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 June 30, 1998
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: (732) 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
9,776,227 Common Shares, no par value were outstanding as of
August 12, 1998.
Page 1 of 14
02
FIRST MONTAUK FINANCIAL CORP
FORM 10-Q
JUNE 30, 1998
INDEX
Page
PART I. FINANCIAL INFORMATION:
Item 1. Financial Statements
Consolidated Statement of Financial Condition
as of June 30, 1998 and December 31, 1997 ....... 3
Consolidated Statements of Income (Loss) for the
Six Months ended June 30, 1998 and 1997
and Three months ended June 30, 1998 and 1997 ..... 4
Consolidated Statements of Cash Flows for the
Six Months ended June 30, 1998 and 1997 ... 5-6
Notes to Financial Statements ..................... 7-8
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations .... 9-10
PART II. OTHE INFORMATION:
Item 5. Other Information........................... 11
Item 6. Exhibits and Reports on Form 8-K............ 12
Signatures .......................................... 13
03
FIRST MONTAUK FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF FINANCIAL CONDITION
June 30, December 31,
ASSETS 1998 1997
------ ---- ----
Cash $ 828,269 $ 789,883
Due from clearing firm 3,229,047 2,707,782
Securities owned, at market 2,660,954 3,150,772
Securities owned, not readily marketable,
at estimated market value 67,429 506,732
Commissions receivable 57,301 246,250
Employee and broker receivables 787,884 927,195
Furniture, equipment and leasehold
improvements-net 1,854,052 1,357,854
Notes receivable 918,659 938,054
Due from officers 140,900 146,691
Other assets 1,551,199 1,164,753
Deferred tax asset-net 671,666 35,968
--------- ---------
Total assets $ 12,767,360 $ 11,971,934
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Securities sold, but not yet
purchased, at market $ 129,215 $ 809,523
Notes payable-bank 292,806 340,769
Subordinated notes payable 200,000 250,000
Commissions payable 1,358,329 1,624,316
Accounts payable 927,617 501,267
Accrued expenses 1,357,238 812,590
Other liabilities 760,129 394,002
--------- ------------------
Total liabilities 5,025,334 4,732,467
--------- ------------------
Common stock issued with guaranteed
selling price - no par value,
103,000 and 173,000 shares issued and
outstanding, respectively 206,500 346,500
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, 9,775,244 and 9,198,444
shares issued and outstanding, respectively 4,793,483 4,334,173
Additional paid-in capital 2,804,042 1,173,437
Retained earnings 363,635 1,570,376
Less: Deferred compensation (425,634) (185,019)
---------- -----------
Total stockholders' equity 7,535,526 6,892,967
---------- -----------
Total liabilities and
stockholders' equity $ 12,767,360 $ 11,971,934
========== ==========
See notes to financial statements.
04
FIRST MONTAUK FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (LOSS)
Six months Three months
ended June 30, ended June 30,
1998 1997 1998 1997
---- ---- ---- ----
Revenues:
Commissions $ 15,441,811 $ 12,162,909 $ 7,814,041 $ 5,604,060
Principal transactions 4,402,917 2,876,753 2,059,474 1,480,244
Investment banking 601,252 225,146 335,048 86,355
Insurance recovery - 650,000 - -
Interest and other income 793,809 554,826 415,272 306,396
---------- ---------- ---------- ----------
21,239,789 16,469,634 10,623,835 7,477,055
----------- ---------- ---------- ----------
Expenses:
Commissions, employee
compensation and benefits 16,263,930 11,727,961 8,028,111 5,365,990
Clearing and floor brokerage 1,742,243 1,280,978 895,760 552,653
Communications and occupancy 1,180,905 882,394 583,914 458,935
Legal matters and related
costs 1,360,076 667,341 1,059,502 70,912
Writedown of Note Receivable
-Global Financial Corp. 875,000 - 875,000 -
Other operating expenses 1,553,901 906,808 982,587 471,868
Interest 66,053 53,823 37,483 39,086
---------- ---------- ---------- ----------
23,042,108 15,519,305 12,462,357 6,959,444
---------- ---------- ---------- ---------
Income (loss) before
income taxes (1,802,319) 950,329 (1,838,522) 517,611
Income taxes (tax benefit) (595,578) 385,113 (611,603) 209,689
---------- ---------- ----------- ---------
Net income (loss) $ (1,206,741) $ 565,216 $(1,226,919) $ 307,922
=========== ========== =========== ==========
Per share of Common Stock:
Basic $ (0.13) $ 0.07 $ (0.13) $ 0.03
=========== ============ =========== ===========
Diluted $ (0.13) $ 0.05 $ (0.13) $ 0.03
=========== ============ =========== ==========
Number of common
shares used in basic
earnings per share 9,643,166 8,532,818 9,664,113 10,357,813
Incremental shares from
assumed conversion of
options - 2,687,189 - 1,360,333
---------- ------------ ---------- ----------
Number of common shares
used in diluted earnings
per share 9,643,166 11,220,007 9,664,113 11,718,146
========= ========== ========= ==========
See notes to financial statements.
05
FIRST MONTAUK FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Six months ended June 30,
1998 1997
---- ----
INCREASE (DECREASE) IN CASH
Cash flows from operating activities:
Net income (loss) $ (1,206,741) $ 565,216
----------- -----------
Adjustments to reconcile net income
(loss) to net cash used in operating
activities:
Common stock issued with guaranteed
selling price - 37,500
Tax benefit related to exercise
of stock options 150,003 -
Depreciation and amortization 162,982 150,012
Amortization of deferred compensation 93,552 -
Loan reserves 875,000 -
Other 22,000 -
Increase (decrease) in cash
attributable to changes in assets
and liabilities
Due from clearing firm (521,265) (430,493)
Securities owned - at market 489,818 (258,377)
Securities owned-not readily marketable 439,303 -
Commissions receivable 188,949 224,127
Other assets (502,441) (268,301)
Deferred income taxes (635,698) 395,647
Securities sold but not yet purchased (680,308) 175,293
Commissions payable (265,987) (373,153)
Accounts payable 426,350 (26,985)
Accrued expenses 522,648 (1,498,054)
Other liabilities 366,127 132,761
----------- -----------
Total adjustments 1,131,033 (1,740,023)
----------- -----------
Net cash used in operating
activities (75,708) (1,174,807)
----------- -----------
Cash flows from investing activities:
Due from officers 5,791 34,234
Employee and broker receivables 139,311 (273,349)
Issuance of notes receivable (1,459,364) -
Repayment of notes receivable 603,759 -
Capital expenditures (665,983) (36,946)
----------- -----------
Net cash used in investing
activities (1,376,486) (276,061)
----------- -----------
Cash flows from financing activities:
Payment of notes payable-bank (47,963) (60,930)
Issuance of subordinated notes payable - 250,000
Payment of subordinated notes payable (50,000) -
Proceeds from rights offering 1,382,751 -
Registration costs (113,518) -
Proceeds from exercise of common stock
options 319,310 508,043
---------- -----------
Net cash provided by financing
activities 1,490,580 697,113
---------- -----------
Net increase (decrease) in cash 38,386 (753,755)
Cash at beginning of year 789,883 1,069,548
---------- -----------
Cash at end of period $ 828,269 $ 315,793
========== ===========
See notes to financial statements.
06
FIRST MONTAUK FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Continued)
Six months ended June 30,
1998 1997
---- ----
Supplemental disclosures of cash flow
information:
Cash paid during the period for:
Interest $ 66,053 $ 53,823
Income taxes $ - $ -
Shares issued with guaranteed
selling price $ - $ 37,500
Transfer of temporary equity to
permanent capital $ 140,000 $ -
See notes to financial statements.
07
FIRST MONTAUK FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998
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,
1998 and 1997. 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
31,1997, as filed with the Securities and Exchange Commission on Form 10-K. The
results reflected for the six-month and three-month periods ended June 30, 1998,
are not necessarily indicative of the results for the entire fiscal year to end
on December 31, 1998.
NOTE 2 - EARNINGS PER SHARE
The Company has adopted Statement of Financial Accounting Standards No.128
(SFAS128), "Earnings per Share," which supersedes APB Opinion No. 15 (APB No.
15). Earnings per Share is effective for all periods ending after December 15,
1997. SFAS 128 requires dual presentation of basic and diluted earnings per
share (EPS) for complex capital structures on the face of the Statements of
Operations. 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 or conversion of other securities into
common stock. Earnings per share data for the 1997 periods have been restated to
conform with the provisions of SFAS 128. Earnings per share as originally
reported for the six-month period ended June 30,1997 was $.06 on both a primary
and fully diluted basis, as compared to $.07 and $.05 on a basic and diluted
basis, respectively, as restated. The impact of the change for the three-month
period in 1997 was not material. Outstanding common stock options have not been
included in the 1998 EPS computations because their inclusion would be
anti-dilative.
NOTE 3 - NOTES RECEIVABLE
During the six months ended June 30, 1998, the Company's subsidiary,
Montauk Advisors, Inc.(MAI), provided net advances of $970,363 to Global
Financial Corp.(Global) to help Global meet its obligations to lease investors
and provide working capital for operating costs. As of June 30, 1998, MAI had an
outstanding receivable from Global of $1,553,167. The loans are evidenced by
notes bearing interest at the rate of 8% per annum, with scheduled maturities,
as extended, of $369,500 on September 1,1998, $358,500 on October 1, 1998, and
$825,000 on December 31, 1998. MAI may at its sole option elect to receive
principal and interest in thirty-six equal monthly installments. Subsequent to
June 30, 1998, MAI made additional loans to Global totaling $280,000.
During the current quarter, the Company undertook a full review of Global
loans to evaluate their collectability, and has determined that, based on
various events and circumstances, it is probable that the loans have been
impaired. Accordingly, the Company has recorded an impairment loss of $875,000
in its financial statements for the quarter ended June 30, 1998. The loan
reserve reflects management's best estimate of the extent of loan impairment
based on available current information. Eventual outcomes could differ from
estimated amounts.
MAI is also continuing to provide short-term working capital loans to
FemCom Business Systems ("FCS"), Global's affiliated equipment vendor, to
purchase equipment for resale to FCS customers. FCS owed MAI $90,852 at June 30,
1998.
08
NOTE 4 - RIGHTS OFFERING
In February 1998, the Company completed an offering of 3,072,779 Units,
each Unit consisting of one Class A Redeemable Common Stock Purchase Warrant,
one Class B Redeemable Common Stock Purchase Warrant, and one Class C Redeemable
Common Stock Purchase Warrant. The Warrants have the following exercise prices
and terms:
Exercise Price Exercise Period
Warrant Per Share from Date of Issuance
------- --------- ---------------------
Class A $3.00 Three years
Class B 5.00 Five years
Class C 7.00 Seven years
Each shareholder of record as of December 15, 1997 received three rights
for each share of Common Stock held as of the record date, with three rights
required to subscribe for a single Unit at a price of $.45 per Unit. The
offering raised gross proceeds of $1,382,751 before deducting related costs of
approximately $236,000.
NOTE 5 - LEGAL SETTLEMENT
During the current quarter, the Company settled a federal court action
brought by the City of Gainesville, Ohio, relating to the sale of
mortgage-backed securities by FMC's former Houston affiliate office. The Company
agreed to make a lump-sum payment of $500,000, which was paid in July.
NOTE 6 - INCOME TAXES
In accordance with the provisions of SFAS 109, the income tax provisions
for the six-month and three-month periods ended June 30, 1998 reflect tax
benefits provided by deferred tax assets. Such deferred tax assets relate
primarily to loan loss reserves and allowances for legal costs. In management's
current estimation, the tax benefits are more likely than not to be realized
based on the expected availability of sufficient future taxable income to absorb
net operating losses and deductible temporary differences once they reverse.
NOTE 7 - RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
Effective January 1, 1998, the Company adopted the provisions of SFAS 130,
"Reporting Comprehensive Income", which promulgates standards for the reporting
and display of comprehensive income and its components. There were no items of
comprehensive income to report during any of the periods presented.
The Company has also adopted SFAS 131, "Disclosures About Segments of an
Enterprise and Related Information", which requires disclosure of reportable
operating segments. The Company will address the segment information reporting
requirements of SFAS 131 in its annual report for the year ended December 31,
1998.
09
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Note: The following discussion and exposition should be read in conjunction
with the Consolidated Financial Statements and related Notes contained elsewhere
in this Form 10-Q. This report may contain forward-looking statements that
involve risks and uncertainties. The Company's actual results may differ
significantly from the results discussed in the forward-looking statements.
Results of Operations
Total revenues for the June 1998 quarter and six month period increased by
42% and 29%, respectively. Total revenues for the six month period increased to
$21,240,000 in 1998 from $16,470,000 in 1997. Revenues for the second quarter
increased to $10,624,000 in 1998 from $7,477,000 in 1997. These results
represent a continuation of record revenue levels, due to a combination of
strong securities markets and increased productivity by the Company's registered
representatives.
For the six month period the Company reported a net loss after income taxes
of $1,207,000, or $.13 per share, as compared with net income of $565,000, or
$.07 per share after taxes in 1997. For the second quarter ended June 30, 1998
the Company reported a net loss of $1,227,000, or $.13 per share, as compared
with net income of $308,000, or $.03 per share after taxes in 1997.
The Company's loss for the six months ended June 30, 1998 was attributable
to two key factors. Legal expenses and settlement costs of $1,360,000 include a
one-time legal settlement of $500,000 to the City of Painesville, Ohio and
litigation costs connected therewith as well as a reserve for future litigation
costs. The Company also took an impairment loss of $875,000 against notes
receivable from Global Financial Corp. (Global). These expense items are
discussed more fully below.
Commission revenues, which include commissions received from the sale of
stocks and bonds on an agency basis, mutual funds, variable annuities and
management fees, rose to $15,442,000 in the first half of 1998, from $12,162,000
during the comparable 1997 period. For the second quarter, agency commissions
increased to $7,814,000 from $5,604,000 in 1997.
Principal transactions rose from $1,480,000 during the second quarter of
1997 to $2,059,000 in the 1998 quarter, an increase of 39%. For the six month
period principal transactions increased from $2,877,000 in 1997 to $4,403,000 in
1998, an increase of 53%. These increases are attributable to additional stock
and bond trading profits, and increased productivity by the Company's registered
representatives who focus on principal transactions.
Revenues for investment banking activities were $335,000 for the second
quarter of 1998 as compared with $86,000 during the 1997 quarter. Investment
banking activity increased in the second quarter of 1998 due to participation in
numerous offerings as a syndicate and/or selling group member or underwriter, as
well as proceeds of $140,000 received from the redemption of warrants obtained
through an investment banking agreement with a public company.
During the six months ended June 30, 1998, the Company paid commissions,
employee compensation and employee benefits of $16,264,000 (77% of total
revenues) as compared to $11,728,000 (74% of total revenues excluding the
one-time insurance recovery of $650,000) in the comparable 1997 period. This
category includes salaries, commission expense, and fringe benefits for salaried
employees. Commissions paid to registered representatives for 1998 were
$13,572,000 (64% of total revenues) as compared to $9,811,000 (62% of total
revenues excluding the one-time insurance recovery of $650,000) in the 1997 six
month period. Commission compensation is directly related to the level of
revenues generated from firm trading, agency and investment banking activities.
For the six months ended June 30, 1998 the Company paid salaries of
$2,074,000 for management, operations and clerical personnel, as compared to
$1,518,000 in 1997. This increase was due in part to the addition of various key
management personnel during the latter part of fiscal 1997 and the first quarter
of 1998, as well as a general increase in employee salaries. The Company has
undertaken a restructuring of certain departments, including the elimination of
personnel and the consolidation of its insurance department, in an attempt to
reduce costs in this category. These savings will be reflected in future
periods.
Clearing and floor brokerage costs increased from $1,281,000 (8% of
revenues) in 1997 to $1,742,000 (8% of revenues) in 1998 due to a higher volume
of transactions for which clearing fees are charged. The percentage of clearing
and floor brokerage 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 $299,000 to $1,181,000 for the
six months ended June 30, 1998. While this expense item as a percentage of total
costs remained the same when compared to 1997, the dollar increase is
principally due to higher rent payments for the expanded Company headquarters,
telephone voice and data charges and market data services. These additional
expenses were necessary for the continued growth and expansion of the Company's
operating infrastructure designed to handle an increase in new registered
representatives and provide better service to the entire registered
representative network. At the same time, the Company has focused on an overall
cost containment program in an attempt to reduce expenses in this category by
outsourcing some of its communications services.
Legal matters and related costs include payments to settle customer claims,
professional fees and other defense costs, and provisions for pending
litigation. These costs more than doubled from $667,000 during the first six
months of 1997, to $1,360,000 in 1998. There are several reasons for this large
increase. The Company decided to settle a federal court action with the City of
Painesville Ohio, which was brought as a result of the activities of the
Company's former Houston branch office in connection with the sale of
mortgage-backed securities, for $500,000 which was accrued for during the second
quarter. Legal costs for the second quarter associated with the defense of this
case were approximately $150,000. Management, with the advice of counsel, deemed
it appropriate to settle this case rather than incur the additional, substantial
costs and risks associated with continued protracted litigation. The Company has
also set aside reserves for legal contingencies that may require the expenditure
of additional fees, costs and expenses.
The Company is in the process of preparing claims against parties which it
believes should contribute to the settlement costs of all claims and suits
arising from the activities of the former Houston brokers' sales of
mortgage-backed securities. Additionally, the Company will be filing a lawsuit
against one of its insurance carriers which has not responded to claims made by
the Company arising from these activities. Management cannot predict with any
degree of certainty the potential for recovery of monies from these impending
actions.
Other operating expenses increased from $907,000 (5.5% of revenues) in 1997
to $1,554,000 (6.6% of revenues) in 1998. The increase was due primarily to a
one-time charge in marketing, advertising and promotional costs associated with
the development of new marketing materials to support the Company's affiliate
recruitment program. Additionally, the Company incurred higher professional fees
for a compliance consultant, added accounting fees due to the Global situation,
as well as executive search fees for the placement of several key employees. The
Company has also increased its reserves against broker loan receivables.
The Company has determined to take a reserve against a portion of its loans
to Global, the financing and servicing company which sold leases through Montauk
Advisors, Inc. (MAI), a subsidiary of the Company, in 1996 and 1997. The amount
of the loan reserve of $875,000 was determined by evaluating certain collateral
which Global and other obligors on the loans have pledged to the Company, as
well as by analyzing the financial condition and future earnings capacity of
Global and the other obligors.
Based upon a plan of revised and reduced payments which Global is expected
to make to its leaseholders, MAI, will likely continue to provide working
capital to Global. MAI has provided an additional $280,000 to Global since June
30, 1998.
Management believes that, based on current available information, the
Company will generate sufficient future taxable income to realize the benefits
of net operating loss carry forwards and other deferred tax assets. Management
reached this conclusion after considering such factors as the expected benefits
of a recently implemented cost-cutting program; anticipated reductions in legal
costs due to the settlement of lawsuits relating to the activities of FMSC's
former Houston affiliate office, as well as the potential to recover some of
these litigation costs from insurance carriers and other parties; significant
revenue growth for the six months ended June 30, 1998 over comparable 1997
levels; and the extended carryforward period (twenty years) of federal net
operating losses, subject to statutory limitations. If the Company subsequently
determines that it is unable to generate sufficient taxable income to use all of
its deferred tax assets, it will be required to establish a valuation allowance
to reduce the balance of deferred tax assets to realizable value. The offsetting
earnings charge from the establishment of a valuation allowance could have a
material adverse impact on future operating results.
Liquidity and Capital Resources
During the six months ended June 30, 1997, the Company's cash balances
increased by $38,000 to $828,000. Operating activities used net funds of
$76,000. 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.
Expenses for legal matters and related costs of $1,360,000 were incurred
during 1998, of which $909,000 were incurred during the second quarter, and are
primarily attributable to the settlement of a lawsuit brought by the City of
Painesville, Ohio and the costs related with the defense of that case. The
Company has also increased its reserves for future legal contingencies. Based
upon a review of pending matters, management expects that legal costs will
decrease during the second half of 1998 as a result of the conclusion of the
legal proceedings arising from the sales of mortgage-backed securities.
Investing activities used cash of $1,376,000 during the six month period.
The Company purchased approximately $665,000 of fixed assets during the 1998
period. These include computers and furniture for the Company's new trading
facility and payments of $235,000 to Uptick Technologies, a computer company
developing a database management system for the Company's back office,
compliance and accounting departments. The Company expects to incur additional
software development costs in other capital expenditures of approximately
$300,000 over the next twelve (12) months. Amounts advanced to brokers and
affiliates decreased by $139,000 in the 1998 period. The decrease is
attributable to the repayment of loans by affiliates and brokers and the
amortization of forgivable loans. During the six months ended June 30, 1998, MAI
provided net advances of $970,000 to Global to help Global meet its obligations
to lease investors and provide working capital for operating costs. As of June
30, 1998, MAI had an outstanding receivable from Global of $1,553,000. The loans
are evidenced by notes bearing interest at the rate of 8% per annum, with
scheduled maturities, as extended, of $369,000 on September 1,1998, $358,000 on
October 1, 1998, and $825,000 on December 31, 1998. MAI may at its sole option
elect to receive principal and interest in thirty-six equal monthly
installments. Subsequent to June 30, 1998, MAI made additional loans to Global
totaling $280,000.
During the current quarter, the Company undertook a full review of Global
loans to evaluate their collectability, and has determined that, based on
various events and circumstances, it is probable that the loans have been
impaired. Accordingly, the Company has recorded an impairment loss of $875,000
in its financial statements for the quarter ended June 30, 1998. The loan
reserve reflects management's best estimate of the extent of loan impairment
based on available current information. Eventual outcomes could differ from
estimated amounts.
MAI has provided short-term working capital loans to FemCom Business
Systems ("FBS"), Global's affiliated equipment vendor, to purchase equipment for
resale to FBS customers. FBS owed MAI $91,000 at June 30, 1998.
Financing activities provided cash of $1,491,000 in the 1998 period. A
total of $1,383,000 was received from proceeds of a rights offering during the
first quarter, and $319,000 from the exercise of 403,800 stock options by
various individuals during the first six months of the year. Cash from financing
activities was reduced by $48,000 in bank loan repayments. During the second
quarter a $50,000 principal payment was made on a $250,000 subordinated loan
agreement between FMSC and a creditor. The five-year loan carries an 8% per
annum interest rate. $50,000 of principal plus interest is payable annually on
April 1 of each of the next four years.
Management believes the Company's liquidity needs, at least through the
next fiscal year, will be provided by operating income and proceeds received
from the exercise of various stock options as well as the proceeds from a rights
offering completed in March 1998. The Company received gross proceeds of
$1,383,000 from the sale of 3,072,779 Units consisting of Warrants to purchase
shares of the Company's Common Stock.
Year 2000 Issue
The onset of the year 2000 brings challenges to companies who use and rely
on computers and technology as a function of their businesses. Many existing
computer programs use only two digits to identify a year in the date field.
These programs were designed and developed without considering the impact of the
upcoming change in the century. If not corrected, many computer applications
could fail or create erroneous results by or at the Year 2000.
The Company has commenced reviewing its compliance with what has come to be
known as the Year 2000 issue ("Y2K"). The Company does not create or develop
computer programs on its own. Rather, it is reliant on outside vendors for
verification of the compliance of their applications which are utilized by the
Company. The Company has currently identified 17 programs which are utilized by
the Company in various departments, which require compliance with Y2K. We have
requested each of these vendors to supply verification that the software which
is utilized by the firm is or will be Y2K compliant by the Year 2000. The most
significant of these outside vendors is the Company's clearing firm, Schroder &
Co., Inc.
The Company has already received some verbal notices of compliance, but is
awaiting a final written confirmation from these vendors. The Company has
designated an individual within the organization to coordinate the Y2K
compliance issue, to communicate with each of the software and service vendors,
to ensure Y2K compliance before the turn of the century. While management has
not finalized an estimate of the cost of internal system modifications, it does
not believe that these costs will have a material impact on the Company's
operations in fiscal 1998.
Effective January 1, 1998, the Company adopted the provisions of SFAS 130,
"Reporting Comprehensive Income", which promulgates standards for the reporting
and display of comprehensive income and its components. There were no items of
comprehensive income to report during any of the periods presented.
The Company has also adopted SFAS 131, "Disclosures About Segments of an
Enterprise and Related Information", which requires disclosure of reportable
operating segments. The Company will address the segment information reporting
requirements of SFAS 131 in its annual report for the year ended December 31,
1998.
11
PART II
OTHER INFORMATION
Item 5. Other Information.
Legal Settlement
During the reporting period, the Company settled a Federal Court action
against the City of Painesville, Ohio which was brought as the result of the
activities of the Company's former Houston branch office in connection with the
sale of mortgage-backed securities. The settlement requires a one-time payment
of $500,000 cash which was paid during the third quarter of 1998.
The Company is in the process of preparing claims against parties which it
believes should contribute to the settlement costs of all claims and suits
arising from the activities of the former Houston brokers' sales of
mortgage-backed securities. Additionally, the Company will be filing a lawsuit
against one of its insurance carriers which has not responded to claims made by
the Company arising from these activities. Management cannot predict with any
degree of certainty, the potential for recovery of monies from these impending
actions.
Global Loans
During the six months ended June 30, 1998, MAI provided net advances of
$970,000 to Global to help Global meet its obligations to lease investors and
provide working capital for operating costs. As of June 30, 1998, MAI had an
outstanding receivable from Global of $1,553,167. The loans are evidenced by
notes bearing interest at the rate of 8% per annum, with scheduled maturities,
as extended, of $369,500 on September 1,1998, $358,500 on October 1, 1998, and
$825,000 on December 31, 1998. MAI may at its sole option elect to receive
principal and interest in thirty-six equal monthly installments. Subsequent to
June 30, 1998, MAI made additional loans to Global totaling $280,000.
During the current quarter, the Company undertook a full review of Global
loans to evaluate their collectability, and has determined that, based on
various events and circumstances, it is probable that the loans have been
impaired. Accordingly, the Company has recorded an impairment loss of $875,000
in its financial statements for the quarter ended June 30, 1998. The loan
reserve reflects management's best estimate of the extent of loan impairment
based on available current information. Eventual outcomes could differ from
estimated amounts.
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 14, 1998 /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
14
EXHIBIT INDEX
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Exhibit 27 - Financial Data Schedule