SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q/A X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period 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 ----------------------- Indicate by check mark whether the Registrant (1) 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 31 EXPLANATORY NOTE We are filing this Amendment No. 1 to our Quarterly Report on Form 10-Q for the six months and three months ended June 30, 2005, as filed with the Securities and Exchange Commission (SEC) on August 3, 2005, in order to revise our unaudited consolidated financial statements for the six months and three months ended June 30, 2005, which supersede our previously issued unaudited consolidated financial statements for such period. The following is a summary of the items of our original Form 10-Q that are amended by this Form 10-Q/A and a brief summary of the changes. Part I, Item 1. Financial Statements This Form 10-Q/A amends the financial statements filed with the original Form 10-Q. The amendments contained in this Form 10-Q/A, for each of the financial statements filed with the original Form 10-Q, are to correctly account for the amortization of deferred compensation and its affect on the provision for income taxes. The amortization of deferred compensation is a non-cash charge which relates to the issuance of restricted stock grants in February 2005 to certain senior executives. o The amendments to the Consolidated Statements of Financial Condition affect the previously reported amounts for: "Accumulated deficit" and "Less deferred compensation" resulting in an exact offset and no net change to total stockholder's equity. o The amendments to the Consolidated Statements of Income reflect changes to the previously reported amounts for: "Commissions, employee compensation and benefits" and "Provision for income taxes". o The amendments to the Consolidated Statements of Cash Flows reflect changes to the previously reported amounts for: "Net income" and "Amortization of deferred costs". o The amendments to the Consolidated Statements of Changes to Stockholders' Equity (Deficit) reflect changes to the previously reported amounts for: "Amortization of deferred compensation" and "Net income for the period" for the balances at June 30, 2005. This Form 10Q/A also corrects a transposition error to the expense category "Commissions, employee compensation and benefits" on our Consolidated Statements of Income which only affected the previously reported "Income before income taxes" for the three month period ended June 30, 2005. The aggregate impact of these adjustments to our financial statements for the three months ended June 30, 2005 will be an increase in the net income applicable to common stockholders from $3,988,908 or $0.28 per basic and $0.20 per diluted share to $4,016,158 or $0.28 per basic and $0.20 per diluted share. For the six months ended June 30, 2005, the aggregate impact will be a decrease in the net income applicable to common stockholders from $3,578,392 or $0.27 per basic and $0.19 per diluted share, as originally reported, to $3,271,015 or $0.24 per basic and $0.18 per diluted share. We have also amended the notes to our financial statements by inserting new Note 2 to explain these changes in greater detail. Further, we have amended Note 3 (which was Note 2 in the original Form 10-Q), Note 12 (Note 11 in the original Form 10-Q) and Note 14 (Note 13 in the original Form 10-Q), to reflect the changes to our financial statements. Note 12 was also amended to accurately reflect the proper vesting schedule for the restricted stock awards granted to certain of our executive officers. Part I, Item 2. Management's Discussion and Analysis of Financial Condition And Results of Operation o We are amending disclosures in our Management's Discussion and Analysis of Financial Condition and Results of Operations contained in the original Form 10-Q solely to properly reflect the above-described revisions to our financial statements. In addition to the above-summarized modifications, we also made changes to correct grammatical and typographical errors where appropriate. Except as otherwise specifically noted, all information contained in this Form 10-Q/A is as of June 30, 2005 and does not reflect any events or changes that have occurred subsequent to the filing of the original Form 10-Q, or modify or update the disclosures therein in any way other than as required to reflect the amendments set forth below. For the convenience of readers, this Amendment No. 1 restates in its entirety our Quarterly Report on Form 10-Q for the six months and three months ended June 30, 2005. FIRST MONTAUK FINANCIAL CORP. FORM 10-Q/A 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 .................... 6-13 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations .................. 14-20 Item 3. Risk Management ........................................ 21 Item 4. Controls and Procedures ................................ 22 PART II. OTHER INFORMATION: Item 1. Legal Proceedings ...................................... 22 Item 2. Changes in Securities .................................. 23 Item 3. Defaults Upon Senior Securities ........................ 23 Item 4. Submission of Matters to a Vote of Security Holders .... 23 Item 5. Other Information ...................................... 24 Item 6. Exhibits and Reports on Form 8-K ....................... 26 Signatures ...................................................... 27 Officers' Certifications ........................................ 28-31 FIRST MONTAUK FINANCIAL CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION June 30 December 31, 2005 2004 (unaudited and restated) 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 (7,434,708) (10,948,157) Less deferred compensation (670,312) (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 and (unaudited) (unaudited and (unaudited) restated) restated) 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 22,888,656 26,230,239 9,954,686 11,342,374 Executive separation 1,432,937 -- -- -- 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 28,613,177 32,778,329 12,160,116 14,221,221 ------------------- ---------------- --------------- -------------- - Income before income taxes 3,532,969 284,761 4,420,385 20,463 Provision for income taxes 19,520 21,941 196,251 (4,383) ------------------- ---------------- --------------- ------------- Net income $ 3,513,449 $ 262,820 4,224,134 24,846 =================== ================ =============== ============= Net income applicable to common stockholders $ 3,271,015 $ 217,322 4,016,158 2,251 =================== ================ =============== ============= Earnings per share: Basic $ 0.24 $ 0.02 $ 0.28 $0.00 Diluted $ 0.18 $ 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 and (unaudited) restated) INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 3,513,449 $ 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 755,077 220,011 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 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 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 (restated) 599,321 599,321 Issuance of restricted stock in connection - 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 (restated) 3,513,449 3,513,449 ---------------- --------------- ----------------------------- --------------- Balances at June 30, 2005 (restated) $ (7,434,708) $ (670,312) - - $ 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 - AMENDMENT Subsequent to the issuance of the Company's unaudited financial statements in its Form 10-Q for the six months and three months ended June 30, 2005, the Company concluded that it did not properly account for the issuance of its restricted stock awards to certain senior executives in February 2005. Therefore, the Company is amending its Form 10-Q to correct the amounts previously reported for amortization of deferred compensation which is included in the Consolidated Statements of Income as part of "Commissions, Employee Compensation and Benefits". The amortization of deferred compensation is a non-cash charge and does not affect the Company's cash flows from operations or its liquidity. In addition, the amendment also corrects a transposition error in reporting "Commissions, employee compensation and benefits" on its Consolidated Statements of Income for the three months ended June 30, 2005 6 The summary of the effects of the amendment is as follows: As Previously Reported As Amended ---------------------- ---------- Consolidated Statements of Financial Condition as of June 30, 2005: ---------------------------------------------- Accumulated deficit $ (7,127,331) $ (7,434,708) Less deferred compensation $ (977,689) $ (670,312) Consolidated Statements of Income for the three months ended June 30, 2005: ------------------------------------------- Commissions, employee compensation and benefits $ 9,822,146 $ 9,954,686 Total expenses $ 12,027,576 $ 12,160,116 Income before income taxes $ 4,552,925 $ 4,420,385 Provision for income taxes $ 259,041 $ 196,251 Net income $ 4,196,884 $ 4,224,134 Net income applicable to common stockholders $ 3,988,908 $ 4,016,158 Consolidated Statements of Income for the six months ended June 30, 2005: ----------------------------------------- Commissions, employee compensation and benefits $ 22,581,216 $ 22,888,656 Total expenses $ 28,305,800 $ 28,613,177 Income before income taxes $ 3,840,346 $ 3,532,969 Net income $ 3,820,826 $ 3,513,449 Net income applicable to common stockholders $ 3,578,392 $ 3,271,015 Earnings per share: Basic $ 0.27 $ 0.24 Diluted $ 0.19 $ 0.18 Consolidated Statements of Cash Flows for the six months ended June 30, 2005 ---------------------------------------- Net income $ 3,820,826 $ 3,513,449 Amortization of deferred costs $ 447,700 $ 755,077 Consolidated Statements of Changes in Stockholders' Equity (Deficit) for the June 30, 2005 period ---------------------------------------- Amortization of deferred compensation $ 291,944 $ 599,321 Net income for the period $ 3,820,826 $ 3,513,449 Balances at June 30, 2005: Retain Earnings (Accumulated Deficit) $ (7,127,331) $ (7,434,708) Deferred Compensation $ (977,689) $ (670,312) 7 NOTE 3 - 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: Six months ended Three months ended June 30, June 30, 2005 2004 2005 2004 ---- ---- ---- ---- (Restated) (Restated) Net income applicable to common stockholders, as reported $3,271,015 $217,322 $4,016,158 $2,251 Deduct: Total stock option 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 $3,234,924 $111,599 $3,998,616 $(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 $3,524,433 $206,695 $4,225,402 $(40,167) ========= ======== ========== ======== Income per share: Basic - as reported $.24 $.02 $.28 $.00 Basic - pro forma .24 .01 .28 .00 Diluted - as reported .18 .02 .20 .00 Diluted - pro forma .17 .01 .20 .00 8 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 4 - 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 5 - 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 6 - 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. NOTE 7 - 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 8 - 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 9 - 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. 9 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 10 - 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 17-Subsequent Event). NOTE 11 - 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. 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. 10 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 17-Subsequent Event). NOTE 12 - 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. One third of such shares vest on February 1, 2005, one third on December 31, 2005 and the final one third on December 31, 2006. 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 vesting schedules. The Company amortizes shares issued to employees over the respective vesting periods. Amortization of deferred compensation related to shares issued to employees was $534,251 and $116,205 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 13 - 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. 11 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 14 - 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 (Restated) (Restated) Numerator - basic: Net income $ 3,513,449 $ 262,820 $ 4,224,134 $ 24,846 Deduct: preferred stock dividends (242,434) (45,498) (207,976) (22,595) ---------- ------- --------- -------- Numerator for basic earnings per share $ 3,271,015 $ 217,322 $ 4,016,158 $ 2,251 ========= ======= ========= ===== Numerator - diluted: Numerator for basic earnings per share $ 3,271,015 $ 217,322 $ 4,016,158 $ 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 $ 3,560,524 $ 312,418 $ 4,242,944 $ 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 ========== ========== ========== ========== 12 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 15 - 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 16 - 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 17 - 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. 13 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. 14 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 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 $4,014,000, from $2,000 for the three months ended June 30, 2004 (the "2004 quarter") to $4,016,000 for the 2005 quarter. Actual net income for the 2005 quarter was $4,224,000, 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 $3,271,000 or $.24 per basic and $0.18 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 $3,513,000, but was reduced by the preferred stock dividends in arrears of $242,000 to arrive at net income applicable to common stockholders. 15 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, as well as deferred compensation expense of $312,000 related to stock grants issued in February 2005. 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%. 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. 16 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 $2,061,000, or 14%, to $12,160,000 in the 2005 quarter. For the 2005 period, total expenses decreased by 13%, to $28,613,000, 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 $1,915,000 (12% of total revenues) from $1,775,000 (12% of revenues), an increase of $140,000 over the 2004 quarter. Included in this category are salaries, stock and 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 second 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 $5,299,000, compared to $3,701,000 for the 2004 period, an increase of $1,598,000. During the 2005 period, we recorded compensation expense of $1,433,000 in connection with a separation agreement with one of our senior officers. In addition, amortization of deferred compensation related to stock grants issued in February 2005 accounted for $410,000 of total compensation costs for the 2005 period. Excluding these compensation costs, compensation and benefits decreased by $245,000, or 7%, 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 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. 17 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. 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 $3,513,000, adjusted by non-cash charges including depreciation and amortization of $974,000 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. 18 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. 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. 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 9 of the consolidated financial statements. 19 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 10 and 17 to the consolidated financial statements). As of June 30, 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 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 11 to the consolidated financial statements). Subsequent to the reporting date, cumulative dividends of $31,555 on Series B Preferred stock were paid. (See Notes 11 and 17 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. 20 Off-Balance Sheet Arrangements We execute securities transactions on behalf of our customers. If either the customer or counter-party fails 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. 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. 21 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. PART II OTHER INFORMATION Item 1. Legal proceedings For a description of new and resolved legal proceedings for the reporting period, please see Note 13 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. 22 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. 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. 23 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. Additionally, the Board of Directors of First Montauk following the closing will consist of Messrs. Mark Goldwasser, Victor K. 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 $4.0 million 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. 24 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 $4.0 million 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. 25 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 - ----------------- ---------------------------------------------------------------------------------------------------- 26 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: October 14, 2005 /s/ Mindy A. Horowitz ------------------------------------- Mindy A. Horowitz Acting Chief Financial Officer /s/ Victor K. Kurylak ------------------------------------- Victor K. Kurylak President and Chief Executive Officer 27 Exhibit 31.1 CERTIFICATION I, Victor K. Kurylak, Chief Executive Officer, certify that: 1. I have reviewed this quarterly report on Form 10-Q/A of First Montauk Financial Corp.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying 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: October 14, 2005 /s/ Victor K. Kurylak - --------------------------------- VICTOR K. KURYLAK CHIEF EXECUTIVE OFFICER 28 Exhibit 31.2 CERTIFICATION I, Mindy A. Horowitz, Acting Chief Financial Officer, certify that: 1. I have reviewed this quarterly report on Form 10-Q/A of First Montauk Financial Corp.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying 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: October 14, 2005 /s/ Mindy A. Horowitz - ------------------------------------- MINDY A. HOROWITZ ACTING CHIEF FINANCIAL OFFICER 29 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/A 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 October 14, 2005 30 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/A for the period ending June 30, 2005 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Mindy A. 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 A. Horowitz - ------------------------------------ Mindy A. Horowitz Acting Chief Financial Officer October 14, 2005 31