SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2005
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:
- -------------------------------------
15,413,899 Common Shares, no par value, were outstanding as of May 16,
2005.
Page 1 of 28
FIRST MONTAUK FINANCIAL CORP.
FORM 10-Q
MARCH 31, 2005
INDEX
Page
PART I. FINANCIAL INFORMATION:
Item 1. Financial Statements
Consolidated Statements of Financial Condition
as of March 31, 2005 and December 31, 2004 ................... F-1
Consolidated Statements of Income and Loss for the
Three Months Ended March 31, 2005 and 2004 ................... F-2
Consolidated Statements of Cash Flows for the
Three Months Ended March 31, 2005 and 2004 ................... F-3
Consolidated Statements of Changes in Stockholders'
Equity (Deficit) ............................................. F4-5
Notes to Consolidated Financial Statements .................... 6-11
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations .................. 12-17
Item 3. Risk Management ........................................ 17
Item 4. Controls and Procedures ................................ 18
PART II. OTHER INFORMATION:
Item 1. Legal Proceedings ..................................... 19
Item 2. Changes in Securities .................................. 19
Item 3. Defaults Upon Senior Securities ........................ 19
Item 4. Submission of Matters to a Vote of Security Holders .... 19
Item 5. Other Information ...................................... 20-22
Item 6. Exhibits ............................................... 23
Signatures ...................................................... 24
Officers' Certifications ........................................ 25-28
FIRST MONTAUK FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
March 31 December 31,
2005 2004
---- ----
ASSETS
Cash and cash equivalents $ 1,947,140 $ 1,034,681
Due from clearing firm 4,830,289 5,815,819
Securities owned, at market value 1,255,388 370,720
Prepaid expenses 1,285,127 340,821
Employee and broker receivables 475,833 548,240
Property and equipment - net 693,231 790,909
Income taxes receivable 37,900 40,525
Deferred taxes, net of valuation allowance 251,291 -
Other assets 997,927 892,659
------------------ -----------------
Total assets $ 11,774,126 $ 9,834,374
================== =================
LIABILITIES AND STOCKHOLDERS' DEFICIT
LIABILITIES
Deferred income $ 4,886,364 $ 5,105,116
6% convertible debentures 1,260,000 3,015,000
Warrants subject to put options 324,855 333,261
Securities sold, not yet purchased, at market value 12,250 174,326
Commissions payable 2,770,193 2,499,793
Accounts payable 1,344,332 614,784
Accrued expenses 1,225,141 1,078,185
Income taxes payable 50,036 44,546
Capital leases payable 33,344 62,460
Other liabilities 252,391 5,520
------------------ -----------------
Total liabilities 12,158,906 12,932,991
------------------ -----------------
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, 305,369 shares issued and outstanding;
liquidation preference: $1,526,845 30,537 30,537
Series B convertible preferred stock, 445,102 shares authorized,
$.10 par value, 197,824 and 0 shares issued and outstanding
respectively; liquidation preference: $1,000,000 19,782 -
Common stock, no par value, 30,000,000 shares authorized,
15,354,051 and 10,258,509 shares issued and outstanding,
respectively 10,055,576 7,257,292
Additional paid-in capital 1,930,810 950,592
Accumulated deficit (11,324,215) (10,948,157)
Less deferred compensation (1,097,270) (388,881)
------------------ -----------------
Total stockholders' deficit (384,780) (3,098,617)
------------------ -----------------
Total liabilities and stockholders' deficit $ 11,774,126 $ 9,834,374
================== =================
See notes to financial statements.
F-1
FIRST MONTAUK FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (LOSS)
Three months ended March 31
2005 2004
---- ----
Revenues:
Commissions $ 9,942,163 $13,487,286
Principal transactions 1,702,757 2,975,811
Investment banking 2,898,712 1,271,888
Interest and other income 1,022,013 1,086,421
-------------------- -----------------
Total revenue 15,565,645 18,821,406
-------------------- -----------------
Expenses:
Commissions, employee compensation and benefits 12,662,133 14,887,865
Executive separation costs 1,432,937 -
Clearing and floor brokerage 421,037 789,193
Communications and occupancy 601,047 678,681
Legal matters and related costs 242,267 1,281,943
Other operating expenses 779,599 865,796
Interest 42,204 79,954
-------------------- -----------------
Total expenses 16,181,224 18,583,432
-------------------- -----------------
Income (loss) before income taxes (615,579) 237,974
Provision (benefit) for income taxes (239,521) -
-------------------- -----------------
Net income (loss) $ (376,058) $ 237,974
==================== =================
Net income (loss) applicable to common stockholders $ (410,516) $ 237,974
==================== =================
Earnings (loss) per share:
Basic $ (0.03) $ 0.02
Diluted $ (0.03) $ 0.02
Weighted average number of shares of stock outstanding:
Basic 12,380,852 9,067,548
Diluted 12,380,852 15,631,311
See notes to financial statements.
F-2
FIRST MONTAUK FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Three months ended March 31
2005 2004
---- ----
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ (376,058) $ 237,974
Adjustments to reconcile net income (loss) to net cash provided by (used in)
operating activities:
Depreciation and amortization of property and equipment 111,165 128,269
Amortization of deferred costs 200,424 113,273
Amortization of deferred income (218,752) (218,752)
Deferred income taxes - net (251,291)
Preferred shares issued in connection with separation agreement 1,000,000
Loss on disposition of property and equipment - 4,689
Increase (decrease) in cash attributable to changes in assets
and liabilities:
Due from clearing firm 985,529 299,141
Securities owned (884,668) (153,324)
Prepaid expenses (944,305) (1,016,550)
Employee and broker receivables 72,407 122,428
Income tax refund receivable 2,625
Other assets (121,464) 221,975
Warrants subject to put options 70 18,635
Securities sold, not yet purchased (162,076) 20,030
Commissions payable 270,400 (407,720)
Accounts payable 729,548 851,460
Accrued expenses 146,956 193,009
Income taxes payable 5,490
Other liabilities 246,870 67,869
-------------------- ------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 812,870 482,406
-------------------- ------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment (13,487) (93,782)
-------------------- ------------------
NET CASH USED IN INVESTING ACTIVITIES (13,487) (93,782)
-------------------- ------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments of capital leases (29,116) (59,046)
Proceeds from exercise of incentive stock option 142,192
-------------------- ------------------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 113,076 (59,046)
-------------------- ------------------
Net increase in cash and cash equivalents 912,459 329,578
Cash and cash equivalents at beginning of period 1,034,681 3,441,743
-------------------- ------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 1,947,140 $ 3,771,321
==================== ==================
Supplemental disclosures of cash flow information: Cash paid during the period
for:
Interest $ 82,150 $ 13,278
==================== ==================
Income taxes $ 3,655 $ 65,324
==================== ==================
See notes to financial statements.
F-3
FIRST MONTAUK FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE PERIOD FROM JANUARY 1, 2003 TO MARCH 31, 2005
Series A Convertible Series B Convertible
Preferred Stock Preferred Stock Common Stock
------------------------ ------------------- ------------------------- Additional
Shares Amount Shares Amount Shares Amount Paid-in Capital
------------------------ ------------------- ------------------------- ---------------
Balances at January 1, 2003 330,250 33,025 - - 8,527,164 6,384,558 950,592
Increase in deferred compensation 142,402
Amortization of deferred compensation
Common stock issued in connection
with legal settlements 500,000 160,000
Issuance of common stock purchase
warrants for services 35,977
Conversion of preferred stock into
common stock (19,161) (1,916) 38,322 1,916
Payment of dividends
Net loss for the year
------------------------ ------------------- ------------------------- --------------
Balances at December 31, 2003 311,089 31,109 - - 9,065,486 6,724,853 950,592
Increase in deferred compensation 82,471
Amortization of deferred compensation
Repurchase of common stock
Cancellation of treasury shares (60,217) (21,162)
Issuance of restricted stock in connection
with employment agreements 1,000,000 350,000
Conversion of preferred stock into
common stock (5,720) (572) 11,440 572
Exercise of incentive stock options 1,800 558
Conversion of bonds into common stock 240,000 120,000
Net income for the year
------------------------ ------------------- -------------------------- --------------
Balances at December 31, 2004 305,369 30,537 - - 10,258,509 7,257,292 950,592
Increase in deferred compensation 151,616
Amortization of deferred compensation
Repurchase of common stock
Cancellation of treasury shares
Issuance of restricted stock in connection
with employment agreements 1,300,000 741,000
Issuance of preferred stock in connection
with separation agreement 197,824 19,782 980,218
Conversion of preferred stock into
common stock -
Exercise of incentive stock options 260,200 142,192
Exercise of warrants 25,342 8,476
Conversion of bonds into common stock 3,510,000 1,755,000
Net income for the year
------------------------ ------------------- -------------------------- --------------
Balances at March 31, 2005 305,369 $ 30,537 197,824 $ 19,782 15,354,051 $ 10,055,576 $1,930,810
======================== =================== ========================== ==============
See notes to financial statements.
F-4
FIRST MONTAUK FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE PERIOD FROM JANUARY 1, 2003 TO MARCH 31, 2005
Retained
Earnings Stockholders'
(Accumulated Deferred Treasury Stock Equity
Deficit) Compensation Shares Amount (Deficit)
------------- -------------- ---------------------- ---------------
Balances at January 1, 2003 (8,135,777) (10,088) (777,690)
Increase in deferred compensation (142,402)
Amortization of deferred compensation 37,156 37,156
Common stock issued in connection
with legal settlements 160,000
Issuance of common stock purchase
warrants for services 35,977
Conversion of preferred stock into
common stock
Payment of dividends (24,839) (24,839)
Net loss for the year (3,518,043) (3,518,043)
------------- ------------ ----------------------- -----------
Balances at December 31, 2003 (11,678,659) (115,334) (4,087,439)
Increase in deferred compensation (432,471) (350,000)
Amortization of deferred compensation 158,924 158,924
Repurchase of common stock (60,217) (21,162) (21,162)
Cancellation of treasury shares 60,217 21,162
Issuance of restricted stock in connection
with employment agreements 350,000
Conversion of preferred stock into -
common stock -
Exercise of incentive stock options 558
Conversion of bonds into common stock 120,000
Net income for the year 730,502 730,502
------------- ------------ ----------------------- -----------
Balances at December 31, 2004 (10,948,157) (388,881) (3,098,617)
Increase in deferred compensation (151,616) -
Amortization of deferred compensation 184,227 184,227
Repurchase of common stock -
Cancellation of treasury shares -
Issuance of restricted stock in connection -
with employment agreements (741,000) -
Issuance of preferred stock in connection -
with separation agreement 1,000,000
Conversion of preferred stock into -
common stock -
Exercise of incentive stock options 142,192
Exercise of warrants 8,476
Conversion of bonds into common stock 1,755,000
Net income for the year (376,058) (376,058)
------------- ------------ ----------------------- -----------
Balances at March 31, 2005 $ (11,324,215) $(1,097,270) $ (384,780)
============= ============ ======================= ===========
See notes to financial statements.
F-5
FIRST MONTAUK FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - MANAGEMENT REPRESENTATION
The accompanying financial statements are unaudited for the
interim period, but include all adjustments (consisting only
of normal recurring accruals) which management considers
necessary for the fair presentation of results at March 31,
2005 and 2004. 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, 2004, as filed with the
Securities and Exchange Commission on Form 10-K.
The results reflected for the three months ended March 31,
2005, are not necessarily indicative of the results for the
year ending December 31, 2005.
NOTE 2 - STOCK-BASED COMPENSATION
The Company accounts for employee stock compensation plans in
accordance with the intrinsic value-based method permitted by
FAS No. 123, "Accounting for Stock-Based Compensation," which
does not result in compensation cost for stock options. The
market value at date of grant of shares of restricted stock is
recorded as compensation expense over the period of
restriction.
The following table illustrates the effect on net earnings and
EPS if the Company had applied the fair value recognition
provisions of FAS 123 to measure stock-based compensation
expense for outstanding stock option awards for the three
months ended March 31, 2005 and 2004:
Three months ended March 31,
2005 2004
Net income (loss) applicable to common
stockholders, as reported $(410,516) $237,974
Deduct: Total stock based employee compensation
expense determined under the fair value based
method for all awards, net of tax (18,549) (63,305)
Pro forma net income (loss) $(429,065) $174,669
Income (loss) per share:
Basic - as reported $(0.04) $0.02
Basic - pro forma $(0.04) $0.02
Diluted - as reported $(0.04) $0.02
Diluted - pro forma $(0.04) $0.01
The fair value of the options issued is estimated on the date
of grant using the Black-Scholes Option Pricing Model with the
following weighted-average assumptions used for grants for the
three months ended March 31, 2005: Dividend yield of 0%;
expected volatility of 103%, risk free interest rate of 4.18%,
and an expected life of 4 years. The weighted average fair
value of options granted during the three months ended March
31, 2005 was $.59.
Weighted average assumptions used for grants for the three
months ended March 31, 2004 were as follows: Dividend yield of
0%; expected volatility of 105%, risk free interest rate of
3.29%, and an expected life of 4 years. The weighted average
fair value of options granted during the three months ended
March 31, 2004 was $.20.
6
NOTE 3 - ACCOUNTS PAYABLE
Accounts payable at March 31, 2005 includes an insurance
premium financing agreement with a current balance of
approximately $810,000, payable in six remaining installments
of approximately $117,000. All installments include interest
at the rate of 3.9% per annum.
NOTE 4 - 6% CONVERTIBLE DEBENTURES
During the quarter ended March 31, 2005, holders of $1,755,000
of our 6% subordinated convertible debentures presented their
debentures to the Company for conversion. The Company issued
an additional 3,510,000 shares of common stock and retired
$1,755,000 of the debentures.
The debentures outstanding as of March 31, 2005 are $1,260,000
and are due to mature in 2007 and 2008, as follows: 2007 -
$480,000; 2008 - $780,000.
NOTE 5 - WARRANTS SUBJECT TO PUT OPTIONS
In July 2003, the Company issued 750,000 five-year warrants to
various plaintiffs as part of a legal settlement (See Note
10). The warrants were issued in three classes of 250,000
warrants each. The Class A warrants, which had an exercise,
price of $.40 per share, were redeemed for $200,000 during the
third quarter of 2004. Class B and Class C warrants have
exercise prices of $.25 per share. During the first quarter
2005, 16,951 each of Class B and Class C warrants were
exercised. The settlement agreement provides that the Company
may be obligated to make additional cash payments of up to
$372,878 in the event that claimants elect to exercise the
remaining warrants on certain dates. Specifically, if a
majority of then existing Class B warrant holders elect to
exercise the outstanding warrants in their particular class
during the month of June 2005 (the "Required Exercise Event"),
the claimants, upon exercising their warrants, will be
required to sell the shares in the open market. If the
warrants are exercised and the shares sold, the Company will
pay to the claimants up to an aggregate amount of $186,439
less the amount received by the claimants from the sale of
their shares, net of commissions. This process will be
repeated for outstanding Class C warrant holders during the
month of June 2006.
In the alternative, the Company may elect or be required to
redeem the unexercised warrants for up to $.80 per warrant, or
a maximum of $186,439 per class, depending upon the then
prevailing market price of the Company's common stock on or
about the date of the Required Exercise Event of a particular
class. The Company may call a warrant class for redemption if
the average market price of the underlying common shares
during the ten trading days immediately preceding the date
upon which the Company receives notice that the warrant
holders of a particular class have elected to declare a
Required Exercise Event is less than $1.20. The Company will
be required to redeem the warrants for $.80 per warrant in
cash if the average market price of the underlying common
shares during the ten trading days immediately preceding the
date upon which the Company receives notice that the warrant
holders of a particular class have elected to declare a
Required Exercise Event is less than or equal to the warrant
exercise price. 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 with respect
to that class.
In accordance with the provisions of FAS 150, "Accounting for
Certain Financial Instruments with Characteristics of both
Liabilities and Equity," the Company has classified its
obligations under the warrants as liabilities in the Statement
of Financial Condition. The fair value of the obligations
embodied in the warrants remaining were initially valued at $
250,875 using the discounted cash flow method, assuming, based
on available evidence, that the Company will be required to
pay the full redemption liability. The Company measures the
value of the warrant obligations as of the end of each
reporting period using the discounted cash flow method until
the obligations are settled. The recorded value at March 31,
2005 was $324,855. Changes in value are recognized in earnings
as interest expense.
7
NOTE 6 - SERIES A PREFERRED STOCK
During the quarter ended June 30, 2003, the Company 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 March 31, 2005 were approximately $187,000 (See Note
14-Subsequent Events).
NOTE 7 - SERIES B PREFERRED STOCK
In February 2005, the Company's board of directors designated
a Series B Convertible Redeemable Preferred Stock with the
following features:
Shares authorized: 445,102
Par value: $.10 per share
Dividends: 8% per annum, payable quarterly at the rate of $.10
per share until conversion or redemption. Voting rights:
Holders of Series B Preferred Stock are entitled to vote
together with common stockholders on all matters in which they
are entitled to vote. The number of votes to which holders of
Series B Preferred are entitled to cast are ten per each share
of Series B Preferred Stock subject to certain adjustments.
Liquidation preference: $5.055 per share Conversion:
Convertible at the option of the holder anytime into ten
shares of Common Stock at $0.5055 per share; automatic
conversion once the closing price for the Common Stock is
$1.01 for more than 60 trading days if the average daily
trading volume exceeds 20,000 shares, or $1.26 for more than
60 trading days if the average daily trading volume exceeds
10,000 shares, or $1.51 for more than 60 trading days.
Redemption: Optional redemption, the holder may require
the Company to redeem all or a portion of its Series B
Preferred Stock by paying cash equal to the issue price plus
all accrued and unpaid dividends within 180 days after a
Redemption Event. A Redemption Event is defined as occurring
if either the Company or its successor ceases to be a
reporting company under the Securities Exchange Act of 1934
(the "Act"), or its Common Stock ceases to be publicly
traded for any reason.
In February 2005 the Company issued 197,824 Series B Preferred
Shares in connection with a separation agreement entered into
with its former Chief Executive Officer.
The Company's charter authorizes the issuance of up to
5,000,000 shares of Preferred Stock. After the issuance of the
Series A and Series B Preferred Shares described above, the
Company is authorized to issue an additional 3,929,898 of
Preferred Stock. The rights and preferences, if any, to be
given to these preferred shares would be designated by the
board of directors at the time of issuance.
NOTE 8 - SEPARATION AGREEMENT
On February 8, 2005, the Company entered into a Separation
Agreement ("Agreement") with its Chief Executive Officer
("CEO"), which provides for the termination of his employment
agreement and his positions as CEO of both the Company and
FMSC as of that date. The Agreement provides that he remain as
a director of the Company.
Pursuant to the terms of the Agreement, the Company entered
into a two- year consulting agreement, and issued 197,824
shares of FMFC Series B Convertible Redeemable Preferred Stock
at a deemed price of $1,000,000, convertible into 1,978,240
shares of the Company's common stock, with voting privileges.
The Company also executed a promissory note for $200,000 with
interest of 8% per annum, paid the CEO a lump-sum cash payment
of $136,000, issued 200,000 options to purchase common stock
at $0.83 per share for three years, vesting over two years,
and cancelled 325,000 options with various exercise prices. In
addition, all restricted common shares not previously vested
were automatically vested upon his termination.
As a result of the terms of the Agreement, the Company's
charge to earnings as compensation expense in the quarter
ending March 31, 2005, was $1,433,000.
8
NOTE 9 - EMPLOYMENT AGREEMENTS
In February 2005, the President and Chief Operating Officer
("COO") was appointed the role of CEO of the Company. The
Company entered into an employment agreement with the new CEO,
which superseded his existing agreement, and issued him
1,000,000 shares of the Company's common stock, as a bonus
payment for the Company's performance for the year ended
December 31, 2004, and in consideration of him being appointed
to CEO. The shares vest in annual increments of one third
commencing on February 1, 2005. In addition, the CEO agreed to
the cancellation of 250,000 of his outstanding stock options
with an exercise price of $0.75 per share. Three other
executive officers received 100,000 shares of common stock,
each with the same vesting schedule as the new CEO.
The Company amortizes shares issued to employees over the
respective vesting periods. Amortization of deferred
compensation related to shares issued to employees was
$146,210 for the three months ended March 31, 2005, including
$80,208 that vested immediately upon the termination of our
former CEO.
NOTE 10 - LEGAL MATTERS
On July 17, 2003, the Company and its broker-dealer
subsidiary, First Montauk Securities Corp., 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 issued to the claimants 500,000 shares of the Company's
common stock valued at $160,000 based on the stock's quoted
market price. The Company also issued to the claimants
five-year warrants to purchase an aggregate of 750,000 common
shares (see Note 5). The first class of 250,000 warrants was
redeemed in 2004. During the quarter ending March 31, 2005,
the holders exercised 16,951 each of Class B and Class C
warrants.
The Company is currently defending four additional claims
relating to the sale of the high-yield bonds. The claimants
seek compensatory damages in excess of $2.2 million plus
punitive damages and the recovery of various costs. The
Company is vigorously defending these actions and believes
that there are meritorious defenses in each case. There is no
insurance coverage available for the payment of settlements
and/or judgments that may result from these particular claims.
The Company is a respondent or co-respondent in various other
legal proceedings, which are related to its securities
business. Management is contesting these claims and believes
that there are meritorious defenses in each case. However,
litigation is subject to many uncertainties, and some of these
actions and proceedings may result in adverse judgments.
Further, the availability of insurance coverage 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. After considering all
relevant facts, available insurance coverage and consultation
with litigation counsel, management believes that significant
judgments or other unfavorable outcomes from pending
litigation could have a material adverse impact on the
Company's consolidated financial condition, results of
operations, and cash flows in any particular quarterly or
annual period, or in the aggregate, and could impair the
Company's ability to meet the statutory net capital
requirements of its securities business.
As of March 31, 2005, the Company has accrued litigation costs
that are probable and can be reasonably estimated based on a
review of existing claims, arbitrations and unpaid
settlements. Management cannot give assurance that this amount
will be adequate to cover actual costs that may be
subsequently incurred. Further, it is not possible to predict
the outcome of other matters pending against the Company. All
such cases will continue to be vigorously defended.
9
NOTE 11 - EARNINGS PER SHARE
Basic earnings per share for the three months ended March 31,
2005 and 2004 is based on the weighted average number of
shares of common stock outstanding. Diluted earnings per share
for the three months ended March 31, 2004 is based on the
weighted average number of shares of common stock and dilutive
securities outstanding.
The following table sets forth the weighted average number of
shares of common stock and dilutive securities outstanding
used in the computation of basic and diluted earnings per
share:
Three months ended March 31,
2005 2004
---- ----
Numerator - basic:
Net income (loss) $(376,058) $237,974
Deduct: Preferred stock dividends (34,458) (22,903)
--------- --------
Numerator for basic earnings per share $(410,516) $215,071
========= =======
Numerator - diluted:
Numerator for basic earnings per share $(410,516) $215,071
Add: Convertible debenture interest, net of tax 28,265 47,548
------- ------
Numerator for diluted earnings per share $(382,251) $(262,619)
======== =========
Denominator:
Weighted average common shares
outstanding 12,380,852 9,067,548
Effect of dilutive securities:
Stock options and warrants -- 214,816
Restricted shares -- 78,947
Convertible debentures -- 6,270,000
------------ ---------
Denominator for diluted earnings per share 12,380,852 15,631,311
========== ==========
The following securities have been excluded from the dilutive
per share computation, as they are antidilutive:
Three months ended
March 31,
2005 2004
---- ----
Stock options 2,520,832 3,961,998
Warrants 445,294 3,660,946
Convertible debentures 2,520,000 --
Convertible preferred stock 2,588,978 610,738
Nonvested employee stock 407,332 921,053
As required by FAS 128, "Earnings per Share", cumulative
preferred stock dividends for the quarter ended March 31, 2005
and 2004 were deducted from net income to arrive at the
numerator for basic earnings per share.
NOTE 12 - MERGER AGREEMENT
The Company executed a Definitive Agreement and Plan of Merger
("Merger Agreement") dated February 10, 2005 with Olympic
Cascade Financial Corporation ("Olympic"). In May 2005, the
Company and Olympic revised the terms of the Merger Agreement.
Under the revised terms, the shareholders of Olympic will
receive 1.75 shares of the Company's common stock for each
share of Olympic stock. The completion of the merger is
subject to stockholder and regulatory approval.
10
NOTE 13 - INCOME TAXES
In prior years, the Company determined that based on the
weight of available evidence, it was more likely than not that
the deferred tax assets would not be realized in future
periods. As such, the Company provided for a valuation
allowance against all deferred tax assets. As of March 31,
2005, the Company is projecting taxable income for 2005. For
the quarter ended March 31, 2005 the Company recorded a
deferred tax asset for the utilization of net operating loss
carryforwards and the realization of other tax benefits of
$251,000. For the quarter ending March 31, 2005, the Company
recorded a tax benefit of $251,000 offset primarily by state
tax expense of $12,000. For the quarter ended March 31, 2004,
our effective tax rate was 0% due to the availability of tax
loss carry forwards to offset pre-tax income.
NOTE 14 - SUBSEQUENT EVENTS
In April 2005, we entered into a new clearing agreement with
National Financial Services LLC ("NFS") to act as our primary
clearing firm. This transaction resulted from NFS's acquisi-
tion in December 2004 of our prior clearing firm, Fiserv
Securities Inc. In connection with the termination of the
clearing agreement and related Financial Agreement with
Fiserv, our contingent obligation to repay Fiserv any of the
cash advances that were provided to us under the Financial
Agreement and the early termination penalty have been
canceled. The advances were recorded as deferred income and
are being amortized over the period of the agreement. The
unamortized amount as of March 31, 2005 is $4,886,000 and will
be recognized as income during the second quarter of 2005.
Each of the termination agreements is effective as of
April 21, 2005.
Subsequent to the reporting period, the board of directors
declared the payment of the Series A and Series B preferred
stock dividends in arrears, based upon the board's expectation
that in the second quarter of 2005 our total assets would
exceed our total liabilities and therefore be permitted under
the New Jersey Business Corporate Act to pay such dividends.
11
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Factors Affecting "Forward-Looking Statements"
From time to time, we 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, we caution readers that a variety of factors could cause our actual
results to differ materially from the anticipated results or other expectations
expressed in our forward-looking statements. These risks and uncertainties, many
of which are beyond our 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 us. We do not undertake any obligation to publicly update or revise any
forward-looking statements. The reader is referred to our previous filings with
the Commission, including our Form 10-K for the year ended December 31, 2004.
Overview
We are a New Jersey-based financial services holding company whose
principal subsidiary, First Montauk Securities Corp., has operated as a full
service retail and institutional securities brokerage firm since 1987. Since
July 2000, First Montauk Securities Corp. has operated under the trade name
"Montauk Financial Group" and 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, Montauk Financial Group established Century Discount
Investments, a discount brokerage division. We also sell insurance products
through our subsidiary, Montauk Insurance Services, Inc.
Montauk Financial Group has approximately 350 registered representatives
and services over 61,000 retail and institutional customers, which comprise over
$3.2 billion in customer assets. With the exception of a company leased branch
office in New York City, all of our other 132 branch office and satellite
locations in 30 states are owned and operated by affiliates; independent
representatives who maintain all appropriate licenses and are responsible for
all office overhead and expenses. Montauk Financial Group also employs
registered representatives directly at its corporate headquarters.
Montauk Financial Group is registered as a broker-dealer with the
Securities and Exchange Commission, the National Association of Securities
Dealers, the Municipal Securities Rule Making Board, the National Futures
Association, 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, and registered as an International
broker-dealer to conduct business with institutional clients in the province of
Ontario, Canada. All securities transactions are cleared through Fiserv
Securities, Inc. of Philadelphia, Pennsylvania with various floor brokerage and
specialist firms also providing execution services. These arrangements provide
Montauk Financial Group 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 Montauk
Financial Group to offer products and services comparable to larger brokerage
firms.
On February 10, 2005 we executed a Definitive Agreement and Plan of Merger
with Olympic Cascade Financial Corporation, ("Olympic"). On May 11, 2005, we and
Olympic agreed to revise the terms of the proposed merger. Under the revised
terms of the agreement, Olympic's shareholders will receive 1.75 shares of our
common stock for each share of Olympic's common stock. Olympic's outstanding
preferred stock, options and warrants will also be exchanged for like securities
of ours, subject to the exchange ratio. In connection with the merger, we and
Olympic have executed letters of intent with an investment firm, to provide
approximately $4.0 million of capital to the combined entity. Completion of the
transaction is subject to several conditions, which are usual and customary for
transactions of this nature, including shareholder approval and completion of
regulatory review and approval of the proposed transaction by the NASD. We
expect to file a joint proxy registration statement with the SEC and to close
the transaction during the third quarter of 2005.
12
On April 21, 2005, we entered into a new clearing agreement with National
Financial Services LLC ("NFS") to act as our primary clearing firm. This
transaction resulted from NFS's acquisition of our prior clearing firm, Fiserv
Securities Inc. in December 2004. In connection with the termination of the
clearing agreement and related Financial Agreement with Fiserv, our contingent
obligation to repay Fiserv any of the cash advances that were provided to us
under the Financial Agreement and the early termination penalty have been
canceled. Each of the termination agreements are effective as of April 21, 2005.
Results of Operations
Three Months Ended March 31, 2005 Compared to Three Months Ended March 31, 2004
The results of operations for the three months ended March 31, 2005, (the
"2005 quarter"), showed a 17% decrease in revenues over the same quarter in the
prior year (the "2004 quarter"), decreasing to $15,566,000, from $18,821,000 in
the 2004 quarter. For the 2005 quarter, we reported a net loss applicable to
common stockholders of $411,000, or ($0.03) per basic and diluted share, as
compared to net income applicable to common stockholders reported in the 2004
quarter, of $238,000, or $0.02 per basic and diluted share. The net loss in the
first quarter of 2005 was due to a one-time charge to compensation and other
expenses of $1,450,000 in connection with a separation agreement with one of our
senior officers, as more fully described below.
The primary source of our revenue is commissions generated from securities
transactions, mutual funds, syndicate offerings and insurance products. Total
revenues from commissions decreased $3,545,000, or 26%, to $9,942,000 for the
2005 quarter, from $13,487,000 for the 2004 quarter, during which we reported
our highest quarterly revenues since March 2000. The components of the change in
commission revenues are as follows:
Revenues from agency transactions decreased $3,836,000, or 41%, from
$9,264,000 in the 2004 quarter to $5,428,000 in the 2005 quarter due primarily
to a decline in investor activity and a lower volume of transaction business in
the 2005 quarter compared to the 2004 quarter.
Mutual fund revenues increased $51,000, or 3%, to $1,688,000 for the 2005
quarter when compared to $1,637,000 for the 2004 quarter. Revenue from insurance
commissions also increased during this quarter, posting revenues of $1,245,000
in the 2005 quarter, up from $1,188,000 in the 2004 quarter, an increase of 5%.
Fees generated from managed accounts have continued to increase over the
years. Fee-based revenues increased to $777,000 for the first quarter of 2005,
an increase of approximately 25% from the 2004 quarter, compared to average
annual increases of 39% since 2001. As the interest from investors who prefer to
pay a fee based on a percentage of asset value, rather than commissions based on
transactions, continue to find this type of fee structure appealing, we expect
this segment of our business to continue to grow.
Total revenues from principal transactions, which include
mark-ups/mark-downs on transactions in which we act as principal, proprietary
trading, and the sale of fixed income securities, decreased $1,273,000, or 43%,
from $2,976,000 for the 2004 quarter to $1,703,000 for the 2005 quarter. This is
primarily due to a $1,315,000 decrease in revenues generated in riskless
principal transactions attributable to a reduction in the number of registered
representatives who conducted more of these types of transactions. Riskless
principal trades are transacted through the firm's proprietary account with a
customer order in hand, resulting in no market risk to the firm. Revenues from
all fixed income sources, which include municipal, government, and corporate
bonds and unit investment trusts increased in 2005 by $357,000 from $978,000 in
the 2004 quarter to $1,335,000 in the 2005 quarter.
Investment banking revenues for the 2005 quarter increased to $2,899,000 in
the 2005 quarter, compared to $1,272,000 in the 2004 quarter, an increase of
$1,627,000, or 128%. This category includes private offerings of securities in
which we acted as placement agent, and new issues of equity and preferred stock
offerings in which we participated as a selling group or syndicate member. The
increase is attributable to the completion of several private offerings during
the quarter.
Interest and other income for the 2005 quarter totaled $1,022,000, as
compared to $1,086,000 for the 2004 quarter, a decrease of $64,000. Interest
income decreased 11%, or $75,000, in 2005, when compared to the 2004 quarter.
Although interest rates have increased since the 2004 quarter, customer margin
and money market balances on which we earn interest declined in 2005.
13
Compensation and benefits expense for management, operations and clerical
personnel, increased in 2005, from $2,108,000 (11% of revenues) to $3,230,000
(21% of revenues), an increase of $1,122,000 over the 2004 quarter. Included in
this category are salaries, option compensation, health insurance premiums and
payroll taxes. During the 2005 quarter, we recorded additional compensation
expense of $1,433,000 in connection with a separation agreement with one of our
senior officers. Excluding the one-time compensation expense, compensation and
benefits decreased by $311,000 or 15% compared to the same quarter in 2004 due
to reductions in staff during 2004 and the discontinuation of our 401(k)
matching contribution accrual. Commission expense, consistently the largest
expense category, which is directly related to commission revenue, decreased
15%, or $1,915,000, from $12,780,000 for the 2004 quarter to $10,865,000 for the
2005 quarter. Commissions as a percentage of total revenues increased from 68%
to 70% for the 2005 quarter reflecting a change in the type and volume of
transactions during the quarter.
Clearing and floor brokerage costs, which are determined by the volume and
type of transactions, decreased $368,000, to $421,000 for the 2005 quarter, from
$789,000 in the 2004 quarter. As a percentage of revenues, clearing costs
decreased to 3% for the 2005 quarter, from 4% in the 2004 quarter. The reduction
in 2005 is primarily due to the change in the type and volume of transactions,
as well as an increase in expense rebates provided by our clearing firm.
Communications and occupancy costs decreased during the 2005-quarter, from
$679,000 in the 2004 quarter to $601,000 in the 2005 quarter. The decrease in
communication and occupancy costs was primarily related to the reduction of our
leased office space and related costs, as well as a reduction in consulting fees
related to technical support. During the 2005 quarter, we eliminated a company
leased branch office in New York City and reduced the leased space in our home
office.
.
Legal matters and related settlement costs decreased by $1,040,000, or 81%,
to $242,000 (1.6% of total revenues) during the 2005 quarter, from $1,282,000
(6.8% of total revenues) for the same quarter in 2004 primarily due to
managements ongoing strategy to control these costs.
In July 2003 we, along with Montauk Financial Group, entered into a
settlement agreement with certain claimants in order to settle pending
arbitration proceedings that were brought against us. The covered proceedings
arose out of customer purchases of certain high-yield corporate bonds, which
declined in market value and subsequently defaulted. The settlement agreement
covers eleven separate claims that sought an aggregate of approximately $12.3
million in damages. In exchange for the consideration we provided, each claimant
granted a general release of claims in favor of our company and all individual
respondents, with the exception of the registered representative who had handled
the claimants' accounts. In consideration for the release granted by the
claimants, we agreed to pay to the claimants an aggregate of $1,000,000 cash and
to issue to the claimants warrants to purchase an aggregate of 750,000 shares of
our common stock in three separate classes of warrants and 500,000 shares of our
common stock.
In addition, the settlement agreement provides that we 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 to exercise up to a maximum of 250,000
warrants, respectively, during the months of June 2004, June 2005 and June 2006,
the claimants, upon exercising their warrants, will be required to sell the
shares in the open market. Thereafter, we 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 do
not elect to exercise the warrants during a particular period, we will not be
required to make a payment for that period. In June 2004 we redeemed all
outstanding Class A warrants for an aggregate of $200,000.
We are currently defending four additional claims relating to the sale of
the high-yield bonds referenced in the preceding paragraphs. The claimants in
these matters seek compensatory damages in excess of $2.2 million, plus punitive
damages and the recovery of various costs. We are vigorously defending theses
actions and believe that there are meritorious defenses in each case. There is
no insurance coverage available for the payment of settlements and/or judgments
that may result from these particular claims.
We are a respondent or co-respondent in various other legal proceedings
that are related to our securities business. We are contesting these claims and
believe that there are meritorious defenses in each case. However, litigation is
subject to many uncertainties, and some of these actions and proceedings may
result in adverse judgments. Further, the availability of insurance coverage 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. After considering all relevant facts, available insurance coverage
and consultation with litigation counsel, we believe that significant judgments
or other unfavorable outcomes from pending litigation could have a material
adverse impact on our consolidated financial condition, results of operations,
and cash flows in any particular quarterly or annual period, or in the
aggregate, and could impair our ability to meet the statutory net capital
requirements of our securities business.
14
We are continuing to take a more aggressive approach toward the analysis,
management and resolution of our outstanding claims and control over outside
legal costs. As of March 31, 2005, we have accrued litigation costs that are
probable and can be reasonably estimated based on a review with outside counsel
of existing claims, arbitrations and unpaid settlements. We cannot give
assurance that this amount will be adequate to cover actual costs that may be
subsequently incurred. Further, it is not possible to predict the outcome of
other matters pending against us.
Other operating costs decreased $60,000, to $780,000 in the 2005 quarter,
from $839,000 in the 2004 quarter. The decrease was primarily due to a reduction
in recruiting placement fees, advertising and office supplies offset by
increases in dues and memberships and consulting fees.
In December 2004, we determined that based on the weight of available
evidence, it was more likely than not that recorded deferred tax assets would
not be realized in future periods. As such, the Company provided for a valuation
allowance against all deferred tax assets. As of March 31, 2005, the Company is
projecting taxable income for 2005. For the quarter ended March 31, 2005 the
Company recorded a deferred tax asset for the utilization of net operating loss
carryforwards and the realization of other tax benefits of $251,000. For the
quarter ending March 31, 2005, the Company recorded a tax benefit of $251,000
offset primarily by state tax expense of $12,000. For the quarter ended March
31, 2004, our effective tax rate was 0% due to the availability of tax loss
carry forwards to offset pre-tax income.
Liquidity and Capital Resources
We maintain a highly liquid balance sheet with approximately 68% of our
assets consisting of cash, securities owned, and receivables from our clearing
firm and other broker-dealers and insurance companies. The balances in these
accounts can and do fluctuate significantly from day to day, depending on
general economic and market conditions, volume of activity, and investment
opportunities. These accounts are monitored on a daily basis in order to ensure
compliance with regulatory capital requirements and to preserve liquidity.
Overall, cash and cash equivalents increased during the quarter by
$912,000. Net cash provided by operating activities during the 2005 quarter was
$813,000, which consists of a net loss of $376,000, adjusted by non-cash charges
including depreciation and amortization of $312,000 and an increase to
compensation expense for stock issued in connection with a separation agreement
of $1,000,000, and a non-cash credit of $219,000and $251,000 for the
amortization of deferred income and deferred income taxes, respectively.
Increases in accounts payable, commissions payable, accrued expenses and other
liabilities of $1,399,000, and a decrease in our clearing receivable of $986,000
was offset by increases in prepaid expenses of $944,000, securities owned of
$885,000, and other assets of $121,000.
Additions to capital expenditures accounted for the entire use of cash from
investing activities of $13,000 during the first quarter of 2005.
Financing activities provided net cash of $113,000 for the 2005 quarter.
Cash increased $142,000 from the proceeds of 260,200 exercised stock options
offset by payments of capital leases of $29,000.
In connection with a settlement agreement, we issued 750,000 five-year
warrants in three classes of 250,000 warrants each, with varying exercise
prices. The Class A warrants, which had an exercise price of $.40 per share,
were redeemed for $200,000 during the third quarter of 2004. During the first
quarter of 2005, the warrant holders exercised 16,951 each of Class B and Class
C warrants. The settlement agreement provides that we may be obligated to make
additional cash payments of up to $186,439 for each class of warrants in the
event that claimants elect to exercise the remaining Class B and Class C
warrants during the months of June 2005 and June 2006, respectively.
Specifically, we may be required to redeem the warrants for $.80 per warrant in
cash if the average market price of the underlying common shares during the ten
trading days immediately preceding the date upon which we receive notice that
the warrant holders of a particular class have elected to declare a Required
Exercise Event is less than or equal to the warrant exercise price.
15
In the first quarter of 2005 holders of $1,755,000 of convertible
debentures that were sold through private offerings in 2002 and 2003, converted
their debentures into shares of our common stock in accordance with the terms of
the debentures. As a result, we have issued 3,510,000 shares of our common stock
during that time period. As of March 31, 2005 there is an aggregate principal
amount of $1,260,000 of debentures outstanding convertible at $.50 per common
share.
Premium financing agreements for the renewal of our errors and omissions
insurance policy had a balance at March 31, 2005 of approximately $810,000,
payable in six remaining installments of approximately $117,000 each. All
installments include interest at the rate of 3.9% per annum.
Consolidated Contractual Obligations and Lease Commitments
The table below provides information about our commitments related to debt
obligations, leases, guarantees and investments as of March 31, 2005. This table
does not include any projected payment amounts related to our potential exposure
to arbitrations and other legal matters.
As of March 31, 2005
Expected Maturity Date
- -------------------------- ---------------- ----------------- ---------------- ---------- -------------- --------- -----------------
After
Category 2005 2006 2007 2008 2009 2009 Total
- -------------------------- ---------------- ----------------- ---------------- ---------- -------------- --------- -----------------
- -------------------------- ---------------- ----------------- ---------------- ---------- -------------- --------- -----------------
Debt Obligations 0 0 $480,000 $780,000 0 0 $1,260,000
- -------------------------- ---------------- ----------------- ---------------- ---------- -------------- --------- -----------------
- -------------------------- ---------------- ----------------- ---------------- ---------- -------------- --------- -----------------
Capital Lease Obligations $24,789 $8,555 0
0 0 0 $33,344
- -------------------------- ---------------- ----------------- ---------------- ---------- -------------- --------- -----------------
- -------------------------- ---------------- ----------------- ---------------- ---------- -------------- --------- -----------------
Operating Lease
obligations $723,425 $830,130 $631,790 $609,149 $609,419 0 $3,403,643
- -------------------------- ---------------- ----------------- ---------------- ---------- -------------- --------- -----------------
- -------------------------- ---------------- ----------------- ---------------- ---------- -------------- --------- -----------------
0 $200,000 0 0 0 0 $200,000
Note Payable
- -------------------------- ---------------- ----------------- ---------------- ---------- -------------- --------- -----------------
- -------------------------- ---------------- ----------------- ---------------- ---------- -------------- --------- -----------------
Other Long-Term
Obligations Reflected on
Balance Sheet under GAAP
$186,439(1) $186,439(1) 0 0 0 0 $372,878(1)
- -------------------------- ---------------- ----------------- ---------------- --------- -------------- --------- -----------------
- -------------------------- ---------------- ----------------- ---------------- --------- -------------- --------- -----------------
Total $934,653 $1,225,124 $1,111,790 $1,389,149 $609,149 0 $5,269,865
- ------------------------- ---------------- ----------------- ---------------- --------- -------------- --------- -----------------
(1) Expected payment obligations embodied in the warrants subject to put
options. For more detailed information please refer to Note 5 of the
consolidated financial statements.
Net Capital
At March 31, 2005, Montauk Financial Group had net capital of $2,720,702,
which was $2,415,479 in excess of its required net capital of $305,223, and the
ratio of aggregate indebtedness to net capital was 1.7 to 1.
16
Series A Convertible Preferred Stock
In 1999, we issued 349,511 shares of Series A Convertible Preferred Stock
in an exchange offering related to a settlement with holders of certain leases.
Each share of the Preferred Stock is convertible into two shares of Common Stock
and pays a quarterly dividend of 6%. Quarterly dividends were paid through the
first quarter of 2003, at which time we suspended the dividend payments in
accordance with applicable state law. (See Note 6 to the consolidated financial
statements).
As of March 31, 2005, we have 305,369 Series A Preferred shares issued and
outstanding.
Series B Convertible Redeemable Preferred Stock
In connection with a Separation Agreement we entered into with Mr. William
J. Kurinsky during the first quarter, we issued an aggregate of 197,824 shares
of a newly created class of Series B Convertible Redeemable Preferred Stock, par
value $0.10 per share, which will have a deemed issue price of $1,000,000, and
is convertible into common stock on the basis of ten shares of common stock for
each share of Series B Preferred Stock. The Series B Preferred Stock also
provides that the Series B Preferred shares have voting rights based upon the
number of shares of common stock into which it would be converted. The Series B
Preferred Stock also includes a cumulative dividend of 8% per year. The shares
are restricted securities under the Securities Act of 1933 and the regulations
of the SEC and we relied upon the exemption from registration under Section 4(2)
of the Securities Act of 1933 to issue the shares of Series B Preferred Stock
(See Note 7 to the consolidated financial statements).
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. Our management must use assumptions and estimates to apply these
principles where actual measurement is not possible or practical.
For a complete discussion of our significant accounting policies, see
"Management Discussion and Analysis" and "Notes to the Consolidated Financial
Statements" in our 2004 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.
Off-Balance Sheet Arrangements
We execute securities transactions on behalf of our customers. If either
the customer or a counter-party fail to perform, we, by agreement with our
clearing broker may be required to discharge the obligations of the
non-performing party. In such circumstances, we may sustain a loss if the market
value of the security is different from the contract value of the transaction.
We seek 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, our clearing firm requires
additional collateral or reduction of positions, when necessary. We also
complete credit evaluations where there is thought to be credit risk.
Item 3. Risk Management
Risk is an inherent part of our business and activities. The extent to
which we properly and effectively identify, assess, monitor and manage the
various types of risk involved in our activities is critical to our soundness
and profitability. We seek to identify, assess, monitor and manage the following
principal risks involved in its business activities: market, credit, operational
and legal. Senior management takes an active role in the risk management process
and requires specific administrative and business functions to assist in the
identification, assessment and control of various risks. Our risk management
policies and procedures are subject to ongoing review and modification.
Market Risk. Certain of our business activities expose us 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 rating of issuers of debt securities. This
risk relates to financial instruments we hold as investment and for trading.
Securities inventories are exposed to risk of loss in the event of unfavorable
price movements. Securities positions are marked to market on a daily basis.
Market-making activities are client-driven, with the objective of meeting
clients' needs while earning a positive spread. At March 31, 2005 and December
31, 2004, the balances of our securities positions owned and sold, not yet
purchased were approximately $1,255,000 and $12,000, and $371,000 and $174,000,
respectively. In our view, 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 its financial position.
17
Credit Risk. Credit risk represents the loss that we would incur if a client,
counterparty or issuer of securities or other instruments that we hold fails to
perform its contractual obligations. Client activities involve the execution,
settlement, and financial of various transactions on behalf of its clients.
Client activities are transacted on either a cash or margin basis. Client
activities may expose us to off-balance sheet credit risk. We 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. We seek to control the risks
associated with client activities by requiring clients to maintain collateral in
compliance with various regulations and company policies.
Operational Risk. Operational risk generally refers to the risk of loss
resulting from our operations, including, but not limited to, improper or
unauthorized execution and processing of transactions, deficiencies in our
operating systems, business disruptions and inadequacies or breaches in our
internal control processes. We operate in diverse markets and rely on the
ability of our employees and systems to process high numbers of transactions
often within short time frames. In the event of a breakdown or improper
operation of systems, human error or improper action by employees, we could
suffer financial loss, regulatory sanctions or damage to our reputation. In
order to mitigate and control operational risk, we have developed and continue
to enhance policies and procedures that are designed to identify and manage
operational risk at appropriate levels. Included in our operational risk
management practice is disaster recovery for our critical systems. We believe
that our disaster recovery program, including off-site back-up technology and
operational facilities, is adequate to handle a reasonable business disruption.
However, there can be no assurances that a disaster directly affecting our
headquarters or operations center would not have a material adverse impact.
Insurance and other safeguards might only partially reimburse us for our losses.
Legal Risk. Legal risk includes the risk of non-compliance with applicable legal
and regulatory requirements. We are subject to extensive regulation in the
different jurisdictions in which we conduct our business. We have various
procedures addressing issues such as regulatory capital requirements, sales and
trading practices, use of and safekeeping of customer funds, credit granting,
collection activities, anti money-laundering and record keeping.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
As of the end of the period covered by this report, we evaluated, under the
supervision and with the participation of our management, including our chief
executive officer and the acting chief financial officer, the effectiveness of
the design and operation of our "disclosure controls and procedures" (as defined
in the Securities Exchange Act of 1934, Rules 13a - 15(e) and 15d - 15(e)).
Based on this evaluation our management, including our chief executive officer
and acting chief financial officer, have concluded that as of the date of the
evaluation our disclosure controls and procedures were effective to ensure that
all material information required to be filed in this report has been made known
to them.
Changes in Internal Controls
There have not been any changes in our internal control over financial
reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the
Exchange Act) during the most recent fiscal quarter that have materially
affected, or are reasonably likely to materially affect, our internal control
over financial reporting.
18
PART II
OTHER INFORMATION
Item 1. Legal proceedings
For a full description of new and resolved legal proceedings for the
reporting period, please see Note 10 and the Management's Discussion and
Analysis.
We are a respondent or co-respondent in various legal proceedings, which
are related to its securities business. Management is contesting these claims
and believes that there are meritorious defenses in each case. However,
litigation is subject to many uncertainties, and some of these actions and
proceedings may result in adverse judgments. Further, the availability of
insurance coverage 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. After considering all relevant facts,
available insurance coverage and consultation with litigation counsel,
management believes that significant judgments or other unfavorable outcomes
from pending litigation could have a material adverse impact on our consolidated
financial condition, results of operations, and cash flows in any particular
quarterly or annual period, or in the aggregate, and could impair our ability to
meet the statutory net capital requirements of its securities business.
As of March 31, 2005, we have accrued litigation costs that are probable
and can be reasonably estimated based on a review of existing claims,
arbitrations and unpaid settlements. Management cannot give assurance that this
amount will be adequate to cover actual costs that may be subsequently incurred.
Further, it is not possible to predict the outcome of other matters pending
against us. All such cases will continue to be vigorously defended.
Item 2. Changes in Securities
(a) During the quarter, we issued an aggregate of 1,300,000 common shares to our
three senior executive officers and one other senior employee in conjunction
with their new employment agreements. The CEO was granted 1,000,000 shares of
common stock with vesting provisions. The other three employees were each
granted 100,000 shares of common stock subject to vesting provisions. We also
issued 260,200 shares in connection with the exercise of incentive stock
options, 25,342 shares in connection with the exercise of Class B and Class C
warrants and 3,510,000 shares from the conversion of $1,755,000 of convertible
debentures. With the exception of the shares of common stock issued upon
conversion of convertible debentures, the shares issued in these transactions
were exempt from the registration requirements of the Securities Act of 1933, as
amended, pursuant to Section 4(2) thereof. The shares of common stock issued
upon conversion of the convertible debentures were issued in reliance upon
Section 3(a)(9) of the Securities Act. All of the shares of common stock issued
in the aforementioned transactions are restricted and may not be offered or sold
other than pursuant to an effective registration statement or in reliance upon
an exemption to such registration requirements. Effective on March 1, 2005, we
filed a registration statement on Form S-8 covering shares of our common stock
issuable pursuant to our stock option plans, including the shares issued to the
aforementioned employees.
In connection with the Separation Agreement we entered into with Mr.
William J. Kurinsky, on February 9, 2005 we issued him an aggregate of 197,824
shares of a newly created class of Series B Convertible Redeemable Preferred
Stock, par value $0.10 per share, which will have a deemed issue price of
$1,000,000, and is convertible into Common Stock on the basis of ten shares of
Common Stock for each share of Series B Preferred Stock. The Series B Stock also
provides that the Series B Preferred shares have voting rights based upon the
number of shares of Common Stock into which it would be converted. The Series B
Preferred Stock also includes a cumulative dividend of 8% per year. The shares
are restricted securities under the Securities Act of 1933 and the regulations
of the SEC and we relied upon the exemption from registration under Section 4(2)
of the Securities Act of 1933 to issue the shares of Series B Preferred Stock.
(b) Not applicable.
(c) Not applicable.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Submission of Matters to a Vote of Security Holders.
Not applicable.
19
Item 5. Other Information
Recent Management Changes
On February 8, 2005 we entered into a Separation Agreement with William J.
Kurinsky, our former CEO, which provided for Mr. Kurinsky to terminate his
employment agreement with us effective on that date. Under the terms of the
Separation Agreement, Mr. Kurinsky agreed to relinquish his position as Chief
Executive Officer of First Montauk and its subsidiaries, including Montauk
Financial Group. Mr. Kurinsky remains on our board of directors. In connection
with Mr. Kurinsky's termination as the Chief Executive Officer, we appointed Mr.
Victor K. Kurylak as our new Chief Executive Officer and President. In 2004, Mr.
Kurylak had served as our President and Chief Operating Officer. In January
2005, Ms. Mindy Horowitz, our Senior Vice President of Finance, became the Chief
Financial Officer and Financial Operations Principal for Montauk Financial Group
and our Acting Chief Financial Officer.
Mr. Kurinsky's Separation Agreement includes the following provisions:
o Mr. Kurinsky's employment agreement dated January 1, 2004,
which had a term set to expire in December 2008, was
terminated in full.
o Mr. Kurinsky was retained as a consultant to the Registrant
for a term of two years with consulting fee of approximately
$12,600 per month.
o Mr. Kurinsky was issued an aggregate of 197,824 shares of
a newly created class of Series B Convertible Redeemable
Preferred Stock, par value $0.10 per share, which will have
a deemed issue price of $1,000,000, and is convertible into
Common Stock on the basis of ten shares of Common Stock for
each share of Series B Preferred Stock. The Series B Stock
also provides that the Series B Preferred shares have voting
rights based upon the number of shares of Common Stock into
which it would be converted. The Series B Preferred Stock
also includes a cumulative dividend of 8% per year.
o We issued to Mr. Kurinsky a promissory note in the principal
amount of $200,000 payable in one year and bearing interest
at 8% per annum.
o We made a lump sum cash payment to Mr. Kurinsky in the
amount of $136,000.
o Mr. Kurinsky's existing options to purchase 325,000 shares
of our common stock with exercise prices of $0.83 to $2.00
per share have been cancelled. Mr. Kurinsky, in connection
with his services as a consultant, received new options to
purchase an aggregate of 200,000 shares of Common Stock with
an exercise price of $0.83 per share. The new options have a
three-year exercise term. Mr. Kurinsky's existing restricted
stock grant of 250,000 common shares also immediately
vested.
o We will continue to pay for the benefits such as health and
medical plans that Mr. Kurinsky was otherwise entitled to
under his employment agreement for a period of 24 months.
o Mr. Kurinsky will be entitled to receive his portion of the
securities that he would have been entitled to under our
corporate finance bonus pool and also his pro rata bonus
which he had been entitled to under his employment agreement
through his date of termination.
In connection with Mr. Kurylak's appointment as our Chief Executive
Officer, we entered into a new employment agreement with him, effective as of
February 8, 2005 and issued to him 1,000,000 shares of our common stock as a
bonus payment for our performance for the year ended December 31, 2004 and in
connection with his assuming the position of Chief Executive Officer. The shares
vest in annual increments of one third commencing on February 1, 2005. In the
event of a change of control of the Company, all unvested shares would vest. Mr.
Kurylak's new employment agreement expires December 31, 2007 and included the
following terms:
o Mr. Kurylak's prior employment agreement was terminated;
o Mr. Kurylak agreed to the cancellation of 250,000 of his
outstanding stock options with an exercise price of $0.75
per share;
o Mr. Kurylak receives a base salary of $275,000 per year,
subject to annual increases of 10%, provided we have net
profits of at least $500,000 per annum;
20
o He is entitled to receive medical and other benefits that we
have in effect for our executives, as well as other benefits
and automobile expenses;
o He is entitled to participate in our executive bonus pool
which has been established by the Board to constitute 15% of
our net pre tax profit and would receive a bonus from such
pool as determined by the Compensation Committee.
o Mr. Kurylak is also entitled to a portion of the finance
pool, defined as up to 20% of all underwriters and/or
placement agent warrants or options that are granted to
Montauk Financial Group upon the same price, terms and
conditions afforded to Montauk Financial Group as the
underwriter or placement agent, but not to exceed 50% of
what is retained by Montauk Financial Group after issuance
to the registered representatives who participated in the
placements; and
o In the event of termination without cause, Mr. Kurylak would
be entitled to a severance payment consisting of accrued
compensation, continuation of his benefits and payment of
his base salary for a period of the greater of three months
or the balance of the term of the agreement.
In February 2005 we also entered into new employment agreements with two
senior executive officers, Robert Rabinowitz, Mindy Horowitz as well as Brian
Cohen. Mr. Rabinowitz serves as Executive Vice President, General Counsel and
Secretary; Ms. Horowitz serves as Chief Financial Officer and Mr. Cohen serves
as Senior Vice President-Information Systems. The Board also approved restricted
stock awards to each of these persons, of 100,000 shares as a performance bonus
award and as an incentive to continue their employment with us. The agreements
are for one-year terms ending February 8, 2006 and are renewable for successive
one year terms unless we provide 120 prior notice of our intention not to renew
the agreements. Mr. Rabinowitz will receive a base salary of $190,000 per year
and is eligible to participate in our bonus and option plans, receives health
and benefits as provided to our executives and is entitled to a car allowance.
In the event of termination of his employment without cause, Mr. Rabinowitz
would be entitled to receive a severance payment equal to the sum of (i) one
year's salary and (ii) his portion of the bonus pool payments he would otherwise
be entitled to and (iii) payment of the costs of health and other benefits for
12 months. The agreements with Ms. Horowitz and Mr. Cohen have similar terms
except that Ms. Horowitz receives a base salary of $140,000 and Mr. Cohen
receives a base salary of $130,000.
Proposed Merger with Olympic Cascade Financial Corporation
On February 10, 2005 we executed a Definitive Agreement and Plan of Merger
with Olympic Cascade Financial Corporation, ("Olympic"). On May 11, 2005, we
announced revised terms of the proposed merger. Under the revised terms of the
agreement, shareholders of Olympic Cascade will receive 1.75 shares of our
common stock for each share of Olympic Cascade's common and preferred stock. All
capital stock (including options, warrants and preferred stock) of Olympic shall
be exchanged for similar securities of our company, subject to adjustment for
the new exchange ratio.
Pursuant to the Merger Agreement, our Board of Directors, following the
closing, will be comprised of seven persons. We will each appoint three
representatives to the newly constituted Board of Directors. Mr. Victor K.
Kurylak and Mr. William J. Kurinsky are expected to be our initial two
representatives with the third decided on prior to closing. In connection with
the merger, we and Olympic have executed letters of intent with St. Cloud
Capital LLC, a Los Angeles based investment firm, to provide approximately $4.0
million of capital to the combined entities. Mr. Marshall Geller, a Senior
Managing Director of St. Cloud Capital, is expected to be named non-executive
chairman of the seven-person board of directors of Montauk following completion
of the merger. The investment by St. Cloud Capital is subject to due diligence
investigation, execution of definitive agreements and customary closing
conditions.
The terms of the merger include provisions that Mr. Mark Goldwasser,
current President and CEO of Olympic, and Mr. Kurylak will comprise the Office
of the Chief Executive Officer. Mr. Kurylak will serve as the Chief Executive
Officer and Mr. Goldwasser will serve as President and Chief Operating Officer.
Both will report directly to the Board of Directors. As a condition to closing,
we and Messrs. Goldwasser and Kurylak will negotiate the definitive terms of
their new respective employment agreements.
21
Completion of the transaction is subject to several conditions, which are
usual and customary conditions for transactions of this nature, including
shareholder approval, completion of the anticipated financing in an amount of at
least $4.0 million in gross proceeds and completion of regulatory review and
approval of the proposed transaction by the NASD. There are also conditions
related to the maintenance and operation of each parties business and financial
condition required for a closing. We expect to file a joint proxy registration
statement with the SEC and to close the transaction during the third quarter of
2005.
As a result of the foregoing conditions, there can be no assurances that
the transaction will be completed or if completed, by such date. Regulatory
review by the SEC and/or NASD could delay the anticipated closing date. If the
transaction is not consummated by October 30, 2005, the parties have the option
not to proceed.
Debenture Conversions
During the first quarter of 2005, holders of $1,755,000 of our 6%
subordinated convertible debentures converted into 3,510,000 shares of our
common stock in accordance with the debenture terms. As of the date of this
report, there is an aggregate principal amount of $1,260,000 of convertible
debentures outstanding convertible at $.50 per share.
Change of Clearing Firms
On April 21, 2005, we entered into a new clearing agreement with National
Financial Services LLC ("NFS") to act as our primary clearing firm. This
transaction resulted from NFS's acquisition of our prior clearing firm, Fiserv
Securities Inc. in December 2004. In connection with the termination of the
clearing agreement and related Financial Agreement and Security Agreements with
Fiserv, our contingent obligation to repay Fiserv any of the cash advances that
were provided to us under the Financial Agreement and the early termination
penalty have been canceled. Each of the termination agreements are effective as
of April 21, 2005.
Preferred Stock Dividends
The Company has declared and paid dividends on its Series A Preferred Stock
at the rate of 6% per annum on a quarterly basis since the third quarter of
1999. Currently, the Company is unable to continue to pay such dividends
pursuant to the New Jersey Business Corporation Act. The New Jersey Business
Corporation Act prohibits a corporation from paying dividends if its total
assets would be less than its total liabilities. Dividends will continue to
accumulate on the outstanding shares of Series A Preferred Stock and will be
paid when the Company is legally authorized to do so under the New Jersey
Business Corporation Act. The cumulative dividends in arrears at March 31, 2005
were approximately $187,000.
Subsequent to the reporting period, the board of directors declared the
payment of the Series A and Series B preferred stock dividends in arrears, based
upon the board's expectation that in the second quarter of 2005 our total assets
would exceed our total liabilities and therefore be permitted under the New
Jersey Business Corporate Act to pay such dividends.
Change of Director
On May 4, 2005, Norma Doxey, who served as a Class II director since 1988,
resigned from our board. Victor K. Kurylak, who serves as our Chief Executive
Officer and President, filled the vacancy created by her resignation.
22
Item 6. Exhibits
Exhibits
The exhibits designated with an asterisk (*) are filed herewith. All
other exhibits have been previously filed with the Commission and,
pursuant 17 C.F.R. ss. 230.411, are incorporated by reference to the
document referenced in brackets following the description of such
exhibits.
Number Description
2.1 Agreement and Plan of Merger dated as of February 10,
2005 by and among First Montauk Financial Corp.,
Olympic Cascade Financial Corp. and FMFC Acquisition
Corporation (Previously filed as Exhibit 10.1 to our
Current Report on Form 8-K dated February 11, 2005).
3.1 Form of Certificate of Amendment of Certificate of
Designation of Rights and Preferences of Series B
Preferred Stock (Previously filed as Exhibit 3.1 to our
Current Report on Form 8-K dated February 9, 2005).
10.1 Separation Agreement between First Montauk Financial
Corp. and William J. Kurinsky, dated February 8, 2005.
(Previously filed as Exhibit 10.29 to our Annual Report
on Form 10-K for the fiscal year ended December 31,
2004).
10.2 Consulting Agreement between First Montauk Financial
Corp. and William J. Kurinsky, dated February 8, 2005.
(Previously filed as Exhibit 10.30 to our Annual Report
on Form 10-K for the fiscal year ended December 31,
2004).
10.3 Employment Agreement dated as of February 1, 2005
between Victor K. Kurylak and First Montauk Financial
Corp. (Previously filed as Exhibit 10.31 to our Annual
Report on Form 10-K for the fiscal year ended December
31, 2004).
10.4 Employment Agreement dated as of February 8, 2005
between Robert I. Rabinowitz and First Montauk
Financial Corp. (Previously filed as Exhibit 10.32 to
our Annual Report on Form 10-K for the fiscal year
ended December 31, 2004).
10.5 Employment Agreement dated as of February 8, 2005
between Mindy A. Horowitz and First Montauk Financial
Corp. (Previously filed as Exhibit 10.33 to our Annual
Report on Form 10-K for the fiscal year ended December
31, 2004).
*31.1Certification of Victor K. Kurylak, Chief Executive
Officer pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002
*31.2Certification of Mindy Horowitz, Acting Chief
Financial Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
*32.1Certification of Victor K. Kurylak, President and
Chief Executive Officer pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
*32.2Certification of Mindy A. Horowitz, Acting Chief
Financial Officer pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
23
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: May 16, 2005 /s/ Mindy Horowitz
-----------------------------
Mindy Horowitz
Acting Chief Financial Officer
/s/ Victor K. Kurylak
------------------------------
Victor K. Kurylak
President and Chief Executive
Officer
24
Exhibit 31.1
CERTIFICATION
I, Victor K. Kurylak, Chief Executive Officer, certify that:
1. I have reviewed this quarterly report on Form 10-Q 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 officer 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: May 16, 2005
/s/ Victor K. Kurylak
- --------------------------------------------
VICTOR K. KURYLAK
CHIEF EXECUTIVE OFFICER
25
Exhibit 31.2
CERTIFICATION
I, Mindy Horowitz, Acting Chief Financial Officer, certify that:
1. I have reviewed this quarterly report on Form 10-Q 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 officer 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: May 16, 2005
/s/ Mindy Horowitz
- -----------------------------------
MINDY HOROWITZ
ACTING CHIEF FINANCIAL OFFICER
26
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 Quarterly Report of FIRST MONTAUK FINANCIAL
CORP. (the "Company") on Form 10-Q for the period ending March 31, 2005 as filed
with the Securities and Exchange Commission on the date hereof (the "Report"),
I, Victor K. Kurylak, President and 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/ Victor K. Kurylak
- ----------------------------------------
Victor K. Kurylak
President and Chief Executive Officer
May 16, 2005
27
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 Quarterly Report of FIRST MONTAUK FINANCIAL
CORP. (the "Company") on Form 10-Q for the period ending March 31, 2005 as filed
with the Securities and Exchange Commission on the date hereof (the "Report"),
I, Mindy Horowitz, Acting 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/ Mindy Horowitz
- ----------------------------------
Mindy Horowitz
Acting Chief Financial Officer
May 16, 2005
28