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 September 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
9,819,477 Common Shares, no par value were outstanding as of November 16,
1998.
Page 1 of 14
<PAGE>
02
FIRST MONTAUK FINANCIAL CORP.
FORM 10-Q
SEPTEMBER 30, 1998
INDEX
Page
PART I. FINANCIAL INFORMATION:
Item 1. Financial Statements
Consolidated Statement of Financial Condition
as of September 30, 1998 and December 31, 1997 ................. 3
Consolidated Statement of Income for the
Nine Months ended September 30, 1998 and 1997
and Three months ended September 30, 1998 and 1997 .............. 4
Consolidated Statement of Cash Flows for the
Nine Months ended September 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 .....................9-12
PART II. OTHER INFORMATION:
Item 5. Other Information..........................................13
Item 6. Exhibits and Reports on Form 8-K...........................13
Signatures..........................................................14
<PAGE>
03
FIRST MONTAUK FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
<TABLE>
September 30, December 31,
ASSETS 1998 1997
------
<S> <C> <C>
Cash $ 97,806 $ 789,883
Due from clearing firm 1,771,884 2,707,782
Securities owned, at market 2,368,880 3,150,772
Securities owned, not readily
marketable, at estimated market value 38,582 506,732
Commissions receivable 64,039 246,250
Employee and broker receivables 1,064,214 927,195
Furniture, equipment and leasehold
improvements-net 1,895,334 1,357,854
Notes receivable 1,357,929 938,054
Due from officers 142,540 146,691
Other assets 1,403,965 1,164,753
Deferred tax asset-net 799,281 35,968
----------- -----------
Total assets $ 11,004,454 $ 11,971,934
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Securities sold, but not yet
purchased, at market $ 20,428 $ 809,523
Notes payable-bank 268,825 340,769
Subordinated notes payable 200,000 250,000
Commissions payable 1,097,725 1,624,316
Accounts payable 666,196 501,267
Accrued expenses 801,894 812,590
Other liabilities 498,041 394,002
----------- -----------
Total liabilities 3,553,109 4,732,467
----------- -----------
Common stock issued with guaranteed
selling price - no par value,
53,000 and 173,000 shares issued and
outstanding, respectively 106,500 346,500
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,
30,000,000 shares authorized,
9,804,477 and 9,198,444 shares issued
and outstanding, respectively 4,920,837 4,334,173
Additional paid-in capital 2,804,042 1,173,437
Retained earnings 16,600 1,570,376
Less: Deferred compensation (396,634) (185,019)
---------- -----------
Total stockholders' equity 7,344,845 6,892,967
---------- -----------
Total liabilities and stockholders'
equity $ 11,004,454 $ 11,971,934
=========== ============
See notes to financial statements.
</TABLE>
<PAGE>
04
FIRST MONTAUK FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (LOSS)
Nine months ended Three months ended
September 30, September 30,
<TABLE>
1998 1997 1998 1997
Revenus:
<S> <C> <C> <C> <C>
Commissions $ 22,640,973 $ 19,508,612 $ 7,199,162 $ 7,345,703
Principal transactions 5,709,850 5,270,309 1,306,933 2,393,556
Investment banking 675,011 314,549 73,759 89,403
Insurance recovery - 650,000 - -
Interest and other income 1,159,520 880,263 365,711 325,437
----------- ------------ ----------- ----------
30,185,354 26,623,733 8,945,565 10,154,099
Expenses:
Commissions, employee
compensation and benefits 23,324,169 18,969,519 7,060,239 7,241,558
Clearing and floor brokerage 2,591,092 2,143,341 848,849 862,363
Communications and occupancy 1,731,415 1,379,534 550,510 497,140
Legal matters & related costs 1,494,017 935,448 133,941 268,107
Writedown of Note Receivable
-Global Financial Corp. 875,000 - - -
Other operating expenses 2,352,749 1,303,776 798,848 396,968
Interest 91,266 72,230 25,213 18,407
----------- ----------- ----------- ----------
32,459,708 24,803,848 9,417,600 9,284,543
----------- ----------- ----------- ----------
Income (loss) before income
taxes (2,274,354) 1,819,885 (472,035) 869,556
Income taxes (tax benefit) (720,578) 737,223 (125,000) 352,110
----------- ----------- ----------- ----------
Net income (loss) $ (1,553,776) $ 1,082,662 (347,035) 517,446
============ ============ =========== ==========
Per share of Common Stock:
Basic $ (0.16) $ 0.12 $ (0.04) $ 0.06
============ ============ =========== ==========
Diluted $ (0.16) $ 0.11 $ (0.04) $ 0.05
============ ============ =========== ==========
Number of common shares used
in basic earnings per share 9,693,806 8,860,543 9,728,693 9,091,749
Incremental shares from
assumed conversion of
options - 1,350,736 - 1,365,019
------------ ------------ ---------- -----------
Number of common shares
used in diluted earnings
per share 9,693,806 10,211,279 9,728,693 10,456,768
============ ============ =========== ============
See notes to financial statements.
</TABLE>
<PAGE>
05
FIRST MONTAUK FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
Nine months ended September 30,
1998 1997
INCREASE (DECREASE) IN CASH
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (1,553,776) $ 1,082,662
------------ ------------
Adjustments to reconcile net income (loss)
to net cash used in operating activities:
Common stock issued with guaranteed
selling price - 28,125
Tax benefit related to exercise of
stock options 150,003 -
Depreciation and amortization 256,329 236,450
Amortization of deferred compensation 122,552 -
Loan reserves 875,000 -
Other 22,000 -
Increase (decrease) in cash attributable to
changes in assets and liabilities
Due from clearing firm 935,898 (652,052)
Securities owned - at market 781,892 (618,883)
Securities owned-not readily marketable 468,150 -
Commissions receivable 182,211 (61,195)
Income tax refund receivable - (203,480)
Other assets (355,207) (52,606)
Deferred income taxes (763,313) 753,580
Securities sold but not yet purchased (789,095) 38,050
Commissions payable (526,591) 324,270
Accounts payable 164,929 (52,489)
Accrued expenses (32,696) (1,119,576)
Other liabilities 104,039 52,086
------------- ------------
Total adjustments 1,596,101 (1,327,720)
------------- ------------
Net cash provided by (used in)
operating activities 42,325 (245,058)
------------- ------------
Cash flows from investing activities:
Due from officers 4,151 29,236
Employee and broker receivables (137,019) (9,912)
Issuance of notes receivable (1,903,634) (257,500)
Repayment of notes receivable 608,759 -
Capital expenditures (800,612) (221,708)
------------- ------------
Net cash used in investing activities (2,228,355) (459,884)
------------- ------------
Cash flows from financing activities:
Other assets - (89,404)
Payment of notes payable-bank (71,944) (91,394)
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 and warrants 346,664 727,000
------------- ------------
Net cash provided by financing
activities 1,493,953 546,202
------------- ------------
Net increase (decrease) in cash (692,077) (158,740)
Cash at beginning of year 789,883 1,069,548
------------- ------------
Cash at end of period $ 97,806 $ 910,808
============= =============
</TABLE>
See notes to financial statements.
<PAGE>
06
FIRST MONTAUK FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Continued)
<TABLE>
Nine months ended September 30,
1998 1997
<S> <C> <C>
Supplemental disclosures of cash flow
information:
Cash paid during the period for:
Interest $ 91,266 $ 72,230
Income taxes $ - $ -
Shares issued with guaranteed
selling price $ - $ 28,125
Transfer of temporary equity to
permanent capital $ 240,000 $ -
Liabilities subordinated to claims of
general creditors $ - $ 250,000
</TABLE>
<PAGE>
07
FIRST MONTAUK FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 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 September
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 nine-month and three-months periods ended
September 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
(SFAS 128), "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. EPS as originally reported for the
nine-month period ended September 30, 1997 was $.11 on both a primary and fully
diluted basis, as compared to $.12 and $.11 on a basis and diluted basis,
respectively, as restated. EPS as originally reported for the three months
period ended September 30, 1997, was $.05 on both a primary and fully diluted
basis, as compared to $.06 and $.05 on a basic and diluted basis, respectively,
as restated. Outstanding common stock options have not been included in the 1998
EPS computations because their inclusion would be anti-dilutive.
NOTE 3 - NOTES RECEIVABLE
During the nine months ended September 30, 1998, the Company's subsidiary,
Montauk Advisors, Inc. (MAI), provided net advances of $1,414,633 to Global
Financial Corp. (Global) to help Global meet its obligations to lease investors
and provide working capital for operating costs. As of September 30, 1998, MAI
had an outstanding receivable from Global of $1,997,436.
During the June 1998 quarter, the Company undertook a full review of Global
loans to evaluate their collectability, and determined that, based on various
events and circumstances, it is probable that the loans have been impaired.
Accordingly, the Company 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 also has outstanding a total of $85,852 in short-term working capital
loans to FemCom Business Systems ("FCS"), Global's affiliated equipment vendor.
<PAGE>
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 June 1998 quarter, the Company settled a federal court action
brought by the City of Painesville, Ohio, relating to the sale of
mortgage-backed securities by FMSC's former Houston affiliate office. The
Company agreed to make a lump-sum payment of $500,000, which was paid in the
current quarter.
NOTE 6- 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.
NOTE 7 - SUBSEQUENT EVENT
In October 1998, the Company issued a series of Convertible Promissory
Notes aggregating $570,000 to a private investor in consideration of $300,000 in
cash and an income stream from equipment lease investments with a remaining
balance of approximately $270,000. The notes carry interest at the rate of 10%
per annum, payable semi-annually, and are convertible into up to 380,000 shares
of the Company's Common Stock at the rate of $1.50 per share. The notes mature
in five years; however, the Company is required to pay 20% of the original
outstanding principal amount into a sinking fund on or before each annual
anniversary date of the Notes. The equipment lease investments are serviced by
Global and were originally sold to the investor through MAI. The Company expects
to record a write-down of approximately $83,000 in the fourth quarter to reduce
the lease investment balance to net realizable value.
<PAGE>
09
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operations
- - ---------------------
Total revenues for the nine-month period ended September 30, 1998 increased
by 13% to $30,185,000 from $26,624,000 in 1997. Total revenues for the September
30, 1998 quarter decreased by 12% to $8,950,000 compared to $10,154,000 for the
comparable period in 1997.
For the nine-month period the Company reported a net loss after income
taxes of $1,554,000, or $.16 per share, as compared with net income of
$1,083,000, or $.11 per share after taxes in 1997. For the third quarter ended
September 30, 1998 the Company reported a net loss of $347,000 or $.04 per
share, as compared with net income of $517,000, or $.05 per share after taxes in
1997.
The Company's loss for the nine months ended September 30, 1998 was
attributable to two key factors. Legal expenses and settlement costs of
$1,494,000 include a one-time legal settlement of $500,000 to the City of
Painesville, Ohio as well as related litigation costs. The Company also
established a reserve for future litigation costs during the period. In
addition, the Company recorded an impairment loss of $875,000 against notes
receivable from Global Financial Corp. (Global) in the second quarter and a
reserve against broker loans receivable of $232,000 in the current quarter.
Commission revenues, which include commissions received from the sale of
stocks, bonds and options on an agency basis, mutual funds, variable annuities
and management fees, rose to $22,641,000 for the nine-month period in 1998, from
$19,509,000 during the comparable 1997 period. However, commissions were flat on
a comparative quarterly basis. During the 1998-quarter, world financial markets
experienced sharp declines, directly impacting the Company's transaction volume,
particularly in equity trading. Steady growth in mutual fund and insurance sales
partially offset lower equity commissions. Commission revenue from these
products increased by 33% to $2,227,000 (25% of total revenues) for the third
quarter of 1998 compared to $1,679,000 (17% of total revenues) for the 1997
third quarter. While this source of revenue produces lower net margins, it tends
to produce residual revenues in future periods. The Company intends to continue
to focus on this area of its business in an effort to help insulate against
the effects to the Company's revenue stream resulting from market volatility.
For the nine-month period, principal transactions increased from $5,270,000
in 1997 to $5,710,000 in 1998, an increase of 8%. However, on a quarterly basis,
revenues from firm trading and market making operations declined from $2,394,000
in 1997 to $1,307,000 in the 1998 quarter. The 45% decrease was attributable to
unrealized and realized losses in over-the-counter stock trading, and an overall
slowdown in market-making activity due to declines in equity markets.
Investment banking revenues increased for the nine month period ended
September 30, 1998 to $675,000 compared to $315,000 in the same period of 1997
as a result of increased participation in offerings as well as the receipt of
$140,000 in investment banking fees.
During the nine months ended September 30, 1998, the Company paid
commissions, employee compensation and employee benefits of $23,324,000 (77% of
total revenues) as compared to $18,970,000 (71% of total revenues) for the 1997
period. This category includes salaries, commission expense, and fringe benefits
for salaried employees. Commissions paid to registered representatives for the
nine-month period in 1998 were $19,442,000 (64% of total revenues) as compared
to $15,889,000 (60% of total revenues) in the 1997 nine-month period. Commission
compensation is directly related to the level of revenues generated from firm
trading, agency and investment banking activities. Commissions have been rising
as a percentage of total revenues as competitive pressures have forced the
Company to raise broker payouts in order to attract quality affiliates. 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.
Clearing and floor brokerage costs increased from $2,143,000 (8% of
revenues) in the first nine months of 1997 to $2,591,000 (9% 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, insurance
and mutual fund transactions and proprietary trading, as well as the average
revenue per transaction in a given period.
<PAGE>
10
Communications and occupancy costs rose by $54,000 or 11% to $551,000 for
the three months ended September 30, 1998 and increased by $351,000 or 25% to
$1,731,000 for the nine month period in 1998. The dollar increase is principally
due to higher rent payments for the expanded Company headquarters, telephone,
voice and data charges and market data services. Management considers the
expansion of the Company's operating infrastructure a critical factor in
attracting new affiliates and improving 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,
among other plans under consideration, outsourcing certain 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 increased during the nine month period ended September
30, 1998 to $1,494,000 from $935,000 in the comparable nine months of 1997;
however, legal costs decreased by 50% on a quarterly basis, from $268,000 in
1997, to $134,000 in the 1998 quarter. There are several reasons for the
significant year-to-date increase. The Company decided to settle a federal court
action with the City of Painesville Ohio, for $500,000 in order to avoid the
costs of protracted litigation. Legal costs associated with the defense of this
case were approximately $150,000. The Company has also set aside reserves for
certain legal contingencies that may require the expenditure of additional fees,
costs and expenses.
Other operating expenses increased from $397,000 (4% of revenues) in the
third quarter ended September 30, 1997 to $799,000 (9% of revenues) for the
comparable period in 1998. For the nine-month period ended September 30, 1998,
expenses in this category increased by $1,049,000 to $2,353,000 (8% of total
revenues) compared to $1,304,000 (5% of total revenues) for the 1997 period. The
increase was due in part to an increase 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 recruitment fees for a compliance consultant and additional
professional fees due to the Global situation described below. The Company has
also increased its reserves against broker loan receivables.
The Company has recorded a reserve against a portion of its loans to
Global, the financing and servicing company that 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 has made to
its leaseholders, MAI will likely continue to provide working capital to Global,
although on a reduced basis. MAI has provided an additional $17,300 to Global
since September 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; 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 nine months ended September 30, 1998, the Company's cash
balances decreased by $692,000 to $98,000. Operating activities provided net
funds of $42,325. The net loss of $1,554,000 was offset by noncash charges of
$1,426,000, such as reserves against loans and depreciation and amortization.
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 $1,494,000 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.
Management has seen a reduction in legal costs in the third quarter of 1998 and
anticipates that this will continue through the fourth quarter, based upon a
review of pending matters.
<PAGE>
11
Investing activities used cash of $2,228,000 during the nine-month period.
The Company purchased approximately $800,000 of fixed assets during the 1998
period. These include computers and furniture for the Company's new trading
facility and expansion of facilities for in-house registered representatives.
Amounts advanced to brokers and affiliates increased by $137,000 in the 1998
period. During the nine months ended September 30, 1998, MAI provided net
advances of $1,415,000 to Global to help Global meet its obligations to lease
investors and provide working capital for operating costs. As of September 30,
1998, MAI had a net receivable from Global of $1,122,000. Subsequent to
September 30, 1998, MAI made additional loans to Global totaling $17,300.
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 $86,000 at September 30, 1998. MAI has
received two payments of $40,000 each since September 30, 1998 towards repayment
of this obligation.
In October 1998, the Company issued a series of Convertible Promissory
Notes aggregating $570,000 to a private investor in consideration of $300,000 in
cash and an income stream from equipment lease investments with a remaining
balance of approximately $270,000. The notes carry interest at the rate of 10%
per annum, payable semi-annually, and are convertible into up to 380,000 shares
of the Company's Common Stock at the rate of $1.50 per share. The notes mature
in five years; however, the Company is required to pay 20% of the original
outstanding principle amount into a sinking fund on or before each annual
anniversary date of the Notes. The equipment lease investments are serviced by
Global and were originally sold to investors through MAI. The Company expects to
record a write-down of approximately $83,000 in the fourth quarter to reduce the
lease investment balance to net realizable value.
Financing activities provided cash of $1,494,000 in the 1998 period. A
total of $1,383,000 was received from proceeds of a rights offering during the
first quarter, and $347,000 from the exercise of stock options by various
individuals during the first nine months of the year. Cash from financing
activities was reduced by $72,000 in scheduled 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 a 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 cash flow and equipment
financing.
Year 2000 Issue
- - ---------------
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 that are utilized by the
Company. The Company has currently identified 17 programs that are utilized by
the Company in various departments, which require compliance with Y2K.
Management has requested the appropriate vendors to supply verification that the
version of the software that is utilized by the firm is or will be Y2K compliant
by the Year 2000. The most significant of these third parties is the Company's
clearing firm, Schroder & Co., Inc., as well as various securities exchanges and
technology equipment suppliers.
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.
<PAGE>
12
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.
<PAGE>
13
PART II
OTHER INFORMATION
Item 5. Other Information.
None.
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.
<PAGE>
14
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: November 16, 1998 /s/ William J. Kurinsky
------------------------
William J. Kurinsky
Secretary/Treasurer
Chief Financial Officer and
Principal Accounting Officer
/s/ Herbert Kurinsky
-----------------------
Herbert Kurinsky
President
<PAGE>
15
EXHIBIT INDEX
-------------
Exhibit 27 - Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> BD
<LEGEND>
This Schedule contains summary financial information extracted from
Consolidated Statements of Financial Condition at September 30, 1998 and
Consolidated Statements of Income (Loss) -- Nine Months ended September 30, 1998
and is qualified in its entirety by reference to such financial statements
included in Form 10-Q for September 30, 1998.
</LEGEND>
<CIK> 0000083125
<NAME> First Montauk Financial Corp.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-mos
<FISCAL-YEAR-END> Dec-31-1998
<PERIOD-START> Jul-1-1998
<PERIOD-END> Sep-30-1998
<CASH> 98
<RECEIVABLES> 1836
<SECURITIES-RESALE> 0
<SECURITIES-BORROWED> 0
<INSTRUMENTS-OWNED> 2407
<PP&E> 1895
<TOTAL-ASSETS> 11004
<SHORT-TERM> 0
<PAYABLES> 3532
<REPOS-SOLD> 0
<SECURITIES-LOANED> 0
<INSTRUMENTS-SOLD> 20
<LONG-TERM> 107
0
0
<COMMON> 4921
<OTHER-SE> 2424
<TOTAL-LIABILITY-AND-EQUITY> 11004
<TRADING-REVENUE> 1307
<INTEREST-DIVIDENDS> 366
<COMMISSIONS> 7199
<INVESTMENT-BANKING-REVENUES> 74
<FEE-REVENUE> 0
<INTEREST-EXPENSE> 25
<COMPENSATION> 7060
<INCOME-PRETAX> (472)
<INCOME-PRE-EXTRAORDINARY> (472)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (347)
<EPS-PRIMARY> (.04)
<EPS-DILUTED> (.04)
</TABLE>
