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, 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 th
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
9,013,054 Common Shares, no par value were outstanding as of
August 13, 1997.
Page 1 of 14
02
FIRST MONTAUK FINANCIAL CORP
FORM 10-QSB
JUNE 30, 1997
INDEX
Page
PART I. FINANCIAL INFORMATION:
Item 1. Financial Statements
Consolidated Statement of Financial Condition
as of June 30, 1997 and December 31, 1996 ....... 3
Consolidated Statement of Income for the
Three Months ended June 30, 1997 and 1996
and Six months ended June 30, 1997 and 1996 ....... 4
Consolidated Statement of Cash Flows for the
Six Months ended June 30, 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 .... 9-10
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 1997 1996
Cash $ 315,793 $ 1,069,548
Securities owned, at market 2,387,812 2,129,435
Commissions receivable 496,254 720,381
Due from clearing firm 1,731,950 1,301,457
Income tax refund receivable 203,480 -
Employee and broker receivables 1,014,952 741,603
Fixed assets-net 1,087,867 1,200,933
Due from officers 137,744 171,978
Other assets 919,357 854,536
Deferred tax asset 776,408 552,168
--------- ---------
Total assets $ 9,071,617 $ 8,742,039
--------- ---------
--------- ---------
LIABILITIES AND STOCKHOLDERS' EQUITY
Securities sold, but not yet
purchased, at market $ 302,920 $ 127,627
Loans payable-bank 397,375 458,305
Commissions payable 1,179,065 1,552,218
Accounts payable 467,712 494,697
Accrued expenses 313,843 1,811,897
Other liabilities 313,277 180,516
Liabilities subordinated to
claims of general creditors 250,000 -
--------- ---------
Total liabilities 3,224,192 4,625,260
--------- ---------
Common stock issued with guaranteed
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, 9,006,154 and
8,222,481 shares issued and outstanding,
respectively 3,865,810 3,588,273
Additional paid-in capital 863,848 243,961
Retained earnings 658,767 93,551
--------- ---------
5,388,425 3,925,785
Less: 196,802 shares in treasury,
at cost - (230,506)
--------- ---------
Total stockholders' equity 5,388,425 3,695,279
--------- ---------
Total liabilities and
stockholders' equity $ 9,071,617 $ 8,742,039
--------- ---------
--------- ---------
See notes to financial statements.
04
FIRST MONTAUK FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME
Six months ended June 30, Three months ended June 30,
1997 1996 1997 1996
Revenues:
Commissions $ 12,162,909 $ 13,820,907 $ 5,604,060 $ 7,741,773
Principal transactions 2,876,753 5,520,783 1,480,244 3,236,671
Investment banking 225,146 269,416 86,355 240,328
Insurance recovery 650,000 - - -
Interest and other income 554,826 501,536 306,396 260,391
---------- ---------- --------- ----------
16,469,634 20,112,642 7,477,055 11,479,163
---------- ---------- --------- ----------
Expenses:
Commissions, employee
compensation and benefits 11,727,961 14,176,399 5,365,990 8,115,064
Clearing and floor
brokerage 1,280,978 1,940,198 552,653 989,765
Communications and
occupancy 882,394 718,983 458,935 377,668
Legal matters and related
costs 667,341 - 70,912 -
Other operating expenses 906,808 1,459,041 471,868 936,964
Interest 53,823 58,078 39,106 22,807
---------- ---------- --------- ----------
15,519,305 18,352,699 6,959,464 10,442,268
---------- ---------- --------- ----------
Income before income taxes 950,329 1,759,943 517,591 1,036,895
Income taxes 385,113 720,077 209,689 439,150
---------- ---------- --------- ----------
Net income $ 565,216 $ 1,039,866 $ 307,902 $ 597,745
---------- ---------- ---------- -----------
---------- ---------- ---------- -----------
Per share of Common Stock:
Net income $ 0.06 $ 0.12 $ 0.03 $ 0.07
---------- ---------- ---------- -----------
---------- ---------- ---------- -----------
Number of shares 10,102,395 9,002,611 10,357,813 9,007,664
---------- ---------- ---------- -----------
---------- ---------- ---------- -----------
See notes to financial statements.
05
FIRST MONTAUK FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
Six months ended June 30,
1997 1996
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
Cash flows from operating activities:
Net income $ 565,216 $ 1,039,866
Adjustments to reconcile net income to net cash
used in operating activities:
Common stock issued with guaranteed selling
price 37,500 140,000
Depreciation and amortization 150,012 104,496
Due from clearing firm (430,493) (366,745)
Commissions receivable 224,127 (245,556)
Securities owned - at market (258,377) 1,753,077
Income tax refund receivable (203,480) -
Other assets (64,821) (431,328)
Deferred income taxes 395,647 264,390
Due to clearing firm - (2,306,032)
Securities sold but not yet purchased 175,293 1,223,421
Commissions payable (373,153) 402,490
Accounts payable (26,985) 158,565
Accrued expenses (1,498,054) (562,469)
Income taxes payable - (557,492)
Other liabilities 132,761 289,647
---------- -----------
Total adjustments (1,740,023) (133,536)
---------- -----------
Net cash provided by (used in)
operating activities (1,174,807) 906,330
----------- ----------
Cash flows from investing activities:
Due from officers 34,234 18,920)
Employee and broker receivables (273,349) (431,840)
Investment in ECM - (24,000)
Capital expenditures (36,946) (319,617)
--------- ---------
Net cash used in investing activities (276,061) (794,377)
--------- ---------
Cash flows from financing activities:
Proceeds from bank loan - 179,625
Liabilities subordinated to claims of
general creditors 250,000 -
Purchase of common stock - 12,825
Repurchase of common stock - (130,503)
Proceeds from exercise of common stock options 508,043 -
Payment of loans payable (60,930) (27,935)
---------- ----------
Net cash provided by financing activities 697,113 34,012
---------- ----------
Net increase (decrease) in cash (753,755) 145,965
Cash at beginning of year 1,069,548 845,471
---------- ----------
Cash at end of period $ 315,793 $ 991,436
---------- ----------
---------- ----------
See notes to financial statements.
06
FIRST MONTAUK FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(Continued)
Six months ended June 30,
1997 1996
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 53,823 $ 58,078
Income taxes $ - $ 1,019,000
Noncash transactions:
Shares issued with guaranteed
resale price $ 37,500 $ 140,000
Tax benefit from exercise of
stock options $ 619,887 $ -
See notes to financial statements.
07
FIRST MONTAUK FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1997
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,
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 six-month period ended June 30, 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 six month period ended June 30, 1997, a total of 769,975 options
issued under the Company's stock option plans were exercised. The Company
received proceeds of $508,000 from these transactions. The exercise of the
options have also produced benefits to the Company in the form of tax deductible
compensation expense totalling $1,469,000. In connection with these deductions,
the Company has recorded a deferred tax asset of $620,000 with an offsetting
credit to additional paid-in capital as provided by applicable accounting rules.
The Company also issued a total of 944,500 stock options during the
six-month period.
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 June 30, 1997, FMSC had net capital and minimum net
capital requirements of $1,837,953 and $250,000, respectively. FMSC's ratio of
aggregate indebtedness to net capital was 1.22 to 1.
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.
08
FIRST MONTAUK FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1997
The Securities and Exchange Commission has accepted an Offer of Settlement
submitted by FMSC relating to the activities of a former affiliate office. The
settlement involves 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 fir's compliance procedures. FMSC has agreed to implement
recommendations contained in the examiner's report.
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
registration statement was declared effective on July 31, 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.
09
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operations
Total revenues for the June 1997 quarter and six month period decreased by
35% and 18%, respectively. Total revenues for the six month period decreased
from $20,112,642 in 1996 to $16,469,634 in 1997. Revenues for the second quarter
declined from $11,479,163 in 1996 to $7,477,055 in 1997.
Net income after taxes for the six month period ended June 30, 1997 also
declined, from $1,039,866, or $.12 per share in 1996, to $565,216, or $.06 per
share, and declined for the second quarter as well from $597,745, or $.07 per
share in 1996 to $307,902, or $.03 per share in 1997. Operating income before
taxes for the first six months of 1997 decreased to $950,329 in 1996 from
$1,759,943 in 1997. For the second quarter, operating income before taxes
declined from $1,036,895 in 1996 to $517,591 in 1997.
The decline in revenues is mainly attributable to a reduction in principal
transactions and commission revenues. Principal transactions decreased from
$3,236,671 during the second quarter of 1996 to $1,480,244 in the 1997 quarter.
Commission revenues also declined from $7,741,773 in 1996 to $5,604,060 for the
1997 quarter.
The Company believes that the previous trend of continued increases in
revenues and earnings has temporarily reversed itself during the first half of
1997 for several reasons. First, management has continued to eliminate
problematic and/or potentially problematic registered representative production
in an effort to reduce its legal and regulatory exposure. While it is believed
that the Company's actions will reduce future legal expense and settlements,
eliminating registered representative production impacts gross revenue levels
until a commensurate level of new registered representative production is added.
In addition, during the second half of 1996 certain individuals responsible for
new business development and registered representative recruitment resigned,
thereby curtailing the Company's efforts in this area. In early 1997, the
Company hired a new business development recruiter and a national sales manager.
However, the vacancies in these positions during the last five months of 1996
resulted in the reduction of new business opportunities in the first half of
1997. With the new business development and recruiting team now firmly
established, the Company believes that increases in revenues can resume in the
second half of 1997, assuming the continuation of a strong equity market.
Another reason for the decline in volume of business was that during the
first half of 1997, certain registered representatives' production had declined
significantly as compared to the same period in 1996.
Investment banking activity also declined in the second quarter of 1997
with a decrease in selling concessions and the absence of any new private
placement offerings during the period. The Company expects to continue
participating in syndications, and is exploring other opportunities in the
investment banking area, including additional private placements and public
offerings.
During the six months ended June 30, 1997, the Company paid commissions,
employee compensation and employee benefits of $11,727,961 (71% of total
revenues) as compared to $14,176,399 (70% of total revenues) in the comparable
1996 period. This category includes salaries, commission expense, and fringe
benefits for salaried employees. Commissions paid to registered representatives
for 1997 were $9,691,374 (59% of total revenues) as compared to $12,280,635 (61%
of total revenues) in 1996. 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, 1997 the Company paid salaries of
$1,518,006 for management, operations and clerical personnel, as compared to
$1,493,630 in 1996.
Clearing and floor brokerage costs declined from $1,940,198 (10% of
revenues) in 1996 to $1,280,978 (8% of revenues) due to lower transactions
volume. 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. The Company also negotiated a more favorable fee structure with its
clearing firm in late 1996.
Communications and occupancy costs rose by $163,411 to $882,394 for the six
months ended June 30, 1997. 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.
Although it has taken longer than expected, management still contends that
growth in this expense category will decrease due to recent negotiations with a
long distance carrier establishing lower rates with telephone service as well as
the elimination of costs related to the operation of the Company's wide area
network. One area expected to be higher is occupancy costs as the Company needs
additional space to continue to build its infrastructure.
10
Legal matters and related costs include payments to settle customer claims,
professional fees and other defense costs, and provisions for pending
litigation. These costs, while increasing by $398,337 during the first six
months of the year, actually decreased during the second quarter by $59,322 as
compared to the 1996 period.
Other operating expenses decreased from $1,190,037 (6% of revenues) in 1996
to $906,808 (6% of revenues) in 1997. The decrease was due primarily to a
temporary reduction in marketing and advertising costs associated with the
Company's affiliate recruitment program.
Operating revenues during the second half of the second quarter, as well as
the first part of the third quarter, indicate a strengthening of gross revenue
production, although revenue levels for the balance of the year 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.
Liquidity and Capital Resources
During the six months ended June 30, 1997, the Company's cash balances
decreased by $753,755 to $315,793. Operating activities used net funds of
$1,174,807. Both "long" and "short" inventory positions of securities increased
by $258,377 and $175,293, respectively, from December 31, 1996 to June 30, 1997.
Management has continued to maintain leaner inventory positions than had been
the case prior to 1996. The Company used cash to reduce its accrued expenses
during the 1997 period. 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 $667,341 during 1997, were
incurred primarily during the first quarter. Management's expectation that legal
costs would level off during the second quarter were realized. An administrative
proceeding brought by the SEC against First Montauk Securities Corp. (FMSC) was
finalized during the second quarter. FMSC was ordered to pay a civil penalty of
$50,000, and disgorgement in the amount of $227,042 to various customers who
were affected by the traders in FMSC's former Houston, Texas branch office. The
Commission has agreed to allow the settlement of certain civil proceedings as a
credit toward the disgorgement payment. The monetary penalties required by the
Order were either paid or accrued for during previous reporting periods.
Investing activities used cash of $276,061 during the six month period. The
Company purchased approximately $35,000 of fixed assets during the 1997 period.
Amounts advanced to brokers and affiliates increased by $273,349 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. Officer loans receivable were reduced by $34,234, and $17,360 was
received by ECM in partial payment of one of its outstanding loans to the
Company during 1997.
Financing activities provided cash of $697,113 in the 1997 period. A total
of $508,043 was received from the exercise of 769,975 stock options by various
individuals during the first six months of the year. Cash from financing
activities was reduced by $60,930 in bank loan repayments. During the second
quarter, a subordinated loan agreement between FMSC and a creditor was approved
by the National Association of Securities Dealers. The five year, $250,000 loan
carries a 8% per annum interest rate. $50,000 of principal plus interest is
payable annually on April 1 of each of the next five years.
Management believes the Company's liquidity needs, at least through the
next fiscal year, will be provided by increasing operating income and proceeds
received from the exercise of various stock options and warrants which have
recently been registered for sale. The Company has filed a registration
statement 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.
11
PART II
OTHER INFORMATION
Item 5. Other Information.
Administrative Proceeding
- - --------------------------
On June 25, 1997, the Securities and Exchange Commission ("SEC") entered an
Order Instituting Administrative Proceedings in the Matter of First Montauk
Securities Corp. ("FMSC"). The entry of the Order by the SEC was in conjunction
with an offer of settlement submitted by FMSC in December 1996. The proceeding
arose in connection with an investigation by the SEC of the activities of FMSC's
former Houston branch office.
The Order provides for the entry of a Cease and Desist Order, as well as a
Censure against FMSC. FMSC also agreed to certain undertakings involving the
retention of an independent consultant to provide recommendations as to First
Montauk's supervisory and compliance policy and procedures. The firm was ordered
to pay a civil penalty of $50,000, and disgorgement in the amount of $227,042 to
various customers who were affected by the traders in FMSC's former Houston,
Texas branch office. The Commission has agreed to allow the settlement of
certain civil proceedings as a credit toward the disgorgement payment.
Increase of Authorized Shares
- - -----------------------------
At the Company's Annual Meeting of Shareholders on June 27, 1997,
shareholders holding a majority of the voting shares approved a resolution
increasing the authorized common stock from 15,000,000 to 30,000,000 shares. An
Amendment to the Company's Certificate of Incorporation was filed on July 2,
1997 increasing the authorized common shares to 30,000,000.
Filing of Registration Statements
- - -----------------------------------
During the period, the Company filed two separate Registration Statements
on Form S-3 with the Securities and Exchange Commission. The first Registration
Statement was filed pursuant to a contractual obligation made by the Company to
certain warrantholders with registration rights, and also included the
registration of shares underlying the Amended Incentive Stock Option Plan, as
well as the Senior Management Incentive Plan. The Registration Statement was
declared effective on July 31, 1997 by the SEC.
The second Registration Statement included shares underlying the warrants
to be issued in connection with the Company's rights offering to its common
shareholders. The offering provides for one subscription Right to be issued for
each share of common stock owned by shareholders of record on a date to be
determined.
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 7.00 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.
12
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, 1997 /s/ William J. Kurinsky
----------------------------------
William J. Kurinsky
Secretary/Treasurer
Chief Financial Officer and
Principal Accounting Officer
/s/ Herbert Kurinsky
----------------------------------
Herbert Kurinsky
President
14
EXHIBIT INDEX
-------------
Exhibit 27 - Financial Data Schedule