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 quarter ended June 30, 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:
- -------------------------------------
15,906,607 Common Shares, no par value, were outstanding as of
August 3, 2005.
Page 1 of 29
FIRST MONTAUK FINANCIAL CORP.
FORM 10-Q
JUNE 30, 2005
INDEX
Page
PART I. FINANCIAL INFORMATION:
Item 1. Financial Statements
Consolidated Statements of Financial Condition
as of June 30, 2005 and December 31, 2004 ................... F-1
Consolidated Statements of Income for the Six Months
and Three Months Ended June 30, 2005 and 2004 ............... F-2
Consolidated Statements of Cash Flows for the
Six Months Ended June 30, 2005 and 2004 ..................... F-3
Consolidated Statements of Changes in Stockholders'
Equity (Deficit) ............................................. F4-5
Notes to Consolidated Financial Statements .................... 6-12
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations .................. 13-19
Item 3. Risk Management ........................................ 19
Item 4. Controls and Procedures ................................ 20
PART II. OTHER INFORMATION:
Item 1. Legal Proceedings ...................................... 21
Item 2. Changes in Securities .................................. 21
Item 3. Defaults Upon Senior Securities ........................ 21
Item 4. Submission of Matters to a Vote of Security Holders .... 22
Item 5. Other Information ...................................... 22
Item 6. Exhibits ............................................... 24
Signatures ...................................................... 25
Officers' Certifications ........................................ 26-29
06
FIRST MONTAUK FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
June 30 December 31,
2005 2004
(unaudited)
ASSETS
Cash and cash equivalents $ 1,844,705 $ 1,034,681
Due from clearing firm 5,598,732 5,815,819
Securities owned, at market value 537,924 370,720
Prepaid expenses 922,347 340,821
Employee and broker receivables 282,229 548,240
Property and equipment - net 603,474 790,909
Income taxes receivable - 40,525
Other assets 785,970 892,659
------------------ -----------------
Total assets $ 10,575,381 $ 9,834,374
================== =================
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
LIABILITIES
Deferred income $ - $ 5,105,116
6% convertible debentures 1,250,000 3,015,000
Warrants subject to put options 57,497 333,261
Securities sold, not yet purchased, at market value 7,148 174,326
Commissions payable 2,528,979 2,499,793
Accounts payable 920,152 614,784
Accrued expenses 1,334,766 1,078,185
Income taxes payable 25,086 44,546
Capital leases payable 12,819 62,460
Other liabilities 243,151 5,520
------------------ -----------------
Total liabilities 6,379,598 12,932,991
------------------ -----------------
Commitments and contingencies (See notes)
STOCKHOLDERS' EQUITY (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, 60,000,000 and 30,000,000 shares
authorized and 15,888,909 and 10,258,509 shares issued and
outstanding, respectively 10,319,674 7,257,292
Additional paid-in capital 1,930,810 950,592
Accumulated deficit (7,127,331) (10,948,157)
Less deferred compensation (977,689) (388,881)
------------------ -----------------
Total stockholders' equity (deficit) 4,195,783 (3,098,617)
------------------ -----------------
Total liabilities and stockholders' equity (deficit) $ 10,575,381 $ 9,834,374
================== =================
See notes to financial statements.
F-1
FIRST MONTAUK FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Six months ended June 30 Three months ended June 30
2005 2004 2005 2004
(unaudited) (unaudited) (unaudited) (unaudited)
Revenues:
Commissions $ 18,536,318 $23,722,498 8,594,155 10,235,212
Principal transactions 2,906,403 5,052,148 1,203,646 2,076,337
Investment banking 3,826,060 2,070,446 927,348 798,558
Interest and other income 6,877,365 2,217,998 5,855,352 1,131,577
------------------- ---------------- ---------------- ------------
Total revenue 32,146,146 33,063,090 16,580,501 14,241,684
------------------- ---------------- ---------------- ------------
Expenses:
Commissions, employee compensation and benefits 22,581,216 26,230,239 9,822,146 11,342,374
Executive separation 1,433,000 -- -- --
Clearing and floor brokerage 838,986 1,441,533 417,949 652,340
Communications and occupancy 1,302,186 1,384,844 701,139 706,163
Legal matters and related costs 314,944 1,782,004 72,677 500,061
Other operating expenses 1,792,075 1,779,498 1,012,476 940,026
Interest 43,393 160,211 1,189 80,257
------------------- ---------------- ---------------- ------------
Total expenses 28,305,800 32,778,329 12,027,576 14,221,221
------------------- ---------------- ---------------- ------------
Income before income taxes 3,840,346 284,761 4,552,925 20,463
Provision for income taxes 19,520 21,941 259,041 (4,383)
------------------- ---------------- ---------------- ------------
Net income $ 3,820,826 $ 262,820 4,196,884 24,846
=================== ================ ================ ============
Net income applicable to common stockholders $ 3,578,392 $ 217,322 3,988,908 2,251
=================== ================ ================ ============
Earnings per share:
Basic $ 0.27 $ 0.02 $ 0.28 $0.00
Diluted $ 0.19 $ 0.02 $ 0.20 $0.00
Weighted average number of shares of stock outstanding:
Basic 13,421,349 9,598,100 14,411,053 9,587,133
Diluted 20,251,184 16,048,897 21,251,791 9,738,345
See notes to financial statements.
F-2
FIRST MONTAUK FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Six months ended June 30
2005 2004
(unaudited) (unaudited)
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 3,820,826 $ 262,820
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization of property and equipment 218,965 260,495
Amortization of deferred costs 447,700 220,011
Amortization of deferred income (5,105,116) (437,504)
Preferred shares issued in connection with separation agreement 1,000,000
Loss on disposition of property and equipment -- 4,690
Increase (decrease) in cash attributable to changes in assets
and liabilities:
Due from clearing firm 217,087 302,671
Securities owned (167,204) (255,901)
Prepaid expenses (581,526) (684,506)
Employee and broker receivables 266,011 338,553
Income tax refund receivable 40,503
Other assets (49,045) 305,401
Warrants subject to put options (194,069) 38,499
Securities sold, not yet purchased (167,178) 211,979
Commissions payable 29,186 (1,678,064)
Accounts payable 305,368 341,039
Accrued expenses 256,581 (347,547)
Income taxes payable (19,460) --
Other liabilities 237,631 (16,822)
------------------- -------------------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES 556,260 (1,134,186)
------------------- -------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment (31,530) (128,223)
------------------- -------------------
NET CASH USED IN INVESTING ACTIVITIES (31,530) (128,223)
------------------- -------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments of capital leases (49,641) (91,853)
Repurchase of common shares -- (21,162)
Proceeds from exercise of incentive stock option 334,935 --
------------------- -------------------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 285,294 (113,015)
------------------- -------------------
Net increase (decrease) in cash and cash equivalents 810,024 (1,375,424)
Cash and cash equivalents at beginning of period 1,034,681 3,441,743
------------------- -------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 1,844,705 $ 2,066,319
=================== ===================
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 88,377 $ 144,989
=================== ===================
Income taxes $ 32,784 $ 85,724
=================== ===================
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 JUNE 30, 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 139,752
Amortization of deferred compensation
with employment agreements 1,300,000 741,000
Issuance of preferred stock in connection
with separation agreement 197,824 19,782 980,218
Exercise of incentive stock options 553,998 334,934
Exercise of warrants 246,402 81,696
Conversion of bonds into common stock 3,530,000 1,765,000
Net income for the period
---------------------- --------------------- ------------------------- -------------
Balances at June 30, 2005 305,369 $30,537 197,824 $19,782 15,888,909 $10,319,674 $ 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 JUNE 30, 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 (139,752) -
Amortization of deferred compensation 291,944 291,944
with employment agreements (741,000) -
Issuance of preferred stock in connection
with separation agreement 1,000,000
Exercise of incentive stock options 334,934
Exercise of warrants 81,696
Conversion of bonds into common stock 1,765,000
Net income for the period 3,820,826 3,820,826
---------------- --------------- ----------------------------- ---------------
Balances at June 30, 2005 $ (7,127,331) $ (977,689) $ 4,195,783
================ =============== ============================= ===============
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 to present fairly the financial position at June 30,
2005 and the results of operations and cash flows for all
periods presented. 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 six-month and three-month
periods ended June 30, 2005, are not necessarily indicative of
the results for the entire year to end on December 31, 2005.
NOTE 2 - STOCK-BASED COMPENSATION
The Company periodically grants stock options to employees in
accordance with the provisions of its stock option plans, with
the exercise price of the stock options being set at the
closing market price of the common stock on the date of grant.
The Company accounts for stock-based compensation plans under
Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees", and accordingly accounts for
employee stock-based compensation utilizing the intrinsic
value method. FAS No. 123, "Accounting for Stock-Based
Compensation", establishes a fair value based method of
accounting for stock-based compensation plans. The Company has
adopted the disclosure only alternative under FAS No. 123,
which requires disclosure of the pro forma effects on earnings
and earnings per share as if FAS No. 123 had been adopted as
well as certain other information. FAS 123R, requiring the
Company to expense employee options, has been deferred and
will be implemented during 2006.
Stock options granted to non-employees are recorded at their
fair value, as determined in accordance with FAS No. 123 and
Emerging Issues Task Force Consensus No. 96-18, and recognized
over the related service period. Deferred charges for options
granted to non-employees are periodically re-measured until
the options vest.
The following table illustrates the effect on net earnings and
earnings per share 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 six and three month periods ended June 30, 2005 and 2004:
6
Six months ended Three months ended
June 30, June 30,
2005 2004 2005 2004
----- ---- ---- ----
Net income applicable to
common stockholders, as reported $3,578,392 $217,322 $3,988,908 $2,251
Deduct: Total stock based
compensation expense determined
under the fair value based method
for all awards, net of tax (36,091) (105,723) (17,542) (42,418)
--------- -------- --------- ------
Pro forma net income (loss) - basic $3,542,301 $111,599 $3,971,366 $(40,167)
========= ======= ========== ========
Add: preferred stock dividends 242,434 -- 207,976 --
Add: convertible debenture interest 47,075 95,096 18,810 --
--------- ------- ---------- --
Pro forma net income (loss) - diluted $3,831,810 $206,695 $4,198,152 $(40,167)
=========== ======= ========== ========
Income per share:
Basic - as reported $.27 $.02 $.28 $.00
Basic - pro forma .26 .01 .28 .00
Diluted - as reported .19 .02 .20 .00
Diluted - pro forma .19 .01 .20 .00
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
six months ended June 30, 2005: Dividend yield of 0%; expected
volatility of 102%, risk free interest rate of 3.72%, and an
expected life of 4 years. The weighted average fair value of
options granted during the six and three months ended June 30,
2005 was $.56 and $.70, respectively.
NOTE 3 - PREPAID EXPENSES
Prepaid expenses at June 30, 2005 include a payment for errors
and omissions insurance coverage. The unamortized amount at
June 30, 2005 is $712,000 which will be written off over the
next seven months.
NOTE 4 - ACCOUNTS PAYABLE
Accounts payable at June 30, 2005 includes an insurance
premium financing agreement with a current balance of
approximately $465,000, payable in four remaining installments
of approximately $117,000. All installments include interest
at the rate of 3.9% per annum.
NOTE 5 - OTHER LIABILITIES
Other Liabilities includes a promissory note executed in
connection with a separation agreement with our former CEO.
The note is in the amount $200,000 payable with interest at 8%
per annum.
7
NOTE 6 - 6% CONVERTIBLE DEBENTURES
During the six months ended June 30, 2005, holders of
$1,765,000 of our 6% subordinated convertible debentures
presented their debentures to the Company for conversion. The
Company issued an additional 3,530,000 shares of common stock
and retired $1,765,000 of the debentures.
Remaining debentures outstanding as of June 30, 2005 of
$1,250,000 due to mature in 2007 and 2008 are as follows: 2007
- $480,000; 2008 - $770,000.
NOTE 7 - INCREASE OF AUTHORIZED COMMON SHARES
During the second quarter of 2005, the shareholders adopted a
resolution to amend the Company's Restated Certificate of
Incorporation to increase the authorized number of shares of
common stock from 30,000,000 to 60,000,000.
NOTE 8 - WARRANTS SUBJECT TO PUT OPTIONS
In July 2003, the Company issued 750,000 five-year warrants to
various individuals as part of a legal settlement. 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. During the first half of 2005, 163,391 each
of Class B and Class C warrants were exercised at $.25 per
share. In addition, our obligation for cash payments on the
remaining Class B warrants expired on June 30, 2005 without
any cash payment having been required. The settlement
agreement provides that the Company may be obligated to make
additional cash payments if a majority of then existing Class
C warrant holders elect to exercise the outstanding Class C
warrants during June 2006 (the "Required Exercise Event"). The
warrantholders, upon exercise of 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 up to an aggregate of $69,287 less the amount received by
the warrant holders from the sale of their shares, net of
commissions.
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 $69,287, depending upon the then prevailing
market price of the Company's common stock on or about the
date of the Required Exercise Event. The Company may also call
the warrants for redemption under certain circumstances.
8
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 Class C warrants remaining were initially
valued at $42,768 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 June
30, 2005 was $57,497. Changes in value are recognized in
earnings as interest expense.
NOTE 9 - 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.
The 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 are
less than its total liabilities. Unpaid preferred dividends
continued to accumulate at 6% per annum. During the quarter
ending June 2005, the board of directors declared the dividend
on the preferred stock in arrears, based upon the board's
expectation that in the second quarter of 2005 the Company's
total assets would exceed its total liabilities, and
therefore, the payment of dividends would be permitted under
New Jersey law. Subsequent to the reporting period, dividends
in the amount of $210,879 were paid on the Company's Series A
Preferred Stock (See Note 16-Subsequent Event).
NOTE 10 - 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 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.
9
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 are designated by the board of
directors at the time of issuance.
During the quarter ending June 30, 2005, the Company declared
a dividend to be paid to its Series B preferred stockholder.
Subsequent to the reporting date, dividends of $31,555 on
Series B Preferred stock were paid (See Note 16-Subsequent
Event).
NOTE 11 - EMPLOYMENT AGREEMENTS
In February 2005, the President and Chief Operating Officer
was appointed the Chief Executive Officer 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 for
the Company's performance for the year ended December 31,
2004, and in consideration of his appointment as 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 also entered into one-year employment agreements with
the Company and were awarded 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
$223,229 and $146,210 respectively, for the six and three
months ended June 30, 2005, including $80,208 for shares that
vested in the first quarter upon the termination of our former
CEO.
NOTE 12 - LEGAL MATTERS
The Company is currently defending four arbitration claims
relating to customer purchases of certain high-yield corporate
bonds that declined in market value or defaulted. 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.
10
As of June 30, 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.
NOTE 13 - EARNINGS PER SHARE
Basic earnings per share for the six and three months ended
June 30, 2005 and 2004 is based on the weighted average number
of shares of common stock outstanding. Diluted earnings per
share for the six and three months ended June 30, 2005 and
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:
Six months ended Three months ended
June 30 June 30
---------------- ------------------
2005 2004 2005 2004
---- ---- ---- ----
Numerator - basic:
Net income $ 3,820,826 $ 262,820 $ 4,196,884 $ 24,846
Deduct: preferred stock dividends ( 242,434) (45,498) ( 207,976) (22,595)
--------- ------- --------- -------
Numerator for basic
earnings per share $ 3,578,392 $ 217,322 $ 3,988,908 $ 2,251
========= ======= ========= =======
Numerator - diluted:
Numerator for basic
earnings per share $ 3,578,392 $ 217,322 $ 3,988,908 $ 2,251
Add: preferred stock dividends 242,434 207,976
Add: convertible debenture
interest, net of tax 47,075 95,096 18,810 --
---------- ------- --------- --------
Numerator for diluted $ 3,867,901 $ 312,418 $ 4,215,694 $ 2,251
========== ======= ========= ========
earnings per share
Denominator:
Weighted average common
shares outstanding 13,421,349 9,598,100 14,411,053 9,587,133
Effect of dilutive securities:
Stock options and warrants 1,216,404 180,797 1,183,763 151,212
Convertible preferred stock 2,588,978 -- 2,588,978 --
Nonvested employee stock 524,453 -- 567,997 --
Convertible debentures 2,500,000 6,270,000 2,500,000 --
---------- --------- --------- ----------
Denominator for diluted earnings
per share 20,251,184 16,048,897 21,251,791 9,738,345
========== ========== ========== ==========
11
The following securities have been excluded from the dilutive
per share computation for the six and three months ended
June 30, 2005 and 2004, as they are antidilutive:
Six months ended Three months ended
June 30 June 30
2005 2004 2005 2004
----------------------- -------------------------
Stock options 1,349,854 3,798,998 1,349,854 3,798,998
Warrants -- 3,410,946 -- 3,410,946
Convertible debt -- -- -- 6,270,000
Convertible preferred stock -- 602,544 -- 602,544
Nonvested employee stock -- 458,322 -- 458,322
NOTE 14 - 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
and executed an Amended and Revised Definitive Agreement and
Plan of Merger. 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. In connection with the
merger, the Company and Olympic have executed letters of
intent with an investment firm, to provide approximately $4
million of capital to the combined entity. Completion of this
financing is a condition of closing the merger transaction.
Completion of the merger transaction is also 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 by the end of 2005.
NOTE 15 - CLEARING AGREEMENT
In April 2005, the Company entered into a new clearing
agreement with National Financial Services LLC ("NFS") to act
as its' primary clearing firm. This transaction resulted from
NFS's acquisition of our prior clearing firm, Fiserv
Securities Inc. ("Fiserv") in December 2004. In connection
with the termination of the clearing agreement and related
Financial Agreement with Fiserv, our contingent obligation to
repay Fiserv for any of the cash advances that were provided
to us under the Financial Agreement and the early termination
penalty under the Fiserv clearing agreement have been
canceled. The advances were recorded as deferred income and
amortized over the term of the agreement. The unamortized
amount of $4,886,000 was recognized as income during the
second quarter of 2005. The termination of both agreements was
effective as of April 21, 2005.
NOTE 16 - SUBSEQUENT EVENT
On May 4, 2005, the Company's Board of Directors declared a
dividend to be paid to its Series A and Series B preferred
stock shareholders of record on June 30, 2005. Subsequent to
the reporting date, the Company paid $242,434 cumulative
dividends, including dividend in arrears of $210,879.
12
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-Q for the quarter ended March 31, 2005,
our Form 10-K for the year ended December 31, 2004 and our other periodic
reports as filed with the Commission.
Executive Overview
First Montauk Financial Corp. (the "Parent"), a New Jersey-based
holding company, and its subsidiaries (collectively with the Parent, "Montauk
Financial") are principally engaged in provided securities brokerage, asset
management, investment banking, insurance and other related financial services
to individuals, institutions and corporations. Terms such as "we," "us," "our"
and "company" refer to Montauk Financial.
We have approximately 330 registered representatives and service more
than 60,000 retail and institutional customers, which comprise over $3.2 billion
in customer assets. With the exception of a corporate leased branch office in
New York City, all of our other 130 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. We also employ registered representatives directly at our
corporate headquarters.
Our broker-dealer subsidiary is registered 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.
Securities transactions are cleared through National Financial Services LLC
("NFS") of Boston, MA, and Penson Financial Services Inc of Dallas, TX, with
various floor brokerage and specialist firms providing additional execution
services. These arrangements provide us with back office support, transaction
processing services on all principal, national and international securities
exchanges, and access to other financial services and products which allows us
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 and entered
into an Amended and Restated Agreement and Plan of Merger on June 27, 2005.
Under the Amended and Restated 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 new exchange ratio. In
connection with the merger, we and Olympic have executed letters of intent with
an investment firm, to provide approximately $4 million of capital to the
13
combined entity. Completion of this financing is a condition of closing the
merger transaction. Completion of the merger transaction is also 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 by the
end of 2005.
On April 21, 2005, we entered into a new clearing agreement with
National Financial Services LLC ("NFS") who, in December 2004, acquired our
prior clearing firm, Fiserv Securities Inc. ("Fiserv"). In connection with
entering into our new clearing agreement, we terminated our clearing agreement
and related Financial and Security Agreements with Fiserv and 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 and Six Months Ended June 30, 2005 Compared to Three and Six Months
Ended June 30, 2004
Financial Overview
Revenues for the three months and six months ended June 30, 2005
reflect the effects of a more difficult market environment. The Company's
results continue to be highly correlated to the U.S. equity markets, and the
market volatility combined with the rising interest rates and high oil prices
had a negative impact on investor confidence during the quarter and six months
ended June 30, 2005.
We reported an increase in overall revenues for the three months ended
June 30, 2005 (the "2005 quarter"). Revenues increased $2,339,000, or 16%, to
$16,581,000. Included in total revenue for the second quarter of 2005 is the
recognition of deferred revenue of $4,886,000 in connection with the termination
of our Financial Agreement with Fiserv Securities, Inc. ("Fiserv"), our prior
clearing firm. Net income applicable to common stockholders increased
$3,987,000, from $2,000 for the three months ended June 30, 2004 (the "2004
quarter") to $3,989,000 for the 2005 quarter. Actual net income for the 2005
quarter was $4,197,000, but was reduced by the preferred stock dividends in
arrears of $208,000 to arrive at net income applicable to common stockholders.
Our earnings per share also increased for the 2005 quarter from $0.00 per basic
and diluted share for the 2004 quarter to $0.28 per basic and $0.20 per diluted
share.
The results of operations for the six months ended June 30, 2005, (the
"2005 period"), showed a 3% decrease in revenues over the same period in the
prior year (the "2004 period"), decreasing to $32,146,000, from $33,063,000 in
the 2004 period. For the 2005 period, we reported net income applicable to
common stockholders of $3,578,000 or $.27 per basic and $0.19 per diluted share,
as compared to net income applicable to common stockholders reported in the 2004
period, of $217,000, or $0.02 per basic and diluted share. Actual net income for
the 2005 period was $3,820,000, but was reduced by the preferred stock dividends
in arrears of $242,000 to arrive at net income applicable to common
stockholders.
There were one-time, non-operational items of revenue and expense that
affected the income for both the 2005 quarter and period. In the first quarter
of 2005, we had 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. During the second quarter of 2005, we recognized the remaining
deferred revenue of $4,886,000 in connection with the termination of our
Financial Agreement with our prior clearing firm.
Revenues
The primary source of our revenue is from commissions generated through
securities and mutual fund transactions, investment banking activities and
insurance sales. Total revenues from commissions decreased $1,641,000, or 16%,
to $8,594,000 for the 2005 quarter, from $10,235,000 for the 2004 quarter, and
$5,186,000, or 22%, for the 2005 period, to $18,536,000 from $23,722,000 for the
2004 period. The 2004 period includes commissions for the first quarter of 2004
in which we reported our highest quarterly revenues since March 2000. The
reduction in securities transaction revenues is also attributable to a net
reduction of registered representatives during the last year as we have sought
to lower the risk profile of registered representatives affiliated with us. The
breakdown of the change in commission revenues are as follows:
Revenue from agency transactions decreased by $1,596,000, or 28%, from
$5,687,000 in the 2004 quarter to $4,091,000 in the 2005 quarter. For the first
six months of 2005, agency commissions were $9,519,000, as compared to
$14,951,000, for the same period in 2004, a decrease of 36%.
14
Mutual fund revenues increased $118,000, or 8%, to $1,568,000 for the
2005 quarter when compared to $1,450,000 for the 2004 quarter. Revenue from
insurance commissions also increased during this quarter, posting revenues of
$1,085,000 in the 2005 quarter, up from $1,063,000 in the 2004 quarter. Mutual
fund and insurance revenues increased in the 2005 period from $3,087,000 to
$3,257,000 and $2,250,000 to $2,330,000 respectively, when compared to the 2004
period.
Fees generated from managed accounts have continued to increase over
the years. Fee-based revenues increased to $866,000 for the 2005 quarter and
$1,644,000 for the 2005 period, an increase of approximately 27% and 26%,
respectively, when compared to the same periods in 2004. 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 $873,000, or 42%,
from $2,076,000 for the 2004 quarter to $1,203,000 for the 2005 quarter. For the
2005 period, this same category decreased $2,146,000, from $5,052,000 in the
2004 period, to $2,906,000 in the 2005 period, a decrease of 42%. This is
primarily due to a $1,739,000 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 for the 2005 period by $218,000, from
$2,016,000 in the 2004 period to $2,234,000 in the 2005 period.
Investment banking revenues for the 2005 quarter increased from
$799,000 in the 2004 quarter, to $927,000 in the 2005 quarter, an increase of
16%. Revenues for the 2005 period were $3,826,000, an increase of $1,756,000, or
85%, over the 2004 period. 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 2005 quarter and six months ended June 2005.
Interest and other income for the 2005 quarter totaled $5,855,000, as
compared to $1,132,000 for the 2004 quarter, and $6,877,000 versus $2,218,000
for the 2005 and 2004 periods, respectively. The recognition of the remaining
unamortized cash advances received from Fiserv, in accordance with the
termination of our Financial Agreement with them, amounted to $4,886,000 and
accounted for the increase in both the quarter and six month period. Interest
income remained fairly constant, increasing 1% from the 2004 quarter to the 2005
quarter and decreasing 5% from the 2004 period to the 2005 period.
Expenses
Total expenses decreased by $2,096,000, or 15%, to $12,125,000 in the
2005 quarter. For the 2005 period, total expenses decreased by 14%, to
$28,306,000, from $32,778,000 in the 2004 period. Compensation and benefits
expense for management, operations and clerical personnel increased for the
second quarter 2005, to $1,879,000 (11% of total revenues) from $1,775,000 (12%
of revenues), an increase of $136,000 over the 2004 quarter. Included in this
category are salaries, option compensation, health insurance premiums, payroll
taxes and bonus accruals. The increase in the 2005 quarter, compared to the 2004
quarter, was primarily attributable to a first quarter officer bonus accrual
reduced by a decrease in officer's salaries, compared to the expense in 2004
that included a reversal of a 401(k) matching contribution. For the 2005 period,
this same category of expense was $4,992,000, compared to $3,701,000 for the
2004 period, an increase of $1,291,000. During the 2005 period, 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 $142,000, or 4%, compared to the
same period in 2005 due to reductions in staff during 2004 and the
discontinuation of our 401(k) matching contribution accrual. Amortization of
deferred stock compensation and severance payments accounted for the largest
portion of the increase between the two periods. Commission expense,
consistently the largest expense category and which is directly related to
15
commission revenue, decreased 16%, or $1,528,000, from $9,567,000 for the 2004
quarter, to $8,040,000 for the 2005 quarter. Commission expense for the 2005
period decreased to $19,022,000, from $22,529,000 in the 2004 period, a decrease
of $3,507,000, or 16%.
Clearing and floor brokerage costs which are determined by the volume
and type of transactions, decreased $234,000, to $418,000 for the 2005 quarter,
from $652,000 for the 2004 quarter. For the 2005 period these costs decreased
$603,000, to $839,000, from the 2004 period costs of $1,442,000. As a percentage
of operating revenues, clearing costs decreased to 4.0% for the 2005 quarter,
from 5.1% in the 2004 quarter and 4.8% to 3.4% for the 2005 period. 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. Clearing costs, as a percentage of gross revenues, can fluctuate on an
interim basis depending upon the product mix.
Communications and occupancy costs decreased during the 2005 quarter,
from $706,000 in the 2004 quarter to $701,000 in the 2005 quarter. For the 2005
period, these costs decreased slightly to $1,302,000 from $1,384,000 for the
same period in 2004. Occupancy and related costs were down from period to period
due to the elimination of a company leased branch office in New York City and a
reduction in the leased space in our home office. Rent, utilities and telephone
decreased by $84,000 and $123,000 for the 2005 quarter and period respectively.
Legal matters and related settlement costs decreased by $427,000, or
85%, from $500,000 to $73,000 for the 2005 quarter compared to the 2004 quarter
and $1,467,000, or 82%, from $1,782,000 to $315,000 for the 2005 period. The
reduction in the 2005 quarter compared to the 2004 quarter is primarily due to
the recovery of legal costs in 2005 from co-respondents which we previously
paid. The reduction for the six month period of 2005 is attributable to an
increase in our legal reserve during the 2004 period for legal settlements which
were anticipated at that time. Management continues to closely monitor our
outstanding claims and control the costs associated with defending these
matters.
The Company is currently defending four arbitration claims relating to
customer purchases of certain high-yield corporate bonds that declined in market
value or defaulted. These claimants seek compensatory damages in excess of $2.2
million plus punitive damages and the recovery of various costs. We are
vigorously defending these 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, which are related to our 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 our securities business.
16
As of June 30, 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 our company. All such cases will continue to be vigorously defended.
Other operating costs increased $72,000, to $1,012,000 in the 2005
quarter, from $940,000 in the 2004 quarter. For the six month period ending June
30, 2005 and 2004, these expenses were $1,792,000 and $1,779,000, respectively,
an increase of $13,000. Due to the exercise of the majority of our outstanding
convertible debentures, we accelerated the amortization of the costs related to
these debentures. The amount amortized was $140,000 and $156,000 for the 2005
quarter and period, respectively.
Liquidity and Capital Resources
We maintain a highly liquid balance sheet with approximately 77% of our
assets consisting of cash, securities owned, and receivables from our clearing
firm and other broker-dealers. 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 period by
$810,000. Net cash provided by operating activities during the 2005 period was
$556,000, as a result of the net income of $3,821,000, adjusted by non-cash
charges including depreciation and amortization of $667,000 and $1,000,000 from
the issuance of stock in connection with a separation agreement, and offset by
non-cash income of $5,105,000 from the acceleration of the amortization of
deferred revenue. Net income was further adjusted by increases in accounts
payable of $305,000, accrued expenses of $257,000, note payable of $200,000 and
a decrease in receivables from brokers and clearing firm of $266,000 and
$217,000 respectively. These increases in cash were offset by an increase in
prepaid expenses of $582,000 and a decrease in warrants subject to put options
of $194,000.
As of June 30, 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. We will continue to vigorously defend against these matters.
Additions to capital expenditures accounted for the entire use of cash
from investing activities of $32,000 during the first six months of 2005.
Financing activities provided net cash of $285,000 for the six month
period. Cash increased $335,000 from the proceeds of 553,998 exercised stock
options offset by payments of capital leases of $50,000.
In connection with a settlement agreement entered into in July 2003, we
issued 750,000 five-year warrants in three classes of 250,000 warrants each,
with varying exercise prices. The Class A warrants were redeemed for $200,000
during the third quarter of 2004. During the first half of 2005, 163,391 each of
Class B and Class C warrants were exercised at $.25 per share. In addition, our
obligation for cash payments on the remaining Class B warrants expired on June
30, 2005 without any cash payment having been required. The settlement agreement
provides that we may be obligated to make additional cash payments of up to
$69,287 for the outstanding Class C warrants during the month of June 2006.
In the first half of 2005 holders of $1,765,000 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 3,530,000 shares of our common stock
during that time period. As of June 30, 2005 there is an aggregate principal
amount of $1,250,000 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 June 30, 2005 of approximately
$465,000, payable in four remaining installments of approximately $117,000 each.
All installments include interest at the rate of 3.9% per annum.
17
Consolidated Contractual Obligations and Lease Commitments
The table below provides information about our commitments related to
debt obligations, leases, guarantees and investments as of June 30, 2005. This
table does not include any projected payment amounts related to our potential
exposure to arbitrations and other legal matters.
As of June 30, 2005
Expected Maturity Date
- -------------------------- ---------------- ----------------- ---------------- ---------------- -------------- --------- -----------
After
Category 2005 2006 2007 2008 2009 2009 Total
- -------------------------- ---------------- ----------------- ---------------- ---------------- -------------- --------- -----------
Debt Obligations 0 0 $480,000 $770,000 0 0 $1,250,000
- -------------------------- ---------------- ----------------- ---------------- ---------------- -------------- --------- -----------
Capital Lease Obligations $4,264 $8,555 0
0 0 0 $12,819
- -------------------------- ---------------- ----------------- ---------------- ---------------- -------------- --------- -----------
Operating Lease
Obligations $460,484 $827,630 $631,790 $609,149 $609,419 0 $3,138,202
- -------------------------- ---------------- ----------------- ---------------- ---------------- -------------- --------- -----------
0 $200,000 0 0 0 0 $200,000
Note Payable
- -------------------------- ---------------- ----------------- ---------------- ---------------- -------------- --------- -----------
Other Long-Term
Obligations Reflected on
Balance Sheet under GAAP 0 $69,287(1) 0 0 0 0 $69,287(1)
- -------------------------- ---------------- ----------------- ---------------- ---------------- -------------- --------- -----------
Total $464,748 $1,105,472 $1,111,790 $1,379,149 $609,149 0 $4,670,308
- -------------------------- ---------------- ----------------- ---------------- ---------------- -------------- --------- -----------
(1) Expected payment obligations embodied in the warrants subject to put
options. For more detailed information please refer to Note 8 of the
consolidated financial statements.
Net Capital
At June 30, 2005, Montauk Financial Group had net capital of
$3,143,648, which was $2,875,556 in excess of its required net capital of
$268,092, and the ratio of aggregate indebtedness to net capital was 1.3 to 1.
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. During the quarter ending June
2005, the board of directors declared the dividend on the preferred stock in
arrears. Subsequent to the reporting period, dividends in the amount of $210,879
were paid. (See Notes 9 and 16 to the consolidated financial statements).
As of June 30, 2005, we have 305,369 Series A Preferred shares issued
and outstanding.
18
Series B Convertible Redeemable Preferred Stock
In connection with a Separation Agreement we entered into with Mr.
William J. Kurinsky during the first quarter of 2005, 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 10 to the consolidated financial
statements).
Subsequent to the reporting date, cumulative dividends of $31,555 on
Series B Preferred stock were paid. (See Notes 10 and 16 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, which
management does not feel has changed during the six month period ended June 30,
2005, 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 our 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.
19
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 June 30, 2005 and December
31, 2004, the balances of our securities positions owned and sold, not yet
purchased were approximately $538,000 and $7,000, 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 our financial position.
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 financing 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 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 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.
20
PART II
OTHER INFORMATION
Item 1. Legal proceedings
For a description of new and resolved legal proceedings for the
reporting period, please see Note 12 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 June 30, 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 Use of Proceeds and Issuer Purchases of
Equity Securities.
a) For the six months ended June 30, 2005, we issued 553,998 shares in
connection with the exercise of incentive stock options, 246,402 shares in
connection with the exercise of Class B and Class C warrants and 3,530,000
shares from the conversion of $1,765,000 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.
(b) Not applicable.
(c) Not applicable.
Item 3. Defaults Upon Senior Securities:
None.
21
Item 4. Submission of Matters to a Vote of Securities Holders:
We held our Annual Meeting of shareholders on June 23, 2005. As of the
record date of May 18, 2005, there were 15,528,151 common shares outstanding and
eligible to vote at the Annual Meeting and 197,824 Series B Convertible
Redeemable Preferred Shares. Based on the applicable conversion rate, each
Series B Preferred Share is entitled to ten votes per Series B share.
Accordingly, the holders of outstanding Series B Preferred Shares were entitled
to 1,978,240 votes. A total of 13,516,680 shares of common stock and 197,824
shares of Series B Preferred Stock were present or represented by proxy at the
meeting. At the Annual Meeting, shareholders were requested to vote on the
election of the following two Class I Directors, both of whom were re-elected as
Class I Directors by the shareholders for a three year term:
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
Name of Nominee Votes Cast In Favor Votes Withheld % In Favor
--------------- ------------------- -------------- ----------
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
Herbert Kurinsky 10,578,994 4,876,226 68.45
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
William J. Kurinsky 10,576,694 4,878,526 68.43
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
A proposal to amend our Restated Certificate of Incorporation to
increase the authorized number of shares of common stock from 30,000,000 to
60,000,000 was submitted to a vote of shareholders. Shareholders representing
10,529,103 shares voted in favor of this proposal, 4,917,698 voted against this
proposal and 8,419 shares abstained. As a result, the amendment to increase the
authorized shares was adopted and the Restated Certificate of Incorporation was
amended effective June 24, 2005.
Item 5. Other Information.
Preferred Stock Dividends
During the quarter ended June 30, 2003, the Company suspended the
payment of cash dividends on its Series A Preferred stock. The 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 are less than its total liabilities. Unpaid preferred dividends
continued to accumulate at 6% per annum. During the quarter ending June 2005,
the board of directors declared the dividend on the preferred stock in arrears,
based upon the board's expectation that in the second quarter of 2005 the
Company's total assets would exceed its total liabilities, and therefore, the
payment of dividends would be permitted under New Jersey law. Subsequent to the
reporting period, dividends in the amount of $210,879 were paid on the Company's
Series A Preferred Stock.
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 and on June 27, 2005 executed
the Amended and Restated Agreement and Plan of Merger (the "Restated
Agreement"). Pursuant to the Restated Agreement, we will issue 1.75 shares of
our common stock for all outstanding shares of common stock of Olympic.
Outstanding Series A Preferred Stock, options and warrants of Olympic will also
reflect the new exchange ratio. Under the terms of the Restated Agreement,
Olympic will become our wholly-owned subsidiary and we will continue to operate
First Montauk Securities Corp. and Olympic's broker dealer firm, National
Securities Corporation, as separate subsidiaries for an undetermined period of
time.
22
Additionally, the Board of Directors of First Montauk following the
closing will consist of Messrs. Mark Goldwasser, Victor Kurylak, two other
designees of each of Olympic and First Montauk and one other mutually agreed
upon designee, who shall serve as chairman (and who shall not be any one of the
four named foregoing persons).
A condition to the merger transaction is completion of a financing in
an amount of $4,000,000 in gross proceeds. First Montauk and Olympic have
previously executed letters of intent with St. Cloud Capital LLC, a Los Angeles
based investment firm, to provide approximately $4.0 million of capital to
Olympic Cascade and First Montauk. The parties are continuing to discuss the
definitive terms of the financing. The investment by St. Cloud Capital is
subject to due diligence investigation, execution of definitive agreements and
customary closing conditions.
The transaction terms also include provisions that Mr. Goldwasser and
Mr. Kurylak will comprise the Office of the Chief Executive Officer of First
Montauk effective at closing. 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 of First Montauk. As a
condition to closing, we and Messrs. Goldwasser and Kurylak will negotiate the
definitive terms of their new respective employment agreements.
In addition, under the terms of the Restated Agreement, Mr. Herbert
Kurinsky, the current Chairman of First Montauk, Mr. William J. Kurinsky, the
former Chief Executive Officer of First Montauk, Mr. Victor K. Kurylak, the
Chief Executive Officer of First Montauk and Mr. Mark Goldwasser, the Chief
Executive of Olympic (and One Clark LLC, an affiliate of Mr. Goldwasser)
delivered voting agreements whereby they have agreed to vote their respective
shares in favor of the transaction.
Completion of the transaction is subject to several conditions
including usual and customary conditions for transactions of this nature,
including shareholder approval, completion of the anticipated financing in an
amount of at least $4,000,000 in gross proceeds and completion of regulatory
review of the proposed transaction by the NASD. The parties expect to file a
joint proxy registration statement with the SEC in the third quarter and the
parties expect to close the transaction by the end of the fourth calendar
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 31, 2005, the parties
have the option not to proceed.
The foregoing description of the merger and the Restated Agreement is
qualified in its entirety by reference to the Restated Agreement.
Change of Clearing Firms
On April 21, 2005, we entered into a new clearing agreement with
National Financial Services LLC 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.
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.
23
Item 6. Exhibits:
The exhibits designated with an asterisk (*) are filed herewith. All
other exhibits have been previously filed with the Commission and, pursuant to
17 C.F.R. ss. 230.411, are incorporated by reference to the document referenced
in brackets following the description of such exhibits.
- ----------------- ----------------------------------------------------------------------------------------------------
3.1 Form of Amendment to Restated Certificate of Incorporation (Filed as Exhibit A to Definitive Proxy
Statement of First Montauk Financial Corp., dated May 19, 2005).
- ----------------- ----------------------------------------------------------------------------------------------------
10.1 Termination of Clearing Agreement dated April 21, 2005 among First Montauk Financial Corp., First
Montauk Securities Corp. and Fiserv Securities, Inc. (Filed as Exhibit 10.1 to Current Report on
Form 8-K dated April 21, 2005).
- ----------------- ----------------------------------------------------------------------------------------------------
10.2 Termination of Financial Agreement and Security Agreement dated April 21, 2005 among First Montauk
Financial Corp., First Montauk Securities Corp. and Fiserv Securities, Inc. (Filed as Exhibit 10.2
to Current Report on Form 8-K dated April 21, 2005).
- ----------------- ----------------------------------------------------------------------------------------------------
10.3 Amended and Restated Agreement and Plan of Merger dated as of June 27, 2005 by and among First
Montauk Financial Corp., Olympic Cascade Financial Corp. and OLY Acquisition Corp. (Filed as
Exhibit 10.1 to Current Report on Form 8-K dated June 27, 2005).
- ----------------- ----------------------------------------------------------------------------------------------------
*31.1 Certification of President and Chief Executive Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
- ----------------- ----------------------------------------------------------------------------------------------------
*31.2 Certification of Acting Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002
- ----------------- ----------------------------------------------------------------------------------------------------
*32.1 Certification of President and Chief Executive Officer pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
- ----------------- ----------------------------------------------------------------------------------------------------
*32.2 Certification of Acting Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002
- ----------------- ----------------------------------------------------------------------------------------------------
24
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: August 3, 2005 /s/ Mindy Horowitz
-----------------------------
Mindy Horowitz
Acting Chief Financial Officer
/s/ Victor K. Kurylak
------------------------------
Victor K. Kurylak
President and Chief Executive
Officer
25
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: August 3, 2005
/s/ Victor K. Kurylak
- --------------------------------------------
VICTOR K. KURYLAK
CHIEF EXECUTIVE OFFICER
26
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: August 3, 2005
/s/ Mindy Horowitz
- -----------------------------------
MINDY HOROWITZ
ACTING CHIEF FINANCIAL OFFICER
27
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 June 30, 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
August 3, 2005
28
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 June 30, 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
August 3, 2005
29