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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
|X| ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended December 31, 1999 -----------------
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from _______________________ to
Commission File No. 0-6729
FIRST MONTAUK FINANCIAL CORP.
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(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 No.)
328 Newman Springs Road, Red Bank, NJ 07701
- - -------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (732) 842-4700
- - -------------------------------------------------------------------------------
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange on
Title of each class which registered
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, no par value
- - -------------------------------------------------------------------------------
(Title of class)
[Cover Page 1 of 2 Pages]
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(D) of the Exchange Act during the past 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 ___
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. [ ]
The issuer's revenues for its most recent fiscal year: $57,585,000
The aggregate market value of the voting stock held by non-affiliates computed
by reference to the price at which the stock was sold, or the average bid and
asked prices of such stock, as of bid and asked prices of such stock, as of
March 30, 2000 was $16,002,591.
The number of shares of Common Stock outstanding, as of March 30, 2000 was
9,594,043.
DOCUMENTS INCORPORATED BY REFERENCE
Not Applicable
[Cover Page 2 of 2 Pages]
01
PART I
Item 1. Business
Introduction
First Montauk Financial Corp. ("FMFC") is a new Jersey-based financial
services holding company whose principal subsidiary, First Montauk Securities
Corp. ("FMSC"), has operated as a full service retail and institutional
securities brokerage firm since 1987. FMSC provides a broad range of securities
brokerage and investment services to a diverse retail and institutional
clientele, as well as corporate finance and investment banking services to
corporations and businesses. In 1997, FMSC established Century Discount
Investments, a discount brokerage division through which it operates an online
brokerage operation. FMFC also sells insurance products through its subsidiary
Montauk Insurance Services, Inc. ("MISI").
FMSC has approximately 383 registered representatives and services over
46,000 retail and institutional customer accounts. All of FMSC's 142 branch
offices, located in 28 states and Saudi Arabia, are owned and operated by
affiliates; independent owners who maintain all appropriate licenses and are
responsible for all office overhead and expenses. FMSC also employs registered
representatives directly at its corporate office.
FMSC is registered as a broker-dealer with the Securities and Exchange
Commission ("SEC"), the National Association of Securities Dealers Regulation,
Inc. ("NASDR"), the Municipal Securities Rule Making Board ("MSRB"), and the
Securities Investor Protection Corporation ("SIPC") and is licensed to conduct
its brokerage activities in 49 states, the District of Columbia, and the
Commonwealth of Puerto Rico. All securities transactions are cleared through
Schroder & Co., Inc, and execution services are provided by E D & F Man
International Securities, Inc. and others. These arrangements provide FMSC with
back office support, transaction processing services on all principal, national
and international securities exchanges, and access to many other financial
services and products which allows FMSC to offer products and services
comparable to large brokerage firms.
FMSC's revenues consist primarily of commissions and fee income from
individual and institutional securities transactions, market making activities
and investment banking services such as private and public securities offerings.
The following table represents the percentage of revenues generated by each of
these activities during the last fiscal year:
Equities:
Listed 30%
Over-The-Counter 37%
Municipal, Government 2%
Corporate Bonds 3%
Unit Investment Trusts 2%
Mutual Funds 13%
Options 6%
Insurance 6%
Corporate Finance 1%
--
Total 100%
The following table reflects FMSC's various sources of revenues and the
percentage of total revenues for fiscal 1999. Revenues from agency transactions
in securities for individual customers of FMSC are shown as commissions.
Revenues from transactions in securities for individual customers where FMSC
acted in a principal capacity are reflected in principal transactions. Also
reflected in principal transactions are trading profits from market making and
other trading activities.
Year Ended December 31, 1999
----------------------------
Amount Percent
------ -------
Agency commissions from
Equity Securities,
Options and Mutual Funds $40,516,625 70%
Principal Transactions in
Equity Securities, Municipal,
Government and Corporate Bonds $14,000,680 24%
Interest and other Income(1) $ 2,628,246 5%
Investment Banking(2) $ 439,065 1%
---------- ---
Total Revenues $57,584,616 100%
(1) "Other Income" consists primarily of handling fees and order flow
remunerations.
(2) Investment banking revenues consists of commissions, selling concessions,
consulting fees and other income from syndicate activities and placement
agent fees.
02
The Affiliate Program
FMSC's primary method of operation is through its affiliate program,
which allows registered representatives to operate as independent contractors. A
registered representative who becomes an affiliate of FMSC establishes his own
office and is solely responsible for the payment of all expenses associated with
the operation of the branch office, including rent, utilities, furniture,
equipment, stock quotation machines, and general office supplies. In return, the
affiliate representative is entitled to retain a significantly higher percentage
of the commissions generated by his sales than a registered representative in a
traditional brokerage arrangement. The affiliate program is designed to attract
experienced brokers with existing clientele who desire to operate their own
offices as well as other professionals in all facets of the financial services
industry.
Affiliates must possess a sufficient level of commission brokerage
business and experience to enable the individual to independently support
his/her own office. Financial professionals such as insurance agents, real
estate brokers, financial planners, and accountants, who already provide
financial services to their clients, can affiliate with FMSC as registered
representatives. Affiliation enables these professionals to offer securities
products and services to their clients through FMSC, and insurance products
through MISI, and earn commissions and fees for these transactions.
FMSC provides full support services to each of the affiliates,
including access to stock and options execution and over-the-counter stock
trading; products such as insurance, mutual funds and investment advisory
programs; and research, compliance, supervision and related services.
Each affiliate is required to obtain and maintain in good standing each
license required by the SEC and NASDR to conduct the type of securities business
in which the affiliate will engage, and to register in the various states in
which he intends to service customers. FMSC is ultimately responsible for
supervising each affiliate and related registered representative. FMSC can incur
substantial liability from improper actions of any of the affiliate
representatives. The Company maintains a professional liability errors and
omissions insurance policy which provides coverage for certain actions taken by
the Company's registered representatives, employees and other agents in
connection with the purchase and sale of securities and the administration of
individual retirement plans.
Century Discount Investments
In June 1997, FMSC established a discount brokerage division, "Century
Discount Investments", to offer investors convenient and prompt retail brokerage
services at significantly reduced commission rates. Century is designed to serve
investors who do their own research and make their own investment decisions.
These customers seek to avoid the higher brokerage commissions for securities
research, market recommendations or portfolio management associated with full
service brokerage firms. FMSC believes that this market segment has become
increasingly significant to the brokerage industry and will continue to grow in
the future. Century's business will concentrate on the execution of unsolicited
transactions on an agency basis from retail customers. Century is able to offer
customers reduced commission rates since its service is not dependent on
individual broker-customer relationships to generate orders. Century does not
assign customer accounts to individual brokers and all Century registered
representatives have immediate access to customer accounts and market
information necessary to respond to any customer inquiry and order.
Century, through its clearing firm, has developed the capability to offer
online, discount brokerage and related investment services. The online services
provide customers with automated securities order placement, market information
and research capabilities through the Internet. In the future, Century intends
to offer a broader range of investment services to the self-directed,
sophisticated retail customer.
Montauk Insurance Services
In 1991, FMFC formed Montauk Insurance Services, Inc ("MISI") for the
purpose of offering and selling variable annuity, variable life as well as
traditional life and health insurance products. Currently, MISI is licensed in
39 states. MISI derives revenue from insurance-related products and services
from the existing customer base of FMSC's registered representatives, who are
also licensed to sell certain insurance products. In fiscal year 1999, the
Company earned gross commissions of $2,938,000 from the sale of insurance and
annuity policies.
03
Asset Management and Portfolio Advisory Service Fees
FMSC is a SEC Registered Investment Adviser, providing investment
advisory services to clients through independent, third-party sponsored advisory
programs offered to individual and institutional clients. FMSC is registered as
an investment adviser in 16 states requiring registration.
Managed account programs generally require the client to pay a single
fee for portfolio advisory services, brokerage execution and custody and
periodic account performance evaluation, rather than a fee plus commissions.
Revenues from asset-managed accounts and portfolio advisory services are
generated from accounts that charge a fee based on a percentage of assets under
management.
Investment Banking
FMSC participates in private and public offerings of equity securities and
provides general investment banking consulting services to various public and
private corporations. Historically, FMSC has not derived a significant amount of
its revenues from investment banking. However, the Company did complete a public
offering of Common Stock of Jeremy's MicroBatch Ice Creams, Inc. in February
2000 in which FMSC acted as the managing underwriter. The offering consisted of
1,200,000 shares of Common Stock at an offering price of $6.00 per share. FMSC
received gross commissions of $720,000 as well as warrants to purchase 120,000
shares of Jeremy's Common Stock at an exercise price of $9.00 per share. The
Company continues to review other underwriting candidates and anticipates that
it will engage in additional public and private offerings in the future.
Strategic Relationships
During the year, the Company formulated several strategic relationships
with financial product vendors and other companies. These relationships provide
cross-marketing opportunities as well as new product offerings to our customers.
One such relationship is with a nationally recognized residential mortgage
provider. Another, involves a relationship with an Internet-based financial
planning firm. The Company expects to expand these relationships in the current
fiscal year to provide for additional sources of revenue and lead generation for
its registered representatives.
Recent Developments
Preferred Stock Exchange Offering
During the period 1996 and 1997, FMFC, through a wholly owned subsidiary,
acted as agent for Global Financial Corp. ("Global") to offer business leases to
its customers. Due to the financial condition of Global, and an affiliated
entity, FMFC made loans exceeding $2,300,000 to enable Global to meet its
continuing obligations to leaseholders. During the third quarter of 1999, FMFC
elected to discontinue its financial assistance to Global and offered to the
customers who purchased Global leases, 349,511 shares of a new issue of Series A
Preferred Stock. The Company also issued $690,526 principal amount of
convertible promissory notes, made cash payments of $235,000 and issued warrants
to purchase 25,000 shares of FMFC Common Stock exercisable at $1.75 per share to
certain investors holding Global leases.
Under the terms of the offering, one share of Preferred Stock was exchanged
for every $5.00 of remaining lease payments, as adjusted, that were assigned to
the Company by Global investors. Each preferred share is convertible into two
shares of the Company's common stock at the rate of $2.50 per share. Conversion
will occur automatically, provided the Company has registered the underlying
common shares, in the event 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. Dividend payments were made to
Preferred shareholders in October 1999 and January 2000.
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 received assignments of gross lease payments in the above
settlement transactions totaling approximately $1,279,000.
04
Competition
FMSC encounters intense competition in all aspects of its business and
competes directly with many other securities firms for clients, as well as
registered representatives. A significant number of such competitors offer their
customers a broader range of financial services and have substantially greater
resources. Retail firms such as Merrill Lynch Pierce Fenner & Smith
Incorporated, Salomon Smith Barney, Inc. and Morgan Stanley/Dean Witter dominate
the industry; however, the Company also competes with numerous regional and
local firms. FMSC also competes for experienced brokers with other firms
offering an independent affiliate program such as Corporate Securities Group,
Inc., Robert Thomas Securities, Inc. and Linsco/Private Ledger Corp.
In addition, a number of firms offer discount brokerage services to
individual retail customers and generally effect transactions at substantially
lower commission rates on an "execution only" basis, without offering other
services such as investment recommendations and research. Moreover, there is
substantial commission discounting by full-service broker-dealers competing for
institutional and individual brokerage business. The Company has recently
entered the discount brokerage arena through its Century Discount Investments
division. (See "Recent Developments".) Additionally, the recent emergence of
online trading has further intensified the competition for brokerage customers.
The continued expansion of discount brokerage firms and online trading could
adversely affect the Company's retail business.
Other financial institutions, notably commercial banks and savings and
loan associations, offer customers some of the same services and products
presently provided by securities firms. In addition, certain large corporations
have entered the securities industry by acquiring securities firms. While it is
not possible to predict the type and extent of competitive services which banks
and other institutions ultimately may offer to customers, FMSC may be adversely
affected to the extent those services are offered on a large scale basis.
FMSC competes through its advertising and recruiting programs for
registered representatives interested in joining its affiliate program. FMSC
often offers incentives to qualified registered representatives to join the
Company. These incentives can include cash loans, both forgivable based on
duration of association and/or production levels, as well as non-forgivable,
incentive stock options and a higher payout during a transitional period. FMSC
is currently implementing new computer programs developed by the Clearing
Broker, Schroder & Co., Inc., to better service its affiliates and to attract
new brokers. The system will enable brokers at any office to instantly access
customer accounts, determine cash positions, send and receive electronic mail,
and receive research reports and compliance memoranda through a computer work
station.
Government Regulation
The securities industry in the United States is subject to extensive
regulation under various federal and state laws and regulations. The SEC is the
federal agency charged with the administration of most of the federal securities
laws. Much of the regulation of the securities industry, however, has been
assigned to various self regulatory organizations ("SROs"), principally the
NASDR, and in the case of NYSE member firms, the NYSE. The SROs, among other
things, promulgate regulations and provide oversight in areas of (i) sales
practices, (ii) trade practices among broker-dealers, (iii) capital
requirements, (iv) record keeping and (v) conduct of employees and affiliates of
member organizations. In addition to promulgating regulations and providing
oversight, the Commission and the SROs have the authority to conduct
administrative proceedings which can result in the censure, fine, suspension or
expulsion of a broker-dealer, its officers or employees. Furthermore, new
legislation, changes in the rules and regulations promulgated by the Commission
and SROs, or changes in the interpretation or enforcement of existing laws and
rules often directly affect the operation and profitability of broker-dealers.
The stated purpose of much of the regulation of broker-dealers is the protection
of customers and the securities markets rather than the protection of creditors
and shareholders of broker-dealers.
Employees
The Company currently has approximately 383 registered representatives
of which 307 are associated with affiliate offices. In addition, the Company
employs 78 support personnel in the areas of operations, compliance, accounting,
and administration. FMFC believes its relationship with its employees is
satisfactory.
Fidelity Bond
As required by the NASDR and certain other authorities, FMSC carries a
fidelity bond covering loss or theft of securities, as well as embezzlement and
forgery. The bond provides total coverage of $5,000,000 (with a $10,000
deductible provision per incident). In addition, the accounts of its customers
are protected by the Securities Investor Protection Corporation ("SIPC") for up
to $500,000 for each customer, subject to a limitation of $100,000 for claims
for cash balances, with an additional $50,000,000 of protection provided by a
private insurance company for the benefit of each customer. SIPC is funded
through assessments on registered broker-dealers. SIPC charges a flat annual fee
of $150.
05
Item 2. Properties
Offices and Facilities
In March 1997, the Company entered into a new seven year lease (the
"Master Lease"), commencing February 1, 1998 for 22,762 square feet of gross
rentable area at its executive offices which are located at Parkway 109 Office
Center, 328 Newman Springs Road, Red Bank, New Jersey. The rent for the premises
is $35,850 per month, and in addition to the base rent, the Company pays as
additional rent, a proportional share of any increases in real estate taxes
above the amount paid during the 1999 calendar year, insurance premiums relating
to the premises, and all utility charges relating to the use of the premises. In
March 1998, the Company signed a First Amendment to the Master Lease
incorporating all of the other rented space in the Red Bank facility into the
March 1997 Master Lease. The First Amendment to the Lease covers an aggregate of
32,442 gross rentable square feet at a monthly rental payment of $52,000 through
January 2005. The Master Lease and First Amendment also contain a six-year
option to renew providing for a base rental payment of approximately $65,000 per
month.
In June 1996, Montauk Insurance Services, the Company's insurance
subsidiary, leased 3,150 square feet in Paramus, New Jersey to house its
administrative offices. In September 1997 the insurance division relocated to
the Company's corporate offices in Red Bank, New Jersey, and the Paramus office
became the home of Century Discount Investments, the Company's discount
division. The three year lease provides for monthly base rent of $5,053 for the
first year, $5,315 for the second year, and $5,578 for the third year. MISI
extended the term of this lease for an additional one year term.
Item 3. Legal Proceedings
Many aspects of the Company's business involve substantial risks of
liability. In recent years, there has been an increasing incidence of litigation
and arbitration involving the securities industry.
FMSC is a respondent in various customer arbitrations and law suits
relating to its securities business. These claims are in various stages of
progress and are being vigorously contested. Management is unable to derive a
meaningful estimate of the amount or range of possible loss relating to pending
litigation, including litigation costs.
In December 1999, the Company agreed to accept a $500,000 cash payment from
another broker-dealer in settlement of an arbitration brought by FMSC arising
from the activities of certain former affiliated FMSC brokers.
As required by SEC Order, and in an effort to reduce future legal claims
and liabilities, the Company retained an independent consultant to conduct a
review of, and to report and make recommendations as to FMSC's supervisory and
compliance policies and procedures, particularly as they relate to the firm's
affiliate program and the supervision of the firm's branch offices by the main
office. FMSC developed and implemented substantial changes to its supervisory
and compliance policies and procedures, including the development of a
hierarchical regional supervisory structure. As part of this restructuring, FMSC
appointed six regional supervisors and designated other branch office managers
and compliance personnel to act as divisional supervisors. In addition, FMSC
revised its recruiting procedures, developed supervisory compliance materials
and held several regional/divisional supervisory training programs.
Item 4. Submission of Matters on a Vote of Security Holders
Not Applicable.
06
PART II
Item 5. Market of and Dividends on the Company's
Common Equity and Related Stockholder Matters
A. Principal Market
The Company's Common Stock is traded in the over-the-counter market.
Trading in the Company's Common Stock is reported on the NASDR Bulletin Board
system and by the National Daily Quotation Service published by the National
Quotation Bureau, Inc. The Company believes that there is an established public
trading market for the Company's Common Stock based on the volume of trading in
the Company's Common Stock and the existence of market makers who regularly
publish quotations for the Company's Common Stock. The Company's Class A, Class
B and Class C Warrants commenced trading in the over-the-counter market upon
their issuance in March 1998.
B. Market Information
The Company's Common Stock commenced trading in the over-the-counter
market in 1987. On March 30, 2000, the Company's common stock had a high and low
bid price of $2.03125 and $1.875, respectively.
The following is the range of high and low bid prices for such securities
for the periods indicated below:
Common Stock
Fiscal Year 1999 High $ Low $
1st Quarter 3.75 1.4375
2nd Quarter 3.00 1.5938
3rd Quarter 2.7188 1.5313
4th Quarter 1.9375 1.1250
Fiscal Year 1998 High $ Low $
1st Quarter 2.875 2.00
2nd Quarter 3.28 2.41
3rd Quarter 2.53 1.01
4th Quarter 1.875 1.125
07
Item 6. Selected Financial Data
Year ended December 31,
1999 1998 1997 1996 1995
Operating results:
Revenues:
Commissions $40,516,625 $30,741,404 $ 27,018,244 $ 25,749,690 $ 17,113,296
Principal transactions 14,000,680 8,795,599 7,257,576 7,660,700 9,763,940
Investment banking 439,065 767,312 1,433,100 634,329 388,249
Insurance recovery -- -- 650,000 -- --
Interest and other income 2,628,246 1,572,063 1,383,713 1,044,969 1,076,718
--------- --------- --------- --------- ----------
Total revenues 57,584,616 41,876,378 37,742,633 35,089,688 28,342,203
---------- ---------- ---------- ---------- ----------
Expenses:
Commissions, employee
compensation and
benefits 42,137,968 31,766,060 26,785,205 25,428,184 19,542,578
Clearing and floor
brokerage 4,109,961 3,674,859 3,021,709 3,139,142 3,112,474
Communications and
occupancy 2,697,433 2,557,313 1,860,350 1,662,936 1,260,209
Legal matters and
related costs 1,395,008 2,377,336 1,452,001 2,731,997 1,542,328
Write-down of Note
Receivable - Global
Financial Corp. 100,000 1,775,000 -- -- --
Loss on Global lease
settlements 600,416 3,524 -- -- --
Other operating expenses 3,545,308 2,958,450 2,093,670 2,006,615 1,439,926
Interest 166,104 131,215 84,695 105,772 192,752
---------- ---------- ---------- --------- ----------
Total expenses 54,752,198 45,243,757 35,297,630 35,074,646 27,090,267
---------- ---------- ---------- ---------- ----------
Income (loss) before
income taxes 2,832,418 (3,367,379) 2,445,003 15,042 1,251,936
Provision for income taxes
(income tax benefit) 549,140 (604,532) 968,178 (17,747) 483,848
--------- --------- ---------- ---------- ----------
Net income (loss) $ 2,283,278 $(2,762,847) $ 1,476,825 $ 32,789 $ 768,088
========== ========== ========== ========== ==========
Net income (loss)
available to
common stockholders $ 2,215,528 $(2,762,847) $ 1,476,825 $ 32,789 $ 768,088
========== =========== ========== ========== ==========
Per share of Common Stock:
Basic $ .22 $ (.28) $ .17 $ .01 $ .10
Diluted $ .21 $ (.28) $ .14 $ .01 $ .09
Weighted average
common shares outstanding -
Basic 9,878,129 9,725,116 8,788,734 7,767,224 8,044,622
========= ========= ========= ========= =========
Weighted average common and
common equivalent shares
outstanding -
Diluted 11,262,708 9,725,116 10,351,032 8,623,538 8,380,906
========== ========= ========== ========= =========
Financial condition:
Total assets $17,059,184 $11,543,734 $11,971,934 $8,742,039 $10,486,967
Total liabilities $ 7,429,046 $ 5,320,107 $ 4,732,467 $4,625,260 $ 6,886,021
Common Stock issued
with guaranteed
selling price $ 36,500 $ 36,500 $ 346,500 $ 421,500 $ -
Stockholders' equity $ 9,593,638 $ 6,187,127 $ 6,892,967 $3,695,279 $ 3,600,946
08
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations
Results of Operations - Three Years Ended December 31, 1999
Fiscal 1999 was the Company's eleventh consecutive year of record
revenues, posting a 38% increase over 1998 record levels. Total revenues
exceeded $57,585,000, a milestone for the Company. The Company benefited along
with the rest of the brokerage industry as fiscal 1999 continued the extremely
favorable market trends, particularly rising transaction volume, liquidity, and
investor demand for technology related stocks. Every revenue category realized
higher revenues when compared with the prior two years, except for investment
banking.
Year Ended December 31,
1999 1998 1997
(000's) % Change (000's) % Change (000's)
Revenues:
Commissions $ 40,517 32 $ 30,741 14 $ 27,018
Principal transactions 14,001 59 8,796 21 7,258
Investment banking 439 ( 43) 767 (46) 1,433
Insurance recovery -- -- -- (100) 650
Legal settlement recovery 500 -- -- -- --
Interest and other income 2,128 35 1,572 14 1,384
----- -- ----- -- -----
$ 57,585 38 $ 41,876 11 $ 37,743
====== == ====== == ======
The rise in revenues in fiscal years 1999 and 1998 resulted from
increased commissions from general securities transactions (stocks, bonds and
options). The increase is primarily attributable to the addition of new
affiliated representatives, as well as an increase in the production from
existing affiliated representatives on a year-to-year comparative basis.
The largest increase as a percentage of revenues over 1998 resulted
from increased principal transactions and trading profits in equity securities.
Revenues from these areas increased 59% in 1999 when compared with 1998. Several
of the firm's proprietary equity traders achieved significantly improved
profitability in 1999.
Investment banking revenues declined in 1999 as compared to the last
two years, particularly 1997, when FMSC earned fees from the underwriting of an
initial public offering for Pacific Health Laboratories, Inc. Underwriting
activity resumed in 2000 with the completion of the initial public offering for
Jeremy's MicroBatch Ice Cream, Inc. (See Business-"Recent Developments").
Year Ended December 31,
1999 1998 1997
(000's) % Change (000's) % Change (000's)
Expenses:
Commissions, employee
compensation and
benefits $ 42,138 33 $ 31,766 19 $26,785
Clearing and floor
brokerage 4,110 12 3,675 22 3,022
Communications and
occupancy 2,697 5 2,557 37 1,860
Legal matters and
related costs 1,395 (41) 2,377 64 1,452
Write-down of Note
receivable - Global
Financial Corp. 100 (94) 1,775 -- --
Loss on lease
settlements 600 50 100 -- --
Other operating expenses 3,546 24 2,862 41 2,094
Interest 166 27 131 54 85
------ -- ------ -- ------
Total expenses $ 54,752 21 $ 45,243 28 $ 35,298
====== == ======= == ========
09
During 1999, the Company paid commissions, employee compensation and
employee benefits of $42,138,000 (73% of total revenues) as compared to
$31,766,000 (76% of total revenues) in 1998. This category includes salaries,
commission expense, and benefits for salaried employees. Commissions paid to
registered representatives for fiscal 1999 totaled $35,698,000 (62% of total
revenues) compared to $26,622,000 (64% of total revenues) in 1998, and accounted
for more than $9,000,000, or 34% of the total increase in this expense category
over fiscal 1998. The dollar increase is primarily due to the increase in
commission revenues. The decrease in the percentage of total revenues, from 64%
to 62%, reflects the higher trading profits, which are typically paid out at a
lower rate than sales commissions.
For 1999, the Company paid salaries and benefits of $6,440,000 for
management, operations and clerical personnel, as compared to $5,144,000 in 1998
and $4,428,000 in 1997. During the second half of 1999, the Company hired
additional management and support staff for various departments including sales,
compliance and operations.
Clearing costs increased by $435,000 from 1998 to 1999 and by $653,000
from 1997 to 1998. The dollar increase in 1999 reflects the increased volume in
securities transactions, which carry clearance and floor brokerage charges.
Clearing costs as a percentage of revenues have decreased over the period from
1997 to 1999, due in part to volume discounts negotiated with the Company's
clearing firm.
Communications and occupancy costs rose by $140,000 in 1999, an
increase of 5% from 1998. The largest increase in this category is in the area
of technology support and software enhancements. In addition, the Company
contracted with a data management consultant to upgrade the existing database
and provide management with better information retrieval systems and reporting
capabilities.
Rent expense for 1999 remained relatively constant, as the first full
annual effect of the headquarters lease was realized in 1999, with no additional
leasehold obligations incurred during the year. A new seven-year master lease
agreement that became effective February 1998 expanded the Company's facilities
to 32,442 gross rentable square feet at a monthly rental of $52,000 through
January 2005. The lease also contains a six-year renewal option providing for a
base rental payment of approximately $65,000 per month.
Legal matters and related costs include payments to defend and settle
customer claims, provisions for pending litigation and general corporate
matters. These costs totaled $1,395,000 in 1999, down 41% from 1998 and 4% from
1997. Settlement of pending matters and a reduction in new legal matters
contributed to the decline, as did enhancements to the Company's compliance and
supervisory systems.
In December 1999, the Company agreed to accept a $500,000 cash payment
in settlement of an arbitration with another broker-dealer against which it had
filed a claim arising out of the trading activities of a former affiliate of the
Company. The settlement was received in February 2000.
The Company has also filed suit against one of its insurers to compel
coverage of several settled claims. There can be no assurance that the Company
will be successful in its efforts to recover additional funds from its insurers
on settled claims, or that monetary losses, if any, from future claims,
settlements or adverse judgments will be covered under the Company's existing
insurance policies.
During 1997 and 1998, the Company, through its wholly-owned subsidiary
Montauk Advisors Inc., ("MAI"), made various loans to Global Financial Corp.
("Global"). These loans have a balance as of December 31, 1999 of $2,207,891
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. The notes are guaranteed by Global, FemCom Systems,
Inc., ("FCS"), Biblio, Inc. ("Biblio") and the shareholder of FCS and Biblio.
The notes are partially collateralized by mortgage liens on real estate owned by
the principal shareholder of FCS and Biblio, a pledge of the shares of Global
and FCS, and various liens on the assets of FCS.
10
During 1998, the Company undertook a full review of the Global loans to
evaluate their collectability, and determined that, based on various events and
circumstances, including the default status of the loans, the insolvency of
Global and FCS, and steadily declining collections on the lease portfolio
serviced by Global, the loans to Global have been impaired. Accordingly, the
Company recorded an impairment loss of $1,775,000 in its financial statements
for 1998, and increased the reserve by $100,000 in 1999 after further review.
The loan reserve reflects management's best estimate of the extent of the loan
impairment based on available current information, including the amount and
value of the collateral. Eventual outcomes could differ from the estimated
amount.
Other operating expenses increased from $2,862,000 in 1998 to
$3,546,000 in 1999. The increase is due primarily to higher bad debts,
depreciation expense increased sales and marketing initiatives.
The Company's effective tax rate in 1999 was 19% as compared to (18)%
in 1998 and 40% in 1997. The rate in 1999 was lower than expected because income
tax expense was offset by the reversal of a valuation allowance established
against deferred tax assets (principally reserves and net operating losses) in
1998. The rate in 1998 was lower than expected because the existence of
uncertainties regarding the resolution of various pending claims and the
previously discussed Global matter led management to record a valuation
allowance of $731,000 to offset deferred tax benefits. In 1999, based on an
assessment of all available evidence, including improved operating results,
management concluded that it was more likely than not that deferred tax assets
as of December 31, 1999 would be realized. Accordingly, the balance of the
valuation allowance at December 31, 1999 ($542,000) was reversed.
Liquidity and Capital Resources
The Company maintains a highly liquid balance sheet with more than 64%
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 inventories 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 from operating activities during the current year provided
cash of $923,000. Cash was generated primarily from net income of $2,283,000,
the increase in commissions owed to brokers of $1,179,000 and non-cash
adjustments of $1,224,000. Non-cash adjustments consisted of depreciation
charges, amortization of stock option compensation, non-cash losses and loan
reserves. These increases were partially offset by an increase in the amount
owed from the clearing firm of $3,586,000.
In 1998 and 1997, the Company realized tax benefits of $116,000 and
$723,000, respectively, relating to the exercise of stock options during the
fiscal year. (See Notes to the consolidated financial statements). These tax
benefits are available to reduce actual corporate tax liabilities. Under
applicable accounting rules, such benefits are reported as an increase in
stockholders' equity rather than as an item of income.
Investing activities required cash of $180,000 during 1999. Additions
to fixed assets consumed $658,000, primarily for the purchase of computers,
office furniture and equipment. Issuance of notes receivable to brokers and
affiliates required $207,000 while the collection of Global leases receivable
provided cash of $619,000. The Global leases were assigned to the Company in
various settlement transactions with Global customers during 1999.
MAI made loans to Global, net of repayments, of $1,497,000 in 1998, and
additional net loans to Global of $111,000 in 1999. During 1999, the Company
discontinued its financial support of Global through loan advances, and
formulated a final resolution of the Global lease issue in order to minimize
further economic losses. In 1999, the Company completed a private offering of
Series A Convertible Preferred Stock with the majority of the Global lease
investors. Under the terms of the offering, each Global lease investor who
participated in the offering received one share of Preferred Stock in exchange
for every $5 of lease investment value that the investor was entitled to receive
from Global after certain adjustments. Each share of the Preferred Stock is
convertible into two shares of the Company's Common Stock and pays a quarterly
dividend of $.75 per Preferred Share.
The Company also exchanged $235,282 in cash payments, 25,000 Common
Stock purchase warrants valued at $27,382, and convertible note principal of
$690,526 for the assignment of Global leases. (See Notes to the consolidated
financial statements).
11
Financing activities used cash of $670,000 in 1999. A total of $223,000
was used to repurchase 180,500 shares 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
$340,000 and dividend payments to preferred stockholders of $68,000. A total of
$205,000 was received from the exercise of 234,450 stock options by various
individuals during the year.
At December 31, 1999, the Company's broker-dealer subsidiary had net
capital of $3,992,000, which was $3,577,000 in excess of its required net
capital of $415,000, and the ratio of aggregate indebtedness to net capital was
1.74 to 1.
The Company has various bank notes totaling $149,000. These notes bear
interest at the prime rate (8.5% at December 31, 1999), and are collateralized
by equipment owned by the Company. The loans are payable in monthly installments
of $8,000.
The Company has both convertible and subordinated debt. In 1998, the
Company issued convertible promissory notes in the aggregate amount of $570,000
to a private investor and his affiliated entities in connection with a Global
lease settlement. Interest is payable semiannually at 10% per annum. Principal
is due in October 2003. One note for $300,000 will be paid from the proceeds of
a sinking fund into which the Company is required to contribute 20% of the
note's original outstanding principal ($60,000) on or before each annual note
anniversary date. The sinking fund balance at December 31, 1999 was $60,000,
which is included in Other Assets in the accompanying Statement of Financial
Condition. The notes are callable at the Company's option upon thirty days'
written notice at a redemption price of 105% of outstanding principal plus
accrued interest. The noteholder has the right to convert the notes into up to
380,000 shares of the Company's common stock based on a conversion price of
$1.50 per share.
In 1999, the Company issued additional convertible notes in the original
aggregate amount of $690,526 to several private investors in connection with a
Global lease settlement. The notes are payable in thirty-six monthly
non-interest bearing installments of $16,404, plus balloon payments of $112,000,
which include interest of $12,000 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 is being amortized over the note
terms using the interest method. The notes are convertible into 345,263 common
shares of the Company's common stock based on a conversion price of $2.00. Once
the underlying 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.
As of December 31, 1999, the Company had an aggregate of $150,000 of
subordinated notes outstanding. The notes are payable in annual installments of
$50,000 plus interest at 8% per annum. The notes are subordinated to the claims
of FMSC's general creditors under a subordination agreement approved by the
NASDR.
Year 2000 Issue
In 1999 the Company completed its Year 2000 ("Y2K") compliance efforts.
The Y2K issue was the result of computer programming designs which could have
caused computer programs to malfunction after the turn of the millennium by
misidentifying the year "2000" as "1900".
Through the date of this report there have been no material failures or
disruptions of systems or services at the Company, (or at the Company's clearing
firm upon which the Company is substantially reliant to process its securities
transactions), attributable to the Y2K issue.
Impact of Inflation
Management of the Company believes that the impact of inflation has an
effect upon the amount of capital generally available for investment purposes
and also may affect the attitude or willingness of investors to buy and sell
securities. The nature of the business of the Company's broker-dealer subsidiary
and the securities industry in general is directly affected by national and
international economic and political conditions, broad trends in business and
finance and volatility of interest rates, changes in and uncertainty regarding
tax laws, and substantial fluctuation in the volume and price levels of
securities transactions and the securities markets. To the extent inflation
results in higher interest rates and has other adverse effects on the securities
markets and the value of securities held in inventory, it may adversely affect
the Company's financial position and results of operations.
12
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.
Effects of Recently Issued Accounting Pronouncement
In June 1998, the Financial Accounting Standards Board issued SFAS No.
133 "Accounting for Derivative Instruments and Hedging Activities", which
requires the recognition of derivatives on the statement of financial condition
at fair value. SFAS No. 133 must be adopted effective January 1, 2001. The
Company does not currently engage in significant derivative or hedging
activities; accordingly, the adoption of SFAS No. 133 is not expected to have a
material impact on the Company's financial position or results of operations.
Market Risk
During fiscal 1997 the Securities and Exchange Commission issued market
risk disclosure requirements to enhance disclosures of accounting policies for
derivatives and other financial instruments and to provide quantitative and
qualitative disclosures about market risk inherent in derivatives and other
financial instruments. The Company manages risk exposure involving various
levels of management. Position limits in trading and inventory accounts are
established and monitored on an ongoing basis. Current and proposed
underwriting, corporate development and other commitments are subject to due
diligence reviews by senior management, as well as professionals in the
appropriate business and support units involved.
The Company maintains inventories as detailed in Note 3 to the
Consolidated Financial Statements. The fair value of these securities at
December 31, 1999, was $3,476,000 in long positions and $180,000 in short
positions. The Company performed an analysis of the Company's financial
instruments and assessed the related risk and materiality in accordance with the
rules. Based on this analysis, in the opinion of management, the market risk
associated with the Company's financial instruments at December 31, 1999 is not
expected to have a material adverse impact on the consolidated financial
position or results of operation of the Company.
Item 8. Financial Statements
See Financial Statements attached hereto.
Item 9. Disagreements on Accounting and Financial Disclosure
Not Applicable.
13
PART III
Item 10. Directors and Executive Officers
The Directors and Executive Officers of the Company and its
subsidiaries are as follows:
Name Age Position
Herbert Kurinsky 68 Director, President and Chief Executive
Officer of FMFC and of FMSC and Registered
Options Principal of FMSC
William J. Kurinsky 39 Director, Vice President, Chief
Operating and Chief Financial Officer
and Secretary of FMFC and of FMSC and
Financial/Operations Principal of FMSC
Robert I. Rabinowitz, Esq. 42 General Counsel, FMFC, Chief
Administrative Officer, Vice President
and General Securities Principal of FMSC
Norma Doxey 60 Director, Vice President of Operations, FMSC
Ward R. Jones, Jr. 69 Director
David I. Portman 59 Director
The Company's Certificate of Incorporation provides for the
classification of the Board of Directors into three classes of Directors, each
class as nearly equal in number as possible but not less than one Director, each
director to serve for a three-year term, staggered by class. The Certificate of
Incorporation further provides that a Director or the entire Board of Directors
may be removed only for cause and only by the affirmative vote of the holders of
at least 70% of the combined voting power of the Company's voting stock, with
vacancies on the Board being filled only by a majority vote of the remaining
Directors then in office. "Cause" is defined as the willful failure of a
director to perform in any substantial respect such Director's duties to the
Corporation (other than any such failure resulting from incapacity due to
physical or mental illness), willful malfeasance by a Director in the
performance of his duties to the Corporation which is materially and
demonstrably injurious to the Corporation, the commission by a Director of an
act of fraud in the performance of his duties, the conviction of a Director for
a felony punishable by confinement for a period in excess of one year, or the
ineligibility of a Director for continuation in office under any applicable
rules, regulations or orders of any federal or state regulatory authority.
All officers serve at the discretion of the Board of Directors. Family
relationships exist among the following officers and directors: Mr. Herbert
Kurinsky is the uncle of Mr. William J. Kurinsky. Mr. Robert I. Rabinowitz is
the brother-in-law of Mr. William J. Kurinsky.
Herbert Kurinsky became a Director and the President of the Company on
November 16, 1987. Mr. Kurinsky is a co-founder of First Montauk Securities
Corp. and has been its President, one of its Directors and its Registered
Options Principal since September of 1986. From March 1984 to August 1986, Mr.
Kurinsky was the President of Homestead Securities, Inc., a New Jersey
broker/dealer. From April 1983 to March 1984, Mr. Kurinsky was a branch office
manager for Phillips, Appel & Waldon, a securities broker/dealer. From February
1982 to March 1983, Mr. Kurinsky was a branch office manager for Fittin,
Cunningham and Lauzon, a securities broker/dealer. From November 1977 to
February 1982, he was a branch office manager for Advest Inc., a securities
broker/dealer. Mr. Kurinsky received a B.S. degree in economics from the
University of Miami, Florida in 1954.
William J. Kurinsky became Vice President, a Director and Financial and
Operations Principal of the Company on November 16, 1987. He is a co-founder of
First Montauk Securities and has been one of its Vice Presidents, a Director and
its Financial/Operations Principal since September of 1986. Prior to that date,
Mr. Kurinsky was Treasurer, Chief Financial Officer and Vice President of
Operations of Homestead Securities, Inc., a securities broker/dealer. Mr.
Kurinsky received a B.S. from Rutgers University in 1984. He is the nephew of
Herbert Kurinsky.
Robert I. Rabinowitz, Esq. is General Counsel of the Company since 1987. He
concurrently served as General Counsel of First Montauk Securities from 1986
until 1998 when a new general counsel was named. Thereafter, he became the Chief
Administrative Officer of FMSC as well as a General Securities Principal. From
January 1986 until November 1986, he was an associate attorney for Brodsky,
Greenblatt & Renahan, a private practice law firm in Rockville, Maryland. Mr.
Rabinowitz is an attorney at law licensed to practice in New Jersey, Maryland
and the District of Columbia, and is a member of the Board of Arbitrators for
the National Association of Securities Dealers, Department of Arbitration. Mr.
Rabinowitz's wife is a niece of Mr. Herbert Kurinsky and a sister of Mr. William
Kurinsky.
14
Norma L. Doxey has been a Director of the Company since December 6, 1988.
Ms. Doxey has been a Vice President of Operations and a Registered
Representative with First Montauk Securities Corp. since September 1986. From
August through September, 1986, she was operation's manager and a Registered
Representative with Homestead Securities, Inc. From July 1984 through August
1985 she held the same position with Marvest Securities.
Ward R. Jones, Jr. has been a director of the Company since June 1991. From
1955 through 1990, Mr. Jones was employed by Shearson Lehman Brothers as a
registered representative, eventually achieving the position of Vice President.
Mr. Jones is currently a registered representative of First Montauk Securities
Corp., but does not engage in any securities business.
David I. Portman has been a director of the Company since June 15, 1993.
From 1978 to the present, Mr. Portman served as the President of Triad Property
Management, Inc., a private corporation which builds, invests in and manages
real estate properties in the State of New Jersey. Mr. Portman was a Director of
Ultra Med, Inc. from 1986 to 1991, a high tech medical equipment manufacturer.
Mr. Portman also serves as a director and officer of Pacific Health
Laboratories, Inc., a position he has held since August 1995. In 1997, FMSC
underwrote an initial public offering of the common stock of Pacific Health
Laboratories, Inc., and is currently a market maker in the stock.
Significant Employees
Mark D. Lowe, 41, has been President of Montauk Insurance Services, Inc.
since October 1998. From 1982 to 1998 Mr. Lowe was a Senior Consultant with
Congilose & Associates, a financial services firm specializing in insurance and
estate planning. Mr. Lowe became a Certified Financial Planner (CFP) in July
1991. Mr. Lowe attended Ocean County College in Toms River, NJ. Mr. Lowe is the
Treasurer of the Estate and Financial Planning Council of Central New Jersey.
Seth Rosen, 47, has been President of Century Discount Investments
since September 1998. From December 1997 to June 1998, Mr. Rosen served as an
executive consultant with Cowen & Co. From 1994 to 1997, Mr. Rosen served as a
Managing Director of National Discount Brokers, a division of Sherwood
Securities.
Certain Reports
No person who, during the fiscal year ended December 31, 1999, was a
Director, officer or beneficial owner of more than ten percent of the Company's
Common Stock (which is the only class of securities of the Company registered
under Section 12 of the Securities Exchange Act of 1934 (the "Act") (a
"Reporting Person") failed to file on a timely basis, reports required by
Section 16 of the Act during the most recent fiscal year or prior years. The
foregoing is based solely upon a review by the Company of Forms 3 and 4 during
the most recent fiscal year as furnished to the Company under Rule 16a-3(d)
under the Act, and Forms 5 and amendments thereto furnished to the Company with
respect to its most recent fiscal year, and any representation received by the
Company from any reporting person that no Form 5 is required.
15
Item 11. Executive Compensation
Summary of Cash and Certain Other Compensation
The following provides certain information concerning all Plan and
Non-Plan (as defined in Item 402 (a)(ii) of Regulation S-K) compensation awarded
to, earned by, paid or accrued by the Company during the years ended December
31, 1999, 1998 and 1997 to each of the named executive officers of the Company.
SUMMARY COMPENSATION TABLE
Annual Compensation Long Term
Compensation
Securities
Underlying
Name & Principal Other Annual Options/ SARs
Position Year Salary Bonus Compensation Granted(1)
- - --------- ---- ------ ----- ------------ ----------
Herbert Kurinsky 1999 $232,925 $100,000 $ 925(2) 0
Chairman, Chief 1998 $175,000 $0 $10,096(2) 100,000
Executive Officer (3) 1997 $168,269 $0 $ 2,724(2) 50,000
William J. Kurinsky 1999 $232,925 $100,000 $ 1,925(4) 0
Vice President, 1998 $175,000 $0 $10,221(4) 100,000
Chief Operating and 1997 $158,173 $0 $ 1,534(4) 75,000
Financial Officer
and Secretary (5)
Robert I. Rabinowitz 1999 $125,000 $ 25,000 $ 1,200(6) 0
General Counsel, FMFC, 1998 $125,000 $ 15,000 $ 295(6) 100,000
Chief Administrative 1997 $111,154 $ 10,000 $ 5,676(6) 75,000
Officer, FMSC (7)
- - ----------------------------
1) In 1997, the Board of Directors authorized a grant to purchase 50,000,
75,000 and 75,000 shares of the Company's Common Stock each to Herbert
Kurinsky, William J. Kurinsky and Robert I. Rabinowitz at exercise prices
of $.96, $1.05 and $1.0625, respectively. These options have vested and are
exercisable until January 14, 2002. In 1998, the Board of Directors
authorized an additional grant to purchase 100,000 shares at exercise
prices of $1.9375, $2.13 and $1.9375 to Herbert Kurinsky, William J.
Kurinsky and Robert I. Rabinowitz, respectively. See "Aggregated
Options/Sar Exercises in Last Fiscal Year and Fy-End Option/Sar Values."
2) Includes (i) for 1999, automobile allowance of $925; (ii) for 1998,
vacation pay of $10,096; (iii) for 1997, commissions of $2,724.
3) Mr. Herbert Kurinsky is the beneficial owner of 11,518 shares of the
Company's Common Stock as of December 31, 1999, which shares had a market
value of $14,628 as of that date, without giving effect to the diminution
in value attributable to the restriction on said shares.
4) Includes: (i) for 1999, automobile allowance of $1,925; (ii) for 1998,
commissions of $125 and vacation pay of $10,096; (iii) for 1997,
commissions of $1,534.
5) Mr. William Kurinsky is the beneficial owner of 1,085,823 shares of the
Company's Common Stock as of December 31, 1999, which shares had a market
value of $1,378,995 as of that date, without giving effect to the
diminution in value attributable to the restriction on said shares.
6) Includes (i) automobile allowance of $1,200 for 1999; (ii) commissions of
$295 in 1998; (iii) commissions of $5,676 in 1997.
7) Mr. Robert I. Rabinowitz is the beneficial owner of 29,500 shares of the
Company's Common Stock as of December 31, 1999, which shares had a market
value of $37,465 as of that date, without giving effect to the diminution
in value attributable to the restriction on said shares.
16
Compensation of Directors
The Company pays directors, who are not employees of the Company, a
retainer of $250 per meeting of the Board of Directors attended and for each
meeting of a committee of the Board of Directors not held in conjunction with a
Board of Directors meeting. Directors employed by the Company are not entitled
to any additional compensation as such. During fiscal year 1999, the Board of
Directors met on three occasions and all directors were present.
Committees of the Board of Directors
The Board of Directors has established an Audit Committee
comprised of Ward R. Jones and David Portman. The Audit Committee met on one
occasion during fiscal year 1999. The Audit Committee reviews (i) the Company's
audit functions, (ii) the finances, financial condition, and interim financial
statements of the Company with management, and (iii), the year end financial
statements of the Company with the Company's independent auditors. Members of
the Audit Committee do not receive additional compensation for such service.
OPTION/SAR GRANTS IN LAST FISCAL YEAR
There were no option grants to the executive officers named below
during the fiscal year ended December 31, 1999.
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR
AND FY-END OPTION/SAR VALUES
Value of
Shares Number of Unexercised
Acquired Unexercised In-the-money
on Value Options as of Options at
Name Exercise Realized(1) December 31,1999 December 31,1999(2)
Exercisable/Unexercisable Exercisable/Unexercisable
Herbert Kurinsky 40,000 $ 18,000 350,000/0 $139,500 /$0
William J. Kurinsky 40,000 $ 18,000 375,000/0 $104,000 /$0
Robert I. Rabinowitz 20,000 $ 9,000 210,000/0 $25,013 /$0
(1) Based upon the closing bid price of the Company's Common Stock on
December 17, 1999 ($1.20 per share), the date that each of the options
was exercised, less the exercise price for the aggregate number of
shares subject to the options.
(2) Based upon the closing bid price of the Company's Common Stock on December
31, 1999 ($1.27 per share), less the exercise price for the aggregate
number of shares subject to the options.
Employment Agreements
In January 1996, the Company entered into new three-year employment
contracts with Herbert Kurinsky, as President and William J. Kurinsky, as
Executive Vice President. The contracts provide for base salaries of $175,000
for the first year of the agreement for each, increasing in each case at the
rate of 10% per year. Each will also be entitled to receive a portion of a bonus
pool consisting of 10% of the pre-tax profits of the Company, to be determined
by the executive management (e.g. Herbert Kurinsky and William J. Kurinsky). The
bonus pool would require a minimum of $500,000 pretax profit per year in order
to become effective. The agreements have been renewed for an additional year.
Each is also entitled to receive commissions at the same rate as paid to other
non-affiliate registered representatives of the Company. They are also entitled
to purchase from FMSC, up to 20% of all underwriters and/or placement agent
warrants or options which are granted to FMSC upon the same price, terms and
conditions afforded to FMSC as the underwriter or placement agent. Each employee
also receives health insurance benefits and life insurance as generally made
available to regular full-time employees of the Company, and reimbursement for
expenses incurred on behalf of the Company and the use of an automobile, or in
the alternative, an automobile allowance. The contracts also provide for
severance benefits equal to three times the previous year's salary in the event
either of the employees is terminated or their duties significantly changed
after a change in management of the Company as defined in the agreement.
During the 1999 fiscal year, the Board of Directors passed a resolution
authorizing the continuation of the employment agreements with Herbert Kurinsky
and William J. Kurinsky for one (1) year through the end of 1999.
17
Incentive Stock Option Plan
In 1992, the Company adopted the 1992 Incentive Stock Option Plan (the
"1992 Plan") which provides for the grant of options to purchase up to 6,000,000
shares of the Company's Common Stock by employees of the Company and
consultants. Under the terms of the Plan, options granted thereunder may be
designated as options which qualify for incentive stock option treatment
("ISOs") under Section 422A of the Code, or options which do not so qualify
("Non-ISOs").
The Plan is administered by the Board of Directors which has the
discretion to determine the eligible employees to whom, and the times and the
price at which, options will be granted; whether such options shall be ISOs or
Non-ISOs; the periods during which each option will be exercisable; and the
number of shares subject to each option. The Board has full authority to
interpret the Plan and to establish and amend rules and regulations relating
thereto.
Under the Plan, the exercise price of an option designated as an ISO
shall not be less than the fair market value of the Common Stock on the date the
option is granted. However, in the event an option designated as an ISO is
granted to a ten percent stockholder (as defined in the Amended Plan) such
exercise price shall be at least 110% of such fair market value. Exercise prices
of Non-ISO options may be less than such fair market value. The aggregate fair
market value of shares subject to options granted to a participant which are
designated as ISOs which become exercisable in any calendar year may not exceed
$100,000.
The Board may, in its sole discretion, grant bonuses or authorize loans
to or guarantee loans obtained by an optionee to enable such optionee to pay any
taxes that may arise in connection with the exercise or cancellation of an
option. Unless sooner terminated, the Plan will expire in 2002. To date, options
to purchase a total of 5,157,500 shares of the Company's Common Stock have been
issued under the 1992 Plan.
Director Plan
In September 1992, the Company adopted the Non-Executive Director Stock
Option Plan (the "Director Plan"). The Director Plan provides for issuance of a
maximum of 1,000,000 shares of Common Stock upon the exercise of stock options
granted under the Director Plan. Options are granted under the Director Plan
until 2002 to non-executive directors who are not full time employees of the
Company or any of its subsidiaries. The Director Plan provides that each
non-executive director will automatically be granted an option to purchase
20,000 shares each September 1, provided such person has served as a director
for the 12 months immediately prior to such September 1st.
The exercise price for options granted under the Director Plan shall be
100% of the fair market value of the Common Stock on the date of grant. Until
otherwise provided in the Stock Option Plan the exercise price of options
granted under the Director Plan must be paid at the time of exercise, either in
cash, by delivery of shares of Common Stock of the Company or a combination of
both. The term of each option commenced on the date it is granted and unless
terminated sooner as provided in the Director Plan, expires five years from the
date of grant. The Director Plan is administered by a committee of the board of
directors composed of not fewer than three persons who are officers of the
Company (the "Committee"). The Committee has no discretion to determine which
non-executive director will receive options or the number of shares subject to
the option, the term of the option or the exercisability of the option. However,
the Committee will make all determinations of the interpretation of the Director
Plan. Options granted under the Director Plan are not qualified for incentive
stock option treatment. To date, a total of 340,000 options have been granted to
the Company's Non-Executive members of the Board of Directors.
Senior Management Plan
In 1996, the Company adopted the 1996 Senior Management Incentive Plan
(the "Management Plan"). The Management Plan provides for the issuance of up to
2,000,000 shares of Common Stock either upon issuance of options issued under
the Plan or grants of restricted stock or incentive stock rights. Awards may be
granted under the Management Plan to executive management employees by the Board
of Directors or a committee of the board, if one is appointed for this purpose.
The Management Plan provides for four types of awards: stock options, incentive
stock rights, stock appreciation rights ("SARs"), and restricted stock purchase
agreements. The stock options granted under the Management Plan can be either
ISOs or non-lSOs similar to the options granted under the Employee Stock Option
Plan, except that the exercise price of non-lSOs shall not be less than 85% of
the fair market value of the Common Stock on the date of grant. Incentive stock
rights consist of incentive stock units equivalent to one share of Common Stock
in consideration for services performed for the Company. If services of the
holder terminate prior to the incentive period, the rights become null and void
unless termination is caused by death or disability. Stock appreciation rights
allow a Grantee to receive an amount in cash equal to the difference between the
fair market value of the stock and the exercise price, payable in cash or shares
of Common Stock. The Board or committee may grant limited SARs, which become
exercisable upon a "change of control" of the Company. A change of control
18
includes the purchase by any person of 25% or more of the voting power of the
Company's outstanding securities, or a change in the majority of the Board of
Directors.
Awards granted under the Management Plan are also entitled to certain
acceleration provisions that cause awards granted under the Plan to immediately
vest in the event of a change of control or sale of the Company. Awards under
the Management Plan may be made until 2006. To date the Company has granted a
total of 1,745,000 options under the Senior Management Plan.
Item 12. Security Ownership of Certain
Beneficial Owners and Management
The following table sets forth, as of March 30, 2000, the number and
percentage of outstanding shares of Common Stock beneficially owned by each
person known by the Company to own beneficially more than 5% of the Company's
outstanding shares of Common Stock and Common Stock Warrants, by each director
of the Company, and by all directors and officers of the Company as a group.
Directors, Officers Amount and Percentage
and 5% Shareholders (1) of Beneficial Ownership (1)
- - ----------------------- ---------------------------
Number of Shares Percent
---------------- -------
Herbert Kurinsky 486,518(2) 5%
Parkway 109 Office Center
328 Newman Springs Road
Red Bank, NJ 07701
William J. Kurinsky 1,945,823(3) 18%
Parkway 109 Office Center
328 Newman Springs Road
Red Bank, NJ 07701
Robert I. Rabinowitz, Esq. 366,999(4) 4%
Parkway 109 Office Center
328 Newman Springs Road
Red Bank, NJ 07701
Ward R. Jones 110,000(5) 1%
7 Leda Lane
Guilderland, NY 12084
Norma Doxey 72,400(6) 1%
Parkway 109 Office Center
328 Newman Springs Road
Red Bank, NJ 07701
David I. Portman 199,800(7) 2%
300 Ocean Avenue, Apt. 6A
Long Branch, NJ 07740
All Directors and 3,181,540 27%
Officers as a group
(7 persons in number)
- - ---------------------
(1) Unless otherwise indicated below, each director, officer and 5%
shareholder has sole voting and sole investment power with respect to
all shares that he beneficially owns.
(2) Includes vested and presently exercisable options of Mr. Herbert
Kurinsky to purchase 475,000 shares of Common Stock.
19
(3) Includes vested and presently exercisable options of Mr. William J.
Kurinsky to purchase 500,000 shares of Common Stock, and 120,000 Class
A Warrants, 120,000 Class B Warrants and 120,000 Class C Warrants.
(4) Includes 270,000 shares of Common Stock reserved for issuance upon the
exercise of vested and presently exercisable stock options, 50,000 of
which are owned by Mr. Rabinowitz's wife, of which he disclaims
beneficial ownership, and 2,000 shares are owned by his children. Mr.
Rabinowitz also owns 5,833 Class A Warrants, 5,833 Class B Warrants and
5,833 Class C Warrants.
(5) Includes 110,000 shares of Common Stock reserved for issuance upon the
exercise of vested and presently exercisable stock options.
(6) Includes 60,000 shares of Common Stock reserved for issuance upon the
exercise of 32,000 vested and presently exercisable stock options and
28,000 non-vested stock options.
(7) Includes 100,000 shares of Common Stock reserved for issuance upon the
exercise of vested and presently exercisable stock options, 16,600
Class A Warrants, 16,600 Class B Warrants and 16,600 Class C Warrants.
NOTE: All Class A Warrants are exercisable at $3.00 per share for a
period of three (3) years from February 17, 1998.
All Class B Warrants are exercisable at $5.00 per share for
a period of five (5) years from February 17, 1998.
All Class C Warrants are exercisable at $7.00 per share for a
period of seven (7) years from February 17, 1998.
Item 13. Certain Relationships and Related Transactions
For information concerning the terms of the employment agreements entered
into between the Company and Messrs. Herbert Kurinsky and William J. Kurinsky,
see "Executive Compensation".
20
PART IV
Item 14. Exhibits, Financial Statements
and Reports on Form 8-K
(A) 1. Financial Statements
See Financial Statements Attached Hereto.
2. Exhibits
Incorporated by reference to the Exhibit Index at the end of this
report.
(B) Reports on Form 8-K
During the last quarter of the period covered by this Report, there
were no reports filed on Form 8-K.
21
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Company has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
FIRST MONTAUK FINANCIAL CORP.
By /s/ Herbert Kurinsky
----------------------------
Herbert Kurinsky, President
Dated: March 30, 2000
Pursuant to the requirements of the Securities Exchange Act of 1934,
this Report has been signed below by the following persons on behalf of the
Company and in the capacities and on the dates indicated.
/s/ Herbert Kurinsky March 30, 2000
- - ------------------------------------
Herbert Kurinsky
President, Chief Executive
Officer and Director
/s/ William J. Kurinsky March 30, 2000
- - ------------------------------------
William J. Kurinsky
Vice-President, Chief Operating
and Chief Financial Officer, and
Principal Accounting Officer,
Secretary and Director
/s/ Norma Doxey March 30, 2000
- - ------------------------------------
Norma Doxey, Director
/s/ Ward R. Jones, Jr. March 30, 2000
- - ------------------------------------
Ward R. Jones, Jr., Director
/s/ David I. Portman March 30, 2000
- - ------------------------------------
David I. Portman, Director
22
EXHIBITS INDEX
The exhibits designated with an asterisk (*) have previously been filed
with the Commission in connection with the Company's Registration Statement on
Form S-l, File No. 33-24696, those designated (**) have been filed with the
Company's Form 10-KSB for the fiscal year ended December 31, 1993, those
designated (***) have been previously filed with the Company's Registration
Statement on Form S-3, File No. 33-65770, and pursuant to 17 C.F.R. Sections
201.24 and 240.12b-32, are incorporated by reference to the document referenced
in brackets following the description of such exhibits. Those designated (****)
denotes exhibits which have been filed with the Company's Form 10-KSB for the
fiscal year ended December 31, 1994. Those designated (******) denotes exhibits
which have been filed with the Company's Proxy Statement dated May 30, 1996.
Those designated (*******) denotes exhibits which have been filed with the
Company's Form 10-KSB for the fiscal year ended December 31, 1996. Those
designated (*******) denotes exhibits which have been filed with the Company's
Form 10-KSB for the fiscal year ended December 31, 1997, (++) denotes
exhibits filed with the Company's Form 10-K for the fiscal year ended December
31, 1998, and (+++) denotes exhibits filed with herewith.
Exhibit No. Description
3.1* Amended and Restated Certificate of Incorporation adopted
at 1989 Special Meeting in lieu of Annual Meeting of
Shareholders.
3.2* Amended and Restated By-Laws.
10.8* Clearing Agreement between the Registrant and Wertheim
Schroder & Co., Incorporated dated January 21, 1991.
10.17******* Office Lease Agreement between First Montauk Securities
Corp. and River Office Equities dated March 5, 1997.
10.17.1++ First Amendment to Office Lease Agreement dated March 5,
1997 between First Montauk Securities Corp. and River
Office Equities dated March 3, 1998 (previously filed under
28.8 in Form 10-K for the fiscal year ended December 31,
1998).
10.18++ Employment Agreement between First Montauk Securities Corp.
and Mark Lowe dated October 15, 1998.
10.19++ Employment Agreement between First Montauk Securities Corp.
and Seth Rosen dated January 25, 1999.
11+++ Computation of Earnings Per Share.
27+++ Financial Data Schedule.
28.1* 1992 Incentive Stock Option Plan.
28.2* 1992 Non-Executive Director Stock Option Plan.
28.3****** Amended and Restated 1992 Incentive Stock Option Plan.
28.4****** Non-Executive Director Stock Option Plan - Amended and
Restated June 28, 1996
28.5****** 1996 Senior Management Incentive Stock Option Plan.
23
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders
First Montauk Financial Corp.
We have audited the accompanying consolidated statements of financial
condition of First Montauk Financial Corp. and subsidiaries as of December 31,
1999 and 1998, and the related consolidated statements of income (loss), changes
in stockholders' equity, and cash flows for each of the three years in the
period ended December 31, 1999. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of First
Montauk Financial Corp. and subsidiaries as of December 31, 1999 and 1998, and
the results of their operations and their cash flows for each of the three years
in the period ended December 31, 1999 in conformity with generally accepted
accounting principles.
Schneider Ehrlich & Associates LLP
Jericho, New York
March 3, 2000
24
FIRST MONTAUK FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
December 31,
1999 1998
ASSETS
Cash $ 686,980 $ 613,513
Due from clearing firm 6,462,346 2,876,202
Commissions receivable 345,996 250,803
Trading and investment account securities 3,475,891 2,733,260
Employee and broker receivables 452,285 598,212
Global leases receivable 824,313 170,101
Notes receivable 482,531 477,729
Due from officers 132,754 131,501
Property and equipment - net 2,193,506 2,074,470
Other assets 1,338,326 917,188
Deferred tax assets - net 664,256 700,755
------- -------
Total assets $17,059,184 $11,543,734
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Securities sold, but not yet purchased, at market $ 180,280 $ 327,047
Notes payable 1,477,428 1,014,844
Commissions payable 2,710,736 1,531,644
Accounts payable 525,809 802,497
Accrued expenses 1,072,552 905,154
Income taxes payable 510,226 --
Other liabilities 952,015 738,921
------- -------
Total liabilities 7,429,046 5,320,107
--------- ---------
Common stock issued with guaranteed selling price - no par value,
18,000 and 18,000 shares issued and outstanding, respectively 36,500 36,500
Commitments and contingencies (See Notes)
STOCKHOLDERS' EQUITY
Preferred Stock, 4,375,000 shares authorized, $.10 par
value, no shares issued and outstanding -- --
Series A Convertible Preferred Stock, 625,000 shares authorized, $.10 par value,
349,511 and -0- shares issued and outstanding, respectively; liquidation
preference: $1,747,555 34,951 --
Common Stock, no par value, 30,000,000 shares
authorized, 10,035,943 and 9,801,493 shares issued
and outstanding, respectively 5,185,818 4,980,977
Additional paid-in capital 4,080,730 2,979,831
Retained earnings (Accumulated deficit) 1,023,057 (1,192,471)
Less: Deferred compensation (508,294) (581,210)
Less: Treasury stock, at cost (180,500 shares) (222,624) --
--------- ---------
Total stockholders' equity 9,593,638 6,187,127
--------- ---------
Total liabilities and stockholders' equity $17,059,184 $11,543,734
========== ==========
See notes to consolidated financial statements.
25
FIRST MONTAUK FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (LOSS)
Years ended December 31,
1999 1998 1997
Revenues:
Commissions $40,516,625 $30,741,404 $27,018,244
Principal transactions 14,000,680 8,795,599 7,257,576
Investment banking 439,065 767,312 1,433,100
Insurance recovery -- -- 650,000
Interest and other income 2,628,246 1,572,063 1,383,713
--------- --------- ---------
57,584,616 41,876,378 37,742,633
---------- ---------- ----------
Expenses:
Commissions, employee compensation
and benefits 42,137,968 31,766,060 26,785,205
Clearing and floor brokerage 4,109,961 3,674,859 3,021,709
Communications and occupancy 2,697,433 2,557,313 1,860,350
Legal matters and related costs 1,395,008 2,377,336 1,452,001
Write-down of Notes Receivable - Global
Financial Corp. 100,000 1,775,000 --
Loss on Global lease settlements 600,416 99,899 --
Other operating expenses 3,545,308 2,862,075 2,093,670
Interest 166,104 131,215 84,695
------- ------- ------
54,752,198 45,243,757 35,297,630
---------- ---------- ----------
Income (loss) before income taxes 2,832,418 (3,367,379) 2,445,003
Provision for income taxes (income tax benefit) 549,140 (604,532) 968,178
------- -------- -------
Net income (loss) $ 2,283,278 $(2,762,847) $ 1,476,825
========= ========= =========
Net income (loss) available to common stockholders $ 2,215,528 $(2,762,847) $ 1,476,825
========= ========= =========
Per share of Common Stock:
Basic $ .22 $ (0.28) $ .17
========= ========== ==========
Diluted $ .21 $ (0.28) $ .14
========= ========== ==========
Weighted average common shares
outstanding - basic 9,878,129 9,725,116 8,788,734
========= ========= =========
Weighted average common and common
equivalent shares outstanding - diluted 11,262,708 9,725,116 10,351,032
========== ========= ==========
See notes to consolidated financial statements.
26
FIRST MONTAUK FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE PERIOD FROM JANUARY 1, 1997 TO DECEMBER 31, 1999
Series A Retained
Convertible Additional Earnings Deferred Treasury
Common Stock Preferred Stock Paid-in (Accumulated Compensa- Stock Stockholders'
Shares Amount Shares Amount Capital Deficit) tion Shares Amount Equity
Balances at January 1, 1997 8,222,481 $3,588,273 -- -- $ 243,961 $ 93,551 -- (196,802)$(230,506)$3,695,279
Exercise of stock options 973,025 662,754 -- -- -- -- -- -- -- 662,754
Exercise of common stock
purchase warrants 150,000 187,500 -- -- -- -- -- -- -- 187,500
Deferred compensation -- -- -- -- 206,871 -- (206,871) -- -- --
Amortization of deferred
compensation -- -- -- -- -- -- 21,852 -- -- 21,852
Cancellation of shares held
in treasury (196,802) (230,506) -- -- -- -- -- 196,802 230,506 --
Sale of restricted stock 12,240 23,027 -- -- -- -- -- -- -- 23,027
Transfer from temporary
equity 37,500 103,125 -- -- -- -- -- -- -- 103,125
Tax benefit related to
exercise of stock options -- -- -- -- 722,605 -- -- -- -- 722,605
Net income for the year -- -- -- -- -- 1,476,825 -- -- -- 1,476,825
--------- --------- -------- ---------- --------- --------- --------- --------- -------- -------
Balances at
December 31, 1997 9,198,444 4,334,173 -- -- 1,173,437 1,570,376 (185,019) -- -- 6,892,967
Proceeds from rights
offering -- -- -- -- 1,382,751 -- -- -- -- 1,382,751
Registration costs -- -- -- -- (236,317) -- -- -- -- (236,317)
Exercise of stock options 432,050 342,419 -- -- -- -- -- -- -- 342,419
Exercise of common stock
purchase warrants 999 4,995 -- -- -- -- -- -- -- 4,995
Deferred compensation -- -- -- -- 544,179 -- (544,179) -- -- --
Amortization of deferred
compensation -- -- -- -- -- -- 147,988 -- -- 147,988
Transfer from temporary
equity 170,000 299,390 -- -- -- -- -- -- -- 299,390
Tax benefit related to
exercise of stock options -- -- -- -- 115,781 -- -- -- -- 115,781
Net loss for the year -- -- -- -- -- (2,762,847) -- -- -- (2,762,847)
--------- --------- -------- ---------- --------- --------- --------- -------- --------- ---------
Balances at
December 31, 1998 9,801,493 4,980,977 -- -- 2,979,831 (1,192,471) (581,210) -- -- 6,187,127
Exercise of stock options 234,450 204,841 -- -- -- -- -- -- -- 204,841
Deferred compensation -- -- -- -- 122,925 -- (122,925) -- -- --
Amortization of deferred
compensation -- -- -- -- -- -- 195,841 -- -- 195,841
Repurchase of common stock -- -- -- -- -- -- -- (180,500) (222,624) (222,624)
Issuance of common stock
purchase warrants -- -- -- -- 27,382 -- -- -- -- 27,382
Issuance of preferred stock -- -- 349,511 34,951 950,592 -- -- -- -- 985,543
Payment of dividends -- -- -- -- -- (67,750) -- -- -- (67,750)
Net income for the year -- -- -- -- -- 2,283,278 -- -- -- 2,283,278
---------- --------- ------- --------- --------- --------- ------- ------- --------- ---------
Balances at
December 31, 1999 10,035,943 $5,185,818 349,511 $ 34,951 $4,080,730 $ 1,023,057 $(508,294) (180,500)$(222,624)$9,593,638
========== ========= ======= ========= ========= ========= ======= ======= ======= =========
See notes to consolidated financial statements.
27
FIRST MONTAUK FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31,
1999 1998 1997
INCREASE (DECREASE) IN CASH
Cash flows from operating activities:
Net income (loss) $ 2,283,278 $(2,762,847) $1,476,825
---------- ---------- ---------
Adjustments to reconcile net income (loss) to
net cash provided by (used in) operating activities:
Common stock issued with guaranteed
selling price -- 30,000 28,125
Tax benefit related to exercise of stock options -- 115,781 722,605
Depreciation and amortization 539,306 357,831 348,508
Amortization of deferred compensation 195,841 147,988 21,852
Loan reserves 100,000 1,775,000 69,000
Payment of common stock guarantees -- (40,610) --
Loss on Global lease settlements 388,655 -- --
Other -- 25,524 --
Increase (decrease) in cash attributable to
changes in assets and liabilities:
Due from clearing firm (3,586,144) (168,420) (842,357)
Trading and investment account securities (742,631) 924,244 (1,528,069)
Commissions receivable (95,193) (4,553) (89,837)
Due from officers (1,253) 15,190 25,287
Employee and broker receivables 145,927 328,983 (185,592)
Other assets (152,692) 22,224 (532,728)
Deferred income taxes 36,499 (664,787) 516,200
Securities sold but not yet purchased (146,767) (482,476) 681,896
Commissions payable 1,179,092 (92,672) 72,098
Income taxes payable 510,226 -- --
Accounts payable (276,689) 301,229 12,570
Accrued expenses 167,398 70,564 (749,307)
Other liabilities 378,631 67,715 213,486
------- ------ -------
Total adjustments (1,359,794) 2,728,755 (1,216,263)
---------- --------- ----------
Net cash provided by (used in)
operating activities 923,484 (34,092) 260,562
------- ------- -------
Cash flows from investing activities:
Issuance of notes receivable (207,000) (2,091,704) (788,414)
Collection of notes receivable 102,197 777,029 11,360
Payment for Global leases receivable (12,532) -- --
Collection of Global leases receivable 619,497 -- --
Additions to property and equipment (658,342) (986,315) (534,005)
Other assets (23,867) 109,344 15,087
------- ------- ------
Net cash used in investing activities (180,047) (2,191,646) (1,295,972)
------- --------- ---------
Cash flows from financing activities:
Proceeds from notes payable -- 300,000 --
Payments of notes payable (227,943) (145,925) (117,536)
Proceeds from capital lease financing -- 304,068 --
Issuance of common stock -- -- 23,027
Repurchase of common stock (222,624) -- --
Payments of capital lease (111,915) (18,621) --
28
FIRST MONTAUK FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(continued)
Payment of preferred stock dividend (67,750) -- --
Proceeds from rights offering -- 1,382,751 --
Registration costs -- (120,320) --
Proceeds from exercise of common stock
options and warrants 204,841 347,415 850,254
Other assets (244,579) -- --
-------- --------- ---------
Net cash provided by (used in)
financing activities (669,970) 2,049,368 755,745
-------- --------- -------
Net increase (decrease) in cash 73,467 (176,370) (279,665)
Cash at beginning of year 613,513 789,883 1,069,548
------- --------- ---------
Cash at end of year $ 686,980 $ 613,513 $ 789,883
======= ========= =========
Supplemental disclosures of cash flow information:
Cash paid (refunded) during the period for:
Interest $ 166,104 $ 131,215 $ 84,695
Income taxes $ 5,232 $ (223,871) $ (203,480)
Debt issued in exchange for Global leases
receivable $ 266,054 $ 170,101 $ --
Preferred stock issued in exchange for
Global leases receivable $ 985,543 $ -- $ --
Common stock purchase warrants issued in
exchange for Global leases receivable $ 27,382 $ -- $ --
Equipment financed under capital lease $ -- $ 88,132 $ --
Transfer of temporary equity to permanent capital $ -- $ 340,000 $ 103,125
See notes to consolidated financial statements.
29
NOTE 1 - NATURE OF BUSINESS
FirstMontauk Financial Corp. (the Company) is a holding company
whose principal subsidiary, First Montauk Securities Corp.
(FMSC), is primarily engaged in securities brokerage, investment
banking and trading. FMSC is a broker-dealer registered with the
Securities and Exchange Commission and the National Association
of Securities Dealers, Inc. Through FMSC, the Company executes
principal and agency transactions, makes markets in
over-the-counter securities, and performs underwriting and
investment banking services. Customers are located throughout
the United States. Montauk Insurance Services, Inc. (MISI) sells
a range of insurance products. Montauk Advisors, Inc. (MAI)
previously sold investments in equipment leases.
FMSC clears all customer transactions on a fully disclosed basis
through an independent clearing firm. Accordingly, FMSC does not
carry securities accounts for customers nor does it perform
custodial functions related to those securities.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The consolidated financial statements include the accounts of
the Company and its subsidiaries. All intercompany accounts and
transactions have been eliminated in consolidation.
Reclassification
Certain items in the 1998 and 1997 financial statements have
been reclassified to conform with the current year's
presentation. These reclassifications were not material to the
consolidated financial statements.
Revenue Recognition
Securities transactions, investment banking revenues, and
commission income and related expenses are recorded on a trade
date basis. Securities owned and securities sold but not yet
repurchased are stated at quoted market values with unrealized
gains and losses reflected in earnings. Investment account
securities not readily marketable are carried at estimated fair
value as determined by management with unrealized gains and
losses included in earnings.
Commissions earned from the sale of insurance products are
recognized upon approval of the customer application by the
insurance carrier.
Depreciation and Amortization
Furniture and equipment and leasehold improvements are stated at
cost. Depreciation of furniture and equipment and amortization
of capital leases are computed generally on a straight-line
basis over the estimated useful lives of the assets, ranging
from three to seven years or terms of the leases, respectively.
Leasehold improvements are amortized over the shorter of
either the asset's useful life or the related lease term.
Statement of Cash Flows
For purposes of the Statement of Cash Flows, the Company
considers all highly liquid debt instruments purchased with an
original maturity of three months or less to be cash
equivalents.
30
Net Income (Loss) per Share
Basic EPS is computed by dividing net income or net loss 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,
but only if dilutive. Other securities include stock options and
warrants, convertible debt and convertible preferred stock.
Outstanding warrants to purchase 9,218,338 common shares are
anti-dilutive and, accordingly, not included in the 1999
diluted EPS computation.
Use of Estimates
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the year.
Actual results could differ from those estimates.
Long-lived assets
In accordance with SFAS No. 121, "Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to be Disposed
of", the Company records impairment losses on long-lived assets
used in operations, when events and circumstances indicate that
the assets might be impaired and the undiscounted cash flows
estimated to be generated by those assets are less than the
carrying amounts of those assets.
Income Taxes
The Company uses the liability method to determine its income
tax expense as required under Statement of Financial Accounting
Standards No. 109 (SFAS 109). Under SFAS 109, deferred tax
assets and liabilities are computed based on differences between
financial reporting and tax basis of assets and liabilities, and
are measured using the enacted tax rates and laws that will be
in effect when the differences are expected to reverse.
Deferred tax assets are reduced by a valuation allowance if,
based on the weight of the available evidence, it is more likely
than not that all or some portion of the deferred tax assets
will not be realized. The ultimate realization of the deferred
tax asset depends on the Company's ability to generate
sufficient taxable income in the future.
The Company and its subsidiaries file a consolidated federal
income tax return and separate state returns.
Accounting Developments
In January 1998, the Company adopted SFAS No. 130, which
establishes requirements for the reporting and display of
comprehensive income and its components in a full set of general
purpose financial statements. Comprehensive income is the total
of net income and all other nonowner changes in equity. The
Company has no comprehensive income components to report for any
period presented.
In June 1998, the FASB issued SFAS No. 133, which requires the
recognition of all derivatives on the statement of financial
condition at fair value. SFAS No. 133 must be adopted effective
January 1, 2001. The Company does not currently engage in
significant derivative or hedging activities; accordingly, the
adoption of SFAS is not expected to have a material impact on
its earnings or financial position.
31
NOTE 3 - TRADING AND INVESTMENT SECURITIES
December 31,
1999 1998
Sold but Sold but
not yet not yet
Owned Purchased Owned Purchased
Marketable:
Municipal obligations $ 73,310 $ -- $ 62,315 $ --
Stocks 2,922,437 97,204 2,353,286 243,119
Corporate obligations 346,420 80,952 270,278 50,738
Other 8,500 2,124 -- 33,190
Non-marketable securities 125,224 -- 47,381 --
------- ------- --------- -------
$3,475,891 $180,280 $2,733,260 $327,047
========== ======== ========== ========
NOTE 4 - EMPLOYEE AND BROKER RECEIVABLES
December 31,
1999 1998
Commission advances $ 28,880 $ 79,317
Loans to brokers and
non-executive employees 423,405 518,895
------- -------
$452,285 $598,212
======== ========
Receivables are generally non-interest bearing and due on demand.
NOTE 5 - PROPERTY AND EQUIPMENT
December 31,
1999 1998
Computer and office equipment $ 2,359,275 $ 2,033,729
Furniture and fixtures 929,373 812,360
Leasehold improvements 728,797 513,014
------- -------
4,017,445 3,359,103
Less: Accumulated depreciation
and amortization (1,823,939) (1,284,633)
---------- ----------
$ 2,193,506 $ 2,074,470
=========== ===========
Depreciation expense was $539,306, $357,831, and $348,508 in
1999, 1998 and 1997, respectively.
NOTE 6 - NOTES RECEIVABLE
1999 1998
a) Environmental Coupon
Marketing, Inc. (ECM) $149,640 $149,640
b) Global Financial Corp. (Global) 332,891 322,237
c) Fem-Com Copy Systems, Inc. (FCS -- 5,852
------- -------
$482,531 $477,729
======== ========
a) ECM is a closely-held marketer of recycling programs to retailers. The
loan is currently in default and stated at estimated net realizable value.
b) From 1997 through 1999, the Company provided working capital loans of
approximately $2.3 million to Global, an independent company that packaged and
sold lease investments through MAI. Global's need for financial assistance arose
from the nonpayment of scheduled monthly installments on certain delinquent and
non-performing leases. The resulting cash flow deficits had impaired Global's
ability to pay lease investors on a timely basis. The MAI loans are evidenced by
notes guaranteed by Global, FCS, Global's affiliated equipment vendor, and
Biblio, Inc., an affiliate of FCS. The notes are further collateralized by
mortgage liens on real estate owned by the shareholder of FCS and Biblio, a
pledge of all of the outstanding shares in Global, and various recorded liens on
the assets of FCS and Biblio.
32
During 1998, the Company undertook a full review of the Global loans to
evaluate their collectability, and determined that, based on various events and
circumstances, including the insolvency of Global and FCS, and steadily
declining collections on the lease portfolio serviced by Global, the loans to
Global were impaired. Accordingly, the Company recorded an impairment loss of
$1,775,000 in its financial statements for 1998, and increased the reserve by
$100,000 in 1999 after further review. 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.
c) MAI provided FCS with working capital financing to purchase equipment
for resale to FCS customers.
NOTE 7 - DUE FROM OFFICERS
Advances to officers are unsecured and currently bear interest
at the rate of 6% per annum. These loans are due on demand.
NOTE 8 - NOTES PAYABLE
1999 1998
a) Notes payable - bank $ 148,919 $ 244,844
b) 10% convertible promissory notes payable 570,000 570,000
c) Convertible promissory notes, net of discount 608,509 --
d) Subordinated notes payable 150,000 200,000
------- -------
$1,477,428 $1,014,844
========= ==========
a) Term loans bearing interest at the prime rate (8.5% at December 31,
1999); payable in monthly installments of $7,994, plus interest; collateralized
by equipment.
b) Notes in the aggregate amount of $570,000 issued to a private investor
and his affiliated entities in connection with a Global lease settlement (see
Note 10); interest is payable semiannually at 10% per annum. Principal is due in
October 2003. One note for $300,000 will be paid from the proceeds of a sinking
fund into which the Company is required to contribute 20% of the note's original
outstanding principal ($60,000) on or before each annual note anniversary date.
The sinking fund balance at December 31, 1999 was $60,000, which is included in
Other Assets in the accompanying Statement of Financial Condition. The notes are
callable at the Company's option upon thirty days' written notice at a
redemption price of 105% of outstanding principal plus accrued interest. The
noteholder has the right to convert the notes into up to 380,000 shares of the
Company's common stock based on a conversion price of $1.50 per share.
c) Notes in the original aggregate amount of $690,526 issued to private
investors in connection with a Global lease settlement (see Note 10). The notes
are payable in thirty-six monthly non-interest bearing installments of $16,404,
plus balloon payments of $112,000, which include interest of $12,000 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 is
being amortized over the note terms using the interest method. The notes are
convertible into 345,263 common shares of the Company's common stock based on a
conversion price of $2.00. Once the underlying 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.
d) Notes payable in annual installments of $50,000 plus interest at 8% per
annum. The notes are subordinated to the claims of FMSC's general creditors
under a subordination agreement approved by the NASDR.
Aggregate annual maturities of notes payable are as follows:
2000 $ 326,364
2001 299,836
2002 281,228
2003 570,000
---------
$1,477,428
=========
33
NOTE 9 - ACCRUED EXPENSES
Accrued expenses consist of the following:
December 31,
1999 1998
Reserves for legal matters $ 595,476 $661,531
Other 477,076 243,623
--------- -------
$1,072,552 $905,154
========== ========
The Company maintains allowances to absorb losses from customer
claims that are probable and can be reasonably estimated.
NOTE 10 - GLOBAL LEASE SETTLEMENTS
During 1998 and 1999, the Company entered into settlement
agreements with various Global lease investors. In 1998, the
Company issued a series of convertible promissory notes
aggregating $570,000 to a lease investor in consideration of
$300,000 in cash and the assignment of his Global lease
investments (see Note 8). In 1999, the Company exchanged
$235,282 in cash payments, 25,000 common stock purchase warrants
valued at $27,382, and convertible note principal of $690,526
(see Note 8) for the assignment of Global leases. The difference
between the cash, debt and warrant consideration issued by the
Company, and the present value of the lease receivables assigned
in the exchange was accounted for as a charge to operations of
$600,416 and $99,899 in 1999 and 1998, respectively.
Also in 1999, the Company completed a private offering of its
Series A Convertible Preferred Stock (see Note 17 for rights and
privileges of the preferred shares). Under terms of the
offering, each Global lease investor that subscribed to the
offering received one share of Preferred Stock in exchange for
every $5.00 of lease investment value that the investor was
entitled to receive from Global after certain adjustments. The
Company issued a total of 349,511 preferred shares, which
have been valued at $985,543, the present value of the lease
receivables assigned in the offering.
NOTE 11 - INCOME TAXES
The provision for income taxes (income tax benefit)
consists of the following:
December 31,
1999 1998 1997
Currently payable:
Federal $ 301,058 $ -- $ 299,584
State 211,583 60,255 161,134
------- ------ -------
512,641 60,255 460,718
------- ------ -------
Deferred:
Federal 505,540 (1,008,591) 470,277
State 72,799 (387,665) 37,183
Valuation allowance (541,840) 731,469 --
-------- ------- -------
36,499 (664,787) 507,460
-------- ------- -------
$ 549,140 $ (604,532) $ 968,178
========= =========== =========
Following is a reconciliation of the income tax provision
(benefit) with income taxes based on the federal statutory rate:
December 31,
1999 1998 1997
Expected federal tax at statutory rate $ 963,421 $(1,144,909) $831,301
Non-taxable income -- -- (12,080)
Non-deductible expenses 20,998 11,456 10,200
State taxes, net of federal tax benefit 172,956 (200,021) 146,700
Other (66,395) (2,527) (7,943)
Change in valuation allowance (541,840) 731,469 --
-------- ------- -------
$ 549,140 $ (604,532) $968,178
========= =========== ========
34
The tax effects of the temporary differences that give rise to
significant portions of the deferred tax assets and liabilities
as of December 31, 1999 and 1998 are:
December 31,
1999 1998
Deferred tax assets:
Accrued expenses $ 500,936 $1,205,632
Tax loss carryforwards 189,629 160,190
Stock option compensation 146,272 67,936
Other 33,993 78,761
------ ------
870,830 1,512,519
------- ---------
Deferred tax liabilities:
Property and equipment 14,855 54,176
Other 2,090 26,119
----- ------
16,945 80,295
------ ------
853,885 1,432,224
Valuation allowance (189,629) (731,469)
-------- --------
Net deferred tax asset $ 664,256 $ 700,755
========= ==========
In 1999, the Company generated sufficient taxable income to
recognize the benefit of tax loss carryforwards and other
deferred tax benefits that became tax deductions during the
year. The balance of the valuation allowance relates to state
tax loss carryforwards whose realization is uncertain.
NOTE 12 - COMMITMENTS AND CONTINGENT LIABILITIES
Leases
The Company leases office facilities and equipment under
operating leases expiring at various dates through 2005. The
lease for the Company's headquarters has a six-year renewal
option through 2011.
In 1998, the Company entered into a capital lease to acquire new
equipment costing $88,000 and to refinance through a
sale/leaseback transaction existing fixed assets with a book
value of approximately $304,000.
Future minimum lease payments as of December 31, 1999 were:
Capital Operating
Lease Leases
2000 $142,704 $ 826,301
2001 146,986 748,910
2002 -- 712,083
2003 -- 652,930
2004 -- 641,071
Thereafter -- 53,333
------- ---------
Total minimum lease payments 289,690 $3,634,628
==========
Less: Amount representing
interest on capital leases 28,026
------
$261,664
========
Operating lease expense for 1999, 1998 and 1997 totaled
$947,732, $857,715 and $498,815, respectively.
Waiver of bonus
In connection with their employment agreements, the Company's
president and executive vice-president were together entitled to
a bonus equal to 10% of the Company's 1999 pre-tax profits. The
officers each received $100,000 towards their bonuses and
irrevocably waived their rights to the balance. The employment
agreements expired in December 1999, and new agreements are
being negotiated.
35
Legal matters
The Company is currently a respondent in certain pending
customer arbitrations and other matters relating to its securi-
ties business. In connection with certain claims, the Company
established an accounting reserve of $595,000 and $662,000, in
1999 and 1998, respectively, for losses that are considered
probable and can be reasonably estimated. Other claims are
in various stages of progress and are being vigorously
contested. With respect to those claims, management is unable
to derive a meaningful estimate of the amount or range of
possible loss that may arise out of pending litigation.
In January 1997, the Company negotiated a $650,000 settlement
with one of its insurance carriers in consideration of a general
release from coverage on various matters. The Company has a
pending lawsuit against another insurance carrier for
reimbursement of customer settlements. There can be no assurance
that the Company will succeed in its efforts at recovery.
In December 1999, the Company agreed to accept a $500,000 cash
payment in settlement of an arbitration against another
securities firm. The Company commenced the arbitration in an
effort to recover customer settlements that it had previously
paid on claims arising from the activities of a former affiliate
office.
Income tax audits
The Internal Revenue Service is currently conducting a field
audit of the Company's federal income tax returns for the years
1995 through 1998. Based on discussions with its
representatives, management does not expect the outcome of these
audits to have a material impact on the Company's financial
statements.
NOTE 13 - FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK and
CONCENTRATION OF CREDIT RISK
The Company executes securities transactions on behalf of its
customers. If either the customer or a counter-party fail to
perform, the Company by agreement with its clearing broker may
be required to discharge the obligations of the non-performing
party. In such circumstances, the Company may sustain a loss if
the market value of the security is different from the contract
value of the transaction. As part of its normal brokerage
activities, the Company also assumes short positions in its
inventory. The establishment of short positions exposes the
Company to off-balance-sheet risk in the event prices increase,
as the Company may be obligated to acquire the securities at
prevailing market prices.
The Company seeks to control off-balance-sheet risk by
monitoring the market value of securities held or given as
collateral in compliance with regulatory and internal
guidelines. Pursuant to such guidelines, the Company's clearing
firm requires additional collateral or reduction of positions,
when necessary. The Company also completes credit evaluations
where there is thought to be credit risk.
Financial instruments that potentially subject the Company to
significant concentrations of credit risk consist principally of
cash and securities inventories. The Company places its cash
primarily in commercial checking accounts. Balances may from
time to time exceed federally insured limits. Cash and
securities inventories maintained at the Company's clearing firm
are uninsured.
36
NOTE 14 - DEFINED CONTRIBUTION PLAN
The Company sponsors a defined contribution pension plan
[401(k)] covering all participating employees. The Company may
elect to contribute up to 100% of each participant's annual
contribution to the plan. Employer contributions for 1999, 1998
and 1997 amounted to $74,132, $38,077 and $33,060, respectively.
NOTE 15 - COMMON STOCK ISSUED WITH GUARANTEED SELLING PRICE
From time to time, the Company has issued unregistered shares of
its Common Stock in settlement of various customer claims and
invoices for legal services. With respect to these shares, the
Company provides a guarantee to pay to the selling stockholder
the difference between a target price and the actual selling
price of the shares upon expiration of the statutory holding
period. The holders of the shares may elect to retain the shares
once the holding period lapses. Such an election will release
the Company from any further obligation to the stockholders.
The Company has established a temporary equity account to record
its maximum liability from the guarantees. Payment of any
shortfall is charged to this account. Any balance remaining at
the end of the respective holding periods is credited to
permanent capital. Following is a schedule of activity in this
account for 1999 and 1998:
Shares Amount
Balances, January 1, 1998 173,000 $346,500
Issuance of additional shares 15,000 30,000
Payment of guarantee -- (40,610)
Reclassification of shares to
permanent capital (170,000) (299,390)
-------- --------
Balances, December 31, 1998
and 1999 18,000 $ 36,500
======== =========
NOTE 16 - STOCK OPTION PLANS
The Company currently has three option plans in place: The 1992
Incentive Stock Option Plan (the "1992 Plan"), the 1992
Non-Executive Director Stock Option Plan (the "Director Plan"),
and the 1996 Senior Management Incentive Plan (the "1996 Plan").
In June 1998, the Company's stockholders approved an amendment
to the 1992 Plan to increase the number of shares reserved for
issuance from 3,500,000 to 6,000,000 shares. Under the 1992
Plan, options may be granted to employees, consultants and
registered representatives of the Company, but only options
issued to employees will qualify for incentive stock option
treatment (ISOs). The exercise price of an option designated as
an ISO may not be less than the fair market value of the
Common Stock on the date of grant. However, ISOs granted to a
ten percent stockholder must have an exercise price of at least
110% of such fair market value. At the time an option is
granted, the Board of Directors will fix the period within
which it may be exercised. Such exercise period may not be
less than one year nor more than ten years from the date of
grant. The 1992 plan will expire in May 2002.
The Company has reserved 1,000,000 shares of its Common Stock
for issuance under the Director Plan. Options to purchase 20,000
shares of Common Stock are granted to each Non-Executive
Director on August 1 of each year, provided such individual has
continually served as a Non-Executive Director for the
twelve-month period immediately preceding the date of grant. The
options will expire in five years from the date of grant. The
exercise price of such options must be equal to the fair market
value of the Company's Common Stock on the date of grant. The
Director Plan will terminate in May 2002.
The Company has reserved 2,000,000 shares for issuance to key
management employees under its 1996 Plan. Awards can be granted
through the issuance of incentive stock rights, stock options,
stock appreciation rights, limited stock appreciation rights,
and shares of restricted Common Stock. The exercise price of an
option designated as an ISO may in no event be less than 100%
of the then fair market price of the stock (110% with respect to
ten percent stockholders), and not less than 85% of the fair
market price in the case of other options. The 1996 Plan will
terminate in June 2006.
37
A summary of the activity in the Company's stock option plans
for the three-year period ended December 31, 1999 is presented
below:
Weighted
Average
Exercise
Shares Prices
Options outstanding, December 31, 1996 2,136,125 $ .76
Granted 1,517,500 1.72
Canceled (56,500) .71
Exercised (973,025) .68
Options outstanding, December 31, 1997 2,624,100 $1.34
Granted 1,442,500 1.99
Canceled (381,250) 2.17
Exercised (432,050) .79
Options outstanding, December 31, 1998 3,253,300 1.61
Granted 710,000 2.01
Canceled (209,150) 2.45
Exercised (234,450) .91
3,519,700 $1.68
Additional information with respect to options under the
Company's option plans is as follows:
Shares of common stock available
for future grant 3,629,700
Weighted-average grant date fair value of options
granted during each year using the Black-Scholes
option pricing model
1997 $.73
1998 $.71
1999 $.70
The Company applies APB No.25 in accounting for employee stock
options. Accordingly, compensation is recognized in the financial
statements only for the fair value of options issued to
consultants and affiliate brokers. Such compensation is amortized
to expense over the related options' vesting periods.
Compensation expense recognized in 1999, 1998 and 1997 totaled
$195,840, $147,988 and $21,652, respectively.
38
Pro forma net income (loss) and EPS information, as
required by SFAS No. 123, have been determined as if the Company
had accounted for employee stock options under the fair value
method. The fair value of these options was estimated at grant
date using a Black-Scholes option pricing model with the
following weighted-average assumptions for 1999, 1998 and 1997:
1999 1998 1997
Risk free interest rates 5.76% 5.03% 6.23%
Expected option lives 2.5 years 2.4 years 3.75 years
Expected volatilities 48.5% 46.5% 46.5%
Expected dividend yields 0% 0% 0%
The Company's pro forma information follows:
Net income (loss) 1999 1998 1997
As reported $2,283,278 $(2,762,847) $1,476,825
Proforma 2,109,706 (3,292,291) 1,246,276
Basic income (loss) per share
As reported $.22 $(.28) $.17
Proforma $.21 $(.34) .14
Diluted income (loss) per share
As reported $.21 $(.28) $.14
Proforma $.19 $(.34) .12
The full impact of calculating compensation expense for stock
options under SFAS No. 123 is not reflected in pro forma net
income, since such expense is amortized over the vesting period
of those options as they vest.
Additional information as of December 31, 1999 with respect to
all outstanding options is as follows:
Options Outstanding Options Exercisable
Weighted
Average Weighted Weighted
Remaining Average Average
Number Contractual Exercise Number Exercise
Range of prices Outstanding Life Price Exercisable Price
$.75 - 1.06 983,600 1.38 $.91 871,000 $.90
1.20 - 1.80 922,100 3.21 1.54 401,693 1.47
1.94 - 2.75 1,614,000 3.55 2.23 656,867 2.27
3,519,700 2.85 $1.68 1,929,560 $1.48
39
NOTE 17 - STOCKHOLDERS' EQUITY
Sale of Restricted Stock
In 1997, the Company sold 12,240 unregistered shares of its
Common Stock to an affiliate broker for total consideration of
$23,027.
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 $1,382,750 before deducting registration costs
of approximately $236,000. There are currently 3,072,446 Class
A, Class B and Class C warrants outstanding, respectively.
Preferred Stock
In 1999, the Company's board of directors authorized the
issuance of up to 625,000 shares of a Series A Convertible
Preferred Stock with the following features:
Par value: $.10 per share
Dividends: 6% payable quarterly at the rate
of $.075 per share until
conversion
Voting rights: None
Liquidation preference: $5.00 per share
Conversion: Automatic conversion into two
shares of Common Stock at $2.50 per
share once the closing price for
the Common Stock is $3.50 or above
for 20 consecutive trading days,
and the shares are registered for
public sale.
During 1999, the Company issued 349,511 Series A shares in a
private exchange offering to Global lease investors (see Note
10). The shares were valued at $985,543, the present value of
the lease payments assigned to the Company in the exchange.
The Company is presently authorized to issue 4,375,000 shares of
Preferred Stock, none of which has been issued at December 31,
1999. The rights and preferences, if any, to be given to
preferred shares will be determined at the time of issuance.
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 1999, the Company repurchased
180,500 shares for $222,624.
Warrants
During 1999, the Company issued 25,000 common stock purchase
warrants in connection with a Global lease settlement. The
warrants are exercisable at $1.75 per share for a five-year
period. The Company valued the warrants at $27,382 using the
Black-Scholes option pricing model.
40
NOTE 18 - FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107, Disclosures
About Fair Value of Financial Instruments, requires that all
entities disclose the fair value of financial instruments, as
defined, for both assets and liabilities recognized and not
recognized in the statement of financial condition. Substan-
tially all of the Company's financial instruments at
December 31, 1999, consisting primarily of marketable equity
ecurities, amounts due from FMSC's clearing firm, accounts
payable and accrued expenses, and notes payable are carried
at, or approximate fair value due to their short-term nature,
the use of mark-to-market accounting for marketable securities,
or because they carry market rates of interest.
NOTE 19 - NET CAPITAL REQUIREMENTS
FMSC is subject to the Securities and Exchange Commission
Uniform Net Capital Rule (Rule 15c3-1), which requires FMSC to
maintain minimum net capital, as defined. At December 31, 1999,
FMSC had net capital of $3,991,872, which was $3,576,619 in
excess of its required net capital of $415,253. FMSC's ratio of
aggregate indebtedness to net capital was 1.74 to 1.
NOTE 20 - RELATED PARTY TRANSACTION
In 1997, FMSC served as underwriter for an initial public
offering of PacificHealth Laboratories ("PHL") common stock. One
of the directors of the Company is a director, officer and major
stockholder of PHL.