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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, 2000 -----------------
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
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
328 Newman Springs Road, Red Bank, NJ 07701
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (732) 842-4700
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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
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(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: $59,330,000
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
April 12, 2001 was $4,344,993.
The number of shares of Common Stock outstanding, as of April 12, 2001 was
8,862,035.
DOCUMENTS INCORPORATED BY REFERENCE
Not Applicable
[Cover Page 2 of 2 Pages]
PART I
Item 1. Business
Introduction
First Montauk Financial Corp. ("FMFC" or the "Company") 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 440 registered representatives and services over
50,000 retail and institutional customer accounts. All of FMSC's 162 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 all 50 states, the District of Columbia, and the
Commonwealth of Puerto Rico. All securities transactions are cleared through
Fiserv Securities, Inc. of Philadelphia, PA. and execution services are provided
by various floor brokerage and specialist firms. 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 15%
Over-The-Counter 41%
Municipal and Government Bonds 1%
Corporate Bonds 4%
Unit Investment Trusts 2%
Mutual Funds 13%
Options 6%
Insurance and Annuities 9%
Corporate Finance 4%
----
Total(1) 95%
- -------------------
(1) Does not include interest and other income.
The following table reflects FMSC's various sources of revenues and the
percentage of total revenues for fiscal 2000. 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
proprietary trading activities.
Year Ended December 31, 2000
Amount Percent
------ -------
Agency commissions from
Equity Securities,
Options and Mutual Funds $46,529,771 78%
Principal Transactions in
Equity Securities, Municipal,
Government and Corporate Bonds $ 7,131,079 12%
Interest and other Income $ 3,252,325 6%
Investment Banking(1) $ 2,416,711 4%
---------- ---
Total Revenues $59,329,886 100%
(1) Investment banking revenues consist of commissions, selling
concessions; consulting fees and other income from underwriting and syndicate
activities and placement agent fees.
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 and obtain the required licenses to
become 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/she 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, investment recommendations or portfolio management associated with
full service brokerage accounts. 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 concentrates 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
28 states. MISI derives revenue from the sale of insurance-related products and
services to the customers of FMSC's registered representatives, who are also
licensed to sell certain insurance products. In fiscal year 2000, the Company
earned gross commissions of $5.1 million from the sale of insurance and annuity
policies.
Asset Management and Portfolio Advisory Services
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 or eligible
to conduct business as an investment adviser in 31 states.
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 its 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
New Clearing Arrangement
In May 2000, FMSC entered into a 10-year clearing agreement with Fiserv
Securities, Inc. under which Fiserv will act as FMSC's primary clearing broker.
In connection with the clearing agreement, FMSC and Fiserv also entered into a
financial agreement under which Fiserv has provided a cash advance of $4,000,000
to FMSC on the date of conversion to Fiserv. The funds, net of federal and state
income taxes, will be used primarily to enable FMSC to pay for the cost of
conversion to Fiserv and expand FMSC's business. For financial reporting
purposes, the Company will earn the advance in accordance with an amortization
schedule established by the parties; however, FMSC will incur an income tax
liability at its effective tax rate on the entire advance in the year in which
it is received. FMSC is required to repay any unearned portion of the $4,000,000
in the event it fails to achieve certain minimum performance criteria, or
terminates the agreement under certain circumstances prior to the expiration
date, as well as penalties for early termination. Fiserv has also agreed to
provide certain additional advances to FMSC in the second, third and fourth
years of the agreement under similar conditions, provided FMSC achieves certain
performance criteria, and subject to certain other conditions. These advances,
if received, will also be amortized to income as earned during the term of the
clearing agreement.
As of February 1, 2001, FMSC and FMFC amended and restated the financial
agreement with Fiserv. Under the restated terms, FMFC, rather than FMSC, will be
the recipient of any additional cash advances payable under the financial
agreement. FMFC has further assumed FMSC's obligation with respect to the
initial payment received in November 2000, and will be solely responsible for
any performance and early termination penalties. In consideration of FMSC's
release from its obligations under the financial agreement and to secure
Fiserv's interest, FMFC has granted to Fiserv a first priority lien in all of
the outstanding shares of FMSC stock that it owns.
New Trade Name
In July 2000 the broker/dealer adopted a new trade name and logo, "Montauk
Financial Group" to be used in advertising, marketing and communications with
customers. The new trade name was designed in connection with the expansion of
financial services from the general securities products and services which had
been the Company's core offering. It is anticipated that the new name and
modernized ship logo, will reflect the growth in all aspects of the Company's
financial services, including asset management, financial and estate planning
and insurance, in addition to general securities products and services.
Common Stock Repurchase Program
In August 1999, the Company's board of directors authorized the repurchase
of an unspecified number of the Company's outstanding common shares in market
transactions. From that time until the end of fiscal 2000, the Company has
purchased an aggregate of 1,285,534 shares of common stock for a total of
$1,695,560. In fiscal 2000, repurchases of 1,105,034 shares were made at a cost
of $1,460,740. The repurchase of common shares on the open market has the effect
of reducing the number of outstanding common shares.
Extension of Class A Warrants
In December 2000, the Company's Board of Directors authorized the extension
of the Company's Class A Warrants for an additional two year period. The Class A
Warrants originally provided the holder with the right to purchase one share of
the Company's Common Stock at an exercise price of $3.00 per share until
February 17, 2001. With the two year extension, holders of Class A Warrants now
have the right to purchase one share of Common Stock at an exercise price of
$3.00 per share until February 17, 2003.
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., Raymond James Financial Services, 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. 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
has recently implemented new programs to better service its affiliates and to
attract new brokers. The systems 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 via the firm's
intranet component of its newly redesigned website.
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 New York Stock Exchange, Inc. ("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 440 registered representatives of
which 390 are associated with affiliate offices. In addition, the Company
employs 120 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 $99,000,000 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.
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 2000 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. In 1999
MISI extended the term of this lease for an additional one year. In February
2000, MISI again extended the lease term for an additional three years at a
monthly base rent of $6,890.
In December 1999 FMSC entered into a 3-year lease commencing December 31,
1999 for 3,254 square feet of gross rentable area in the Vantage Ponte Building,
Glen Allen, Virginia for offices for its former Montauk Affinity Marketing Corp.
and for an affiliate retail brokerage office. The rent for the premises is
$4,474.25 per month and in addition to the base rent, the company is responsible
for additional rent comprising an operating expense pass through of
approximately 5% annually. During October 2000, the company terminated its
affiliation with Montauk Affinity Marketing Corp. and the lease premises became
entirely used by an affiliate for retail brokerage. Effective June 1, 2001, this
lease will be assigned to and assumed by an FMSC affiliate, Millenium Capital
Management Co. This affiliate will then be responsible for the complete lease
obligations.
On March 31, 2001, the Company entered into a lease assignment and
assumption agreement for a 3-year lease for 3,272 gross rentable square feet at
a new branch office at 2250 Glades Road, Boca Raton, Florida. The rent for the
premises is $7,433 per month, which includes in the base rate common area,
maintenance charges, and taxes. This office will maintain a portion of leased
space for administrative offices, with the balance of the space for affiliate
retail offices.
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 a customer arbitration seeking rescissionary
damages of approximately $19 million plus punitive damages. The claimant alleges
violations of various provisions of the federal and state securities laws. FMSC
has filed its answer to the claims and is vigorously defending the action. FMSC
is also a defendant or co-defendant in various other legal proceedings
incidental to its securities business. FMSC is contesting the allegations of
these claims and believes that there are meritorious defenses in each case.
In view of the inherent difficulty of predicting the outcome of litigation,
management is unable to derive a meaningful estimate of the amount or range of
possible loss that may arise out of pending legal proceedings in any particular
quarterly or annual period, or in the aggregate. However, it is possible that
the ultimate outcome of these matters could have a material adverse impact on
the Company's financial condition, results of operations, and cash flows. As of
December 31, 2000, the Company has not established a loss provision in the
accompanying financial statements for any liability that may result from these
contingencies.
Item 4. Submission of Matters on a Vote of Security Holders
Not Applicable.
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 in the pink sheets published by Pink Sheets LLC. 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 April 12, 2001, the Company's common stock had a high and low bid
price of $.55 and $.53, respectively.
The following is the range of high and low bid prices for such securities
for the periods indicated below:
Common Stock
Fiscal Year 2000 High Bid Low Bid
1st Quarter $ 1.97 $ 1.13
2nd Quarter 1.75 1.25
3rd Quarter 1.56 1.00
4th Quarter 1.22 0.60
Fiscal Year 1999 High Bid Low Bid
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 Bid Low Bid
1st Quarter $ 2.875 $ 2.00
2nd Quarter 3.28 2.41
3rd Quarter 2.53 1.01
4th Quarter 1.875 1.125
Item 6. Selected Financial Data
Year ended December 31,
2000 1999 1998 1997 1996
---- ---- ---- ---- ----
Operating results:
Revenues:
Commissions $46,529,771 $40,516,625 $30,741,404 $ 27,018,244 $ 25,749,690
Principal transactions 7,131,079 14,000,680 8,795,599 7,257,576 7,660,700
Investment banking 2,416,711 439,065 767,312 1,433,100 634,329
Insurance recovery - - - 650,000 -
Interest and other income 3,252,325 2,628,246 1,572,063 1,383,713 1,044,969
--------- --------- --------- --------- -----------
Total revenues 59,329,886 57,584,616 41,876,378 37,742,633 35,089,688
---------- ---------- ---------- ---------- -----------
Expenses:
Commissions, employee
compensation and
benefits 46,800,661 42,137,968 31,766,060 26,785,205 25,428,184
Clearing and floor
brokerage 4,003,345 4,109,961 3,674,859 3,021,709 3,139,142
Communications and
occupancy 2,731,681 2,697,433 2,557,313 1,860,350 1,662,936
Legal matters and
related costs 1,181,115 1,395,008 2,377,336 1,452,001 2,731,997
Write-down of Note
Receivable - Global
Financial Corp. 239,183 100,000 1,775,000 -- --
Loss on Global lease
Settlements -- 600,416 3,524 -- --
Other operating expenses 4,862,158 3,545,308 2,958,450 2,093,670 2,006,615
Interest 160,230 166,104 131,215 84,695 105,772
---------- --------- --------- ---------- ---------
Total expenses 59,978,373 54,752,198 45,243,757 35,297,630 35,074,646
---------- ---------- ---------- ----------
Income (loss) before
income taxes (648,487) 2,832,418 (3,367,379) 2,445,003 15,042
Provision for income taxes
(income tax benefit) 6,721 549,140 (604,532) 968,178 (17,747)
---------- ---------- --------- ---------- ----------
Income (loss) before extraordinary
loss (655,208) 2,283,278 $(2,762,847) $ 1,476,825 $ 32,789
========== ========== =========== ========== ===========
Extraordinary loss -
extinguishment of debt, net of tax (34,200) -- -- -- --
---------- ---------- ---------- ---------- -----------
Net income (loss) $ (689,408) $ 2,283,278 $ (2,762,847) $ 1,476,825 $ 32,789
========== ========== ========== =========== ===========
Net income (loss)
available to
common stockholders $ (792,136) $2,215,528 $(2,762,847) $ 1,476,825 $ 32,789
========== ========= =========== =========== ===========
Per share of
Common Stock:
Basic $ (.08) $ .22 $ (.28) $ .17 $ .01
Diluted $ (.08) $ .21 $ (.28) $ .14 $ .01
Item 6. Selected Financial Data
(continued)
Year ended December 31,
2000 1999 1998 1997 1996
Weighted average common shares
outstanding - Basic 9,450,055 9,878,129 9,725,116 8,788,734 7,767,224
========== ========= ========= ========= =========
Weighted average
common and common
equivalent shares
outstanding -
Diluted 9,450,055 11,262,708 9,725,116 10,351,032 8,623,538
========== ========== ========= ========== =========
Financial condition:
Total assets $16,913,063 $17,059,184 $11,543,734 $11,971,934 $8,742,039
Total liabilities $ 9,203,672 $ 7,429,046 $ 5,320,107 $ 4,732,467 $4,625,260
Common Stock issued
with guaranteed
selling price $ 6,500 $ 36,500 $ 36,500 $ 346,500 $ 421,500
Stockholders' equity $ 7,702,891 $ 9,593,638 $ 6,187,127 $ 6,892,967 $3,695,279
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations
Results of Operations - Three Years Ended December 31, 2000
Fiscal 2000 was the Company's twelfth consecutive year of record revenues,
with total revenues exceeding $59 million. The year began strong as Y2K fears
were eliminated by a smooth transition into the new millennium and the U.S.
stock market came roaring into 2000. As the year progressed, diminishing
investor confidence in the financial markets, coupled with more realistic
valuations in the technology sector and a general slow down in the economy,
reflected poorly on the Company's results of operations during the second half
of the year, as trading volume dropped significantly.
Year Ended December 31,
2000 1999 1998
(000's) % Change (000's) Change (000's)
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Revenues:
Commissions $46,530 15 $40,517 32 $30,741
Principal transactions 7,131 (50) 14,001 59 8,796
Investment banking 2,417 450 439 ( 43) 767
Interest and other income 3,252 24 2,628 67 1,572
------------------------------------------------------------------
Total Revenues $59,330 3 $57,585 38 $41,876
------------------------------------------------------------------
The year-to-year revenue growth resulted from increased commissions from
general securities transactions and insurance related products, particularly
from the sale of variable annuities. This overall increase in commission revenue
was due primarily to the addition of new affiliated representatives, a direct
result of the increase in, and maturation of, our recruiting and marketing
efforts. The Company also benefited from the exceptional performance in the
equities markets of the first quarter of 2000, during which we earned 41% of our
total revenues for the year.
The insurance segment, consisting primarily of variable annuity products,
increased $2,180,000, or 73%, from 1999 to 2000. Through training, education and
marketing, the Company has succeeded in increasing its insurance sales with its
existing base of financial professionals. The rise in revenues in fiscal 1999
when compared with 1998 resulted from increased commissions from general
securities transactions (stocks, bonds and options). That increase was 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.
Market-making and principal trading activities accounted for the only
decrease in the Company's revenues for fiscal 2000. Revenues for 2000 were $7.1
million, down from $14 million in 1999, a decrease of 50%. The decrease is due
to investment and trading losses primarily in Nasdaq and other securities held
in the firm's proprietary accounts. The firm has taken steps in 2001 to reduce
market exposure by closely monitoring inventory position limits and implementing
stop loss levels.
In 1999, 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 over 1998.
The Company also realized a significant increase in investment banking
revenues as a result of the completion of an initial public offering in the
first quarter of 2000. The investor market for new offerings declined
substantially in the latter part of the year, with the trend continuing into
fiscal 2001. Therefore, it is anticipated that the Company will be unable to
sustain these revenue levels in this business sector for 2001.
Year Ended December 31,
2000 1999 1998
(000's) % Change (000's) % Change (000's)
-----------------------------------------------------------------------
Expenses:
Commissions, employee
compensation and
benefits $46,801 11 42,138 33 $ 31,766
Clearing and floor
brokerage 4,003 (3) 4,110 12 3,675
Communications and
occupancy 2,732 1 2,697 5 2,557
Legal matters and
related costs 1,181 (15) 1,395 (41) 2,377
Write-down of Note
receivable - Global
Financial Corp. 239 1 100 (94) 1,775
Loss on lease
settlements -- (100) 600 50 100
Other operating expenses 4,862 37 3,546 24 2,862
Interest 160 (4) 166 27 131
----------------------------------------------------------------------
Total expenses $59,978 10 $ 54,752 21 $45,243
----------------------------------------------------------------------
Total expenses increased by $5,226,000, or 10% to $59,978,000 for 2000, up
from $54,752,000 for 1999. Expenses increased in most areas due to the Company's
continued expansion of operations, enhanced marketing efforts and staffing, and
increased commission payouts to a greater number of registered representatives.
During 2000, the Company paid commissions, employee compensation and
employee benefits of $46,801,000 (79% of total revenues) as compared to
$42,138,000 (73% of total revenues) in 1999. This category includes salaries,
commission expense, and benefits for salaried employees. Commissions paid to
registered representatives for fiscal 2000 totaled $39,289,000 (66% of total
revenues) compared to $35,502,000 (62% of total revenues) in 1999, and accounted
for almost $4,000,000, or 80% of the total increase in this expense category
over fiscal 1999. The dollar increase in commissions paid is due primarily to
the increase in commission revenues, as well as the increase in commission
payout percentages, which is required to remain competitive in the independent
brokerage arena.
For 2000, the Company paid salaries, bonuses and benefits of $7,512,000 for
management, operations and clerical personnel, as compared to $6,636,000 in 1999
and $5,294,000 in 1998. During the second half of 2000, the Company hired
additional management and support staff for various departments, primarily in
sales, recruiting and compliance. In 2000, the Company also added employees to
its mutual fund and insurance departments, as well as on the equity order desk.
The Company employed approximately 120 salaried employees as of December 31,
2000, 78 salaried employees as of December 31, 1999 and 68 salaries employees as
of December 31, 1998. These increases in personnel were required to service and
support the Company's growing network of affiliated registered representatives.
Clearing costs, which are associated with the level of transaction volume
and type, remained fairly constant during 2000. For 2000, clearing costs were $4
million (7% of total revenues) as compared to $4.1 million (7% of total
revenues) in 1999. In 1999, clearing costs increased by $435,000 from 1998. The
dollar increase in 1999 reflected the increased volume in securities
transactions, which carry clearance and floor brokerage charges. The percentage
of clearing costs to gross revenues can, and does, fluctuate depending upon the
product mix. Certain transactions, such as options and bonds, have a higher
execution and clearing cost than others. In 1998 clearing costs were $3.6
million (9% of total revenues). Clearing costs as a percentage of revenues has
decreased over the period from 1998 to 2000 due in part to volume discounts
negotiated with the Company's clearing firm.
Communications and occupancy costs remained relatively constant during
fiscal 2000, increasing only slightly from $2,697,000 in 1999 to $2,732,000 in
2000. Communications and occupancy costs rose by $140,000 in 1999, an increase
of 5% from 1998. The largest increase in this category was in the area of
technology support and software enhancements. In 1999, the Company contracted
with a data management consultant to upgrade the existing database and provide
management with better information retrieval systems and reporting capabilities.
For the third consecutive year, legal matters and related costs decreased
as a result of the enhanced supervision and compliance measures implemented in
1999. These costs totaled $1,181,000 in 2000, down 15% from 1999 and 50% from
1998. FMSC is a respondent in a new customer arbitration (See Legal
Proceedings). FMSC is also a defendant or co-defendant in various other legal
proceedings incidental to its securities business. FMSC is contesting the
allegations of these claims and believes that there are meritorious defenses in
each case. In view of the inherent difficulty of predicting the outcome of
litigation, management is unable to derive a meaningful estimate of the amount
or range of possible loss that may arise out of pending legal proceedings.
In December 1999, the Company accepted 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. 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.
Other operating expenses increased from $3,546,000 in 1999 to $4,861,000 in
2000, an increase of 37%. The increase is due primarily to the write-off of the
balance of the receivable from Global Financial Corp. and various broker loan
receivables, costs associated with the conversion to the new clearing firm, and
increased sales and marketing initiatives. Other operating expenses increased
from $2,862,000 in 1998 to $3,546,000 in 1999, an increase of 24%. That increase
was due primarily to higher bad debts, depreciation expense and increased sales
and marketing initiatives.
The Company's effective tax rate in 2000 was 1% as compared to 19% in 1999
and (18)% in 1998. The rate in 2000 was higher than expected because of the
effect of non-deductible expenses and an increase in the tax valuation allowance
during the year. Management increased the tax valuation allowance in 2000 to
offset tax benefits arising from state tax loss carryforwards and stock-based
compensation because their realization is uncertain. 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. 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. The rate in 1998 was higher 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.
For the year 2000, the Company reported a net loss of $792,000 or $.08 per
basic and diluted share, as compared to net income of $2,216,000, or $.22 per
basic share and $.21 per diluted share, for 1999. For 1998, the Company reported
a net loss of $2,763,000, or $.28 per basic and diluted share.
Liquidity and Capital Resources
The Company maintains a highly liquid balance sheet with 60% 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 provided by operating activities during 2000 was $5,333,000. Cash
was generated in part from the $4 million advance received under the financial
agreement with Fiserv in November 2000. For financial reporting purposes, the
Company will earn the advance on a straight-line basis over the term of the
clearing agreement. Amortization can be accelerated based on performance. The
entire advance is subject to income taxes in the year of receipt. Fiserv has
agreed to provide additional advances of $1,750,000 in each of the next three
years of the agreement, provided FMSC meets certain performance and other
criteria. Operating cash flows were also provided by funds drawn from FMSC's
clearing firms of $4,057,000. These increases were partially offset by a net
loss in 2000, increases in employee and broker receivables of $1,157,000,
increases in deferred income taxes of $1,057,000, and decreases in commissions
payable of $1,073,000. In an effort to compete with other broker-dealers for
registered representatives, FMSC has increasingly made loans to brokers as an
inducement to join the Company. Some of these loans are forgivable if the
registered representative remains licensed with the Company for an agreed upon
period of time, generally 1-2 years, and/or meets specified production goals.
The unamortized balance of these loans at December 31, 2000 was $606,473. Other
loans to registered representatives are payable in installments, generally over
periods from 1-2 years, with interest rates ranging from 0% to 8% per annum.
Investing activities required cash of $37,000 during 2000. Additions to
fixed assets consumed $722,000, primarily for the purchase of computers, office
furniture and equipment. The collection of Global leases receivable provided
cash of $650,000. The Global leases were assigned to the Company in various
settlement transactions with Global customers during 1999 (See Note 11 to the
consolidated financial statements).
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 leaseholder was required to assign their interest in
all lease payments to which they were entitled. Each share of the Preferred
Stock is convertible into two shares of the Company's Common Stock and pays a
quarterly dividend of $.075 per Preferred Share.
Financing activities used cash of $2,282,000 in 2000. A total of $1,461,000
was used to repurchase 1,105,034 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 note and capital lease repayments of
$1,019,000 and dividend payments to preferred stockholders of $103,000. A total
of $56,000 was received from the exercise of 57,000 stock options by various
individuals during the year.
At December 31, 2000, the Company's broker-dealer subsidiary had net
capital of $1,194,000, which was $682,000 in excess of its required net capital
of $512,000, and the ratio of aggregate indebtedness to net capital was 6.43 to
1.
The Company has various bank notes totaling $53,000. These notes bear
interest at the prime rate (9.5% at December 31, 2000), and are collateralized
by equipment owned by the Company. The loans are payable in monthly installments
of $7,994.
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. The principal amount was originally
due in October 2003. In 2000, the Company redeemed the notes for 110% of the
note principal, and recorded an extraordinary loss of $57,000 before income
taxes from the early extinguishment.
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 had 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 shares
of the Company's common stock based on a conversion price of $2.00 per share.
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, 2000, the Company had an aggregate of $100,000 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.
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.
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 and June 2000, the FASB issued SFAS No. 133, "Accounting for
derivative instruments and hedging activities" and SFAS No. 138, "Accounting for
certain derivative instrument and certain hedging activities." These statements
establish accounting and reporting standards requiring that every derivative
instrument be recorded on the balance sheet as either an asset or liability
measured at its fair value. SFAS No. 133 and 138 also require that changes in
the derivative's fair value be recognized currently in earnings unless specific
hedge accounting criteria are met. The Company will adopt SFAS No. 133 and No.
138 in the first quarter of fiscal 2001, and does not expect that the adoption
of these new standards will have a material impact on its earnings or financial
positions.
Market Risk
Certain of the Company's business activities expose it to market risk. This
market risk represents the potential for loss that may result from a change in
value of a financial instrument as a result of fluctuations in interest rates,
equity prices or changes in credit ratings of issuers of debt securities. This
risk relates to financial instruments held by the company as investment and for
trading.
The Company's securities inventories are exposed to risk of loss in the
event of unfavorable price movements. The Company's securities inventories are
marked to market on a daily basis. The Company's market-making activities are
client-driven, with the objective of meeting clients' needs while earning a
positive spread. At December 31, 2000 and December 31,1999, the balances of the
Company's equity securities positions owned and sold but not yet purchased were
approximately $3,689,000 and $386,000 and $2,931,000 and $99,000, respectively.
In the opinion of management, the potential exposure to market risk, trading
volatility and the liquidity of securities held in the firm's inventory
accounts, could potentially have a material effect on the Company's financial
position.
The Company's client activities involve the execution, settlement, and
financing of various transactions on behalf of its clients. Client activities
are transacted on either a cash or margin basis. The Company's client activities
may expose it to off-balance sheet credit risk. The Company may have to purchase
or sell financial instruments at the prevailing market price in the event of the
failure of a client to settle a trade on its original terms or in the event that
cash and securities in the client margin accounts are not sufficient to fully
cover the client losses. The Company seeks to control the risks associated with
client activities by requiring clients to maintain collateral in compliance with
various regulations and Company policies.
Item 8. Financial Statements
See Financial Statements attached hereto.
Item 9. Disagreements on Accounting and Financial Disclosure
Not Applicable.
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 69 Director, President and Chief Executive
Officer of FMFC and of FMSC and Registered
Options Principal of FMSC
William J. Kurinsky 40 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. 43 General Counsel, FMFC, Chief
Administrative Officer, Vice President
and General Securities Principal of FMSC
Norma Doxey 61 Director, Vice President of Operations, FMSC
Ward R. Jones, Jr. 70 Director
David I. Portman 60 Director
Barry D. Shapiro, C.P.A. 58 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.
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.
Barry D. Shapiro, C.P.A. has been a director of the Company since December
6, 2000. From October 2000 to the present, Mr. Shapiro is a shareholder of the
accounting firm, Withum, Smith + Brown in its Red Bank office. Mr. Shapiro was a
partner of Shapiro & Weisman C.P.A.'s P.A. from 1976 thru 1996 when he became a
partner of Rudolf, Cinnamon & Calafato, P.A. until joining Withum Smith + Brown.
Mr. Shapiro was previously employed with the Internal Revenue Service from 1965
thru 1971, where he was responsible for audit, review and conference functions.
Mr. Shapiro is a member of the New Jersey Society of Certified Public
Accountants, where he currently participates on the IRS Co-Op and State Tax
Committees. Mr. Shapiro is a past Trustee, Treasurer and Vice President of the
NJSCPA. He has been involved and is in many civic and community activities, as
well as charitable organizations, including the Monmouth County New Jersey
Chapter of the American Cancer Society and the Ronald McDonald House of Long
Branch, New Jersey. Mr. Shapiro received a B.S. in accounting from Rider
University in 1965.
Significant Employees
Dave M. McCoy, 39, has been director of retail sales since June 2000. Prior
to that he was an affiliate registered representative with First Montauk
Securities Corp. in the Boca Raton, Florida branch office since August 1992.
From October 1991 through August 1992, Mr. McCoy was a Manager at Chelsea Street
Securities, and from October 1990 through October 1991, he was a trader/manager
in Biltmore Securities, both in Boca Raton, FL. Mr. McCoy holds a General
Securities Agent and Principal licenses.
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.
Certain Reports
No person who, during the fiscal year ended December 31, 2000, 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.
Item 11. Executive Compensation
Summary of Cash and Certain Other Compensation
The following table 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, 2000, 1999 and 1998 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
- ---------------- ---- ------ ----- ------------ -------------
Herbert Kurinsky 2000 $256,217.78 $ 29,306.21 $ 2,000 (4) 125,000(1)
Chairman, Chief 1999 $232,925 $100,000 $ 925(4) 0
Executive Officer (7) 1998 $175,000 $ 0 $ 10,096(4) 100,000(1)
William J. Kurinsky 2000 $256,217.78 $ 0 $ 2,000 (5) 125,000(2)
Vice President, 1999 $232,925 $100,000 $ 1,925(5) 0
Chief Operating and 1998 $175,000 $ 0 $ 10,221(5) 100,000(2)
Financial Officer
and Secretary (8)
Robert I. Rabinowitz 2000 $150,000 $24,234.64 $ 2,000 (6) 60,000(3)
General Counsel, FMFC, 1999 $125,000 $25,000 $ 1,200(6) 0
Chief Administrative 1998 $125,000 $15,000 $ 295(6) 100,000(3)
Officer, FMSC (9)
- --------------------------
1) In 2000, the Compensation Committee of the Board of Directors (the
"Committee") authorized an option grant to Mr. Herbert Kurinsky to purchase
125,000 shares of Common Stock at an exercise price of $2.00 per share. In 1998,
the Board of Directors authorized a grant to purchase 100,000 shares at an
exercise prices of $1.9375 to Herbert Kurinsky. See "Aggregated Options/Sar
Exercises in Last Fiscal Year and Fy-End Option/Sar Values."
2) In 2000, the Compensation Committee of the Board of Directors (the
"Committee") authorized an option grant to Mr. William J. Kurinsky to purchase
125,000 shares of Common Stock at an exercise price of $2.00 per share. In 1998,
the Board of Directors authorized a grant to purchase 100,000 shares at an
exercise prices of $2.13 to William J. Kurinsky. See "Aggregated Options/Sar
Exercises in Last Fiscal Year and Fy-End Option/Sar Values."
3) In 2000, the Board of Directors authorized an option grant to Mr. Robert
Rabinowitz to purchase 60,000 shares of Common Stock at an exercise price of
$2.00 per share. In 1998, the Board of Directors authorized a grant to purchase
100,000 shares at an exercise prices of $1.9375 to Robert Rabinowitz. See
"Aggregated Options/Sar Exercises in Last Fiscal Year and Fy-End Option/Sar
Values."
4) Includes (i) for 2000, automobile allowance of $2000; (ii) for 1999,
auto allowance of $925; (iii) for 1998, vacation pay of $10,096.
5) Includes: (i) for 2000, automobile allowance of $2,000; (ii) for 1999,
auto allowance of $1928; (iii) for 1998, commissions of $125 and vacation pay of
$10,096.
6) Includes (i) for 2000, automobile allowance of $2,000; (ii) for 1999,
automobile allowance of $1200; (iii) for 1998, commissions of $295.
7) Mr. Herbert Kurinsky is the beneficial owner of 51,518 shares of the
Company's Common Stock as of December 31, 2000, which shares had a market value
of $36,578 as of that date, without giving effect to the diminution in value
attributable to the restriction on said shares.
8) Mr. William Kurinsky is the beneficial owner of 1,065,823 shares of the
Company's Common Stock as of December 31, 2000, which shares had a market value
of $756,734 as of that date, without giving effect to the diminution in value
attributable to the restriction on said shares.
9) Mr. Robert I. Rabinowitz is the beneficial owner of 29,500 shares of the
Company's Common Stock as of December 31, 2000, which shares had a market value
of $20,945 as of that date, without giving effect to the diminution in value
attributable to the restriction on said shares.
Compensation of Directors
The Company pays directors, who are not employees of the Company, a
retainer of $250 per meeting of the Board of Directors attended and for each
meeting of a committee of the Board of Directors not held in conjunction with a
Board of Directors meeting. Directors employed by the Company are not entitled
to any additional compensation as such. During fiscal year 2000, the Board of
Directors met on four (4) occasions and all directors were present, either in
person or by telephonic conference call.
Committees of the Board of Directors
The Board of Directors has established an Audit Committee comprised of Ward
R. Jones, David Portman and Barry Shapiro. The Audit Committee met on one (1)
occasion during fiscal year 2000. The Audit Committee reviews (i) the Company's
audit functions, (ii) the finances, financial condition, and interim financial
statements of the Company with management, and (iii), the year end financial
statements of the Company with the Company's independent auditors. Members of
the Audit Committee do not receive additional compensation for such service.
OPTION/SAR GRANTS IN LAST FISCAL YEAR
The following table contains information with respect to the named
executive officers concerning options granted during the year ended December 31,
2000.
INDIVIDUAL GRANTS
Number of % of Total
Underlying Granted to Exercise
Options/SARs Employees in or Base Expiration
Name Granted(#) Fiscal Year Price ($Sh) Date
---- ------------ ------------ ----------- ----------
Herbert Kurinsky 125,000 6.3% $2.00 3/27/05
William J. Kurinsky 125,000 6.3% $2.00 3/27/05
Robert I. Rabinowitz 60,000 3% $2.00 3/27/05
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 December 31,2000 December 31, 2000(1)
---- -------- -------- ---------------- --------------------
Exercisable/Unexercisable Exercisable/Unexercisable
Herbert Kurinsky -- $0 475,000/0 $0/$0
William J. Kurinsky -- $0 500,000/0 $0/$0
Robert I. Rabinowitz -- $0 328,750/0 $0/$0
(1) Based upon the closing bid price of the Company's Common Stock on
December 31, 2000 ($.71 per share), less the exercise price for the aggregate
number of shares subject to the options.
Employment Agreements
In January 2000, 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 $256,218
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. 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.
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.
In June 2000 at the Company's Annual Meeting of Shareholders, a resolution
was passed amending the Incentive Stock Option Plan to increase the number of
shares reserved for issuance from 6,000,000 to 8,000,000. To date, options to
purchase a total of 6,504,998 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 380,000 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-ISOs similar to the options granted under the Employee Stock Option
Plan, except that the exercise price of non-ISOs 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
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.
In June 2000 at the Company's Annual Meeting of Shareholders, a resolution
was passed amending the Senior Management Stock Option Plan to increase the
number of shares reserved for issuance from 2,000,000 to 4,000,000. To date,
options to purchase a total of 2,375,000 shares of the Company's Common Stock
have been issued under the Senior Management Plan.
Item 12. Security Ownership of Certain
Beneficial Owners and Management
The following table sets forth, as of April 12, 2001, 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 526,518(2) 5.6
Parkway 109 Office Center
328 Newman Springs Road
Red Bank, NJ 07701
William J. Kurinsky 1,925,823(3) 19.8
Parkway 109 Office Center
328 Newman Springs Road
Red Bank, NJ 07701
Robert I. Rabinowitz, Esq. 375,749(4) 4.0
Parkway 109 Office Center
328 Newman Springs Road
Red Bank, NJ 07701
Ward R. Jones 110,000(5) 1.2
7 Leda Lane
Guilderland, NY 12084
Norma Doxey 74,900(6) *
Parkway 109 Office Center
328 Newman Springs Road
Red Bank, NJ 07701
David I. Portman 219,800(7) 2.4
300 Ocean Avenue, Apt. 6A
Long Branch, NJ 07740
Barry Shapiro, C.P.A. 0 N/A
- ------------
- ------------
All Directors and 3,232,790 29.8
Officers as a group
(7 persons in number)
* Indicates less than 1%
_____________________
(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.
(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 vested and presently exercisable options of Mr. Robert
Rabinowitz to purchase 328,750 shares of Common Stock; 50,000 of which are owned
by Mr. Rabinowitz's wife. Mr. Rabinowitz's children own 2,000 shares of Common
Stock. Mr. Rabinowitz also owns 5,833 Class A Warrants, 5,833 Class B Warrants
and 5,833 Class C Warrants.
(5) Includes vested and presently exercisable options of Mr. Ward Jones to
purchase 100,000 shares of Common Stock.
(6) Includes vested and presently exercisable options of Ms. Norma Doxey to
purchase 44,500 shares of Common Stock, and 18,000 non-vested stock options.
(7) Includes vested and presently exercisable options of Mr. David Portman
to purchase 100,000 shares of Common Stock. Mr. Portman also owns 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 five (5) 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".
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.
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: April 12, 2001
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 April 12, 2001
- -------------------------------
Herbert Kurinsky
President, Chief Executive
Officer and Director
/s/ William J. Kurinsky April 12, 2001
- --------------------------------
William J. Kurinsky
Vice-President, Chief Operating
and Chief Financial Officer, and
Principal Accounting Officer,
Secretary and Director
/s/ Norma Doxey
- -------------------------------- April 12, 2001
Norma Doxey, Director
/s/ Ward R. Jones, Jr.
- -------------------------------- April 12, 2001
Ward R. Jones, Jr., Director
/s/ David I. Portman
- -------------------------------- April 12, 2001
David I. Portman, Director
/s/ Barry Shapiro
- -------------------------------- April 12, 2001
Barry Shapiro, Director
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 this document. 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. Those designated (+++) denotes exhibits which have been filed with the
Company's Proxy Statement dated May 23, 2000 and are incorporated by reference
herewith. Those designated (++++) 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.
10.20++++ Employment Agreement between First Montauk Financial Corp.
and Herbert Kurinsky dated January 1, 2000.
10.21++++ Employment Agreement between First Montauk Financial Corp.
and William J. Kurinsky dated January 1, 2000.
10.22++++ Clearing Agreement dated May 8, 2000 between Fiserv
Securities, Inc. and First Montauk Securities Corp.
10.23++++ Financial Agreement dated May 8, 2000 between Fiserv
Securities, Inc. and First Montauk Securities Corp.
10.24++++ Amended and Restated Financial Agreement dated February 1,
2001 between Fiserv Securities, Inc., First Montauk Financial
Corp. and First Montauk Securities Corp.
10.25++++ Security Agreement dated February 1, 2001 between Fiserv
Securities, Inc. and First Montauk Financial Corp.
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.
28.6+++ Second Amended and Restated 1992 Incentive Stock Option Plan.
28.7+++ 1996 Senior Management Incentive Plan Amended as of June 23,
2000.
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,
2000 and 1999, 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, 2000. 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 auditing standards generally
accepted in the United States of America. 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 consolidated financial position of
First Montauk Financial Corp. and subsidiaries as of December 31, 2000 and 1999,
and the consolidated results of their operations and their cash flows for each
of the three years in the period ended December 31, 2000 in conformity with
accounting principles generally accepted in the United States of America.
Schneider & Associates LLP
Jericho, New York
March 19, 2001
FIRST MONTAUK FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
December 31,
2000 1999
ASSETS
Cash and cash equivalents $ 3,701,010 $ 686,980
Due from clearing firms 2,405,666 6,462,346
Commissions receivable 39,200 345,996
Trading and investment account securities 3,975,309 3,475,891
Employee and broker receivables 1,609,666 452,285
Global leases receivable 174,661 824,313
Notes receivable 18,000 482,531
Due from officers 175,068 132,754
Property and equipment - net 2,304,533 2,193,506
Deferred income taxes - net 1,721,262 664,256
Other assets 788,688 1,338,326
---------- ----------
Total assets $16,913,063 $17,059,184
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Deferred income $ 3,933,333 $ --
Securities sold, but not yet purchased, at market 386,459 180,280
Notes payable 559,179 1,477,428
Commissions payable 1,637,733 2,710,736
Accounts payable 450,974 525,809
Accrued expenses 840,578 1,072,552
Income taxes payable 875,786 510,226
Other liabilities 519,630 952,015
--------- ---------
Total liabilities 9,203,672 7,429,046
--------- ---------
Temporary equity - stock subject to redemption 6,500 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 shares
issued and outstanding; liquidation
preference: $1,747,555 34,951 34,951
Common Stock, no par value, 30,000,000 shares
authorized, 9,309,309 and 10,035,943 shares issued,
8,822,409 and 9,855,443 shares outstanding, respectively 4,063,397 5,185,818
Additional paid-in capital 4,253,765 4,080,730
Retained earnings 230,921 1,023,057
Less: Deferred compensation (393,120) (508,294)
Less: Treasury stock, at cost (486,900 and 180,500
shares, respectively) (487,023) (222,624)
---------- ----------
Total stockholders' equity 7,702,891 9,593,638
---------- ----------
Total liabilities and stockholders' equity $16,913,063 $17,059,184
========== ==========
See notes to consolidated financial statements.
FIRST MONTAUK FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (LOSS)
Years ended December 31,
2000 1999 1998
Revenues:
Commissions $46,529,771 $40,516,625 $30,741,404
Principal transactions 7,131,079 14,000,680 8,795,599
Investment banking 2,416,711 439,065 767,312
Interest and other income 3,252,325 2,628,246 1,572,063
---------- ----------- ----------
59,329,886 57,584,616 41,876,378
---------- ----------- ----------
Expenses:
Commissions, employee compensation
and benefits 46,800,661 42,137,968 31,766,060
Clearing and floor brokerage 4,003,345 4,109,961 3,674,859
Communications and occupancy 2,731,681 2,697,433 2,557,313
Legal matters and related costs 1,181,115 1,395,008 2,377,336
Write down of Notes Receivable - Global
Financial Corp. 239,183 100,000 1,775,000
Loss on Global lease settlements -- 600,416 99,899
Other operating expenses 4,862,158 3,545,308 2,862,075
Interest 160,230 166,104 131,215
---------- ---------- ----------
59,978,373 54,752,198 45,243,757
---------- ---------- ----------
Income (loss) before income taxes (648,487) 2,832,418 (3,367,379)
Provision for income taxes (income tax benefit) 6,721 549,140 (604,532)
---------- ---------- ----------
Income (loss) before extraordinary loss (655,208) 2,283,278 (2,762,847)
Extraordinary loss - extinguishment of debt,
net of tax (34,200) -- --
---------- ---------- ----------
Net income (loss) $ (689,408) $ 2,283,278 $ (2,762,847)
========== ========== ==========
Net income (loss) available to common stockholders $ (792,136) $ 2,215,528 $ (2,762,847)
========== ========== ==========
Per share of Common Stock:
Basic:
Before extraordinary loss $ (0.08) $ 0.22 $ (0.28)
Extraordinary loss -- -- --
--------- ---------- ----------
Net income (loss) available to common
stockholders $ (0.08) $ 0.22 $ (0.28)
========= ========== ==========
Diluted:
Before extraordinary loss $ (0.08) $ 0.21 $ (0.28)
Extraordinary loss -- -- --
--------- ---------- ----------
Net income (loss) available to common
stockholders $ (0.08) $ 0.21 $ (0.28)
========= ========== ==========
Weighted average common shares
outstanding - basic 9,450,055 9,878,129 9,725,116
========= ========== ==========
Weighted average common and common
equivalent shares outstanding - diluted 9,450,055 11,262,708 9,725,116
========= ========== ==========
See notes to consolidated financial statements.
FIRST MONTAUK FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE PERIOD FROM JANUARY 1, 1998 TO DECEMBER 31, 2000
Series A Convertible Additional
Common Stock Preferred Stock Paid-in
Shares Amount Shares Amount Capital
Balances at January 1, 1998 9,198,444 $4,334,173 -- -- $1,173,437
Proceeds from rights offering -- -- -- -- 1,382,751
Registration costs -- -- -- -- (236,317)
Exercise of stock options 432,050 342,419 -- -- --
Exercise of common stock
purchase warrants 999 4,995 -- -- --
Deferred compensation -- -- -- -- 544,179
Amortization of deferred
compensation -- -- -- -- --
Transfer from temporary equity 170,000 299,390 -- -- --
Tax benefit related to exercise of
stock options -- -- -- -- 115,781
Net loss for the year -- -- -- -- --
--------- --------- -------- --------- ---------
Balances at December 31, 1998 9,801,493 4,980,977 -- -- 2,979,831
Exercise of stock options 234,450 204,841 -- -- --
Deferred compensation -- -- -- -- 122,925
Amortization of deferred
compensation -- -- -- -- --
Repurchase of common stock -- -- -- -- --
Issuance of common stock
purchase warrants -- -- -- -- 27,382
Issuance of preferred stock -- -- 349,511 34,951 950,592
Payment of dividends -- -- -- -- --
Net income for the year -- -- -- -- --
---------- --------- ------- ------ ---------
Balances at December 31, 1999 10,035,943 5,185,818 349,511 34,951 4,080,730
Exercise of stock options 57,000 55,920 -- -- --
Transfer from temporary equity 15,000 18,000 -- -- --
Deferred compensation -- -- -- -- 173,035
Amortization of deferred
compensation -- -- -- -- --
Repurchase of common stock -- -- -- -- --
Cancellation of treasury shares (798,634) (1,196,341) -- -- --
Payment of dividends -- -- -- -- --
Net loss for the year -- -- -- -- --
--------- --------- ------- ------ ---------
Balances at December 31, 2000 9,309,309 $4,063,397 349,511 $34,951 $4,253,765
========= ========= ======= ====== =========
See notes to consolidated financial statements.
FIRST MONTAUK FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE PERIOD FROM JANUARY 1, 1998 TO DECEMBER 31, 2000
Retained
Earnings
(Accumulated Deferred Treasury Stock Stockholders'
Deficit) Compensation Shares Amount Equity
Balances at January 1, 1998 $1,570,376 $(185,019) -- -- $6,892,967
Proceeds from rights offering -- -- -- -- 1,382,751
Registration costs -- -- -- -- (236,317)
Exercise of stock options -- -- -- -- 342,419
Exercise of common stock
purchase warrants -- -- -- -- 4,995
Deferred compensation -- (544,179) -- -- --
Amortization of deferred
compensation -- 147,988 -- -- 147,988
Transfer from temporary equity -- -- -- -- 299,390
Tax benefit related to exercise of
stock options -- -- -- -- 115,781
Net loss for the year (2,762,847) -- -- -- (2,762,847)
--------- ------- --------- --------- ---------
Balances at December 31, 1998 (1,192,471) (581,210) -- -- 6,187,127
Exercise of stock options -- -- -- -- 204,841
Deferred compensation -- (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
Issuance of preferred stock -- -- -- -- 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 1,023,057 (508,294) (180,500) (222,624) 9,593,638
Exercise of stock options -- -- -- -- 55,920
Transfer from temporary equity -- -- -- -- 18,000
Deferred compensation -- (173,035) -- -- --
Amortization of deferred
compensation -- 288,209 -- -- 288,209
Repurchase of common stock -- -- (1,105,034) (1,460,740) (1,460,740)
Cancellation of treasury shares -- -- 798,634 1,196,341 --
Payment of dividends (102,728) -- -- -- (102,728)
Net loss for the year (689,408) -- -- -- (689,408)
--------- ------- --------- --------- ---------
Balances at December 31, 2000 $ 230,921 $(393,120) (486,900) $ (487,023) $ 7,702,891
========= ======= ========= ========= =========
See notes to consolidated financial statements.
FIRST MONTAUK FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31,
2000 1999 1998
Cash flows from operating activities:
Net income (loss) $ (689,408) $ 2,283,278 $(2,762,847)
Adjustments to reconcile net income (loss) to
net cash provided by (used in) operating activities:
Common stock issued with guaranteed
selling price -- -- 30,000
Tax benefit related to exercise of stock options -- -- 115,781
Depreciation and amortization 600,626 539,306 357,831
Amortization of deferred compensation 288,209 195,841 147,988
Amortization of bond discount 31,736 10,988 --
Loan reserves and write-offs 389,823 100,000 1,775,000
Loss on Global lease settlements -- 377,667 --
Other (1,448) -- (15,086)
Increase (decrease) in cash attributable to
changes in assets and liabilities:
Due from clearing firms 4,056,680 (3,586,144) (168,420)
Commissions receivable 306,796 (95,193) (4,553)
Trading and investment account securities (499,418) (742,631) 924,244
Employee and broker receivables (1,157,381) 145,927 328,983
Due from officers (42,314) (1,253) 15,190
Deferred income taxes - net (1,057,006) 36,499 (664,787)
Other assets 344,209 (152,692) 22,224
Deferred income 3,933,333 -- --
Securities sold, but not yet purchased 206,179 (146,767) (482,476)
Commissions payable (1,073,003) 1,179,092 (92,672)
Accounts payable (74,835) (276,689) 301,229
Accrued expenses (231,974) 167,398 70,564
Income taxes payable 365,560 510,226 --
Other liabilities (363,337) 378,631 67,715
--------- --------- ---------
Total adjustments 6,022,435 (1,359,794) 2,728,755
Net cash provided by (used in) --------- --------- ---------
operating activities 5,333,027 923,484 (34,092)
--------- --------- ---------
Cash flows from investing activities:
Issuance of notes receivable -- (207,000) (2,091,704)
Collection of notes receivable 74,708 102,197 777,029
Payment for Global leases receivable -- (12,532) --
Collection of Global leases receivable 649,652 619,497 --
Additions to property and equipment (722,205) (658,342) (986,315)
Other assets (39,150) (23,867) 109,344
--------- --------- ---------
Net cash used in investing activities (36,995) (180,047) (2,191,646)
--------- --------- ---------
Cash flows from financing activities:
Proceeds from notes payable -- -- 300,000
Payments of notes payable (896,364) (227,943) (145,925)
Proceeds from capital lease financing -- -- 304,068
Repurchase of common stock (1,460,740) (222,624) --
Payments of capital leases payable (122,669) (111,915) (18,621)
Payment of preferred stock dividends (102,728) (67,750) --
Proceeds from rights offering -- -- 1,382,751
Registration costs -- -- (120,320)
Proceeds from exercise of stock
options and warrants 55,920 204,841 347,415
Other assets 244,579 (244,579) --
--------- -------- ---------
Net cash provided by (used in)
financing activities (2,282,002) (669,970) 2,049,368
--------- -------- ---------
Net increase (decrease) in cash and
cash equivalents 3,014,030 73,467 (176,370)
Cash and cash equivalents at beginning of year 686,980 613,513 789,883
--------- -------- ---------
Cash and cash equivalents at end of year $ 3,701,010 $ 686,980 $ 613,513
========= ======== =========
See notes to consolidated financial statements.
FIRST MONTAUK FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(continued)
Years ended December 31,
2000 1999 1998
Supplemental disclosures of cash flow
information:
Cash paid (refunded) during the period for:
Interest $ 160,230 $ 166,104 $ 131,215
Income taxes $ 725,800 $ 5,232 $ (223,871)
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 leases $ -- $ -- $ 88,132
Transfer of temporary equity to permanent capital $ 18,000 $ -- $ 299,390
See notes to consolidated financial statements.
NOTE 1 - NATURE OF BUSINESS
First Montauk 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, but is no longer active. The
Company operates in one business segment.
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 1999 financial statements have been
reclassified to conform with the current year's presentation. These
reclassifications are not material to the consolidated financial statements.
Revenue Recognition
Securities transactions, commission income and related expenses are
recorded on a trade date basis. Underwriting fees are recorded at the time the
underwriting is completed and the income is reasonably determinable. Sales
concessions from participation in syndicated offerings are recorded on
settlement date.
Securities owned and securities sold but not yet repurchased are stated at
quoted market value with unrealized gains and losses included 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.
Advertising
Advertising costs are expensed as incurred and totaled $348,000, $398,000,
and $230,000 in 2000, 1999, and 1998, respectively.
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.
Cash Equivalents
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. Cash equivalents consist of money market
funds.
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. The following securities
have been excluded from the dilutive per share computation as they are
antidilutive:
Years ended December 31,
2000 1999 1998
---- ---- ----
Stock options 4,509,698 -- 3,253,300
Warrants 9,242,338 9,242,338 9,217,338
Convertible debt 345,263 -- 380,000
Convertible preferred stock 699,022 -- 699,022
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.
Stock-based compensation
The Company uses the intrinsic value method to value stock options issued
to employees and directors, as permitted by SFAS No. 123, "Accounting for
Stock-Based Compensation". Stock options granted to nonemployees are recorded at
their fair value, which is measured initially at the grant date using the
Black-Scholes options pricing model, and recognized over the related service
period. These options are periodically remeasured during the vesting period.
Comprehensive Income
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.
Accounting Pronouncements
In June 1998 and June 2000, the FASB issued SFAS No. 133, "Accounting for
derivative instruments and hedging activities" and SFAS No. 138, "Accounting for
certain derivative instrument and certain hedging activities." These statements
establish accounting and reporting standards requiring that every derivative
instrument be recorded on the balance sheet as either an asset or liability
measured at its fair value. SFAS No. 133 and 138 also require that changes in
the derivative's fair value be recognized currently in earnings unless specific
hedge accounting criteria are met. The Company will adopt SFAS No. 133 and No.
138 in the first quarter of fiscal 2001, and does not expect that the adoption
of these new standards will have a material impact on its earnings or financial
positions.
NOTE 3 - TRADING AND INVESTMENT SECURITIES
December 31,
2000 1999
Sold but Sold but
not yet not yet
Owned Purchased Owned Purchased
----- --------- ----- ---------
Marketable:
Municipal obligations $ 5,995 $ -- $ 73,310 $ --
Stocks 3,490,353 110,113 2,922,437 97,204
Corporate obligations 191,362 -- 346,420 80,952
Options 163,867 276,346 -- --
Other 35,249 -- 8,500 2,124
Nonmarketable securities 88,483 -- 125,224 --
--------- ------- --------- -------
$3,975,309 $386,459 $3,475,891 $180,280
========= ======= ========= =======
Securities owned, and securities sold, but not yet purchased consist of
trading securities at quoted market values. Nonmarketable securities consist of
investment securities recorded at estimated fair value that cannot be publicly
offered or sold unless registration has been effected under the Securities Act
of 1933.
NOTE 4 - EMPLOYEE AND BROKER RECEIVABLES
December 31,
2000 1999
Commission advances $ 251,512 $ 28,880
Forgivable loans 606,473 82,634
Other loans 751,681 340,771
--------- -------
$1,609,666 $452,285
The Company has an arrangement with certain registered representatives to
forgive their loans if they remain licensed with the Company for an agreed upon
period of time, generally one to two years, and/or if they meet specified
production goals. The loans are being amortized to expense for financial
reporting purposes over the term of the loan. Loan amortization expense was
$129,986, $88,253 and $206,851 in 2000, 1999 and 1998, respectively.
Other loans to employees and registered representatives are payable in
installments generally over periods from one to two years with interest rates
ranging from 0% to 8% per annum.
NOTE 5 - PROPERTY AND EQUIPMENT
December 31,
2000 1999
Computer and office equipment $ 2,793,518 $ 2,359,275
Furniture and fixtures 1,140,170 929,373
Leasehold improvements 785,190 728,797
--------- ---------
4,718,878 4,017,445
Less: Accumulated depreciation and amortization (2,414,345) (1,823,939)
--------- ---------
$ 2,304,533 $ 2,193,506
========= =========
Depreciation expense was $600,626, $539,306 and $357,831 in 2000, 1999 and
1998, respectively.
NOTE 6 - NOTES RECEIVABLE
December 31,
2000 1999
---- ----
a) Environmental Coupon Marketing, Inc. (ECM) $ -- $149,640
b) Global Financial Corp. (Global) 18,000 332,891
------ -------
$18,000 $482,531
====== =======
a) ECM is a closely-held marketer of recycling programs to retailers.
During 2000, the Company wrote off the ECM note balance after evaluating
prospects for collection, including a review of ECM's financial condition and
the note's default status.
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. 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.
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. During 2000, the Company applied $75,000
from a property sale to the note, and recorded an additional impairment charge
of $239,000 due to uncertainty as to the timing and the amount of proceeds that
might be realized from future asset sales. The balance of the note ($18,000) was
subsequently collected.
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 - NEW CLEARING/FINANCIAL AGREEMENTS
In May 2000, FMSC entered into a 10-year clearing agreement with Fiserv
Securities, Inc. ("Fiserv") under which Fiserv will act as FMSC's primary
clearing broker. In connection with the clearing agreement, the parties also
entered into a financial agreement under which Fiserv agreed to provide a cash
advance of $4,000,000 (the "initial payment") to FMSC upon the date of
conversion of customer accounts to Fiserv. The conversion occurred in November
2000, at which time the advance was paid. For financial reporting purposes, the
Company will earn the advance on a straight-line basis over the term of the
clearing agreement. Amortization can be accelerated based on performance. FMSC
is obligated to repay any unearned portion of the initial payment in the event
it fails to achieve certain minimum performance criteria by the end of the
agreement, or terminates the agreement under certain circumstances prior to
expiration. FMSC could also be subject to monetary penalties for nonperformance.
Fiserv has agreed to provide additional advances to FMSC in the second,
third and fourth years of the clearing agreement under conditions similar to the
initial payment, provided FMSC meets certain performance and other criteria.
These advances, if received, will also be amortized to income as earned during
the term of the clearing agreement.
Subsequent to December 31, 2000, the Company and FMSC amended and restated
the financial agreement with Fiserv (see Note 22).
NOTE 9 - NOTES PAYABLE
December 31,
2000 1999
---- ----
a) Notes payable - bank $ 52,994 $ 148,919
b) 10% convertible promissory notes payable -- 570,000
c) Convertible promissory notes, net of discount 406,185 608,509
d) Subordinated notes payable 100,000 150,000
------- ---------
$559,179 $1,477,428
======= =========
a) Term loans bearing interest at the prime rate (9.5% at December 31,
2000); 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 was payable semiannually at 10% per annum. Principal was due
in October 2003. The notes were 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 had 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. During 2000, the Company redeemed the loans for 110% of the
note principal, and recorded an extraordinary loss of $57,000 before income
taxes from the early extinguishment.
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 NASD.
Aggregate annual maturities of long-term debt are as follows:
2001 $281,803
2002 277,376
-------
$559,179
=======
NOTE 10 - ACCRUED EXPENSES
Accrued expenses consist of the following:
December 31,
2000 1999
---- ----
Reserves for legal matters $ -- $ 595,476
Other 840,578 477,076
------- -------
$840,578 $1,072,552
In 1999, the Company established an allowance of $595,476 to absorb losses
from customer claims and other legal matters that were probable and could be
reasonably estimated.
NOTE 11 - 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 12 - INCOME TAXES
The provision for income taxes (income tax benefit) consists of the
following:
December 31,
2000 1999 1998
---- ---- ----
Currently payable:
Federal $ 838,225 $ 301,058 $ --
State 225,502 211,583 60,255
--------- ------- -------
1,063,727 512,641 60,255
--------- ------- -------
Deferred:
Federal (817,223) 138,673 (727,531)
State (239,783) (102,174) 62,744
--------- ------- -------
(1,057,006) 36,499 (664,787)
--------- ------- -------
$ 6,721 $ 549,140 $ (604,532)
========= ======= ========
Following is a reconciliation of the income tax provision (benefit) with
income taxes based on the federal statutory rate:
December 31,
2000 1999 1998
---- ---- ----
Expected federal tax at statutory rate $(220,319) $ 963,421 $(1,144,909)
Non-deductible expenses 32,219 20,998 11,456
State taxes, net of federal tax effect (44,355) 172,956 (200,021)
Other -- (66,395) (2,527)
Change in valuation allowance 239,176 (541,840) 731,469
-------- ------- ---------
$ 6,721 $ 549,140 $ (604,532)
======== ======= =========
The tax effects of the temporary differences that give rise to significant
portions of the deferred tax assets and liabilities as of December 31, 2000 and
1999 are:
December 31,
2000 1999
---- ----
Deferred tax assets:
Deferred income $1,573,333 $ --
Accrued expenses 75,188 500,936
Tax loss carryforwards 180,986 189,629
Stock-based compensation 247,819 146,272
Other 72,741 33,993
--------- -------
2,150,067 870,830
--------- -------
Deferred tax liabilities:
Property and equipment -- 14,855
Other -- 2,090
--------- -------
-- 16,945
--------- -------
-- 853,885
Valuation allowance (428,805) (189,629)
-------- -------
Net deferred tax assets $1,721,262 $ 664,256
========= =======
The Company has recorded valuation allowances to offset tax benefits
arising from state tax loss carryforwards and stock-based compensation because
their realization is uncertain.
NOTE 13 - 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. The Company has also entered into
various agreements classified as capital leases.
Future minimum lease payments as of December 31, 2000 are as follows:
Capital Operating
Leases Leases
------- ---------
2001 $146,986 $ 828,003
2002 -- 773,173
2003 -- 666,150
2004 -- 641,071
2005 -- 53,333
------- -------
Total minimum lease payments 146,986 $2,961,730
Less: Amount representing interest on =========
capital leases 7,991
-------
Present value of minimum lease
payments $138,995
=======
Operating lease expense for 2000, 1999 and 1998 totaled $955,866, $947,732
and $857,715, respectively.
Employment agreements
In January 2000, the Company entered into new employment agreements with
its president and vice-president. The agreements run for three years and provide
for 10% annual increases in base salaries, and customary fringe benefits. The
officers will also be entitled to share in a bonus pool equal to 10% of the net
pre-tax profit of the Company, as defined.
Legal matters
FMSC is a respondent in a customer arbitration seeking rescissionary
damages of approximately $19 million plus punitive damages. The claimant alleges
violations of various provisions of federal and state securities laws. FMSC has
filed its answer to the claims and is vigorously defending the action. FMSC is
also a defendant or co-defendant in various other legal proceedings incidental
to its securities business. The Company is contesting the allegations of these
claims and believes that there are meritorious defenses in each case. In view of
the inherent difficulty of predicting the outcome of litigation, management is
unable to derive a meaningful estimate of the amount or range of possible loss
that may arise out of pending legal proceedings in any particular quarterly or
annual period, or in the aggregate. However, it is possible that the ultimate
outcome of these matters could have a material adverse impact on the Company's
financial condition, results of operations, and cash flows. As of December 31,
2000, the Company has not established a loss provision in the accompanying
financial statements for any liability that may result from these contingencies.
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 14 - FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK and
CONCENTRATIONS 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.
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.
The Company has sold securities that it does not currently own and will
therefore be required to purchase such securities at a future date. The Company
has recorded these obligations in the financial statements at market values of
the related securities ($386,459 and $180,280 at December 31, 2000 and 1999,
respectively) and will incur a loss if the market value of the securities
increases subsequent to year-end.
Financial instruments that potentially subject the Company to significant
concentrations of credit risk consist principally of cash and securities
inventories. The Company maintains all inventory positions and a significant
portion of its cash balances at its clearing firm. Asset balances may
periodically exceed insurance coverage.
NOTE 15 - 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
2000, 1999 and 1998 were $-0-, $74,132 and $38,077, respectively.
NOTE 16 - TEMPORARY EQUITY - STOCK SUBJECT TO REDEMPTION
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 the year ended December 31, 2000 (there was no activity during
1999):
Shares Amount
------ ------
Balances, December 31, 1999 18,000 $ 36,500
Payments -- (12,000)
Transfer to permanent capital (15,000) (18,000)
------ ------
Balances, December 31, 2000 3,000 $ 6,500
====== ======
NOTE 17 - 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 2000, the Company's stockholders approved an amendment to the 1992
Plan to increase the number of shares reserved for issuance from 6,000,000 to
8,000,000 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
shall 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.
In June 2000, the Company's stockholders approved an amendment to the 1996
Plan to increase the number of shares reserved for issuance to key management
employees from 2,000,000 to 4,000,000 shares. 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.
A summary of the activity in the Company's stock option plans for the
three-year period ended December 31, 2000 is presented below:
Weighted Average
Exercise
Shares Prices
------ ------
Options outstanding, December 31, 1997 2,624,100 $1.34
Granted 1,442,500 1.99
Canceled (381,250) 2.17
Exercised (432,040) .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
Options outstanding, December 31, 1999 3,519,700 1.68
Granted 2,014,498 1.87
Canceled (967,500) 1.37
Exercised (57,000) .98
Options outstanding, December 31, 2000 4,509,698 $1.84
Additional information with respect to options under the Company's option
plans is as follows:
Shares of common stock available
for future grant 6,582,702
Weighted-average grant date fair value of options
granted during each year using the Black-Scholes
option pricing model
1998 $.71
1999 $.70
2000 $.49
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 2000, 1999 and 1998 totaled $288,209, $195,840 and
$147,988, respectively.
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 2000, 1999 and 1998:
2000 1999 1998
---- ---- ----
Risk free interest rates 6.07% 5.76% 5.03%
Expected option lives 2.4 years 2.5 years 2.4 years
Expected volatilities 72% 48.5% 46.5%
Expected dividend yields 0% 0% 0%
The Company's pro forma information follows:
Net income (loss) 2000 1999 1998
---- ---- ----
As reported $ (689,408) $2,283,278 $(2,762,847)
Pro forma (1,152,958) 2,109,706 (3,292,291)
Basic income (loss) per share
As reported $(.08) $.22 $(.28)
Pro forma $(.13) $.21 $(.34)
Diluted income (loss) per share
As reported $(.08) $.21 $(.28)
Pro forma $(.13) $.19 $(.34)
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, 2000 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 - 1.09 520,000 2.03 years $1.02 423,400 $1.04
1.20 - 1.80 1,282,698 3.11 1.52 634,160 1.49
1.94 - 2.75 2,707,000 3.53 2.16 1,467,400 2.17
4,509,698 3.24 $1.84 2,524,960 $1.81
NOTE 18 - STOCKHOLDERS' EQUITY
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 (see below)
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.
In December 2000, the Company's board of directors approved a two-year
extension of the Class A Warrants to February 17, 2003.
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, 2000. The rights and
preferences, if any, to be given to these 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. During 2000,
the Company repurchased 1,105,034 shares for $1,460,740.
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.
NOTE 19 - FAIR VALUE OF FINANCIAL INSTRUMENTS
Substantially all of the Company's financial instruments at December 31,
1999 and 2000, consisting primarily of marketable equity securities, amounts due
from FMSC's clearing firms, 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 in the case of notes payable, because they carry
market rates of interest, or rates that management estimates are comparable to
those available for issuance of debt with similar terms and remaining
maturities.
NOTE 20 - 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, 2000, FMSC had net capital of $1,193,770, which was
$682,041 in excess of its required net capital of $511,729. FMSC's ratio of
aggregate indebtedness to net capital was 6.43 to 1.
NOTE 21 - VALUATION AND QUALIFYING ACCOUNTS
Additions
Balance at Charged to Charged to Balance at
beginning costs and other end
of period expenses accounts Deductions of period
---------- ---------- ---------- ---------- ---------
Valuation allowance for deferred tax assets:
Year ended December 31, 2000 $189,629 $ 239,176 $ -- $ -- $ 428,805
Year ended December 31, 1999 731,469 -- -- (541,840) 189,629
Year ended December 31, 1998 -- 731,469 -- -- 731,469
Reserve for notes receivable:
Year ended December 31, 2000 $ -- $ 239,000 $ -- $ (239,000) (a) $ --
Year ended December 31, 1999 -- 100,000 -- (1,875,000) (a) --
Year ended December 31, 1998 -- 1,775,000 -- -- 1,775,000
(a) Amounts determined not to be collectible.
NOTE 22 - UNAUDITED QUARTERLY RESULTS OF OPERATIONS
March 31, June 30, September 30, December 31,
2000 2000 2000 2000
---- ---- ---- ----
Revenues $24,486,906 $13,346,260 $12,671,033 $ 8,825,687
Income (loss) before extraordinary loss 1,888,320 143,847 (390,173) (2,297,202)
Net income (loss) available to
common stockholders 1,862,781 84,107 (414,876) (2,324,148)
Income (loss) per common share:
Basic:
Income (loss) before extraordinary
loss .19 .01 (.04) (.25)
Net income (loss) available
to common stockholders .19 .01 (.04) (.25)
Diluted:
Income (loss) before extraordinary
loss .17 .01 (.04) (.25)
Net income (loss) available
to common stockholders .17 .01 (.04) (.25)
March 31, June 30, September 30, December 31,
1999 1999 1999 1999
--- ---- ---- ----
Revenues $12,521,300 $15,068,415 $12,146,742 $17,848,159
Net income available to common
stockholders 647,969 709,069 56,955 801,535
Income per common share:
Net income available to common
stockholders - basic .07 .07 .01 .08
Net income available to common
stockholders - diluted .06 .07 .01 .07
NOTE 22 - SUBSEQUENT EVENT
As of February 1, 2001, the Company and FMFC amended and restated the
financial agreement with Fiserv. Under the restated terms, the Company, rather
than FMSC, will be the recipient of any additional cash advances payable under
the financial agreement. The Company has further assumed FMSC's obligation with
respect to the initial payment received in November 2000, and will be solely
responsible for any performance and early termination penalties. In
consideration of FMSC's release from its obligations under the financial
agreement and to secure Fiserv's interest, the Company has granted to Fiserv a
first priority lien in all of the outstanding shares of FMSC that it owns.