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, 2000
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
9,312,293 Common Shares, no par value, were outstanding as of November 17,
2000.
Page 1 of 11
<PAGE>
02
FIRST MONTAUK FINANCIAL CORP
FORM 10-Q
SEPTEMBER 30, 2000
INDEX
Page
PART I. FINANCIAL INFORMATION:
Item 1. Financial Statements
Consolidated Statements of Financial Condition
as of September 30, 2000 and December 31, 1999 ....... 3
Consolidated Statements of Income for the
Nine Months ended September 30, 2000 and 1999
and Nine Months ended September 30, 2000 and 1999 ...... 4
Consolidated Statements of Cash Flows for
the Nine Months ended September 30, 2000 and 1999 ...... 5
Notes to Financial Statements .......................... 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations ......... 7-9
PART II. OTHER INFORMATION:
Item 5. Other Information................................ 10
Item 6. Exhibits and Reports on Form 8-K................. 10
Signatures ............................................... 11
<PAGE>
03
FIRST MONTAUK FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<S> <C> <C>
September 30, December 31,
ASSETS 2000 1999
Cash $ 4,658,197 $ 686,980
Due from clearing firm 2,530,976 6,462,346
Trading and investment account securities 3,547,845 3,475,891
Commissions receivable 47,121 345,996
Global leases receivable 297,900 824,313
Notes receivable 258,183 482,531
Employee and broker receivables 986,173 452,285
Property and equipment - net 2,442,489 2,193,506
Due from officers 121,058 132,754
Deferred tax asset-net 554,914 664,256
Other assets 865,451 1,338,326
----------- -----------
Total assets $ 16,310,307 $ 17,059,184
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Securities sold, but not yet purchased, at market $ 489,065 $ 180,280
Notes payable 625,679 1,477,428
Commissions payable 1,466,516 2,710,736
Accounts payable 549,311 525,809
Accrued expenses 1,084,760 1,072,552
Income taxes payable 858,072 510,226
Other liabilities 777,440 952,015
----------- -----------
Total liabilities 5,850,843 7,429,046
----------- -----------
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
Convertible preferred stock, 5,000,000 shares authorized, $.10
par value, 349,511 shares issued and outstanding
respectively; stated at liquidation value. 1,747,555 1,747,555
Common Stock, no par value, 30,000,000 shares
authorized, 9,312,293 and 10,035,943 shares issued
and outstanding, respectively 5,241,738 5,185,818
Additional paid-in capital 2,569,231 2,368,126
Retained earnings 2,555,070 1,023,057
Less: Deferred compensation (494,289) (508,294)
Less: Treasury stock (798,634, and 180,500 shares, respectively) (1,196,341) (222,624)
----------- -----------
Total stockholders' equity 10,422,964 9,593,638
----------- -----------
Total liabilities and stockholders' equity $ 16,310,307 $ 17,059,184
=========== ===========
See notes to financial statements.
</TABLE>
<PAGE>
04
<TABLE>
FIRST MONTAUK FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
<S> <C> <C> <C> <C>
Nine months ended September 30, Three months ended September 30,
2000 1999 2000 1999
Revenues:
Commissions $ 37,765,633 $ 28,753,439 $ 10,122,888 $ 8,775,484
Principal transactions 8,031,153 9,073,724 1,226,532 2,533,481
Investment banking 2,448,489 257,264 669,663 75,103
Interest and other income 2,258,924 1,652,030 651,950 762,674
----------- ----------- ----------- -----------
50,504,199 39,736,457 12,671,033 12,146,742
----------- ----------- ----------- -----------
Expenses:
Commissions, employee compensation and benefits 38,317,291 29,190,712 10,671,549 8,871,483
Clearing and floor brokerage 3,278,104 3,126,008 878,429 860,232
Communications and occupancy 2,092,461 1,952,921 610,828 662,154
Legal matters and related costs 572,016 947,755 249,156 285,501
(Gain) Loss on Global lease settlements - 600,416 - 600,416
Other operating expenses 3,322,906 2,160,144 817,273 663,585
Interest 146,801 121,866 32,345 39,072
----------- ----------- ----------- -----------
47,729,579 38,099,822 13,259,580 11,982,443
----------- ----------- ----------- -----------
Income (loss) before income taxes 2,774,620 1,636,635 (588,547) 164,299
Income taxes 1,132,626 180,298 (198,374) 65,000
----------- ----------- ----------- -----------
Net income (loss) before extraordinary items 1,641,994 1,456,337 (390,173) 99,299
Extraordinary loss-extinguishment
of debt, net of tax (34,200) - - -
----------- ----------- ----------- -----------
Net income (loss) $ 1,607,794 $ 1,456,337 $ (390,173) $ 99,299
=========== =========== =========== ============
Net income (loss) available to common stockholders $ 1,532,012 $ 1,413,993 $ (414,876) $ 56,955
=========== =========== =========== ============
Per share of Common Stock:
Basic:
Before extraordinary loss $ 0.16 $ 0.14 $ (0.04) $ 0.01
Extraordinary loss - - - -
----------- ----------- ----------- ------------
Net income (loss) $ 0.16 $ 0.14 $ (0.04) $ 0.01
=========== =========== =========== ============
Diluted:
Before extraordinary loss $ 0.15 $ 0.14 $ (0.04) $ 0.01
Extraordinary loss - - - -
----------- ----------- ----------- ------------
Net income (loss) $ 0.15 $ 0.14 $ (0.04) $ 0.01
=========== =========== =========== ============
Weighted average common shares outstanding-basic 9,560,256 9,880,174 9,394,457 9,908,027
=========== =========== =========== ============
Weighted average common shares outstanding-diluted 11,018,623 10,678,523 9,394,457 10,823,564
=========== =========== =========== ============
See notes to financial statements.
</TABLE>
<PAGE>
05
<TABLE>
FIRST MONTAUK FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<S> <C> <C>
Nine months ended September 30,
2000 1999
INCREASE (DECREASE) IN CASH
Cash flows from operating activities:
Net income $ 1,607,794 $ 1,456,337
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 449,202 306,513
Amortization 240,154 139,462
Loss on Global lease settlements - 465,134
Bad debt reserves 149,640 -
Increase (decrease) in cash attributable to
changes in operating assets and liabilities:
due from clearing firm 3,931,370 377,774
Trading and investment account securities (71,954) (2,072,640)
Commissions receivable 298,875 83,521
Due from officers 11,696 (5,411)
Employee and broker receivables (533,888) (209,100)
Other assets 472,875 174,044
Deferred income taxes 109,342 82,315
Securities sold but not yet purchased 308,785 (107,222)
Commissions payable (1,244,220) 139,706
Accounts payable 23,504 (117,104)
Accrued expenses 12,208 51,120
Income taxes payable 347,846 93,417
Other liabilities (137,260) (269,088)
----------- -----------
Total adjustments 4,368,175 (867,559)
----------- -----------
Net cash provided by operating activities 5,975,969 588,778
----------- -----------
Cash flows from investing activities:
Issuance of notes receivable - (243,616)
Collection of notes receivable 74,708 93,884
Collection of Global leases receivable 526,413 447,750
Additions to property and equipment (711,037) (493,381)
Dispositions of property and equipment 12,851 -
----------- -----------
Net cash used in investing activities (97,065) (195,363)
----------- -----------
Cash flows from financing activities:
Payment of notes payable (773,172) (88,347)
Payment of subordinated notes payable (50,000) (50,000)
Payment of capital lease payable (90,936) (82,969)
Payment of preferred stock dividend (75,782) (42,344)
Exercise of stock options 55,920 104,261
Repurchase of common stock (973,717) (51,559)
----------- -----------
Net cash used in financing activities (1,907,687) (210,958)
----------- -----------
Net increase in cash 3,971,217 182,457
Cash at beginning of period 686,980 613,513
----------- -----------
Cash at end of period $ 4,658,197 $ 795,970
=========== ==========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 146,801 $ 121,866
=========== ==========
Income taxes $ 675,347 $ 2,952
=========== ==========
Global lease settlement:
Global leases received in settlement transaction $ - $ 1,219,903
=========== ==========
Note payable issued $ - $ 625,917
=========== ==========
Preferred stock issued $ - $ 1,693,750
=========== ==========
See notes to financial statements.
</TABLE>
<PAGE>
06
FIRST MONTAUK FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2000
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, 2000 and 1999. 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, 1999, 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, 2000, are not necessarily indicative of the results for the entire
fiscal year to end on December 31, 2000.
NOTE 2 - EARNINGS PER SHARE
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 of stock options and the deemed conversion
of preferred stock and convertible debt. The EPS calculations do not include
warrants to purchase approximately 9,240,000 common shares because they are
anti-dilutive.
NOTE 3 - SHARE REPURCHASE
During the nine months ended September 30, 2000, the Company repurchased
618,134 shares of its common stock for $973,717 under a share repurchase program
authorized in 1999.
NOTE 4 - NEW CLEARING/FINANCIAL AGREEMENT
In May 2000, the Company entered into a 10-year clearing agreement with
Fiserv Securities, Inc. ('Fiserv') under which Fiserv will act as the Company's
primary clearing broker. In connection with the clearing agreement, the Company
and Fiserv also entered into a financial agreement under which Fiserv will
provide a cash advance of $4,000,000 to the Company upon the date of conversion
to Fiserv.
In November 2000, the Company completed the conversion of its customer
accounts to Fiserv, and received the initial cash advance of $4,000,000.
NOTE 5 - DEBT PREPAYMENT
In May 2000, the Company repaid $570,000 of convertible notes for 110% of
face value, or $627,000. The $57,000 premium was recorded as an extraordinary
loss, net of income taxes of $22,800.
<PAGE>
07
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Factors Affecting "Forward-Looking Statements"
From time to time, the Company may publish "forward-looking statements"
within the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities and Exchange Act of 1934, as amended, or make oral
statements that constitute forward-looking statements. These forward-looking
statements may relate to such matters as anticipated financial performance,
future revenues or earnings, business prospects, projected ventures, new
products, anticipated market performance, and similar matters. The Private
Securities Litigation Reform Act of 1995 provides a safe harbor for
forward-looking statements. In order to comply with the terms of the safe
harbor, the Company cautions readers that a variety of factors could cause the
Company's actual results to differ materially from the anticipated results or
other expectations expressed in the Company's forward-looking statements. These
risks and uncertainties, many of which are beyond the Company's control,
include, but are not limited to: (i) transaction volume in the securities
markets, (ii) the volatility of the securities markets, (iii) fluctuations in
interest rates, (iv) changes in regulatory requirements which could affect the
cost of doing business, (v) fluctuations in currency rates, (vi) general
economic conditions, both domestic and international, (vii) changes in the rate
of inflation and related impact on securities markets, (viii) competition from
existing financial institutions and other new participants in competition from
existing financial institutions and other new participants in the securities
markets, (ix) legal developments affecting the litigation experience of the
securities industry, and (x) changes in federal and state tax laws which could
affect the popularity of products sold by the Company. The Company does not
undertake any obligation to publicly update or revise any forward-looking
statements.
General
The Company, through its wholly-owned broker-dealer subsidiary, is
primarily engaged in securities brokerage and trading as a principal in equities
and fixed income securities. The Company also engages in investment advisory
activities, insurance and annuity sales. All of these activities are highly
competitive and sensitive to many factors outside the control of the Company,
including market volatility, investor confidence and participation in the
markets and general economic conditions.
Results of Operations
Three Months Ended September 30, 2000 (the "2000 Period") vs. September 30,
1999 (the "1999 Period")
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Three Months Ended September
2000 1999
(000's) % Change (000's)
Revenues:
Commissions $ 10,123 15 $ 8,775
Principal transactions 1,226 (52) 2,534
Investment banking 670 793 75
Interest and other income 652 (14) 763
------ ---- ------
$ 12,671 4 $12,147
Three Months Ended September
2000 1999
(000's) % Change (000's)
Expenses:
Commissions, compensation
and benefits $ 10,672 20 $ 8,871
Clearing and floor brokerage 878 2 860
Communications and occupancy 611 (8) 662
Legal matters and related costs 249 (13) 286
Loss on Global lease settlements - (100) 600
Other operating expenses 817 23 664
Interest 32 (18) 39
------ ----- ------
$ 13,259 11 $11,982
</TABLE>
<PAGE>
08
As the financial markets continued to experience significant volatility and
uncertainty, the Company's results of operations reflected such conditions. For
the three months ended September 30, 2000, the Company recorded revenue of
$12,761,000, a slight increase of $525,000 or 4% over the third quarter of 1999.
The lack luster performance can be attributed to the industry-wide pullback in
market activity during the second and third quarters of 2000 as a result of
volatility in the technology sector, the decrease in trading volume and the
decrease in overall market values in both the Nasdaq and listed markets.
Included in the 2000 Period total revenues, are realized and unrealized losses
of $481,000 from market-making and investment activities in Jeremy's MicroBatch
Ice Creams, which the Company took public in February 2000.
Commission revenue from the sale of listed and over-the-counter securities
and other agency transactions increased to $6,534,000 (52% of total revenues)
during 2000, from $6,284,000 (52% of total revenues). Commission revenue from
the sale of mutual funds, insurance products, and fees from managed accounts
rose to $3,589,000 (28% of total revenues) for the 2000 Period from $2,491,000
(21% of total revenues), an increase of 44% over 1999.
Revenues from market-making activities and principal trading accounted for
the largest decrease in revenues. Revenues for the 2000 Period were $1,227,000,
down from $2,533,000 in 1999, a decrease of 52%. The decrease is due to
investment and trading losses in Nasdaq securities as well as losses relating to
the Company's investment and market-making activities in Jeremy's MicroBatch Ice
Creams.
Investment banking revenues increased by $595,000, due to one private
placement transaction completed during the period, which was introduced to the
Company by one of its affiliate brokers.
Compensation and benefits for the 2000 Period increased $1,800,000 or 20%
over the same period last year. This category includes salaries, commission
expense, payroll taxes and fringe benefits for salaried employees. Commissions
paid to registered representatives for 2000 were $8,798,000 (69% of total
revenues) as compared to $7,281,000 (60% of total revenues) in 1999, an increase
of $1,517,000. Commission expense as a percentage of total revenues will
fluctuate depending upon the product mix of commission-based versus principal
transactions and trading gains and losses. The Company pays out a higher
percentage on agency and investment banking transactions, which increased in the
2000 Period when compared with the 1999 Period. In addition, trading and
investment losses for the 2000 Period reduced principal transaction revenue,
which had the effect of increasing the percentage of commission expense to total
revenue.
Clearing costs, which is associated with the level of transaction volume,
remained fairly constant during the 2000 Period. For the 2000 Period, clearing
costs were $878,000 (7% of total revenues) as compared to $860,000 (7% of total
revenues) when compared to the 1999 Period. 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. Subsequent to the 2000 Period, the Company entered into a new
clearing arrangement with Fiserv Securities, Inc.
Communications and occupancy costs were $611,000 (5% of total revenues) for
the 2000 Period as compared to $662,000 (5% of total revenues) for the 1999
Period.
Other operating expenses increased by $154,000, to $817,000, during the
2000 Period when compared to the 1999 Period. The increase is due primarily to
increased advertising campaigns for its discount brokerage division and
registered representative recruiting.
The Company continued to benefit from the enhanced supervision and
compliance measures it implemented in 1999. Legal settlement costs for the
three-month period of 2000 was less than $1,000 compared to $114,000 for the
same period last year. The cost of defending certain claims increased by $77,000
during the 2000 Period. 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.
The effective tax rates for the nine months and three months ended
September 30, 2000 were 40.8% and (33.7%), respectively, as compared to 11% and
39%, in the respective 1999 periods. Income taxes were accrued on 2000 income to
date using regular statutory federal and state tax rates. The tax benefit on the
September 2000 quarterly loss was less than expected due to valuation allowances
provided on certain subsidiary company state tax losses.
<PAGE>
09
For the 2000 Period, the Company reported a net loss of $415,000 or $(.04)
per basic and diluted share, as compared to a net income of $57,000, or $.01 per
basic and diluted share for the 1999 Period. For the nine months ended September
30, 2000, the Company reported net income available to common stockholders of
$1,532,000, or $.16 per basic and $.14 per diluted share, respectively, as
compared to net income of $1,414,000, or $.14 per basic and diluted share for
the nine months ended September 30, 1999.
Liquidity and Capital Resources
The Company maintains a highly liquid balance sheet with 66% of the
Company's assets consisting of cash and cash equivalents; securities owned,
which are marked to market; 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. Additionally, the Company's
liquidity can fluctuate significantly depending largely upon general economic
and market conditions, volume of activity, and investment opportunities.
Net cash provided by operating activities for the nine months was
$5,976,000. The primary source of this increase was the net income for the nine
months of $1,608,000 and the reduction in the receivable due from the clearing
firm of $3,931,000.
Investing activities required cash of $97,000 over the last nine months.
Additions to capital expenditures consumed $711,000; the majority of which was
in the first quarter of 2000. The Company projects additional expenditures for
infrastructure and technology, particularly for the Company's move to the new
clearing firm, to be approximately $100,000 for the remainder of fiscal 2000.
Collection of notes receivable and Global leases receivable provided cash of
$601,000.
Financing activities used cash of $1,908,000 during the first nine months
of 2000. A total of $974,000 was used to repurchase 618,134 of the Company's
outstanding shares pursuant to a stock repurchase program authorized by the
board of directors in August 1999. In addition, the Company made notes and
capital lease repayments of $914,000 and dividend payments to preferred
shareholders of $76,000. A total of $56,000 was received from the exercise of
57,000 stock options by various individuals during the year.
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 on April 1 and October 1 of each year, and are
convertible into a maximum of 380,000 shares of the Company's Common Stock at
the rate of $1.50 per share. In May 2000, the Company prepaid the note in full
for 110% of face value, or $627,000. The $57,000 premium was recorded as an
extraordinary loss, net of income taxes of $22,800.
In May 2000, the Company entered into a 10-year clearing agreement with
Fiserv Securities, Inc. under which Fiserv will act as the Company's primary
clearing broker. In connection with the clearing agreement, the Company and
Fiserv also entered into a financial agreement under which Fiserv will provide a
cash advance of $4,000,000 to the Company, which was received on November 13,
2000. The funds, net of federal and state income taxes, will be used primarily
to enable the Company to pay for the cost of conversion to Fiserv and expand the
Company's business. For financial reporting purposes, the Company will earn the
advance in accordance with an amortization schedule established by the parties;
however, the Company will incur an income tax liability at its effective tax
rate on the entire advance in the year in which it is received. The Company is
required to repay any unearned portion of the $4,000,000 in the event it fails
to achieve certain minimum performance criteria or terminates the agreement
under certain circumstances prior to the expiration date as well as penalties
for early termination. Fiserv has also agreed to provide certain additional
advances to the Company in the second, third and fourth years of the agreement
under similar conditions provided the Company achieves certain performance
criteria and subject to certain other conditions. These advances, if received,
will also be amortized to income as earned during the term of the clearing
agreement. The Company believes that the advance received net of taxes will be
sufficient to pay for the anticipated costs of conversion.
Management believes that operating income will satisfy the Company's
liquidity needs, at least through the current fiscal year.
<PAGE>
10
PART II
OTHER INFORMATION
Item 5. Other Information.
New Clearing Arrangement
In May 2000, the Company entered into a 10-year clearing agreement with
Fiserv Securities, Inc. ("Fiserv") under which Fiserv will act as the Company's
primary clearing broker. In connection with the clearing agreement, the Company
and Fiserv also entered into a financial agreement under which Fiserv will
provide a cash advance of $4,000,000 to the Company upon the date of conversion
to Fiserv.
In November 2000, the Company completed the conversion of its customer
accounts to Fiserv, and received the initial cash advance of $4,000,000.
Stock Repurchase Program
During the quarter ended September 30, 2000, the Company repurchased
170,200 shares of its common stock for $201,075 under a share repurchase program
authorized in 1999.
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>
11
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 20, 2000 /s/ William J. Kurinsky
----------------------------------
William J. Kurinsky
Secretary/Treasurer
Chief Financial Officer and
Principal Accounting Officer
/s/ Herbert Kurinsky
----------------------------------
Herbert Kurinsky
President
<PAGE>
EXHIBIT INDEX
-------------
Exhibit 11 - Computation of Earnings Per Share
Exhibit 27 - Financial Data Schedule
