SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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, 1997
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
8,942,179 Common Shares, no par value were outstanding as of May 14,
1997.
2
FIRST MONTAUK FINANCIAL CORP.
FORM 10-QSB
MARCH 31, 1997
INDEX
Page
----
PART I. FINANCIAL INFORMATION:
Item 1. Financial Statements
Consolidated Statement of Financial Condition
as of March 31, 1997 and December 31, 1996 .................... 3
Consolidated Statement of Income for the
Three Months Ended March 31, 1997 and 1996 .................... 4
Consolidated Statement of Cash Flows for the
Three Months Ended March 31, 1997 and 1996 .................... 5-6
Notes to Financial Statements .................................. 7-8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations .................... 9-12
PART II. OTHER INFORMATION:
Item 5. Other Information .........................................13-14
Item 6. Exhibits and Reports on Form 8-K ........................ 14
Signatures ....................................................... 15
3
FIRST MONTAUK FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF FINANCIAL CONDITION
March 31, December 31,
ASSETS 1997 1996
------ --------- ------------
Cash $ 695,002 $1,069,548
Securities owned, at market 2,351,147 2,129,435
Commissions receivable 601,558 720,381
Due from clearing firm 971,486 1,301,457
Employee and broker receivables 858,954 741,603
Fixed assets-net 1,146,428 1,200,933
Notes receivable-ECM 212,640 230,000
Due from officers 135,689 171,978
Other assets 926,873 624,536
Deferred tax asset 378,032 552,168
--------- ---------
Total assets $8,277,809 $8,742,039
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Securities sold, but not yet purchased,
at market $ 67,138 $ 127,627
Loans payable-bank 427,840 458,305
Commissions payable 1,139,480 1,552,218
Accounts payable 510,359 494,697
Accrued expenses 1,156,366 1,811,897
Other liabilities 117,221 180,516
--------- ---------
Total liabilities 3,418,404 4,625,260
--------- ---------
Common stock issued with guranteed
selling price - no par value,
210,500 shares issued and outstanding 459,000 421,500
Commitments and contingencies (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, 8,704,679 and
8,222,481 shares issued and outstanding 3,805,579 3,588,273
Additional paid-in capital 243,961 243,961
Retained earnings 350,865 93,551
--------- ----------
4,400,405 3,925,785
Less: 196,802 shares in treasury,
at cost - (230,506)
--------- ----------
Total stockholders' equity 4,400,405 3,695,279
--------- ----------
Total liabilities and stockholders'
equity $8,277,809 $8,742,039
========= ==========
See notes to financial statements.
4
FIRST MONTAUK FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME
Three months ended March 31,
1997 1996
---- ----
Revenues:
Commissions $6,558,849 $6,079,134
Principal transactions 1,396,509 2,284,112
Investment banking 138,791 29,088
Insurance recovery 650,000 -
Interest and other income 248,430 241,145
--------- ---------
8,992,579 8,633,479
--------- ---------
Expenses:
Commissions, employee compensation
and benefits 6,361,971 6,061,335
Clearing and floor brokerage 728,325 950,433
Communications and occupancy 423,459 341,315
Legal matters and related costs 596,429 138,770
Other operating expenses 434,940 383,307
Interest 14,717 35,271
--------- ---------
8,559,841 7,910,431
--------- ---------
Income before income taxes 432,738 723,048
Income taxes 175,424 280,927
--------- ---------
Net income $ 257,314 $ 442,121
========= =========
Per share of Common Stock:
Net income $ 0.03 $ 0.05
========= =========
Number of shares 9,845,255 8,776,799
========= =========
See notes to financial statements.
5
FIRST MONTAUK FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
Three months ended March 31,
1997 1996
---- ----
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
Cash flows from operating activities:
Net income $ 257,314 $ 442,121
Adjustments to reconcile net income
to net cash used in operating
activities:
Common stock issued with guaranteed
selling price 37,500 -
Depreciation and amortization 89,177 65,354
Due from clearing firm 329,971 (10,884)
Commissions receivable 118,823 (173,355)
Securities owned - at market (221,712) 3,123,107
Other assets (302,337) (307,687)
Deferred income taxes 174,136 282,953
Due to clearing firm - (2,306,032)
Securities sold but not yet purchased (60,489) 21,166
Commissions payable (412,738) 201,784
Accounts payable 15,662 132,000
Accrued expenses (655,531) (185,354)
Income taxes payable - (538,065)
Other liabilities (63,295) (80,413)
---------- -----------
Total adjustments (950,833) 224,574
---------- -----------
Net cash provided by (used in)
operating activities (693,519) 666,695
---------- -----------
Cash flows from investing activities:
Due from officers 36,289 7,775
Employee and broker receivables (117,351) (190,760)
Notes receivable-ECM 17,360
Investment in ECM - (24,000)
Capital expenditures (34,672) (214,886)
---------- -----------
Net cash (used in) investing
activities (98,374) (421,871)
---------- -----------
Cash flows from financing activities:
Proceeds from bank loan - 179,625
Proceeds from exercise of common
stock options 447,812 -
Payment of loans payable (30,465) (12,472)
---------- -----------
Net cash provided by (used in)
financing activities 417,347 167,153
---------- -----------
Net increase (decrease) in cash (374,546) 411,977
Cash at beginning of year 1,069,548 845,471
---------- -----------
Cash at end of period $ 695,002 $ 1,257,448
========= ===========
See notes to financial statements.
6
FIRST MONTAUK FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(Continued)
Three months ended March 31,
1997 1996
Supplemental disclosures of cash flow
information:
Cash paid during the period for:
Interest $ 14,717 $ 35,271
Income taxes $ - $ 542,242
See notes to financial statements.
7
FIRST MONTAUK FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO 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,
1997 and 1996. 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 audited financial statements at, and for the year
ended December 31, 1996. The results reflected for the three-month period ended
March 31, 1997, are not necessarily indicative of the results for the entire
fiscal year to end on December 31, 1997.
NOTE 2 - EARNINGS PER SHARE
Earnings 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. The difference between primary and fully diluted
earnings per share is not material.
NOTE 3 - STOCK OPTIONS
During the quarter ended March 31, 1997, a total of 676,500 options issued
under the Company's stock option plans were exercised. The Company received
proceeds of $447,812 from these transactions. The exercise of the options have
also produced potential future tax benefits to the Company in the form of tax
deductible compensation expense totalling $1,322,651. The current financial
statements do not reflect these benefits.
The Company also issued a total of 749,000 stock options during the current
quarter.
NOTE 4 - 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 March 31, 1997, FMSC had net capital and minimum net
capital requirements of $1,392,787 and $250,000, respectively. FMSC's ratio of
aggregate indebtedness to net capital was 1.75 to 1.
8
NOTE 5 - LEGAL MATTERS
In January 1997, the Company and its broker-dealer subsidiary, FMSC,
entered into an agreement to settle a customer lawsuit for a total of $750,000.
A payment of $500,000 was made upon settlement; FMSC has issued a five-year note
for the $250,000 balance, payable in installments of $50,000 per year plus
interest at the rate of 8% per annum. The NASD recently approved FMSC's
application to subordinate the loan for net capital purposes. FMSC has also
submitted an Offer of Settlement with the Securities and Exchange Commission
relating to the activities of a former affiliate office. The settlement will
likely involve the payment of a $50,000 fine, the disgorgement of profits
amounting to $175,000 plus interest, and the censure and suspension of one of
the Company's principals. The SEC has informally agreed to credit the
disgorgement against amounts already due in settlement of related civil
litigation. The Offer also requires FMSC to engage an independent compliance
examiner to audit the firm's compliance procedures. FMSC has agreed to implement
recommendations contained in the examiner's report. The Company has been
cooperating with ongoing investigations of the registered representatives of the
affiliate office by the SEC and other regulatory authorities.
In January 1997, the Company and FMSC settled a pending customer
arbitration for $500,000 in cash. The Company further agreed to issue to the
customer and her counsel a total of 150,000 five-year warrants to purchase the
Company's Common Stock for $1.25 per share. Two of the Company's officers have
agreed to guarantee a minimum selling price of $1.917 per share with respect to
the shares underlying the warrants. Any differential between the minimum selling
price of $1.917 per share and the warrant exercise price of $1.25 per share will
be paid to the warrantholders out of a $100,000 escrow account established with
personal funds of the officers to secure the guarantee. The warrantholders will
have 60 days in which to exercise the warrants and sell the shares, commencing
from the date the warrantholders are notified that a registration statement
filed to register the shares has been declared effective by the SEC. The Company
is required to file the registration statement no later than June 10, 1997. The
officers will not be obligated to pay the differential with respect to any
unexercised warrants and/or unsold shares at the expiration of the 60 day period
unless the quoted market price for the Company's common stock is below $1.25 for
the entire period. In such an event, the warrantholders will be entitled to
tender the warrants to the Company in exchange for the escrowed funds.
The Company is presently reviewing the extent to which settled and pending
claims may be covered under its insurance policies. In January 1997, the Company
negotiated a $650,000 settlement with one of its insurance carriers in
consideration of a general release from coverage on various matters. Discussions
with other carriers are continuing. There can be no assurance that the Company
will be successful in its efforts to recover additional funds from its insurers
on claims filed to date.
9
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operations
- ---------------------
Total revenues for the first quarter of 1997 increased by $359,100 to
$8,992,579. This includes a one-time insurance recovery of $650,000. Absent this
payment, gross operating revenues declined slightly from 8,633,479 to 8,342,579,
a 3.4% decrease as compared to the 1996 quarter. The decrease was caused by
fluctuations in the financial markets, as well as a reduction in principal
transactions.
Commission revenues from the sale of listed and over-the-counter
securities, mutual funds, leasing and other agency transactions increased to
$6,558,849 (79% of gross operating revenues) from $6,079,134 (70% of gross
operating revenues) in the 1996 quarter. This increase came from stock and
mutual fund transactions as retail investment volume maintained its 1996 levels
during the 1997 quarter. Leasing and insurance product sales also improved
during the period. The Company plans to further develop its insurance business
through increased marketing and wider distribution during the year.
Revenues from principal transactions decreased by 39% from 1996 levels to
$1,396,509 (17% of gross operating revenues) from $2,284,112 (26% of gross
operating revenues). The decrease is attributable to a combination of lower
transaction volume and losses sustained in the firm's equity trading portfolio.
In addition, the Company continues to execute more of its over-the-counter
equity business on an agency basis, whereby the Company earns a commission by
acting as an agent between its customer and another brokerage firm.
Investment banking revenues increased from $29,088 in 1996 to $138,791 in
the 1997 quarter. This increase resulted from the firm's participation in the
private offering of PacificHealth Laboratories as placement agent, as well as
participation as a selling group member in a number of public offerings. The
Company expects to continue participating in syndications, and is exploring
other opportunities in the investment banking area, including additional private
placements.
During the 1997 quarter the Company paid commissions, employee compensation
and employee benefits of $6,361,971 (76% of gross operating revenues) as
compared to $6,061,335 ( 70% of gross operating revenues) in 1996. This category
includes salaries, commission expense, and fringe benefits for salaried
employees.
10
Commissions paid to registered representatives for the first quarter 1997
were $5,213,762 (62% of gross operating revenues) as compared to $5,120,878 (59%
of gross operating revenues) in 1996. Commission compensation is directly
related to the level of revenues generated from firm principal and agency
trading and investment banking activities. The dollar increase in 1997 resulted
primarily from the slightly 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 1997 the Company paid salaries of $758,893 for management, operations
and clerical personnel, as compared to $ 701,912 in 1996. This increase was due
in part to the addition of operational employees and a general increase in
employee salaries.
Clearing costs decreased in 1997 to $728,325 (9% of revenues) from $950,433
(11% of gross operating revenues) in 1996. The percentage of clearing costs to
gross operating 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. The decrease in clearing costs was also
attributable to a more favorable fee structure negotiated with the Company's
clearing firm.
Communications and occupancy costs rose by $82,144 to $423,459 during the
1997 quarter. The increase is due to higher telephone charges, market data
services, and computer consulting costs. Management believes that growth in this
expense category will slow due to recent negotiations with a long distance
carrier establishing lower rates for telephone service, as well as to planned
reductions in the cost of operating the Company's wide area network. One partial
offsetting factor is expected to be higher occupancy costs, owing to the further
expansion of the Company's headquarters in January 1998.
Legal matters and related costs include payments to settle customer claims,
professional fees and other defense costs, and provisions for pending
litigation. These costs increased to $596,429 in 1997 from $138,770 in the prior
period. In March 1997, the Company received a $650,000 cash settlement with one
of its insurance carriers. The Company is presently reviewing the extent to
which settled and pending claims may be covered under other insurance policies.
There can be no assurance that the Company will be successful in its efforts to
recover additional funds from these insurers.
Other operating expenses increased from $383,307 (4% of gross operating
revenue) in 1996 to $434,940 (5% of gross operating revenues) in 1997. The
increase was due primarily to an increase in business development costs
associated with the Company's affiliate recruitment program, as well as higher
insurance and administrative overhead costs.
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.
11
Liquidity and Capital Resources
- -------------------------------
During the three months ended March 31, 1997, the Compan's cash balances
decreased by $374,546 to $695,002. Operating activities used net funds of
$693,519. Inventory positions of securities held by the Company declined to
$2,351,147 as a result of continuing efforts by management to retain fewer
securities on hand during periods of increasing market volatility. The Company
used cash to reduce its accrued expenses during the 1997 quarter. The balances
in the Company's cash, clearing firm and securities inventory 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.
Two significant legal claims were paid during the first quarter of 1997
resulting in a reduction in cash flow of $1,000,000. In the settlement of a
civil action brought by National Guardian Life Insurance Company ("NGL") against
the Company, the Company paid $500,000 in cash and gave NGL a five year
subordinated note for $250,000 with 8% per annum interest, subordinated in
accordance with certain provisions and requirements of the National Association
of Securities Dealers Regulation, Inc. ("NASDR") governing subordinated loans to
broker/dealers. The loan agreement provides for a $50,000 principal payment
annually on April 1 of each of the next five years along with an annual interest
payment on the declining balance.
In the second claim, the Company settled a customer arbitration with the
payment of $500,000 in cash and the issuance of a Warrant to purchase the
Company's common stock for $1.25 per share. The Warrantholder has a guaranteed
minimum sales price of $1.917 per share. The guarantee is secured by funds held
in escrow which were provided by one of the Company's executive officers.
Legal expenses of $596,429 were incurred during the 1997 period in
connection with the defense of these and other matters. It is anticipated, but
cannot be assured, that legal costs will level off after the first quarter as a
result of the settlement or other disposition of several large outstanding legal
claims.
Investing activities used cash of $98,374 during the quarter. The Company
purchased approximately $35,000 of fixed assets during the 1997 quarter. The
investment consists primarily of telecommunications equipment and computer
systems. The Company anticipates an increase in expenditures of approximately
$300,000 for communications hardware and software, and other equipment during
1997. Amounts advanced to brokers and affiliates increased by $117,351 in the
1997 period. The increase is attributable to loans to new affiliates, advances
to employees, and amounts receivable from brokers. These receivables are
generally due on demand, except for an $84,000 loan that is due by July 31,
1997, with interest at the rate of 6% per annum. Officer loans receivable were
reduced by $36,289, and $17,360 was received by ECM in partial payment of one of
its outstanding loans to the Company.
12
Financing activities provided cash of $417,347 in the 1997 period. A total
of $447,812 was received from the exercise of 676,500 stock options by various
individuals during the first quarter. Cash from financing activities was reduced
by $30,465 in bank loan repayments.
Management believes the Company's liquidity needs at least through the next
fiscal year will be provided by increasing operating income and margin loans
secured by trading inventories under an arrangement with the Company's clearing
broker. The Company is preparing a registration statement for filing with the
SEC for a proposed Rights offering to its shareholders. If and when completed
under the terms presently contemplated, the Company will receive gross proceeds
of approximately $1,188,000. There is no assurance that the Company will
consummate the Rights offering, or what the final terms and conditions might be.
The Company is also negotiating a line of credit with an equipment financing
company.
13
PART II
OTHER INFORMATION
Item 5. Other Information.
Settlement of Legal Claims
In January 1997 the Company settled a civil litigation with National
Guardian Life Insurance Co. ("NGL"). The settlement provided for the payment to
NGL of $500,000 in cash and to provide NGL with a $250,000 five-year
Subordinated Loan bearing interest at 8% annually. The loan is to be paid at the
annual rate of $50,000 principal plus interest on the declining balance. The
Subordinated Loan Agreement was recently approved by the National Association of
Securities Dealers.
In January 1997, the Company and FMSC settled an arbitration proceeding
brought by a customer which resulted from options trading activity in her
brokerage account. The Company paid to the customer $500,000 in cash, and issued
to her and her counsel a total of 150,000 five-year warrants to purchase the
Company's Common Stock for $1.25 per share. Two of the Company's officers have
agreed to guarantee a minimum selling price of $1.917 per share with respect to
the shares underlying the warrants. Any differential between the minimum selling
price of $1.917 per share and the warrant exercise price of $1.25 per share will
be paid to the warrantholders out of a $100,000 escrow account established with
personal funds of the officers to secure the guarantee. The warrantholders will
have 60 days in which to exercise the warrants and sell the shares, commencing
from the date the warrantholders are notified that a registration statement
filed to register the shares has been declared effective by the SEC. The Company
is required to file a registration statement with the SEC to register the
underlying Common Stock for resale no later than June 10, 1997. The officers
will not be obligated to pay the differential with respect to any unexercised
warrants and/or unsold shares at the expiration of the 60 day period unless the
quoted market price for the Compan's common stock is below $1.25 for the entire
period. In such an event, the warrantholders will be entitled to tender the
warrants to the Company in exchange for the escrowed funds.
Proposed Rights Offering
In March 1997, the Company announced its intention to effect a Rights
Offering to its common shareholders. Following the effectiveness of a
registration statement to be filed with the Securities and Exchange Commission,
and subject to shareholder approval of an increase in the Company's authorized
shares, the Company intends to issue one subscription Right for each share of
common stock owned by its shareholders of record on a date to be determined.
14
Three subscription Rights will entitle the holder to purchase one Unit at a
price of $.45. Each Unit is expected to consist of one Series A Warrant, one
Series B Warrant and one Series C Warrant. Each Warrant will entitle the holder
to purchase one share of the Company's common stock under the following
conditions:
Exercise Period
Warrant Exercise Price From Date of Issuance
- ------- -------------- ---------------------
Series A $3.00 Three years
Series B 5.00 Five years
Series C 10.00 Seven years
The Warrants will be redeemable, at the option of the Company, under
certain terms and conditions upon at least 30 days written notice. There is no
assurance that the Company will consummate the Rights offering, or what the
final terms and conditions might be. The Company reserves the right to withdraw
the offering or otherwise modify the terms and conditions prior to its
effectiveness.
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.
15
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 15, 1997 /s/ William J. Kurinsky
-------------------------
William J. Kurinsky
Secretary/Treasurer
Chief Financial Officer and
Principal Accounting Officer
/s/ Herbert Kurinsky
-------------------------
Herbert Kurinsky
President
16
EXHIBIT INDEX
-------------
Exhibit 27 - Financial Data Schedule