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, 1999
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
9,931,327 Common Shares, no par value were outstanding as of
November 19, 1999.
Page 1 of 15
<PAGE>
02
FIRST MONTAUK FINANCIAL CORP
FORM 10-Q
SEPTEMBER 30, 1999
INDEX
Page
PART I. FINANCIAL INFORMATION:
Item 1. Financial Statements
Consolidated Statements of Financial Condition
as of September 30, 1999 and December 31, 1998 ....... 3
Consolidated Statements of Income (Loss) for the
Nine Months ended September 30, 1999 and 1998
and Nine Months ended September 30, 1999 and 1998 ...... 4
Consolidated Statements of Cash Flows for the
Nine Months ended September 30, 1999 and 1998 ...... 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
September 30, December 31,
1999 1998
ASSETS
Cash $ 795,970 $ 613,513
Due from clearing firm 2,498,428 2,876,202
Securities owned, at market 4,699,569 2,685,879
Securities owned, not readily
marketable, at estimated market value 106,331 47,381
Commissions receivable 167,282 250,803
Employee and broker receivables 807,312 598,212
Furniture, equipment and leasehold
improvements-net 2,261,338 2,074,470
Notes receivable 627,461 477,729
Global leases receivable 772,153 -
Due from officers 136,912 131,501
Other assets 913,245 1,087,289
Deferred tax asset-net 618,440 700,755
--------- ---------
Total assets $14,404,441 $11,543,734
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Securities sold, but not yet
purchased, at market $ 219,825 $ 327,047
Notes payable-bank 172,900 244,844
Subordinated notes payable 150,000 200,000
Notes payable-other 609,514
Bonds payable 484,453 473,625
Capital lease payable 290,610 373,579
Commissions payable 1,671,350 1,531,644
Accounts payable 685,392 802,497
Income taxes payable 93,417 -
Accrued expenses 1,056,274 905,154
Other liabilities 192,629 461,717
--------- ---------
Total liabilities 5,626,364 5,320,107
--------- ---------
Common stock issued with guaranteed
selling price - no par value,
18,000 shares issued and outstanding 36,500 36,500
Commitments and contingencies (See Notes)
STOCKHOLDERS' EQUITY
Series A Convertible Preferred Stock,
$.10 par value; 5,000,000 shares
authorized; 338,750 shares issued
and outstanding at liquidation value 1,693,750 -
Common Stock, no par value,
30,000,000 shares authorized,
9,900,727 issued and 9,895,427
outstanding in 1999 5,085,238 4,980,977
Additional paid-in capital 2,342,026 2,979,831
Retained earnings (Accumulated deficit) 221,522 (1,192,471)
Less: treasury stock, at cost,
26,500 shares (51,559) -
Less: Deferred compensation (549,400) (581,210)
--------- ---------
Total stockholders' equity 8,741,577 6,187,127
--------- ---------
Total liabilities and
stockholders' equity $14,404,441 $11,543,734
========== ==========
See notes to financial statements.
<PAGE>
04
FIRST MONTAUK FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (LOSS)
Nine months Three months
ended September 30, ended September 30,
1999 1998 1999 1998
Revenues:
Commissions $ 28,753,439 $ 22,640,973 $ 8,775,484 $ 7,199,162
Principal transactions 9,073,724 5,709,850 2,533,481 1,306,933
Investment banking 257,264 675,011 75,103 73,759
Interest and other income 1,652,030 1,159,520 762,674 365,711
---------- ---------- ---------- ---------
39,736,457 30,185,354 12,146,742 8,945,565
---------- ---------- ---------- ---------
Expenses:
Commissions, employee
compensation and benefits 29,190,712 23,324,169 8,871,483 7,060,239
Clearing and floor brokerage 3,126,008 2,591,092 860,232 848,849
Communications and occupancy 1,952,921 1,731,415 662,154 550,510
Legal matters and related
costs 947,755 1,494,017 285,501 133,941
Writedown of Note Receivable
- -Global Financial Corp. - 875,000 - -
Loss on Global lease
settlements 600,416 - 600,416 -
Other operating expenses 2,160,144 2,352,749 663,585 798,848
Interest 121,866 91,266 39,072 25,213
---------- ---------- ---------- ---------
38,099,822 32,459,708 11,982,443 9,417,600
---------- ---------- ---------- ---------
Income (loss) before
income taxes 1,636,635 (2,274,354) 164,299 (472,035)
Income taxes 180,298 (720,578) 65,000 (125,000)
---------- ---------- ---------- ---------
Net income (loss) $ 1,456,337 $(1,553,776) $ 99,299 $ (347,035)
========== ========== ========== ==========
Net income (loss)
available to common
stockholders $ 1,413,993 $(1,553,776) $ 56,955 $ (347,035)
========== =========== ========== ==========
Per share of Common Stock:
Basic $ 0.14 $ (0.16) $ 0.01 $ (0.04)
========== =========== ========== ==========
Diluted $ 0.13 $ (0.16) $ 0.01 $ (0.04)
========== =========== ========== ==========
Number of common shares used
in basic income (loss)
per share 9,880,174 9,693,806 9,908,027 9,728,693
Incremental shares from
assumed conversion of
options 798,349 - 915,537 -
---------- --------- --------- --------
Number of common shares used
in diluted income (loss)
per share 10,678,523 9,693,806 10,823,564 9,728,693
========== ========= ========== =========
See notes to financial statements.
<PAGE>
05
FIRST MONTAUK FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine months ended September 30,
1999 1998
---- ----
INCREASE (DECREASE) IN CASH
Cash flows from operating activities:
Net income (loss) $ 1,456,337 $ (1,553,776)
Adjustments to reconcile net income
(loss) to net cash used in operating
activities:
Tax benefit related to exercise of
stock options - 150,003
Depreciation and amortization 306,513 256,329
Loss on Global lease settlements 465,134 -
Amortization of deferred compensation 128,634 122,552
Loan reserves - 875,000
Amortization of bond discount 10,828 -
Other - 22,000
Increase (decrease) in cash attributable
to changes in assets and liabilities
Due from clearing firm 377,774 935,898
Securities owned - at market (2,013,690) 781,892
Securities owned-not readily
marketable (58,950) 468,150
Commissions receivable 83,521 182,211
Global lease receivable 447,750 -
Other assets 174,044 (355,207)
Deferred income taxes 82,315 (763,313)
Securities sold but not yet purchased (107,222) (789,095)
Commissions payable 139,706 (526,591)
Accounts payable (117,104) 164,929
Income taxes payable 93,417 -
Accrued expenses 51,120 (32,696)
Other liabilities (269,088) 104,039
--------- ---------
Total adjustments (205,298) 1,596,101
--------- ---------
Net cash provided by operating
activities 1,251,039 42,325
--------- ---------
Cash flows from investing activities:
Due from officers (5,411) 4,151
Employee and broker receivables (209,100) (137,019)
Issuance of notes receivable (243,616) (1,903,634)
Repayment of notes receivable 93,884 608,759
Capital expenditures (493,381) (800,612)
--------- ---------
Net cash used in investing activities (857,624) (2,228,355)
--------- ---------
See notes to financial statements.
<PAGE>
06
FIRST MONTAUK FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Continued)
Nine months ended September 30,
1999 1998
Cash flows from financing activities:
Payment of notes payable-bank (71,944) (71,944)
Payment of subordinated notes payable (50,000) (50,000)
Payment of capital lease payable (82,969) -
Payment of notes payable-other (16,403) -
Proceeds from rights offering - 1,382,751
Registration costs - (113,518)
Payment of preferred stock dividend (42,344) -
Payment toward purchase of treasury stock (51,559) -
Proceeds from exercise of common stock options 104,261 346,664
------- ---------
Net cash provided by (used in) financing
activities (210,958) 1,493,953
------- ---------
Net increase in cash 182,457 (692,077)
Cash at beginning of year 613,513 789,883
------- -------
Cash at end of period $ 795,970 $ 97,806
========== ==========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 121,866 $ 91,266
========== ==========
Income taxes $ 2,952 $ -
=========== ==========
Transfer of temporary equity to permanent
capital $ - $ 24,000
=========== ==========
Global lease settlement:
Global Leases received in settlement
transaction $ 1,219,903 $ -
========= ==========
Notes payable issued $ 625,917 $ -
========= ==========
Preferred stock issued $ 1,693,750 $ -
========= ==========
See notes to financial statements.
<PAGE>
07
FIRST MONTAUK FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1999
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, 1999 and 1998. 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, 1998, as filed with the Securities and Exchange Commission on Form
10-K.
The results reflected for the nine-month and three-month periods ended
September 30, 1999, are not necessarily indicative of the results for the entire
fiscal year to end on December 31, 1999.
NOTE 2 - EARNINGS PER SHARE
Basic EPS is computed by dividing net income-common stockholders 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.
NOTE 3 - GLOBAL LEASE SETTLEMENTS
During the third quarter of 1999, the Company agreed to issue 338,750
shares of Series A Convertible Preferred Stock, convertible promissory note
principal of $690,526, cash payments of $235,282, and 25,000 warrants in buy-out
arrangements with investors holding leases sold by Global Financial Corp.
(Global). Global is the unaffiliated financing company that packaged and sold
leasing investments through Montauk Advisors, Inc. (MAI), a Company subsidiary.
Since 1997, MAI had provided loans to Global to help it meet cash flow
deficiencies arising from the nonpayment of scheduled monthly installments on
certain delinquent and non-performing leases. In 1998, the Company recorded an
impairment loss of $1,775,000 after evaluating the recoverability of the loans.
A total of $875,000 of the loss was charged during the nine-month period ended
September 30, 1998. During the first quarter of 1999, the Company advised Global
that as of April 30, 1999 it would no longer provide financial assistance and
subsequently entered into settlement discussions directly with Global lease
investors.
The preferred shares were issued under a private exchange offering, whereby
the Company agreed to exchange one share of Preferred Stock for every $5.00 of
remaining lease payments that were assigned to the Company by Global investors
subscribing to the offering. Each preferred share is convertible into two shares
of the Company's common stock at the rate of $2.50 per share. Conversion will
automatically take place, provided the Company has registered the underlying
common shares and the closing stock price of the Common Stock is at least $3.50
per share for twenty consecutive trading days. The Preferred Stock will pay a
quarterly dividend of $.075 per share. The first dividend in the amount of
$42,344 covered a five-month period and was paid on October 1, 1999. The Company
accrued the dividend during the current quarter.
The convertible notes issued by the Company are payable in thirty-six
monthly non-interest bearing installments of $16,404, plus balloon payments of
$112,000, including interest calculated on the basis of 8% of the balloon amount
beginning in month nineteen of the note term. The Company has recorded a loan
discount on the notes of $64,609, which will be amortized over the note terms.
The notes are convertible into 345,263 common shares. Once the shares are
registered, the Company can request that the noteholders convert their shares.
Proceeds from the sale of the shares must be applied towards the unpaid
principal of the notes. Any excess proceeds or unsold shares will be returned to
the Company.
The Company also issued 25,000 five-year warrants to certain investors in
connection with their lease assignments. The warrants entitle the holder to
purchase the Company's common stock for $1.75 per share. The Company valued the
warrants at $27,281 using the Black-Scholes option pricing model.
<PAGE>
08
The Company received assignments of gross lease payments in the above
settlement transactions totaling approximately $1,279,000. This amount has been
discounted to a present value of $1,220,000. The difference between the
consideration paid by the Company and the present value of the assigned payments
has been accounted for as a current charge to paid-in capital of $762,000 on the
issuance of the preferred stock, and a charge to operations of $600,000 on the
other transactions.
NOTE 4 - STOCK REPURCHASE PROGRAM
On August 5, 1999, the Company's board of directors authorized the
repurchase of an unspecified number of the Company's outstanding common shares.
During the quarter ended September 30, 1999, the Company purchased 26,500 shares
for $51,559.
NOTE 5- INCOME TAXES
Based on its review of current operating results and other factors,
management believes that it is more likely than not that the tax benefits from
net operating losses and other deferred tax assets will be realized.
Accordingly, as of September 30, 1999 the Company has recorded a net reversal of
$367,000 of federal tax valuation allowances and $150,000 of state tax valuation
allowances to offset tax provisions accrued on current taxable income.
<PAGE>
09
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operations
For the three months ended September 30, 1999, the Company recorded revenue
of $12,147,000, an increase of 36% over the third quarter of 1998. During the
nine month period ended September 30, 1999, total revenue was a record
$39,736,000, an increase of 32% over the 1998 comparable period. An active
equities market and the addition of new affiliated registered representatives
and the increase in production of existing registered representatives helped
contribute to the record results.
For the nine month period, the Company reported net income of $1,456,000,
or $.14 and $.13 per basic and diluted share, respectively, as compared to a
loss of $1,554,000 or $.16 per basic and diluted share, over the 1998
comparative period. Net income for the 1999 third quarter was $99,300, or $.01,
per basic and diluted share, as compared to a loss of $347,000, or $.04 per
basic and diluted share, in the third quarter of 1998.
Commission revenue from the sale of listed and over-the-counter securities
and mutual funds, fees from managed accounts, variable annuities and other
agency transactions increased to $28,753,000 (72% of total revenues) during the
first nine months of 1999, from $22,641,000 (75% of total revenues) during the
comparable 1998 period. For the third quarter of 1999, commission revenue rose
to $8,775,000 (72% of total revenues) from $7,199,000 (59% of total revenues)
during the same period in 1998. This increase resulted primarily from agency
equity and mutual fund transactions as retail investment volume continued at
strong levels during the 1999 third quarter.
The largest dollar increase was in the area of agency transactions, which
rose from $4,510,000 in the third quarter of 1998 to $5,802,000 during the same
period in 1999, an increase of 29%. For the nine month period the increase was
$5,633,000, or 38% over the comparable period in 1998. The growth in this
business segment was due to significantly increased activity by the Company's
registered representatives in the sale of equity securities on an agency basis.
Another strong area of revenue growth, the largest percentage increase, was
in proprietary and principal trading activities, primarily in Nasdaq equity
securities. Revenue in this category rose from $1,307,000 (11% of total
revenues) in the third quarter of 1998 to $2,533,000 (21% of total revenues) in
the 1999 third quarter.
For the nine months ended September 30, 1999, the amount paid for
compensation and benefits increased to $29,191,000 (73% of total revenue)
compared with $23,324,000 (77% of total revenue) for the first nine months of
1998. For the three months ended September 30, 1999, the Company paid
compensation and benefits of $8,874,000 (73% of total revenue) as compared to
$7,060,00 (79% of total revenue) for the same period in 1998. This category
includes salaries, commission expense, payroll taxes and fringe benefits for
salaried employees. Commissions paid to registered representatives for the first
nine months of 1999 was $24,546,000 (62% of total revenue) as compared to
$19,442,000 (64% of total revenue) during the first nine months of 1998.
Commissions paid to registered representatives for the third quarter of 1999
increased to $7,281,000 (60% of total revenue) as compared to $5,870,000 (66% of
total revenue) for the same period in 1998. The increased commission expense is
directly related to the higher level of agency trades transacted by the
Company's affiliated registered representatives. Commission expense as a
percentage of total revenues will fluctuate within a narrow range depending upon
the product mix of commission-based business and principal transactions. This
percentage will also fluctuate based upon the contribution to revenues from the
Company's in-house brokers and affiliated registered representatives. In-house
brokers usually receive a lower commission payout than independent affiliates
but are not generally required to pay their own overhead.
<PAGE>
10
For the nine months ended September 30, 1999, the Company paid salaries of
$3,688,000 for management, operations and clerical personnel, as compared to
$3,034,000 during the first nine months of 1998. The three month period ended
September 30, 1999 reflected an increase in this category of $337,000 to
$1,298,000, an increase of 35%. This increase represents the addition of new
staff in various departments including compliance and supervision, trading and
operations, a new Chief Sales Officer and additional sales and marketing
personnel. The Company added personnel to support the continued growth of its
sales force and for the development of new strategic relationships to provide
marketing, training and promotional support to our registered representatives,
as well as expanding our product lines.
Clearing costs increased for the first nine months of 1999 to $3,126,000
(8% of total revenues) from $2,591,000 (9% of total revenues) in 1998. The
dollar increase in clearing costs was attributable to a larger number of overall
transactions by the firm's registered representatives. The percentage of
clearing costs to gross revenues can fluctuate depending upon the product mix.
Certain transactions, such as options and bonds, have a higher execution and
clearing cost than others.
Communications and occupancy costs for the first nine months of 1999
increased by $221,000, or 13%, over the comparable 1998 period, to $1,953,000.
Expenses in this category for the third quarter increased by $112,000, or 20%,
over the comparable 1998 period. The increase is primarily due to higher rent
expense for the Company's expanded headquarters. Higher communications and
market data service costs associated with the growth in business activity also
contributed to the increase.
Legal fees and settlement costs for the nine month period of 1999 was
reduced to $948,000, or 2% of total revenue, as compared to $1,494,000, or 5% of
total revenue in 1998. Expenses in this category increased by $152,000 for the
third quarter of 1999 as existing claims were settled during this quarter.
Through enhanced supervision and compliance measures, the Company has made
progress towards reducing its exposure to customer claims arising out of
securities activities. The Company is currently a respondent in various customer
claims arising in the normal course of its securities business; however, none of
these claims is expected to have a material impact on its financial condition or
operating results.
During the third quarter of 1999, the Company entered into buy-out
arrangements with various investors holding leases sold by Global Financial
Corp. ("Global"). The Company purchased approximately $1,279,000 of lease
payments in exchange for a combination of cash, debt and preferred stock (see
Liquidity and Capital Resources). Based on a review of the lease portfolio
assigned in the settlements, the Company recorded a $600,000 impairment charge
in the quarter to reflect certain non-performing and canceled leases. The
Company is evaluating the extent to which the impaired leases can be pursued for
collection.
Other operating expenses decreased by $193,000 to $2,160,000 (5% of total
revenue) during the first nine months of 1999 when compared to the same period
in 1998. The Company also realized a decrease in the third quarter of $135,000
from the third quarter of 1998. The decrease in this category was the result of
a reduction in advertising and promotion, bad debts and consulting fees.
However, the Company expects the cost for advertising and recruitment to
increase for the remainder of the fiscal year as it launches new advertising and
business development campaigns for the recruitment of new registered
representatives and for its discount brokerage division.
The effective tax rates for the nine months and three months ended
September 30, 1999 were 11% and 39%, respectively, as compared to (32%) and
(26%) in the respective 1998 periods. Tax provisions accrued at regular
statutory rates on 1999 income have been offset in part by the reversal of
valuation allowances established in fiscal 1998, because management currently
believes that the tax benefits provided by deferred tax assets will be realized.
Management expects that tax expense on additional 1999 income will be accrued at
rates ranging from 35% to 40%.
<PAGE>
11
Operating results will continue to be dependent upon general economic and
securities market conditions, and management's ability to continue to recruit
successful registered representatives and contain administrative and legal
costs. Management currently believes that revenue and expenses will continue to
increase as a result of the Company's recruiting efforts and various strategic
programs being implemented which are designed to attract higher quality
registered representatives and sources for new business.
Liquidity and Capital Resources
The Company maintains a highly liquid balance sheet with 57% of the
Company's assets consisting of cash and cash equivalents, securities owned, and
receivables from the Company's clearing firm and other broker-dealers.
Market-making and other securities dealer activities require the Company to
carry significant levels of securities inventory in order to meet customer and
internal trading needs. The balances in the Company's cash, inventory and
clearing firm 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.
Net cash provided by operating activities for the nine months was
$1,251,000. The primary source of this increase was the net income for the nine
months of $1,456,000. During the nine months, inventory positions of securities
held by the Company increased by $2,014,000, while securities sold but not yet
purchased decreased by $107,000. Accounts payable, accrued expenses and other
liabilities decreased by $195,000.
Investing and financing activities required cash of $1,069,000 over the
last nine months. Additions to capital expenditures consumed $493,000; most of
which was for the development of a sales tracking and operations management
software system, renovations at the headquarters complex, and the upgrading of
existing, and the purchase of additional telecommunications and office
equipment. The Company projects additional expenditures for infrastructure and
technology to be approximately $100,000 for the remainder of fiscal 1999.
Repayments of bank notes, issuance of notes receivable, payment of subordinated
notes payable and capital lease payable used cash of $580,000, while proceeds
from the exercise of common stock options provided cash of $104,000.
From June 1997 through April 1999, the Company, through its wholly owned
subsidiary Montauk Advisors Inc., ("MAI"), made various loans to Global. These
loans have a balance as of September 30, 1999 of $2,252,820 before reserves.
Global is a lease servicing company that sold leases through MAI. These loans
were made for the purpose of assisting Global in meeting cash flow deficiencies
arising from the nonpayment of scheduled monthly installments on certain
delinquent, canceled and non-performing leases. The loans, some of which bear
interest at 8% per annum and were due at various times during 1998, are
currently in default. In 1998 and 1999 management undertook a full review of the
loans to evaluate their collectibility and determined that, based on various
events and circumstances, including the default status of the loans, that the
loans had been impaired and a reserve for uncollectibility was required.
Accordingly, the loans as of September 30, 1999 are stated net of a $1,775,000
reserve established during fiscal 1998.
During the first quarter, the Company advised Global that as of April 30,
1999 it would no longer provide financial assistance to Global. In May 1999, the
Company submitted a buy-out plan to leaseholders holding Global leases on May 1,
1999. During the third quarter of 1999, the Company agreed to issue 338,750
shares of Series A Convertible Preferred Stock, convertible promissory notes
with principal of $690,526, cash payments of $235,282, and 25,000 warrants in
buy-out arrangements with investors holding leases sold by Global.
The preferred shares were issued under a private exchange offering, whereby
the Company agreed to exchange one share of Preferred Stock for every $5.00 of
remaining lease payments that were assigned to the Company by Global investors
subscribing to the offering. Each preferred share is convertible into two shares
of the Company's common stock at the rate of $2.50 per share. Conversion will
automatically take place, provided the Company has registered the underlying
common shares and the closing stock price of the Common Stock is at least $3.50
for twenty consecutive trading days. The Preferred Stock will pay a quarterly
dividend of $.075 per share. The first dividend in the amount of $42,344 covered
a five-month period and was paid on October 1, 1999. The Company accrued the
dividend during the third quarter.
<PAGE>
12
The convertible notes issued by the Company are payable in thirty-six
monthly non-interest bearing installments of $16,404, plus balloon payments of
$112,000, including interest calculated on the basis of 8% of the balloon amount
beginning in month nineteen of the note term. The Company has recorded a loan
discount on the notes of $64,609, which will be amortized over the note terms.
The notes are convertible into 345,263 common shares. Once the shares are
registered, the Company can request that the noteholders convert their shares.
Proceeds from the sale of the shares must be applied towards the unpaid
principal of the notes. Any excess proceeds or unsold shares will be returned to
the Company.
The Company also issued 25,000 five-year warrants to certain investors in
connection with their lease assignments. The warrants entitle the holder to
purchase the Company's common stock for $1.75 per share. The Company valued the
warrants at $27,281 using the Black-Sholes option pricing model.
The Company received assignments of gross lease payments in the above
settlement transaction totaling approximately $1,279,000. This amount has been
discounted to a present value of $1,220,000. The difference between the
consideration paid by the Company and the present value of the assigned payments
has been accounted for as a current charge to paid-in capital of $762,000 on the
issuance of the preferred stock, and a charge to operations of $600,000 on the
other transactions (see Results of Operations).
Management believes that operating income will satisfy the Company's
liquidity needs, at least through the current fiscal year.
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 were designed and developed without considering the impact of
the upcoming change in the century. If not corrected, many computer systems
could malfunction and lead to significant business delays and disruptions in the
U.S. and internationally by or at the year 2000.
The Company has reviewed its compliance with what has come to be known as
the Year 2000 Issue ("Y2K"). The Company does not create or develop its own
proprietary computer programs. Rather, it is reliant on outside vendors or
providers for verification of the compliance of their applications, which are
utilized by the Company. To date, we have verified that all third parties upon
which the Company relies to provide mission critical systems, are Y2K compliant.
The most significant of these outside vendors is the Company's clearing firm,
Schroder & Co., Inc. ("Schroder"). Schroder has been mandated by the NYSE to
participate in industry testing of all computer interfaces relating to
securities processing. The Company has participated with Schroder in point to
point testing of their interfaces and applications. These tests were
successfully completed in June 1999. The Company has received notice from
Schroders that it has completed its review and successfully tested all mission
critical systems.
The Company has designated an individual within the organization to
coordinate the Y2K compliance issues and to communicate with each software and
service provider, 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 1999.
In addition, FMSC inventoried its computer and systems operations that
could be affected by Y2K issues, including steps to remediate systems requiring
such attention. This has included a review of our facilities, office equipment,
telecommunications systems, market data services and third-party products and
services used by our company, and retention of consultants, where necessary. As
of the filing of this report, the Company has no known Y2K compliance issues
outstanding.
<PAGE>
13
PART II
OTHER INFORMATION
Item 5. Other Information.
Leaseholder Private Exchange Offering
During the third quarter of 1999, the Company issued 338,750 shares of
Series A Convertible Preferred Stock; convertible promissory notes for a total
principal of $690,526; cash payments of $235,282; and 25,000 warrants in buy-out
arrangements with investors holding leases sold by Global Financial Corp.
(Global).
The preferred shares were issued under a private exchange offering, whereby
the Company exchanged one share of Preferred Stock for every $5.00 of remaining
lease payments that were assigned to the Company by Global investors subscribing
to the offering. Each preferred share is convertible into two shares of the
Company's common stock at the rate of $2.50 per share. Conversion will
automatically take place, provided the Company has registered the underlying
common shares and the closing stock price of the Common Stock is at least $3.50
per share for twenty consecutive trading days. The Preferred Stock will pay a
quarterly dividend of $.075 per share. The first dividend in the amount of
$42,344 covered a five-month period and was paid on October 1, 1999.
The convertible notes issued by the Company are payable in thirty-six
monthly non-interest bearing installments of $16,404, plus balloon payments of
$112,000, including interest calculated on the basis of 8% of the balloon amount
beginning in month nineteen of the note term. Once the shares are registered,
the Company can request that the noteholders convert their shares. Proceeds from
the sale of the shares must be applied towards the unpaid principal of the
notes. Any excess proceeds or unsold shares will be returned to the Company.
The Company also issued 25,000 five-year warrants to certain investors in
connection with their lease assignments. The warrants entitle the holder to
purchase the Company's common stock for $1.75 per share. The Company valued the
warrants at $27,281 using the Black-Scholes option pricing model.
The Company received assignments of gross lease payments in the above
settlement transactions totaling approximately $1,279,000.
Stock Repurchase Program
On August 5, 1999, the Company's board of directors authorized the
repurchase of an unspecified number of the Company's outstanding common shares.
During the quarter ended September 30, 1999, the Company purchased 26,500 shares
for $51,559.
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 22, 1999 /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>
(Replace this text with the legend)
</LEGEND>
<CIK> 0000083125
<NAME> First Montauk Financial Corp.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-mos
<FISCAL-YEAR-END> Dec-31-1999
<PERIOD-START> Jul-1-1999
<PERIOD-END> Sep-30-1999
<CASH> 796
<RECEIVABLES> 4,065
<SECURITIES-RESALE> 0
<SECURITIES-BORROWED> 0
<INSTRUMENTS-OWNED> 4,806
<PP&E> 2,261
<TOTAL-ASSETS> 14,404
<SHORT-TERM> 3,698
<PAYABLES> 0
<REPOS-SOLD> 0
<SECURITIES-LOANED> 0
<INSTRUMENTS-SOLD> 220
<LONG-TERM> 1,707
0
1,694
<COMMON> 5,122
<OTHER-SE> 1,963
<TOTAL-LIABILITY-AND-EQUITY> 14,404
<TRADING-REVENUE> 9,074
<INTEREST-DIVIDENDS> 1,652
<COMMISSIONS> 28,753
<INVESTMENT-BANKING-REVENUES> 257
<FEE-REVENUE> 0
<INTEREST-EXPENSE> 122
<COMPENSATION> 29,170
<INCOME-PRETAX> 1,636
<INCOME-PRE-EXTRAORDINARY> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,414
<EPS-BASIC> .14
<EPS-DILUTED> .13
</TABLE>
