SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q/A
AMENDMENT NO. 2
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2003
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from --------------- to -------------------
Commission File No. 0-6729
FIRST MONTAUK FINANCIAL CORP
(Exact name of registrant as specified in its charter)
New Jersey 22-1737915
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
Parkway 109 Office Center, 328 Newman Springs Rd., Red Bank, NJ 07701
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (732) 842-4700
Former name, former address and former fiscal year, if changed since last
report.
Indicate by check mark whether the Registrant (l) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
Indicate by check whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes No X
APPLICABLE ONLY TO CORPORATE ISSUERS:
-------------------------------------
8,945,484 Common Shares, no par value, were outstanding as of November 14,
2003.
Page 1 of 22
02
Explanatory Note
This Amendment No. 2 to the Quarterly Report on Form 10-Q/A of First
Montauk Financial Corp. for the fiscal quarter ended June 30, 2003 is being
filed in order to restate the Company's consolidated financial statements as of
and for the three and six months ended June 30, 2003 to adjust the valuation of
certain warrants issuable by the Company. The restatement had the effect of
increasing stockholders' deficit and the net loss for the three and six months
ended June 30, 2003 as originally reported by $88,000. All information in this
Form 10-Q/A is as of June 30, 2003 and does not reflect any subsequent
information or events other than the aforementioned restatement. In addition,
this Amendment No. 2 to the Quarterly Report on Form 10-Q/A includes amendments
to Item 2 of Part I, Management's Discussion and Analysis of Financial Condition
and Results of Operations, to account for the aforementioned adjustments to the
consolidated financial statements.
03
FIRST MONTAUK FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
June 30, December 31,
2003 2002
---- ----
(restated)
(unaudited)
ASSETS
Cash and cash equivalents $ 2,562,673 $ 2,638,819
Due from clearing firm 5,146,894 4,591,701
Trading and investment account securities 489,993 183,944
Employee and broker receivables 1,132,159 1,070,087
Loans receivable - officers 165,620 178,936
Property and equipment - net 1,193,502 1,396,892
Income tax refund receivable 212,300 212,300
Deferred income taxes - net 460,000 460,000
Other assets 1,785,551 692,827
----------- ------------
Total assets $13,148,692 $11,425,506
========== ==========
LIABILITIES AND STOCKHOLDERS' DEFICIT
LIABILITIES
Deferred income $ 5,108,104 $ 5,456,323
Securities sold, not yet purchased, at market value 412,288 --
Notes payable -- 48,057
Commissions payable 4,727,239 2,681,128
Accounts payable 1,317,931 577,225
Accrued expenses 2,656,441 1,987,871
Capital leases payable 236,169 343,682
6% convertible debentures 1,240,000 1,030,000
Other liabilities 57,136 78,910
------------- -------------
Total liabilities 15,755,308 12,203,196
---------- ----------
Commitments and contingencies (See Notes)
STOCKHOLDERS' DEFICIT
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,
330,250 shares issued and outstanding, respectively; liquidation
preference: $1,651,250 33,025 33,025
Common Stock, no par value, 30,000,000 shares
authorized, 8,527,164 shares issued and outstanding 3,416,220 3,416,220
Additional paid-in capital 3,942,124 3,918,930
Accumulated deficit (9,971,428) (8,135,777)
Less: Deferred compensation (26,557) (10,088)
-------------- -----------
Total stockholders' deficit (2,606,616) (777,690)
---------- -----------
Total liabilities and stockholders' deficit $13,148,692 $11,425,506
========== ==========
See notes to financial statements.
04
FIRST MONTAUK FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF LOSS
Six months Three months
ended June 30, ended June 30,
2003 2002 2003 2002
---- ---- ---- ----
(restated) (restated)
(unaudited) (unaudited)
Revenues:
Commissions $18,891,411 $20,114,309 $11,242,152 $10,430,603
Principal transactions 5,503,426 3,630,583 3,242,096 1,510,044
Investment banking 363,415 103,020 168,087 39,985
Interest and other income 2,100,385 1,777,285 1,250,135 896,097
---------- ---------- ---------- -----------
Total revenues 26,858,637 25,625,197 15,902,470 12,876,729
---------- ---------- ---------- ----------
Expenses:
Commissions, employee compensation and benefits 21,481,549 21,309,105 12,383,927 10,831,326
Clearing and floor brokerage 1,357,882 1,367,085 789,612 686,171
Communications and occupancy 1,374,148 1,554,198 680,569 877,913
Legal matters and related costs 2,845,120 639,941 2,444,054 372,785
Other operating expenses 1,533,193 1,969,017 904,032 1,059,927
Interest 77,557 54,645 39,744 21,739
----------- ------------ ----------- -----------
Total expenses 28,669,449 26,893,991 17,241,938 13,849,861
---------- ---------- ---------- ----------
Net loss $(1,810,812) $(1,268,794) $(1,339,468) $ (973,132)
========== ========== ========== ========
Net loss applicable to common stockholders $(1,835,651) $(1,318,473) $(1,339,468) $ (997,971)
========== ========== ========== ==========
Per share of Common Stock:
Basic and diluted $ (0.21) $ (0.15) $ (0.16) $ (0.12)
========= ========= ========== ==========
Number of common shares used in
basic and diluted loss per share 8,527,164 8,579,173 8,527,164 8,534,075
========== ========== ========== ==========
See notes to financial statements.
05
FIRST MONTAUK FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Six months ended June 30,
2003 2002
---- ----
(restated)
(unaudited)
Cash flows from operating activities:
Net loss $(1,810,812) $(1,268,794)
---------- ----------
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 260,077 259,290
Amortization 11,304 11,254
Increase (decrease) in cash attributable to
changes in assets and liabilities:
Due from clearing firm (555,193) (905,486)
Trading and investment account securities (306,049) 221,756
Loans receivable - officers 13,316 (30,067)
Employee and broker receivables (62,072) 424,642
Other assets (1,097,303) 144,006
Income tax refund receivable -- 996,681
Deferred income (348,219) (281,775)
Securities sold not yet purchased 412,288 (162,906)
Commissions payable 2,046,111 163,004
Accounts payable 740,706 238,632
Accrued expenses 668,570 72,485
Other liabilities (21,774) (277,104)
-------- ----------
Total adjustments 1,761,762 874,412
--------- ----------
Net cash used in operating activities (49,050) (394,382)
------------ ---------
Cash flows from investing activities:
Additions to property and equipment (56,687) (124,726)
----------- ------------
Cash flows from financing activities:
Payments of notes payable (48,057) (148,421)
Payments of capital lease (107,513) (96,616)
Proceeds from issuance of 6% convertible debentures 210,000 --
Payments toward purchase of treasury stock -- (25,016)
Payments of preferred stock dividends (24,839) (49,679)
------------ -----------
Net cash provided by (used in) financing activities 29,591 (319,732)
------------ -----------
Net decrease in cash and cash equivalents (76,146) (838,840)
Cash and cash equivalents at beginning of period 2,638,819 1,779,554
---------- ----------
Cash and cash equivalents at end of period $ 2,562,673 $ 940,714
========== ===========
Supplemental disclosures of cash flow information:
Cash paid (received) during the period for:
Interest $ 62,146 $ 54,645
=========== ============
Income taxes $ 20,170 $(1,047,257)
=========== ==========
Noncash financing activity:
Warrants charged to deferred financing costs in
connection with debenture offering $ 2,178 $ --
=========== ===============
See notes to financial statements.
06
FIRST MONTAUK FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - MANAGEMENT REPRESENTATION
The accompanying financial statements are unaudited for the interim periods, but
include all adjustments (consisting only of normal recurring accruals) which
management considers necessary for the fair presentation of results at June 30,
2003 and 2002. The preparation of financial statements in conformity with GAAP
requires the Company to make estimates and assumptions that affect the reported
amounts of revenues and expenses during the reporting period. Actual results
could vary from these estimates. These financial statements should be read in
conjunction with the Company's Annual Report at, and for the year ended December
31, 2002, as filed with the Securities and Exchange Commission on Form 10-K.
The results reflected for the six-month and three-month periods ended June 30,
2003, are not necessarily indicative of the results for the entire fiscal year
to end on December 31, 2003.
NOTE 2 - NET LOSS PER SHARE
Basic loss per share is computed by dividing net loss by the weighted-average
number of common shares outstanding for the period. Diluted loss per share
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:
Six months ended June 30,
2003 2002
---- ----
Stock options 3,900,498 4,439,498
Warrants 3,221,446 9,242,338
Convertible debt 2,480,000 66,404
Convertible preferred stock 660,500 662,380
NOTE 3 - OTHER ASSETS
Other assets consist of the following:
June 30, December 31,
2003 2002
---- ----
Prepaid insurance $ 900,782 $256,215
Other assets 778,808 436,612
------- -------
$1,679,590 $692,827
========= =======
Prepaid insurance includes unamortized premiums for various corporate insurance
policies. The June 2003 balance reflects a significant increase over the prior
year for errors and omissions (E&O) coverage for the annual policy period that
commenced January 31, 2003.
NOTE 4 - ACCOUNTS PAYABLE
Accounts payable at June 30, 2003 includes a balance of $506,105 due under an
insurance premium finance agreement. The balance is payable in seven monthly
installments of $127,687, including interest at the rate of 4.4% per annum.
07
NOTE 5 - 6% CONVERTIBLE DEBENTURES
In December 2002 and January 2003, the Company raised gross proceeds of
$1,240,000 in a private placement of 6% convertible debentures. The debentures
are convertible into 2,480,000 shares of common stock at $.50 per share, subject
to adjustment for stock dividends and stock splits, and mature five years from
the date of issuance unless previously converted. Interest is payable in cash on
a semi-annual basis until maturity or conversion, commencing on April 1, 2003.
In the event that the closing bid price of the Company's common stock is 200% of
the conversion price for the twenty (20) consecutive trading days prior to the
date of notice of conversion or prepayment, the Company, at its option, may upon
thirty (30) days written notice to the holders, demand the conversion of some or
all of the debentures, or prepay some or all of the debentures at the following
prepayment prices: 130% of the principal amount if prepaid from the date of
issuance until the first anniversary of the date of issuance; 120% of the
principal amount if prepaid anytime thereafter. The debentures contain certain
covenants which, among other things, prevent the sale of all or substantially
all of the Company's assets without provision for the payment of the debentures
from such sales proceeds, and making loans to any executive officers or 5%
stockholders.
Offering costs of approximately $64,000 have been capitalized and are being
amortized on a straight-line basis over the term of the debentures.
NOTE 6 - STOCK OPTIONS
In December 2002, the FASB issued Statement of Financial Accounting Standards
No. 148, "Accounting for Stock-Based Compensation -- Transition and Disclosure"
("FAS 148"), which (i) amends FAS Statement No. 123, "Accounting for Stock-Based
Compensation," to provide alternative methods of transition for an entity that
voluntarily changes to the fair value based method of accounting for stock-based
employee compensation; (ii) amends the disclosure provisions of, FAS 123 to
require prominent disclosure about the effects on reported net income of an
entity's accounting policy decisions with respect to stock-based employee
compensation; and iii) amends APB opinion No. 28, "Interim Financial Reporting,"
to require disclosure about those effects in interim financial information.
Items (ii) and (iii) of the new requirements in FAS 148 are effective for
financial statements for fiscal years ending after December 15, 2002. The
Company has adopted FAS 148 for the fiscal year ended December 31, 2002 and
continues to account for stock-based compensation utilizing the intrinsic value
method. The additional disclosures required by FAS 148 are as follows:
Six months ended June 30, Three months ended June 30,
2003 2002 2003 2002
---- ---- ---- ----
Net loss applicable to common
stockholders, as reported $(1,835,651) $(1,318,473) $(1,339,468) $ (997,971)
Deduct: Total stock based
compensation expense determined
under the fair value based method
for all awards, net of tax (40,671) (77,299) (18,359) (41,749)
---------- ----------- ----------- ---------
Pro forma net loss $(1,876,322) $(1,395,772) $(1,357,827) $(1,039,720)
========== ========== ========== ===========
Loss per share:
Basic and diluted - as reported (0.21) (0.15) (0.16) (0.12)
Basic and diluted - pro forma (0.21) (0.16) (0.16) (0.12)
Pro forma net loss and loss per share 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.
08
NOTE 7 - LEGAL MATTERS
FMSC is a respondent in arbitrations arising from customer purchases of high
yield corporate bonds which declined in market value or defaulted. The claims
allege, among other charges, unsuitable recommendations and/or improper use of
margin. Some of the claims seek punitive damages and the recovery of various
costs. As discussed in Note 11 - Subsequent Events, the Company entered into a
global settlement with a number of these claimants in July 2003. There are
currently nine other arbitrations pending representing approximately $1.7
million in asserted damages plus interest. The Company is vigorously defending
these actions and believes that there are meritorious defenses in each case.
There is no remaining insurance coverage available for the payment of
settlements and/or judgments that may result from these claims.
FMSC is also a respondent or co-respondent in other legal proceedings related to
its securities business. FMSC is contesting these claims and believes there are
meritorious defenses in each case. The availability of insurance coverage in any
particular case is determined on a case by case basis by the insurance carrier,
and is limited to the coverage limits within the policy for any individual claim
and in the aggregate.
As of June 30, 2003, the Company has accrued approximately $2,218,000, including
the cost of the July 2003 settlement, for litigation costs that are probable and
can be reasonably estimated based on a review of existing claims, arbitrations
and unpaid settlements. Management cannot give any assurance that this accrual
will be adequate to cover actual costs that may be subsequently incurred. It is
not possible to predict the outcome of other matters pending against FMSC. All
such cases are, and will continue to be, vigorously defended. However,
litigation is subject to many uncertainties, and some of these actions and
proceedings may result in adverse judgments. After considering all relevant
facts, available insurance coverage and the advice of litigation counsel, it is
possible that the Company's consolidated financial condition, results of
operations, or cash flows could be materially affected by unfavorable outcomes
or settlements of certain pending litigation.
FMSC has also filed a claim against one of its competitors for raiding, unfair
competition and use of proprietary and confidential information. The Company has
obtained temporary Injunctive relief from the Supreme Court of New York, as well
as a consent injunctive order from an NASD arbitration panel. A hearing will be
held later this year to determine the damages portion of the Company's claims.
Management is unable to determine at this time what damages, if any, might be
awarded or received.
NOTE 8 - INCOME TAXES
The Company has reported an effective tax rate of 0% for all periods presented
due to net operating losses. The tax benefits of these losses and other
temporary differences have been offset by increases in the Company's tax
valuation allowance due to management's uncertainty as to the ultimate
realization of such benefits.
NOTE 9 - WARRANTS
The Company's 3,072,446 Class A warrants and 3,072,446 Class B warrants expired
on February 17, 2003.
In connection with the convertible debenture offering, the Company issued
124,000 common stock purchase warrants as compensation to registered
representatives. The Company valued the warrants at approximately $13,500 using
the Black-Scholes option pricing method, and included the warrant value in
deferred financing costs.
09
NOTE 10 - SUSPENSION OF PREFERRED STOCK DIVIDENDS
The Company has suspended the payment of cash dividends on its Series A
Preferred stock. New Jersey Business Corporation Act prohibits the payment of
any distribution by a corporation to, or for the benefit of its shareholders, if
the corporation's total assets would be less than its total liabilities. Unpaid
preferred dividends will continue to accumulate at 6% per annum. Arrearages must
be fully paid before any distribution can be declared or paid on the Company's
common stock. Cumulative dividends in arrears at June 30, 2003 were
approximately $25,000.
Note 11 - RESTATEMENT
Subsequent to the issuance of the Company's unaudited consolidated
financial statements for the quarter ended June 30, 2003, the Company discovered
a computational error in the valuation of certain warrants issued in July 2003,
but accrued for as of June 30, 2003. The correction resulted in an increase of
$88,000 in Legal matters and related costs in the Statement of Operations for
the three and six months ended June 30, 2003. A summary of the significant
effects of the restatement is as follows:
June 30, 2003
-------------
As Previously
Reported As Restated
-------- -----------
Accrued expenses $ 2,568,441 $ 2,656,441
Total liabilities 15,667,308 15,755,308
Accumulated deficit (9,883,428) (9,971,428)
Total stockholders' deficit (2,518,616) (2,606,616)
For the Three Months Ended
June 30, 2003
-------------
As Previously
Reported As Restated
-------- -----------
Legal matters and related costs $ 2,356,054 $ 2,444,054
Total expenses 17,153,938 17,241,938
Net loss (1,251,468) (1,339,468)
Net loss applicable to common
stockholders (1,251,468) (1,339,468)
Net loss per share - basic and
diluted $ (.15) $ (.16)
For the Six Months Ended
June 30, 2003
-------------
As Previously
Reported As Restated
-------- -----------
Legal matters and related costs $ 2,757,120 $ 2,845,120
Total expenses 28,581,449 28,669,449
Net loss (1,722,812) (1,810,812)
Net loss applicable to common
stockholders (1,747,651) (1,835,651)
$ (.20) (.21)
10
NOTE 12- SUBSEQUENT EVENT
On July 17, 2003, the Company entered into an agreement with certain claimants
in order to settle pending arbitration proceedings. The litigation arose out of
customer purchases of certain high-yield corporate bonds that declined in market
value or defaulted. The settlement agreement covers eleven separate claims which
sought an aggregate of approximately $12.3 million in damages. In exchange for
the consideration provided by the Company, each claimant granted a general
release of claims in favor of the Company and all individual respondents, with
the exception of the former registered representative who had handled the
claimants' accounts. The Company paid an aggregate of $1,000,000 cash, and
agreed to issue to the claimants 500,000 shares of the Company's common stock
and five-year warrants to purchase an aggregate of 750,000 additional common
shares. The Company has agreed to register all shares of common stock underlying
the warrants and fifty percent of the shares of common stock issued outright.
The warrants are expected to be issued in three classes of 250,000 warrants
each. The first class will have an exercise price of $.40 per share; the other
two classes will have an exercise price of $.25 per share. In addition, the
settlement agreement provides that the Company may be obligated to make
additional payments of up to $600,000, in the event that claimants elect to
exercise the warrants on certain dates. Specifically, upon the election of the
majority of then existing warrant holders of a particular class to exercise up
to a maximum of 250,000 warrants, respectively, during the months of June 2004,
June 2005 and June 2006 (the "Required Exercise Events"), the claimants, upon
exercising their warrants, will be required to sell the shares in the open
market. In the alternative, the Company may elect or be required to redeem the
warrants depending upon the then prevailing market price of the Company's Common
Stock. If the warrants are exercised, and the shares sold, the Company would pay
to the claimants up to an aggregate amount of $200,000 less the amount received
by the claimants from the sale of their shares net of commissions. In the event
that warrant holders of a particular class elect not to declare a Required
Exercise Event, the Company's guarantee will be canceled for that year.
While the basic warrant exercise terms have been agreed to by the Company and
the claimants, the specific procedures by which the warrants may be exercised
and/or redeemed may still be modified based upon further negotiations between
the Company and the claimants.
As of June 30, 2003, the Company has accrued the cash settlement of $1,000,000,
the value of the stock issuances of $160,000 based on the stock's quoted market
price, and the fair value of the warrants in the amount of $441,000 determined
using the discounted cash flow method. In accordance with the provisions of FAS
150, "Accounting for Certain Financial Instruments with Characteristics of both
Liabilities and Equity," the Company will re-measure the fair value of the
warrants as of the end of each reporting period until the Company's obligations
with respect to the warrants are resolved. Changes in fair value will be
recognized in earnings.
11
Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Factors Affecting "Forward-Looking Statements"
From time to time, the Company may publish "forward-looking statements"
within the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities and Exchange Act of 1934, as amended, or make oral
statements that constitute forward-looking statements. These forward-looking
statements may relate to such matters as anticipated financial performance,
future revenues or earnings, business prospects, projected ventures, new
products, anticipated market performance, and similar matters. The Private
Securities Litigation Reform Act of 1995 provides a safe harbor for
forward-looking statements. In order to comply with the terms of the safe
harbor, the Company cautions readers that a variety of factors could cause the
Company's actual results to differ materially from the anticipated results or
other expectations expressed in the Company's forward-looking statements. These
risks and uncertainties, many of which are beyond the Company's control,
include, but are not limited to: (i) transaction volume in the securities
markets, (ii) the volatility of the securities markets, (iii) fluctuations in
interest rates, (iv) changes in regulatory requirements which could affect the
cost of doing business, (v) fluctuations in currency rates, (vi) general
economic conditions, both domestic and international, (vii) changes in the rate
of inflation and related impact on securities markets, (viii) competition from
existing financial institutions and other participants in competition from
existing financial institutions and other 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. The reader is referred to the Company's previous filings on Form
10-Q for the period ended March 31, 2003 and Form 10-K for the year ended
December 31, 2002.
Overview
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. FMFC also sells insurance
products through its subsidiary Montauk Insurance Services, Inc.
FMSC has approximately 476 registered representatives and services over
60,000 retail and institutional customer accounts. With the exception of two
Company-leased branch offices, all of FMSC's 185 other branch office and
satellite locations in 33 states 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 and the Company-leased branch offices.
FMSC is registered as a broker-dealer with the Securities and Exchange
Commission, the National Association of Securities Dealers Regulation, Inc., the
Municipal Securities Rule Making Board, and the Securities Investor Protection
Corporation 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 various floor brokerage and specialist firms provide
execution services. 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.
12
RESULTS OF OPERATIONS
The results of operations for the six months and three months ended June
30, 2003 (the "2003 period" and the "2003 quarter," respectively) showed an
increase in revenues over the same periods in the prior year (the "2002 period"
and the "2002 quarter," respectively). Total revenue for the 2003 quarter
reflects the single highest revenue quarter since March 31, 2000. The continued
lower interest rate environment, combined with the end to the major conflict in
Iraq, positively affected investor confidence, and aided in their decision to
once again return to investing in the equity markets.
The Company's primary source of revenue is derived from commissions
generated on agency transactions, including the sales of listed and
over-the-counter stocks and options. Revenues from agency transactions increased
$727,000, or 11%, from $6,722,000 to $7,449,000 during the 2003 quarter. For the
six months ended June 30, 2003, there was a slight decrease in these revenues,
from $12,912,000 in the 2002 period, to $12,287,000 in the 2003 period.
Revenues from mutual fund commissions decreased for both the 2003 quarter
and the 2003 period. Mutual fund revenues decreased $474,000, from $3,275,000 in
the 2002 period to $2,801,000, in the 2003 period, a decrease of 14%, and
$221,000 from $1,811,000 to $1,590,000 in the 2002 and 2003 quarters,
respectively, a decrease of 12%.
Revenues from insurance commissions decreased $301,000, from $2,409,000 in
the 2002 period, to $2,108,000 in the 2003 period, a decrease of 12%. For the
2003 quarter, there was a slight increase of $96,000 over the 2002 quarter.
On the other hand, total revenues from principal transactions, which
include mark-ups/mark-downs on transactions in which the company acts as
principal, proprietary trading, syndicate commissions and fixed income
securities, showed significant increases during both periods in 2003. For the
2003 quarter, gross revenue from mark-ups/mark-downs on principal transactions
increased $795,000, from $487,000 to $1,282,000, an increase of 163% over the
2002 quarter. For the 2003 period, the increase was virtually the same as it was
during the 2003 quarter. The significant increase in syndicate revenues of
$644,000 for the 2003 quarter and $593,000 for the 2003 period, as compared to
the comparable periods in 2002 reflects a heightened investor desire for new
offerings. Trading in the firm's equity trading accounts increased for the 2003
quarter by $213,000 when compared to the 2002 quarter, as new policies and
procedures governing firm trading operations and risk management was fully
implemented during the year. Revenues from principal transactions in the fixed
income sector increased during both 2003 periods. Revenues from all fixed income
sources, which includes municipal, government, corporate bonds and unit
investment trusts increased to $1,041,000 from $822,000 and $2,201,000 from
$1,569,000 for the 2003 quarter and 2003 period, respectively. Unrealized gains
in securities inventory increased by $132,000; from an unrealized loss of
$121,000 for the 2002 quarter to an unrealized gain of $11,000 for the 2003
quarter.
13
Investment banking revenues for the 2003 quarter were $168,000, an increase
of $128,000, over the 2002 quarter. During the six month period ended June 30,
2003, revenues increased to $363,000 from $103,000 during the first six months
of 2002, an increase of $260,000.
Interest and other income for the 2003 quarter totalled $1,250,000 as
compared to $896,000 in the 2002 quarter. For the six month period ended June
30, 2003, interest and other income increased to $2,100,000 from $1,777,000 for
the first six months of 2002. While interest income remained relatively
constant, the increase is primarily attributable to a recovery of bad debt
write-offs and increases in charges to customers during the 2003 quarter.
Compensation expense increased $1,553,000, or 14%, to $12,384,000 in the
2003 quarter, from $10,831,000 in the 2002 quarter. Commission expense, which is
directly related to commissionable revenues, increased 18%, or $1,656,000, from
$8,956,000 in the 2002 quarter, to $10,612,000 in the 2003 quarter. Salaries and
benefits expense decreased $103,000, or 5%, from $1,875,000 in the 2002 quarter,
to $1,772,000 in the 2003 quarter due to staff reductions implemented in 2002
and 2003.
Compensation expense showed a slight increase of $173,000, or 1%, to
$21,482,000 in the 2003 period, from $21,309,000 in the 2002 period. Commission
expense increased 2%, or $339,000, from $17,623,000 in the 2002 period to
$17,962,000 in the 2003 period. Salaries and benefits expense decreased
$166,000, or 5%, from $3,686,000 in the 2002 period, to $3,520,000 in the 2003
period due to the same reasons described above.
Communication and occupancy expenses decreased $198,000, or 22%, from
$878,000 in the 2002 quarter to $680,000 in the 2003 quarter. The decrease is
attributable to a one-time credit for excess CAM charges on the corporate
headquarters' lease; the elimination of two company leased branch offices and
their related costs and equipment rental expenses.
Legal matters and related costs increased $2,071,000 to $2,444,000 during
the 2003 quarter as compared to $373,000 in the 2002 quarter. This increase is
primarily attributable to the costs to defend and settle asserted claims of
approximately $13 million arising from customer purchases of high-yield
corporate bonds. As discussed in Footnote 12 - Subsequent Events, the Company
entered into a global settlement with a number of these claimants in July 2003.
As of June 30, 2003, the Company has accrued approximately $2,218,000, including
the cost of the July 2003 settlement, for litigation costs that are probable and
can be reasonably estimated based on a review of existing claims, arbitrations
and unpaid settlements. In addition to those claims settled in July, there
remain nine additional arbitrations representing approximately $1.7 million in
asserted damages arising from the same or similar allegations. The Company is
vigorously defending these actions and believes that there are meritorious
defenses in each case. There is no remaining insurance coverage available for
the payment of settlements and/or judgments that may result from these claims.
FMSC has also filed a claim against one of its competitors for raiding,
unfair competition and use of proprietary and confidential information. The
Company has obtained temporary injunctive relief from the Supreme Court of New
York, as well as a consent injunctive order from an NASD arbitration panel. A
hearing will be held later this year to determine the damages portion of the
Company's claims. Management is unable to determine at this time what damages,
if any, might be awarded.
Other operating expenses decreased to $904,000 in the 2003 quarter, from
$1,060,000 in the 2002 quarter. For the six month period ending June 30, 2003
and 2002, these expenses decreased to $1,533,000 from $1,969,000, respectively.
Bad debt expenses decreased from $219,000 during the 2002 quarter to $3,000 in
the 2003 quarter, and from $361,000 for the first six months of 2002 to $1,000
for the six month period ended June 30, 2003. The cost for errors and omission
insurance increased by $153,000 for the 2003 six-month period, resulting from
the substantial increase in premiums from the Company's policy renewal in
January 2003.
14
The Company has reported an effective tax rate of 0% for all periods
presented due to net operating losses. The tax benefits of these losses and
other temporary differences have been offset by increases in the tax valuation
allowance due to management's uncertainty as to the ultimate realization of such
benefits.
For the six month period ended June 30, 2003, the Company reported a net
loss applicable to common stockholders of $1,836,000 or $.21 per basic and
diluted share, as compared to the net loss applicable to common stockholders
reported for the same period in 2002 of $1,318,000 or $.15 per basic and diluted
share. For the three months ended June 30, 2003, the Company reported a net loss
applicable to common stockholders of $1,339,000, or $.16 per basic and diluted
share, as compared to a net loss applicable to common stockholders of $998,000,
or $.12 per basic and diluted share for the second quarter of 2002.
LIQUIDITY AND CAPITAL RESOURCES
As with most financial firms, the Company maintains a highly liquid balance
sheet with 62% of the Company's assets consisting of cash, securities owned, and
receivables from the Company's clearing firm and other broker-dealers. 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.
Cash and cash equivalents decreased during the first six months of 2003 by
$76,000, to $2,563,000. Net cash used in operating activities was $49,000 for
the 2003 period. The primary components of the decrease are the loss of
$1,811,000 and an increase in other assets, comprised mainly of an increase in
prepaid insurance of $1,097,000, offset by an increase in commissions payable of
$2,046,000.
Under the financing agreement with Fiserv, the Company is eligible to
receive its fourth and final advance of $1,250,000 in November 2003, subject to
meeting certain performance criteria. Advances are subject to income taxes in
the year of receipt.
Additions to capital expenditures accounted for the entire use of cash from
investing activities of $57,000 during the first quarter of 2003. The Company
projects $150,000 in capital expenditures over the next twelve months.
Financing activities provided cash of $30,000 during the 2003 period. The
Company received gross proceeds of $210,000 from the second closing of its
private offering of 6% convertible debentures. This was offset by payments of
notes payable, capital leases and preferred stock dividends of $48,000, $107,000
and $25,000, respectively. During fiscal 2001, the Company entered into two
capital leases under a sale-leaseback financing with a leasing company. The sale
of the fixed assets resulted in a gain of approximately $45,000, which has been
deferred and is being amortized over the related lease terms. The leases,
totaling $662,000, are together payable in 36 monthly installments of $21,000
and an additional 12 installments of $3,900.
15
Consolidated Contractual Obligations and Lease Commitments
The tables below summarize information about the consolidated contractual
obligations as of June 30, 2003 and the effects these obligations are expected
to have on the Company's consolidated liquidity and cash flows in future years.
These tables do not include any projected payment amounts related to the
Company's potential exposure to arbitrations and other legal matters.
Future minimum operating lease payments as of June 30, 2003 are as follows:
Operating
Leases
2003 $ 555,003
2004 1,103,126
2005 296,302
2006 169,500
---------
Total minimum lease payments $2,123,931
=========
Future minimum lease payments as of June 30, 2003 are as follows:
Capital
Leases
2003 $124,458
2004 114,396
2005 15,711
2006 --
--------
Total minimum lease payments 254,565
Less: Amount representing interest (18,397)
--------
$236,168
========
In 1999, the Company completed a private offering of Series A Convertible
Preferred Stock in connection with the settlement with holders of leases of
Global Financial Corp. 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
Common Stock and pays a quarterly dividend of 6%. Pursuant to the offering, the
Company issued an aggregate of 349,511 shares of Series A Preferred Stock. The
offering was exempt from registration pursuant to Sections 4(2) and 4(6) of the
Securities Act of 1933, as amended, and Regulation D, promulgated thereunder.
The Company has suspended the quarterly payments of its Series A Preferred Stock
dividend in accordance with applicable state law (See Note 10 to the financial
statements and Part II Item 5.)
In October 2002, the Company commenced a private offering of up to
$3,000,000 of 6% convertible debentures to accredited investors. Each debenture
is convertible at an initial conversion price of $0.50 per share, subject to
adjustment for stock dividends, combinations, splits, recapitalizations, and
like events. Interest on the debentures accrues at the rate of 6% per annum and
is payable in cash on a semi-annual basis on April 1st and October 1st of each
year until maturity or conversion. Each debenture is due and payable five (5)
years from issuance, unless previously converted into shares of Common Stock.
The offering expired on March 1, 2003. In the offering, the Company sold an
aggregate amount of $1,240,000 of debentures, $1,030,000 in fiscal 2002 and
$210,000 in fiscal 2003. The proceeds of the financing will be used to satisfy
general working capital needs. The debentures have not been registered for offer
or sale under the Securities Act; such securities are being issued on the basis
of the statutory exemption provided by Section 4(2) of the Securities Act, as
amended, and/or Rule 506 of Regulation D, promulgated thereunder relating to
transactions by an issuer not involving any public offering.
16
APPLICATION OF CRITICAL ACCOUNTING POLICIES
Generally accepted accounting principles are complex and require management
to apply significant judgments to various accounting, reporting and disclosure
matters. Management of the Company must use assumptions and estimates to apply
these principles where actual measurement is not possible or practical.
For a complete discussion of the Corporation's significant accounting
policies, see "Management Discussion and Analysis" and "Notes to the
Consolidated Financial Statements" in the Company's 2002 Annual Report filed on
Form 10-K. Certain policies are considered critical because they are highly
dependent upon subjective or complex judgments, assumptions and estimates.
Changes in such estimates may have a significant impact on the financial
statements.
17
PART II
OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
Exhibit 31.1 - Section 302 Certification of Herbert Kurinsky, President
Exhibit 31.2 - Section 302 Certification of William J. Kurinsky, Chief
Financial Officer
Exhibit 32.1 - Certification pursuant to Section 1350 pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002 by Herbert
Kurinsky
Exhibit 32.2 - Certification pursuant to Section 1350 pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002 by
William J. Kurinsky
18
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
FIRST MONTAUK FINANCIAL CORP.
(Registrant)
Dated: November 14, 2003 /s/ William J. Kurinsky
-------------------------------
William J. Kurinsky
Secretary/Treasurer
Chief Financial Officer and
Principal Accounting Officer
/s/ Herbert Kurinsky
-------------------------------
Herbert Kurinsky
President
19 Exhibit 31.1
CERTIFICATION
I, Herbert Kurinsky, President, certify that:
1. I have reviewed this quarterly report on Form 10-Q/A of First Montauk
Financial Corp.;
2. Based on my knowledge, this report does not contain any untrue statement of
a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
a) designed such disclosure controls and procedures, or caused such disclosure
controls and procedures to be designed under our supervision, to ensure
that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this report is being
prepared;
b) (Not applicable.)
c) Evaluated the effectiveness of the registrant's disclosure controls and
procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of
the period covered by this report based on such evaluation; and
d) Disclosed in this report any change in the registrant's internal control
over financial reporting that occurred during the registrant's most recent
fiscal quarter (the registrant's fourth fiscal quarter in the case of an
annual report) that has materially affected, or is reasonably likely to
materially affect, the registrant's internal control over financial
reporting; and
5. The registrant's other certifying officer(s) and I have disclosed, based on
our most recent evaluation of internal control over financial reporting, to
the registrant's auditors and the audit committee of the registrant's board
of directors (or persons performing the equivalent functions):
a) all significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are reasonably
likely to adversely affect the registrant's ability to record, process,
summarize and report financial information; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal control over
financial reporting.
Date: November 14, 2003
/s/ Herbert Kurinsky
- ---------------------------------
HERBERT KURINSKY
PRESIDENT
20
Exhibit 31.2
CERTIFICATION
I, William J. Kurinsky, Chief Financial Officer, certify that:
1. I have reviewed this quarterly report on Form 10-Q/A of First Montauk
Financial Corp.;
2. Based on my knowledge, this report does not contain any untrue statement of
a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
a) designed such disclosure controls and procedures, or caused such disclosure
controls and procedures to be designed under our supervision, to ensure
that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this report is being
prepared;
b) (Not applicable.)
c) Evaluated the effectiveness of the registrant's disclosure controls and
procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of
the period covered by this report based on such evaluation; and
d) Disclosed in this report any change in the registrant's internal control
over financial reporting that occurred during the registrant's most recent
fiscal quarter (the registrant's fourth fiscal quarter in the case of an
annual report) that has materially affected, or is reasonably likely to
materially affect, the registrant's internal control over financial
reporting; and
5. The registrant's other certifying officer(s) and I have disclosed, based on
our most recent evaluation of internal control over financial reporting, to
the registrant's auditors and the audit committee of the registrant's board
of directors (or persons performing the equivalent functions):
a) all significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are reasonably
likely to adversely affect the registrant's ability to record, process,
summarize and report financial information; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal control over
financial reporting.
Date: November 14, 2003
/s/ William J. Kurinsky
- ---------------------------------
WILLIAM J. KURINSKY
CHIEF FINANCIAL OFFICER
21
Exhibit 32.1
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Amendment No. 2 to the Quarterly Report of FIRST
MONTAUK FINANCIAL CORP. (the "Company") on Form 10-Q for the period ending June
30, 2003 as filed with the Securities and Exchange Commission on the date hereof
(the "Report"), I, Herbert Kurinsky, Chief Executive Officer of the Company,
certify, pursuant to 18 U.S.C. section 1350, as adopted pursuant to Section 906
of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of Section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and result of operations of the
Company.
/s/ Herbert Kurinsky
- -----------------------------------
Herbert Kurinsky
Chief Executive Officer
November 14, 2003
22
Exhibit 32.2
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Amendment No. 2 to the Quarterly Report of FIRST
MONTAUK FINANCIAL CORP. (the "Company") on Form 10-Q for the period ending June
30, 2003 as filed with the Securities and Exchange Commission on the date hereof
(the "Report"), I, William J. Kurinsky, Chief Financial Officer of the Company,
certify, pursuant to 18 U.S.C. section 1350, as adopted pursuant to Section 906
of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of Section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and result of operations of the
Company.
/s/ William J. Kurinsky
- -----------------------------------
William J. Kurinsky
Chief Financial Officer
November 14, 2003