002. The
Company received advanced totaling $5,250,000 in 2000 and 2001 under the
financing agreement
Additions to capital expenditures contributed the entire use of cash for
investing activities of $45,000 during the first quarter of 2002. The Company
projects $400,000 in capital expenditures over the next twelve months.
Financing activities used cash of $172,000 in fiscal 2002. Payments of
notes payable, capital leases and preferred stock dividends used $99,000,
$48,000 and $25,000, respectively. During fiscal 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.
9
PART II
OTHER INFORMATION
Item 5. Other Information.
None.
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.
10
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 20, 2002 /s/ William J. Kurinsky
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William J. Kurinsky
Secretary/Treasurer
Chief Financial Officer and
Principal Accounting Officer
/s/ Herbert Kurinsky
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Herbert Kurinsky
President