<PAGE> 1
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 March 31, 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 ____
7,927,606 Common Shares, no par value were outstanding as of May 10, 1996.
Page 1 of 13
<PAGE> 2
FIRST MONTAUK FINANCIAL CORP.
FORM 10-QSB
MARCH 31, 1996
INDEX
Page
PART I. FINANCIAL INFORMATION:
Item 1. Financial Statements
Consolidated Statement of Financial Condition
as of March 31, 1996 and December 31, 1995 .................. 3
Consolidated Statement of Income for the
Three Months Ended March 31, 1996 and 1995 .................. 4
Consolidated Statement of Cash Flows for the
Three Months Ended March 31, 1996 and 1995 .................. 5
Notes to Financial Statements ................................ 6-8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations ............... 9-11
PART II. OTHER INFORMATION:
Item 5. Other Information....................................... 12
Item 6. Exhibits and Reports on Form 8-K....................... 12
Signatures ..................................................... 13
2
<PAGE> 3
FIRST MONTAUK FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
March 31, December 31,
ASSETS 1996 1995
---------- -----------
<S> <C> <C>
Cash and cash equivalents $1,257,448 $ 845,471
Securities owned, at market 3,991,400 7,114,507
Commissions receivable 557,223 383,868
Due from clearing firm 10,884 --
Employee and broker receivables 548,285 357,525
Fixed assets-net 954,201 804,668
Notes receivable-ECM 282,000 282,000
Due from officers 147,749 155,524
Other assets 505,918 174,231
Deferred tax asset 86,220 369,173
---------- -----------
Total assets $8,341,328 $10,486,967
========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Due to clearing organization $ -- 2,306,032
Securities sold, but not yet purchased, at market 187,548 166,382
Loans payable-bank 214,698 47,544
Commissions payable 1,668,974 1,467,190
Accounts payable 521,312 389,312
Accrued expenses 1,206,761 1,392,115
Income taxes payable 83,625 621,690
Other liabilities 415,343 495,756
---------- -----------
Total liabilities 4,298,261 6,886,021
---------- -----------
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,7,920,106 shares issued
and outstanding 3,320,012 3,320,012
Additional paid-in capital 220,172 220,172
Retained earnings 502,883 60,762
---------- -----------
Total stockholders' equity 4,043,067 3,600,946
---------- -----------
Total liabilities and stockholders' equity $8,341,328 $10,486,967
========== ===========
</TABLE>
See notes to financial statements
3
<PAGE> 4
FIRST MONTAUK FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME
<TABLE>
<CAPTION>
Three months ended March 31,
1996 1995
---------- ----------
<S> <C> <C>
Revenues
Net firm trading gains $2,284,112 $1,652,561
Commissions 6,079,134 2,792,065
Investment banking 29,088 61,441
Interest and other income 241,145 232,346
---------- ----------
8,633,479 4,738,413
---------- ----------
Expenses
Commissions, employee compensation and benefits 6,061,335 3,331,405
Clearing and floor brokerage 950,433 523,555
Communications and occupancy 341,315 252,534
Other operating expenses 522,077 365,303
Interest 35,271 61,383
---------- ----------
7,910,431 4,534,180
---------- ----------
Income before income taxes 723,048 204,233
Income taxes 280,927 80,781
---------- ----------
Net income $ 442,121 $ 123,452
========== ==========
Per share of Common Stock:
Net income $ 0.05 $ 0.02
========== ==========
Number of shares 8,776,799 8,112,406
========== ==========
</TABLE>
See notes to financial statements
4
<PAGE> 5
FIRST MONTAUK FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
Three months ended March 31,
1996 1995
----------- ----------
<S> <C> <C>
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
Cash flows from operating activities:
Net income $ 442,121 $ 123,452
Adjustments to reconcile net income to net cash
used in operating activities:
Depreciation and amortization 65,354 43,285
Receivable from clearing organization (10,884) (299,805)
Commissions receivable (173,355) (117,976)
Securities owned - at market 3,123,107 1,750,841
Other assets (307,687) (40,072)
Deferred income taxes 282,953 --
Due to clearing organization (2,306,032) (2,279,250)
Securities sold but not yet purchased 21,166 525,849
Commissions payable 201,784 82,163
Accounts payable 132,000 (37,599)
Accrued expenses (185,354) --
Income taxes payable (538,065) 65,486
Other liabilities (80,413) (30,808)
----------- -----------
Total adjustments 224,574 (337,886)
----------- -----------
Net cash provided by (used in) operating activities 666,695 (214,434)
----------- -----------
Cash flows from investing activities:
Due from officers 7,775 2,460
Employee and broker receivables (190,760) 90,387
Investment in ECM (24,000) --
Capital expenditures (214,886) (52,398)
----------- -----------
Net cash provided by (used in) investing activities (421,871) 40,449
----------- -----------
Cash flows from financing activities:
Proceeds from bank loan 179,625 --
Payment of loans payable (12,472) (6,486)
----------- -----------
Net cash provided by (used in) financing activities 167,153 (6,486)
----------- -----------
Net increase (decrease) in cash and cash equivalents 411,977 (180,471)
Cash and cash equivalents at beginning of year 845,471 673,951
----------- -----------
Cash and cash equivalents at end of period $ 1,257,448 $ 493,480
=========== ===========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 35,271 $ 61,383
Income taxes $ 542,242 $ 15,295
</TABLE>
See notes to financial statements
5
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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, 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 three-month period ended March 31, 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. Outstanding options are not
included in the 1995 calculation since their impact is anti-dilutive.
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:
<TABLE>
<CAPTION>
Sold but not
Owned yet purchased
----- -------------
March 31, December 31, March 31, December 31,
1996 1995 1996 1995
---------- ---------- -------- --------
<S> <C> <C> <C> <C>
Obligations of U.S.
government and
its agencies $ 50,423 $ 163,444 $ -- $ 18,467
State and municipal
obligations 1,169,406 3,574,616 37,670 44,854
Corporate stocks
and bonds 2,682,773 3,242,516 149,009 103,061
Options and warrants 88,798 133,931 869 --
---------- ---------- -------- --------
$3,991,400 $7,114,507 $187,548 $166,382
========== ========== ======== ========
</TABLE>
6
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NOTE 4 - NOTES RECEIVABLE - ECM
As of March 31, 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 $ 945,744
Other 261,017
----------
$1,206,761
==========
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.
7
<PAGE> 8
NOTE 7 - COMMITMENTS AND CONTINGENT LIABILITIES - continued
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 sustained on certain securities
purchased from FMSC. On March 28, 1996, without admitting liability or
wrongdoing, FMSC reached an agreement with Escambia to settle their
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
also 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.
NOTE 8 - NET CAPITAL REQUIREMENTS
FMSC is subject to the Securities and Exchange Commission Uniform Net
Capital Rule (Rule 15c3-1), which requires the maintenance of minimum
net capital, as defined. At March 31, 1996, FMSC had net capital and
minimum net capital requirements of $1,367,405 and $250,000,
respectively. FMSC's ratio of aggregate indebtedness to net capital
was 2.39 to 1.
8
<PAGE> 9
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Liquidity and Capital Resources
During the three months ended March 31, 1996, the Company's cash balances
increased by $411,977 to $1,257,448. Operating activities provided net funds of
$666,695. Inventory levels dropped by $3,123,107 from December 31, 1995 to March
31, 1995, which was offset in part by a reduction in the Company's net debit
balances with its clearing firm. 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 $538,055 for 1995 income tax liabilities during
the quarter.
Investing activities used cash of $421,871 during the quarter. The Company
purchased approximately $215,000 of fixed assets during the period, consisting
primarily of telecommunications and computer systems, and office expansion. At
the present time, management anticipates additional capital expenditures of
approximately $150,000 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 $190,760 during the quarter. 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 second or third quarter
of 1996.
Financing activities provided cash of $167,153 during the quarter, due primarily
to an additional term loan from the Company's bank to finance equipment
purchases.
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 March 1996 quarter,
continuing the trend from last year. Total revenues for 1996 increased by
$3,895,066 to $8,633,479, an 82% increase over the comparable 1995 period. U.S.
equity markets remained strong in the first quarter of 1996 due to interest rate
stability and strong
9
<PAGE> 10
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 $1,652,561
(35% of total revenues) to $2,284,112 (26% 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 1996. The reduction in trading
profits as a percentage of total revenue was due to two principal factors: I)
the discontinuance of proprietary trading in mortgage-backed and U.S. government
securities, 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 transactions rose 217% to $6,079,134 (70%
of total revenues) as compared to $2,792,065 (59% of total revenues) in the 1995
quarter. 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, although modest to date, is expected to expand
during the remainder of the year. The Company expects to continue participating
in syndications, and is exploring other opportunities in the investment banking
area, including 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 1996 period the Company paid commissions, employee compensation and
employee benefits of $6,061,335 (70% of total revenues) as compared to
$3,331,405 (70% of total revenues) in 1995. This category includes salaries,
commission expense, and fringe benefits for salaried employees. Commissions paid
to registered representatives for 1996 were $5,120,878 (59% of total revenues)
as compared to $2,780,400 (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 1996 the Company paid salaries of $701,912 for management, operations and
clerical personnel, as compared to $407,300 in 1996. This increase was due in
part to the growth in revenues, which required additional trading assistants and
other
10
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personnel for transactions processing. The Company also added employees to
its computer, marketing and finance departments subsequent to the March 1995
quarter.
Clearing costs increased from $523,555 (11% of revenues) to $950,433 (11% 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 $88,781 to $341,315 during the 1996
quarter. 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 $365,303 (8% of revenues) in 1995 to
$522,077 (6% of revenues) in 1996. The increase was due primarily to higher
marketing costs and professional fees.
While the Company has achieved substantial revenue growth in the first quarter
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.
11
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PART II
OTHER INFORMATION
Item 5. Other Information.
In 1995 the Company's broker-dealer subsidiary, First Montauk Securities
Corp. ("FMSC"), was named as a defendant in a Civil Suit brought by Escambia
County, Florida in the U.S. District Court for the Northern District of Florida.
The suit alleged that FMSC was responsible to Escambia County for alleged losses
as a result of certain mortgage-backed securities sold to Escambia by On March
28, 1996, without admitting liability or wrongdoing FMSC reached an agreement
with Escambia to settle their claims. Under terms of the agreement, FMSC will
pay Escambia the sum of $900,000 in two installments: $600,000 was paid in April
1996 with the remaining $300,000 due on August 1, 1996. FMSC is also 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.
In May 1996 the Company authorized a share repurchase plan to repurchase up
to a maximum of 500,000 shares of its Common Stock in open market transactions
over a nine month period.
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.
12
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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 10, 1996 /s/ William J. Kurinsky
-------------------------
William J. Kurinsky
Secretary/Treasurer
Chief Financial Officer and
Principal Accounting Officer
/s/ Herbert Kurinsky
-------------------------
Herbert Kurinsky
President
13
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EXHIBIT INDEX
-------------
Exhibit 27 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> BD
<LEGEND>
This Schedule contains summary financial information extracted from (a)
Consolidated Statement of Financial Conditions March 31, 1996 and Consolidated
Statement of Income -- Three Months ended March 31, 1996 and is qualified in its
entirety by reference to such (B) 10QSB March 31, 1996
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> MAR-31-1996
<CASH> 1,257
<RECEIVABLES> 557
<SECURITIES-RESALE> 0
<SECURITIES-BORROWED> 0
<INSTRUMENTS-OWNED> 3,991
<PP&E> 954
<TOTAL-ASSETS> 8,341
<SHORT-TERM> 0
<PAYABLES> 3,896
<REPOS-SOLD> 0
<SECURITIES-LOANED> 0
<INSTRUMENTS-SOLD> 187
<LONG-TERM> 215
0
0
<COMMON> 3,320
<OTHER-SE> 723
<TOTAL-LIABILITY-AND-EQUITY> 8,341
<TRADING-REVENUE> 2,284
<INTEREST-DIVIDENDS> 241
<COMMISSIONS> 6,079
<INVESTMENT-BANKING-REVENUES> 29
<FEE-REVENUE> 0
<INTEREST-EXPENSE> 35
<COMPENSATION> 6,061
<INCOME-PRETAX> 723
<INCOME-PRE-EXTRAORDINARY> 442
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 442
<EPS-PRIMARY> .05
<EPS-DILUTED> .05
</TABLE>
