SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1996
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 No. 0-6729
FIRST MONTAUK FINANCIAL CORP.(Exact
name of registrant as specified in its charter)
New Jersey
22-1737915
(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
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (908) 842-4700
Former name, former address and former fiscal year, if changed
since last report.
Indicate by check mark whether the Registrant (l) 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
8,000,979 Common Shares, no par value were outstanding as of August 8, 1996.
Page 1 of 14
FIRST MONTAUK FINANCIAL CORP.
FORM 10-QSB
JUNE 30, 1996
INDEX
Page
PART I. FINANCIAL INFORMATION:
Item 1. Financial Statements
Consolidated Statement of Financial Condition
as of June 30, 1996 and December 31, 1995 .................................. 3
Consolidated Statement of Income for the
Three Months ended June 30, 1996 and 1995
and Six months ended June 30, 1996 and 1995 ............................... 4-5
Consolidated Statement of Cash Flows for the
Six Months ended June 30, 1996 and 1995 .................................. 6
Notes to Financial Statements
......................................................................... 7-9
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations ......................................10-12
PART II. OTHER INFORMATION:
Item 5. Other
Information................................................................ 13
Item 6. Exhibits and Reports on Form 8-K................................. 13
Signatures
....................................................................... 14
FIRST MONTAUK FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF FINANCIAL CONDITION
June 30, December 31,
ASSETS 1996 1995
Cash and cash equivalents $ 991,436 $ 845,471
Securities owned, at market 5,361,430 7,114,507
Commissions receivable 629,424 383,868
Due from clearing firm 366,745 -
Employee and broker receivables 789,365 357,525
Fixed assets-net 1,019,789 804,668
Notes receivable-ECM 282,000 282,000
Due from officers 174,444 155,524
Other assets 629,559 174,231
Deferred tax asset 104,783 369,173
--------------- ---------------
Total assets $ 10,348,975 $ 10,486,967
=============== ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
Due to clearing firm $ - $ 2,306,032
Securities sold, but not yet purchased, at market 1,389,803 166,382
Loans payable-bank 199,234 47,544
Commissions payable 1,869,680 1,467,190
Accounts payable 547,877 389,312
Accrued expenses 829,646 1,392,115
Income taxes payable 64,198 621,690
Other liabilities 785,403 495,756
--------------- ---------------
Total liabilities 5,685,841 6,886,021
--------------- ---------------
Shares issued with guaranteed resale price 140,000 -
Commitments and contingent liabilities (See Notes)
Stockholders' equity
Preferred Stock, 5,000,000 shares authorized, $.10 par value,
no shares issued and outstanding - -
Common Stock, no par value, 15,000,000 shares
authorized, 7,831,104 and 7,920,106 shares issued
and outstanding, respectively 3,202,334 3,320,012
Additional paid-in capital 220,172 220,172
Retained earnings 1,100,628 60,762
-------------- ---------------
Total stockholders' equity 4,523,134 3,600,946
--------------- ---------------
Total liabilities and stockholders' equity $ 10,348,975 $ 10,486,967
=============== =============
See notes to financial statements.
FIRST MONTAUK FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME
Three months ended June 30,
1996 1995
Revenues
Net firm trading gains $ 3,236,671 $ 2,468,492
Commissions 7,741,773 4,351,573
Investment banking 240,328 69,516
Interest and other income 260,391 215,480
-------------- ---------------
11,479,163 7,105,061
-------------- ---------------
Expenses
Commissions, employee compensation and benefits 8,115,064 4,881,532
Clearing and floor brokerage 989,765 768,192
Communications and occupancy 377,668 280,248
Other operating expenses 936,964 598,885
Interest 22,807 57,457
------------- ---------------
10,442,268 6,586,314
-------------- ---------------
Income before income taxes 1,036,895 518,747
Income taxes 439,150 205,035
-------------- ---------------
Net income $ 597,745 $ 313,712
============== ===============
Per share of Common Stock:
Net income $ 0.07 $ 0.04
============== ===============
Number of shares 9,007,664 8,320,709
============== ===============
See notes to financial statements.
FIRST MONTAUK FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME
Six months ended June 30,
1996 1995
Revenues
Net firm trading gains $ 5,520,783 $ 4,121,053
Commissions 13,820,907 7,143,638
Investment Banking 269,416 130,957
Interest and other income 501,536 447,826
-------------- -----------
20,112,642 11,843,474
-------------- -----------
Expenses
Commissions, employee compensation and benefits 14,176,399 8,212,937
Clearing and floor brokerage 1,940,198 1,291,747
Communications and occupancy 718,983 532,782
Other operating expenses 1,459,041 964,188
Interest 58,078 118,840
-------------- --------------
18,352,699 11,120,494
-------------- --------------
Income before income taxes 1,759,943 722,980
Income taxes 720,077 285,816
-------------- --------------
Net income $ 1,039,866 $ 437,164
============== ==============
Per share of Common Stock:
Net income $ 0.12 $ 0.05
============== ===============
Number of shares 9,002,611 8,220,032
============== ===============
See notes to financial statements.
FIRST MONTAUK FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
Six months ended June 30,
1996 1995
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
Cash flows from operating activities:
Net income $ 1,039,866 $ 437,164
Adjustments to reconcile net income to net cash
used in operating activities:
Depreciation and amortization 104,496 87,095
Shares issued with guaranteed resale price 140,000
Receivable from clearing organization (366,745) (73,348)
Commissions receivable (245,556) (146,053)
Securities owned - at market 1,753,077 (344,295)
Other assets (431,328) (64,738)
Deferred income taxes 264,390 -
Due to clearing organization (2,306,032) (2,279,250)
Securities sold but not yet purchased 1,223,421 1,572,837
Commissions payable 402,490 397,660
Accounts payable 158,565 293,478
Accrued expenses (562,469) -
Income taxes payable (557,492) 200,421
Other liabilities 289,647 213,594
-------------- --------------
Total adjustments (133,536) (142,599)
-------------- --------------
Net cash provided by operating activities 906,330 294,565
-------------- --------------
Cash flows from investing activities:
Due from officers (18,920) (1,894)
Employee and broker receivables (431,840) 63,717
Investment in ECM (24,000) -
Capital expenditures (319,617) (141,884)
-------------- --------------
Net cash used in investing activities (794,377) (80,061)
-------------- --------------
Cash flows from financing activities:
Proceeds from bank loan 179,625 -
Payment of loans payable (27,935) (12,967)
Purchase of common stock 12,825
Repurchase of common stock (130,503) (80,488)
Stock registration costs - (2,815)
-------------- --------------
Net cash provided by (used in)
financing activities 34,012 (96,270)
-------------- --------------
Net increase in cash and cash equivalents 145,965 118,234
Cash and cash equivalents at beginning of year 845,471 673,951
-------------- --------------
Cash and cash equivalents at end of period $ 991,436 $ 792,185
============== ==============
Supplemental disclosures of cash flow information:Cash paid during the period
for:
Interest $ 58,078 $ 118,840
Income taxes $ 1,019,000 $ 85,295
Noncash transactions:
Shares issued with guaranteed resale price$ 140,000
See notes to financial statements.
FIRST MONTAUK FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1996
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 June 30, 1996 and 1995.
Moreover, these financial statements do not purport to
contain complete disclosure in conformity with generally accepted accounting
principles and should be read in conjunction with the Company's audited
financial statements at, and for the year ended December 31, 1995.
The results reflected for the six month and three-month
periods ended June 30, 1996, are not necessarily indicative of the results for
the entire fiscal year to end on December 31, 1996.
NOTE 2 - INCOME PER SHARE
Income per share is computed by dividing net income by the
weighted average number of shares of common stock and common stock equivalents
outstanding during the period. Common stock equivalents include shares issuable
upon the exercise of options.
NOTE 3 - SECURITIES OWNED AND SECURITIES SOLD BUT NOT YET PURCHASED
Marketable securities owned and sold but not yet purchased
consist of trading securities at quoted market values, as indicated below:
Sold but not
Owned yet purchased
June 30, December 31, June 30, December 31,
1996 1995 1996 1995
Obligations of U.S.
government and
its agencies $ 119,156 $ 163,444 $ -- $ 18,467
State and municipal
obligations 1,082,954 3,574,616 966,402 44,854
Corporate stocks
and bonds 4,133,070 3,242,516 373,557 103,061
Options
and warrants 26,250 133,931 49,844 --
$5,361,430 $7,114,507 $1,389,803 $166,382
NOTE 4 - NOTES RECEIVABLE - ECM
As of June 30, 1996, the Company has loaned a total of $282,000
to Environmental Coupon Marketing, Inc. ("ECM"), a closely-held marketer of
recycling programs to retailers featuring store coupons and cash incentives to
consumers. The first loan, in the amount of $100,000, bears interest at the rate
of 6% per annum and matures on the earlier of a proposed private placement of
ECM securities, or August 9, 1996. The second loan for $182,000 is non-interest
bearing and may be converted into up to 350,000 shares of ECM common stock at
the rate of $.52 per share. This loan matures on October 9, 1996. Both loans are
unsecured.
The Company has also purchased 210,000 shares of ECM common
stock for $.40 per share, or $84,000. This investment is included in Other
Assets in the accompanying Consolidated Statement of Financial Condition.
NOTE 5 - ACCRUED EXPENSES
Accrued expenses consist of the following:
Reserves for legal matters $ 435,744
Other 393,902
$ 829,646
NOTE 6 - BANK LOAN
In January 1996, the Company borrowed an additional $179,625
from its bank. The loan is evidenced by a note which is payable in sixty monthly
installments of $2,994 plus interest at the bank's prime rate. The loan is
secured by various equipment.
NOTE 7 - COMMITMENTS AND CONTINGENT LIABILITIES
Employment Agreements
Effective January 1, 1996, the Company approved new employment
contracts for two of its officers. The contracts will run for three years, and
provide for annual salaries of $175,000 for the first year, with a provision for
a 10% annual increase in the second and third years. The agreement also provides
for a bonus pool of up to 10% of consolidated pre-tax profits. The bonus pool
becomes effective each year only upon the achievement of pre-tax profits
exceeding $500,000.
Legal Matters
In 1995, the Company's broker-dealer subsidiary, FMSC, was
named as a defendant in a civil suit brought by Escambia County, Florida
("Escambia") for alleged losses.
NOTE 7 - COMMITMENTS AND CONTINGENT LIABILITIES - continued
sustained on certain securities purchased from FMSC. On March
28, 1996, without admitting liability or wrongdoing, FMSC reached an agreement
with Escambia to settle the Escambia claims. Under terms of the agreement, FMSC
will pay Escambia the sum of $900,000 in two installments: $600,000 immediately
and $300,000 on August 1, 1996. The first installment was paid in April 1996.
FMSC is cooperating with various regulatory authorities that are conducting
inquiries into the Escambia transactions as well as other issues related to
FMSC's trading in mortgage-backed securities.
FMSC is also a respondent in certain pending customer
arbitrations relating to its securities business. These claims are in various
stages of progress and are being vigorously contested by FMSC. The ultimate
outcome and/or range of loss, if any, from these matters is not presently
determinable.
Shares issued with guaranteed resale price
During the second quarter of 1996, the Company entered into two
agreements to settle customer claims. Under terms of the agreements, the Company
has issued a total of 70,000 restricted shares of its common stock with a
guarantee to pay the difference between $2.00 per share and the sales price of
the shares upon expiration of a two-year holding period. The shareholders may
elect to retain the shares after two years. Such an election will release the
Company from any further obligation.
The Company has established a temporary equity account to
record its maximum liability with respect to the shares ($140,000). Payment of
any shortfall will be charged to this account. Any balance in the account will
be credited to permanent capital at the end of the two-year period.
NOTE 8 - NET CAPITAL REQUIREMENTS
FMSC is subject to the Securities and Exchange Commission
Uniform Net Capital Rule (Rule 15c3-1), which requires FMSC to the maintenance
of minimum net capital, as defined. At June 30, 1996, FMSC had net capital and
minimum net capital requirements of $1,477,088 and $250,000, respectively.
FMSC's ratio of aggregate indebtedness to net capital was 2.14 to 1.
NOTE 9 - STOCK REPURCHASE PLAN
In May 1996, the Company's Board of Directors authorized the
repurchase of up to 500,000 shares of the Company's common stock. As of June 30,
1996, the Company had repurchased 108,502 shares for total consideration of
$130,503. The repurchase program is scheduled to expire December 31, 1996.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Liquidity and Capital Resources
During the six months ended June 30, 1996, the Company's cash balances
increased by $145,965 to $906,330. Operating activities provided net funds of
$921,330. Long inventory positions decreased and short inventory positions
increased by $1,753,077 and $1,223,421, respectively from December 31, 1995 to
June 30, 1996. The cash provided by these changes in inventory levels was offset
in part by a reduction in the Company's net debit balances with its clearing
firm by $2,306,032. The balances in the Company's cash, clearing firm and
inventory accounts can 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. The Company also
paid approximately $1,019,000 for 1995 and 1996 income tax liabilities during
the 1996 period.
Investing activities used cash of $794,377 during the period. The
Company purchased approximately $320,000 of fixed assets for the six months,
consisting primarily of telecommunications and computer systems, and office
improvements. At the present time, management anticipates additional capital
expenditures of approximately $100,000 for the balance of the year, based on
current projections of equipment and facility requirements. This amount may be
subject to change depending on such factors as the Company's rate of revenue
growth, hiring of additional in-house brokers and traders, and personnel demands
to manage higher transactions volume. Amounts advanced to brokers and affiliates
also increased by $431,840 in 1996. The increase is attributable to loans to new
affiliates ($130,000), advances to employees ($22,000), and amounts receivable
from brokers ($280,000). The Company also purchased additional shares in ECM for
$24,000, bringing the total investment in ECM to $366,000 in stock and loans.
ECM is a privately-held marketer of recycling programs. A private placement of
ECM securities is currently planned for the third quarter of 1996.
Financing activities provided cash of $34,012 during the six month
period, due primarily to an additional term loan of $179,625 from the Company's
bank to finance equipment purchases. The Company also commenced a stock buyback
program in May 1996. Through June 30, 1996 the Company had repurchased 108,502
shares for total consideration of $130,503. The Company's board of directors has
authorized the repurchase of up to 500,000 shares through December 31, 1996.
Management believes the Company's liquidity needs at least through the
next fiscal year will be provided by increasing operating revenues and margin
loans secured by trading inventories under an arrangement with its clearing
broker.
Results of Operations
The Company reported record revenues and earnings in the June 1996
quarter and six month periods, continuing the trend that began last year. Total
revenues for 1996 increased by $8,269,169 to $20,112,642, a 70% increase over
the comparable 1995 period. Revenues for the quarter rose 62% to a record
$11,479,163 compared to $7,105,061 for the second quarter of 1995.
Net income for the second quarter ended June 30, 1996 increased 91% to
a record $597,745 or $.07 per share from $313,712 or $.04 per share for the same
period last year. Operating income before taxes for the 1996 quarter doubled to
$1,036,895 from $518,747 last year. Compared to the first quarter of 1996, net
income rose 35% from $442,121 or $.05 per share, operating income was up 43%
from $723,048 and revenues increased 33% from $8,633,479.
For the six months ended June 30, 1996, net income rose 138% to
$1,039,866 or $.12 per share compared with net income of $437,164 or $.05 per
share for the same period last year. Operating income rose 143% to $1,759,943
from $722,980 in the comparable 1995 period. Revenues increased 70% to
$20,112,642 compared to $11,843,474 for the first half of 1995.
U.S. equity markets remained strong in the second quarter of
1996 due to continued interest rate stability and strong earnings reports.
These markets once again experienced record trading volume and mutual
fund investment.
Revenues from firm trading increased by 35% over 1995 levels from
$3,236,671 (28% of total revenues) to $5,520,783 (27% of total revenues). Dollar
increases were due to record gains from market-making and other equity trading
activities as the stock market rally carried over into the second quarter of
1996. The contribution of trading profits to total revenue from period to period
was basically unchanged due to two principal factors: i)the discontinuation of
proprietary trading in mortgage-backed and U.S. government securities, which
accounted for combined revenues of $930,000 in 1995 and $-0- in 1996, and ii)a
surge in commission-based revenues.
Commission income from the sale of listed and over-the-counter
securities, mutual funds, leasing and other agency transaction rose 93% to
$13,820,907 (69% of total revenues) for the six months ended June 30, 1996 as
compared to $7,143,637 (60% of total revenues) in the comparable 1995 period.
The quarterly comparison showed an increase of 78%, or $3,390,201. The largest
increases came from stock and mutual fund transactions as retail investment
volume maintained record levels during the 1996 quarter. Leasing and insurance
product sales also improved during the period. The Company plans to develop its
insurance business through increased marketing and wider distribution during the
year. The leasing operation is also expected to grow subject to the availability
of quality lease investments.
Investment banking activity picked up in the second quarter of 1996
with an increase in selling concessions and the completion of a private
placement offering. The Company expects to continue participating in
syndications, and is exploring other opportunities in the investment banking
area, including additional securities private placements. As previously
discussed, the Company has also purchased a minority interest in ECM and has
provided ECM with short-term financing.
During the six months ended June 30, 1996 the Company paid commissions,
employee compensation and employee benefits of $14,176,399 (70% of total
revenues) as compared to $8,212,937 (69% of total revenues) in the comparable
1995 period. This category includes salaries, commission expense, and fringe
benefits for salaried employees. Commissions paid to registered representatives
for 1996 were $12,280,635 (61% of total revenues) as compared to $7,031,938 (59%
of total revenues) in 1995. Commission compensation is directly related to the
level of revenues generated from firm trading, agency and investment banking
activities. The dollar increase in 1996 resulted primarily from a higher volume
of agency transactions. Commission expense as a percentage of total revenues
will fluctuate within a narrow range in the future depending upon the mix of
commission-based business and trading profits, as well as the contribution to
revenues from the Company's in-house brokers and affiliate offices. In-house
brokers usually receive a lower commission payout than independent affiliates
but are not generally required to pay their own overhead.
For the six months ended June 30, 1996 the Company paid salaries of
$1,493,630 for management, operations and clerical personnel, as compared to
$871,606 in 1995. This increase was due in part to the growth in revenues, which
required additional trading assistants and other personnel for transactions
processing. The Company also added employees to its computer, marketing and
finance departments subsequent to the June 1995 quarter.
Clearing costs increased from $1,291,747 (11% of revenues) to
$1,940,198 (10% of revenues) in 1996 due to higher transactions volume. The
percentage of clearing costs to total revenue will fluctuate somewhat depending
upon the combination of agency business and proprietary trading, as well as the
average revenue per transaction in a given period.
Communications and occupancy costs rose by $186,201 to $718,983 for the
six months ended June 30, 1996. The increase is due to higher telephone charges,
market data services, and occupancy expenses resulting from the addition of
trading personnel, in-house brokers and an expansion of operating facilities.
Other operating expenses increased from $964,188 (8% of revenues) in
1995 to $1,459,041 (7% of revenues) in 1996. The increase was due primarily to
higher marketing costs associated with the Company's affiliate recruitment
program, and legal expenses.
While the Company has achieved substantial revenue growth in the first
half of 1996, operating results will continue to be sensitive to general
economic conditions, particularly the interest rate environment, and the outlook
of retail investors on the financial markets. These markets have recently become
more uncertain and volatile, and transactions volume, the source of the
Company's commission-based revenues, has been declining. While seasonal factors
may currently be at play, the Company cannot assure that the rate of revenue
growth experienced in the first two quarters of 1996 can be sustained for the
balance of the year.
PART II
OTHER INFORMATION
Item 5. Other Information.
In May 1996, the Company's Board of Directors authorized the
repurchase of up to 500,000 shares of the Company's common stock. As of June 30,
1996, the Company had repurchased 108,502 shares for total consideration of
$130,503. The repurchase program is scheduled to expire December 31, 1996.
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.
13
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: August 7, 1996
By /s/ William J. Kurinsky
William J. Kurinsky
Secretary/Treasurer
Chief Financial Officer and
Principal Accounting Officer
By /s/ Herbert Kurinsky
Herbert Kurinsky
President