================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
|X| SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD
ENDED SEPTEMBER 30, 2005
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD
FROM TO
Commission File Number: 0-6729
FIRST MONTAUK FINANCIAL CORP.
- --------------------------------------------------------------------------------
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
New Jersey 22-1737915
---------------------- ----------------------------------
(State of Incorporation) (I.R.S. Employer Identification No.)
Parkway 109 Office Center, 328 Newman Springs Road, Red Bank, New Jersey 07701
- --------------------------------------------------------------------------------
(Address of principal executive offices)(Zip Code)
(732) 842-4700
- --------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
- --------------------------------------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
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 the
filing requirements for the past 90 days.
Yes |X| No |_|
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Exchange Act). Yes |_| No |X|
Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act). |_| Yes |X| No
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS
Indicate by check mark whether the registrant has filed all documents
and reports required to be filed by Sections 12, 13 or 15(d)of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.
|_| Yes |_| No
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date: 15,931,607 shares of Common
Stock were outstanding at November 14, 2005.
02
FIRST MONTAUK FINANCIAL CORP.
FORM 10-Q
SEPTEMBER 30, 2005
INDEX
Page
PART I. FINANCIAL INFORMATION:
Item 1. Financial Statements
Consolidated Statements of Financial Condition
as of September 30, 2005 and December 31, 2004 .............. F-1
Consolidated Statements of Income (Loss) for the Nine Months
and Three Months Ended September 30, 2005 and 2004........... F-2
Consolidated Statements of Cash Flows for the Nine Months
Ended September 30, 2005 and 2004 ........................... F-3
Consolidated Statements of Changes in Stockholders'
Equity (Deficit) ............................................F-4-F-5
Notes to Consolidated Financial Statements ..................... 6-13
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations ................. 14-22
Item 3. Quantitative and Qualitative Disclosures about
Market Risk .......................................... 23
Item 4. Controls and Procedures ................................ 24
PART II. OTHER INFORMATION:
Item 1. Legal Proceedings ...................................... 25
Item 2. Unregistered Sales of Equity Securities and
Use of Proceeds .................................... 25
Item 3. Defaults Upon Senior Securities ........................ 25
Item 4. Submission of Matters to a Vote of
Securities Holders ................................. 26
Item 5. Other Information ...................................... 26
Item 6. Exhibits ............................................... 26
Signatures ...................................................... 27
Officers' Certifications ........................................ 28-31
FIRST MONTAUK FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
September 30 December 31,
2005 2004
---- ----
(unaudited)
ASSETS
Cash and cash equivalents $ 317,225 $ 1,034,681
Due from clearing firm 6,085,101 5,815,819
Securities owned, at market value 491,893 370,720
Prepaid expenses 628,093 340,821
Employee and broker receivables 384,139 548,240
Property and equipment - net 525,591 790,909
Income taxes receivable - 40,525
Other assets 742,595 892,659
-------------------- -------------------
Total assets $ 9,174,637 $ 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 113,393 333,261
Securities sold, not yet purchased, at market value 24,132 174,326
Commissions payable 2,183,223 2,499,793
Accounts payable 521,494 614,784
Accrued expenses 1,342,459 1,078,185
Income taxes payable 29,523 44,546
Capital leases payable 10,721 62,460
Other liabilities 238,381 5,520
-------------------- -------------------
Total liabilities 5,713,326 12,932,991
-------------------- -------------------
Commitments and contingencies (See notes)
STOCKHOLDERS' EQUITY (DEFICIT)
Preferred stock, 3,929,898 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 15,906,607 and 10,258,509 shares issued and
outstanding, respectively 10,300,266 7,257,292
Additional paid-in capital 1,930,810 950,592
Accumulated deficit (8,331,817) (10,948,157)
Less deferred compensation (488,267) (388,881)
-------------------- -------------------
Total stockholders' equity (deficit) 3,461,311 (3,098,617)
-------------------- -------------------
Total liabilities and stockholders' equity $ 9,174,637 $ 9,834,374
==================== ===================
See notes to consolidated financial statements.
F-1
04
FIRST MONTAUK FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (LOSS)
Nine months ended September 30 Three months ended September 30
2005 2004 2005 2004
(unaudited) (unaudited) (unaudited) (unaudited)
----------- ----------- ----------- -----------
Revenues:
Commissions $28,130,672 $31,757,699 $ 9,594,354 $ 8,035,201
Principal transactions 4,374,706 7,150,559 1,468,303 2,098,411
Investment banking 4,221,343 2,524,041 395,283 453,595
Interest and other income 7,943,791 3,378,100 1,066,426 1,160,102
---------- ---------- ---------- ----------
Total revenue 44,670,512 44,810,399 12,524,366 11,747,309
---------- ---------- ---------- ----------
Expenses:
Commissions, employee compensation
and benefits 33,203,291 35,797,902 10,314,635 9,567,663
Executive separation 1,432,937 -- --
Clearing and floor brokerage 1,452,104 1,894,478 613,118 452,945
Communications and occupancy 1,901,651 2,024,567 599,465 639,723
Legal matters and related costs 1,043,929 1,995,462 728,985 213,458
Other operating expenses 2,685,248 2,543,171 893,173 763,673
Interest 72,145 233,660 28,752 73,449
----------- ----------- ----------- -----------
Total expenses 41,791,305 44,489,240 13,178,128 11,710,911
----------- ----------- ----------- -----------
Income (loss) before income taxes 2,879,207 321,159 (653,762) 36,398
Provision (benefit) for income taxes 22,615 18,438 3,095 (3,503)
----------- ----------- ----------- -----------
Net income (loss) $ 2,856,592 $ 302,721 $ (656,857) $ 39,901
=========== =========== =========== ===========
Net income (loss) applicable to
common stockholders $ 2,571,252 $ 234,628 $ (699,763) $ 17,306
=========== =========== =========== ===========
Earnings (loss) per share:
Basic $ 0.19 $ 0.03 $ (0.05) $ -
Diluted $ 0.14 $ 0.02 $ (0.04) $ -
Weighted average number of shares
of stock outstanding:
Basic 13,859,366 9,291,318 14,622,209 9,516,709
Diluted 20,116,007 15,713,257 14,622,209 9,618,770
See notes to consolidated financial statements.
F-2
FIRST MONTAUK FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine months ended September 30
2005 2004
(unaudited) (unaudited)
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
ASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 2,856,592 $ 302,721
Adjustments to reconcile net income to net cash
(used in) operating activities:
Depreciation and amortization of property and equipment 303,144 389,531
Amortization of deferred costs 902,700 324,145
Amortization of deferred income (5,105,116) (656,256)
Preferred shares issued in connection with separation agreement 1,000,000 -
Loss on disposition of property and equipment - 4,692
Increase (decrease) in cash attributable to changes in assets
and liabilities:
Due from clearing firm (269,283) 768,438
Securities owned (121,172) (457,111)
Prepaid expenses (287,272) (284,080)
Employee and broker receivables 164,101 383,761
Income tax refund receivable 40,525 -
Other assets (12,045) 204,662
Warrants subject to put options (122,073) (148,085)
Securities sold, not yet purchased (150,194) 175,605
Commissions payable (316,570) (1,686,007)
Accounts payable (93,290) (365,871)
Accrued expenses 264,273 (828,189)
Income taxes payable (15,023) (69,522)
Other liabilities 232,860 (1,676)
----------- -----------
NET CASH USED IN OPERATING ACTIVITIES (727,843) (1,943,242)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment (37,826) (227,891)
----------- -----------
NET CASH USED IN INVESTING ACTIVITIES (37,826) (227,891)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments of capital leases (51,739) (119,954)
Proceeds from capital lease financing - 69,585
Repurchase of common shares - (21,162)
Proceeds from exercise of incentive stock options 340,201 -
Payments of preferred stock dividends (240,249) -
--------- ----------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 48,213 (71,531)
--------- ----------
Net decrease in cash and cash equivalents (717,456) (2,242,664)
Cash and cash equivalents at beginning of period 1,034,681 3,441,743
--------- ----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 317,225 $ 1,199,079
========= ===========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 92,949 $ 170,137
========= ===========
Income taxes $ 63,020 $ 85,724
========= ===========
See notes to consolidated 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 SEPTEMBER 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 98,979
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 555,198 340,201
Exercise of warrants 262,900 97,794
Conversion of bonds into common stock 3,530,000 1,765,000
Payment of preferred stock dividends
Net income for the period
---------------------- --------------------- ------------------------- -------------
Balances at September 30, 2005
(unaudited) 305,369 $30,537 197,824 $19,782 15,906,607 $10,300,266 $ 1,930,810
====================== ===================== ========================= =============
See notes to consolidated 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 SEPTEMBER 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 (98,979) -
Amortization of deferred compensation 740,593 740,593
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 340,201
Exercise of warrants 97,794
Conversion of bonds into common stock 1,765,000
Payment of preferred stock dividends (240,252) (240,252)
Net income for the period 2,856,592 2,856,592
---------------- --------------- ----------------------------- ---------------
Balances at September 30, 2005 (unaudited) $ (8,331,817) $ (488,267) $ 3,461,311
================ =============== ============================= ===============
See notes to consolidated financial statements.
F-5
FIRST MONTAUK FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 - MANAGEMENT REPRESENTATION
The accompanying financial statements of First Montauk
Financial Corp. and subsidiaries (the "Company") 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 September 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 nine-month and three-month
periods ended September 30, 2005 are not necessarily
indicative of the results for the entire year to end on
December 31, 2005.
NOTE 2 - STOCK-BASED COMPENSATION
The Company periodically grants stock options to employees in
accordance with the provisions of its stock option plans, with
the exercise price of the stock options being set at no less
than 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 of date of grant, as determined in accordance
with FAS No. 123 and Emerging Issues Task Force Consensus No.
96-18, and recognized over the related vesting period.
6
NOTE 2- STOCK-BASED COMPENSATION (CONT'D)
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 nine and three month periods ended September 30, 2005 and
2004:
Nine months ended Three months ended
September 30, September 30,
2005 2004 2005 2004
---- ---- ---- ----
Net income applicable to common
stockholders, as reported $2,571,252 $234,628 $(699,763) $17,306
Deduct: Total stock option based
compensation expense determined
under the fair value based method
for all awards, net of tax (308,900) (120,189) (272,809) (15,150)
--------- --------- --------- ------
Pro forma net income (loss) - basic $2,262,352 $114,439 $(972,572) $(2,156)
Add: preferred stock dividends 285,340 -- 42,906 --
Add: convertible debenture interest 56,250 95,617 18,750 --
--------- ------- -------- ------
Pro forma net income (loss)-diluted $2,603,942 $210,056 $(910,916) $(2,156)
========= ======= ========== =======
Income (loss) per share:
Basic - as reported $.19 $.03 $(.05) $.00
Basic - pro forma $.16 $.01 $(.07) $.00
Diluted - as reported $.14 $.02 $(.04) $.00
Diluted - pro forma $.13 $.01 $(.06) $.00
The fair value of the options issued is estimated on the date
of grant using the Black-Scholes Option Pricing Model with the
following weighted-average assumptions used for grants for the
nine months ended September 30, 2005: Dividend yield of 0%;
expected volatility of 55%, risk free interest rate of 4.18%,
and an expected life of 4 years. The weighted average fair
value of options granted during the nine and three months
ended September 30, 2005 was $.41 and $.46, respectively.
NOTE 3 - PREPAID EXPENSES
Prepaid expenses at September 30, 2005 include a payment for
errors and omissions insurance coverage. The remaining
unamortized amount at September 30, 2005 is $407,000 and will
be written off over the remaining policy period of four
months.
NOTE 4 - OTHER LIABILITIES
Other liabilities include a promissory note executed in
connection with a separation agreement with our former CEO.
The note is in the amount of $200,000, payable with interest
at 8% per annum.
7
NOTE 5 - 6% CONVERTIBLE DEBENTURES
During the nine months ended September 30, 2005, holders of
$1,765,000 of our 6% subordinated convertible debentures
presented their debentures to the Company for conversion. The
Company issued 3,530,000 shares of common stock and retired
$1,765,000 of the debentures.
Remaining debentures outstanding as of September 30, 2005 of
$1,250,000 due to mature in 2007 and 2008 are as follows: 2007
- $480,000; 2008 - $770,000.
NOTE 6 - INCREASE OF AUTHORIZED COMMON SHARES
During the quarter ended June 30, 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 7 - 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 nine months ended September 30
2005, 174,388 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 warrant holders, 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 $60,490 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 $60,490, depending upon the then prevailing
market price of the Company's common stock on or about the
date of the Required Exercise Event. The Company may also call
the warrants for redemption under certain circumstances.
8
NOTE 7- WARRANTS SUBJECT TO PUT OPTIONS (CONT'D)
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 $37,337 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.
Changes in value are recognized in earnings as interest
expense. The recorded value at September 30, 2005 was
$113,393. This includes the value of the Class B warrants of
$60,490 at June 30, 2005. Although our obligation for a cash
payment on the Class B warrants expired in June, the warrants
are exercisable until July 2008 and therefore the recorded
value will remain until the warrants are exercised or they
expire.
NOTE 8 - 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. Accordingly, in July 2005, dividends in
arrears in the amount of $210,879 were paid on the Company's
Series A Preferred Stock. Subsequent to the reporting date, an
additional payment of $22,903 was distributed for dividends
declared through September 30, 2005.
NOTE 9 - SERIES B PREFERRED STOCK
In February 2005, the Company's board of directors designated
a Series B Convertible Redeemable Preferred Stock with the
following features:
Shares authorized: 445,102
Par value: $.10 per share
Dividends: 8% per annum, payable quarterly at the rate of $.10
per share until conversion or redemption.
Voting rights: Holders of Series B Preferred Stock are
entitled to vote together with common stockholders on all
matters in which they are entitled to vote. The number of
votes to which holders of Series B Preferred are entitled
to cast are ten per each share of Series B Preferred Stock
subject to certain adjustments.
Liquidation preference: $5.055 per share
9
NOTE 9 - SERIES B PREFERRED STOCK (CONT'D)
Conversion: Convertible at the option of the holder anytime
into ten shares of common stock at $0.5055 per share;
automatic conversion once the closing price for the common
stock is $1.01 for more than 60 trading days if the
average daily trading volume exceeds 20,000 shares, or
$1.26 for more than 60 trading days if the average daily
trading volume exceeds 10,000 shares or $1.51 for more
than 60 trading days.
Redemption: Optional redemption. The holder may
require the Company to redeem all or a portion of its
Series B Preferred Stock by paying cash equal to the issue
price plus all accrued and unpaid dividends within 180
days after a Redemption Event. A Redemption Event is
defined as occurring if either the Company or its
successor ceases to be a reporting company under the
Securities Exchange Act of 1934 (the "Act"), or its common
stock ceases to be publicly traded for any reason.
In February 2005 the Company issued 197,824 Series B Preferred
Shares in connection with a separation agreement entered into
with its former Chief Executive Officer.
The Company's charter authorizes the issuance of up to
5,000,000 shares of Preferred Stock. After the issuance of the
Series A and Series B Preferred Shares described above, the
Company is authorized to issue an additional 3,929,898 of
Preferred Stock. The rights and preferences, if any, to be
given to these preferred shares would be designated by the
board of directors at the time of issuance.
During the quarter ending September 30, 2005, the Company
declared a dividend to be paid to its Series B preferred
stockholder. Subsequent to the reporting date, dividends of
$20,000 on Series B Preferred stock were paid.
NOTE 10 - 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 vested on February 1, 2005, one third
will vest 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 employment agreements with the
Company and were awarded 100,000 shares of common stock each
with vesting schedules.
10
NOTE 10 - EMPLOYMENT AGREEMENTS (CONT'D)
The Company amortizes shares issued to employees over the
respective vesting periods. Amortization of deferred
compensation related to shares issued to employees was
$650,456 and $116,205 respectively, for the nine and three
months ended September 30, 2005, including $80,208 for shares
that vested in the first quarter of 2005 upon the termination
of our former CEO.
NOTE 11 - LEGAL MATTERS
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 judgment.
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.
The New Jersey Bureau of Securities is conducting an inquiry
into First Montauk Securities Corp.'s sale of certain
high-yield bonds to the firm's clients from 1998 to 2001, and
the subsequent resale of those securities to other customers
in 2001. Since the Bureau has not commenced any formal
proceedings or made any formal demands in this matter, our
management is unable at this time to determine whether the
outcome of this inquiry will have a material adverse affect on
the Company's financial condition.
As of September 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 12 - EARNINGS PER SHARE
Basic earnings per share for the nine and three months ended
September 30, 2005 and 2004 is based on the weighted average
number of shares of common stock outstanding. Diluted earnings
per share for the nine and three months ended September 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:
11
NOTE 12 - EARNINGS PER SHARE (CONT'D)
Nine months ended Three months ended
September 30 September 30
----------------- ------------------
2005 2004 2005 2004
---- ---- ---- ----
Numerator - basic:
Net income $ 2,856,592 $ 302,721 $ (656,857) $ 39,901
Deduct: preferred stock dividends ( 285,340) (68,093) ( 42,906) (22,595)
--------- ------- ------------ ------------
Numerator for basic
earnings per share $ 2,571,252 $ 234,628 $ (699,763) $ 17,306
========= ======= ============ ============
Numerator - diluted:
Numerator for basic
earnings per share $ 2,571,252 $ 234,628 $ ( 699,763) $ 17,306
Add: preferred stock dividends 285,340 42,906
Add: convertible debenture
interest, net of tax 56,250 95,617 18,750 --
---------- -------- ------------ ------------
Numerator for diluted
earnings per share $ 2,912,842 $ 330,245 $ ( 638,107) $ 17,306
========== ======= ============ ============
Denominator:
Weighted average common
shares outstanding 13,859,366 9,291,318 14,622,209 9,516,709
Effect of dilutive securities:
Stock options and warrants 1,219,094 151,939 -- 102,061
Convertible preferred stock 1,978,240 -- -- --
Nonvested employee stock 559,307 -- -- --
Convertible debentures 2,500,000 6,270,000 --
--------- --------- ------------ -----------
Denominator for diluted earnings
per share 20,116,007 15,713,257 14,622,209 9,618,770
========== ========== ============ ===========
The following securities have been excluded from the dilutive
per share computation for the nine and three months ended
September 30, 2005 and 2004, as they are antidilutive:
Nine months ended Three months ended
September 30 September 30
2005 2004 2005 2004
----------------------- ---------------------
Stock options 1,916,275 3,602,998 2,721,102 3,602,998
Warrant 50,457 3,385,946 464,724 3,385,946
Convertible debt -- -- 2,500,000 6,270,000
Convertible preferred stock 610,738 602,544 2,588,978 602,544
Nonvested employee stock 724,027 500,000 1,283,334 500,000
12
NOTE 13 - 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
were being amortized over the term of the agreement. The
unamortized amount of $4,886,000 was recognized as income and
included in interest and other income during the second
quarter of 2005. The termination of both agreements was
effective as of April 21, 2005.
NOTE 14 - SUBSEQUENT EVENTS
Termination of Merger:
On October 24, 2005, the Company and Olympic Cascade Financial
Corporation ("Olympic") jointly announced that they have
agreed to terminate the Amended and Restated Agreement and
Plan of Merger, dated as of June 27, 2005 (the "Amended and
Restated Merger Agreement") by and among the Company, Olympic,
and OLY Acquisition Corporation, a wholly owned subsidiary of
the Company.
Under the terms of the letter agreement terminating the
Amended and Restated Merger Agreement, the parties shall have
no further obligation to each other arising out of the Merger
Agreement, the Merger, and the transactions contemplated
thereby, and each party agreed to bear its own expenses.
As a result of the termination of the merger plans, the
Company has expensed $368,000 of merger costs, previously
included in other assets on the statement of financial
condition.
Amended Forms 10-Q:
On October 14, 2005, the Company filed amended Forms 10-Q for
both the June 30, 2005 and March 31, 2005 periods. With
respect to both of the Original Forms 10-Q, the purpose of the
amendments was to correctly account for the amortization of
deferred compensation related to the issuance of restricted
stock grants in February 2005 to certain senior executives. In
addition, the amendment to the Original Forms 10-Q corrects
the vesting schedule of the restricted stock grants awarded to
certain executive officers. Further, the amendment to the
Original June 10-Q corrects a transposition error on the
Company's previously reported Consolidated Statements of
Income (Loss) to the expense category "Commissions, employee
compensation and benefits" for the three months ended June 30,
2005.
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/A for the quarters ended June 30, 2005
and 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 311 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 125 branch office and satellite locations in 28 states are
owned and operated by affiliates; independent representatives who maintain all
appropriate licenses and are responsible for all office overhead and expenses.
We also employ registered representatives directly at our corporate
headquarters.
Our broker-dealer subsidiary is registered with the Securities and
Exchange Commission, the National Association of Securities Dealers, the
Municipal Securities Rule Making Board, the National Futures Association, and
the Securities Investor Protection Corporation and is licensed to conduct its
brokerage activities in all 50 states, the District of Columbia, and the
Commonwealth of Puerto Rico, and registered as an International broker-dealer to
conduct business with institutional clients in the province of Ontario, Canada.
Securities transactions are cleared through National Financial Services LLC
("NFS") of Boston, MA, and Penson Financial Services Inc of Dallas, TX, with
various floor brokerage and specialist firms providing additional execution
services. These arrangements provide us with back office support, transaction
processing services on all principal, national and international securities
exchanges, and access to other financial services and products which allows us
to offer products and services comparable to larger brokerage firms.
On February 8, 2005, we entered into a Separation Agreement
("Agreement") with our Chief Executive Officer ("CEO"), which provided for the
termination of his employment agreement and his position as CEO of the Company,
effective as of February 1, 2005. Pursuant to the terms of the Agreement, we
entered into a two- year consulting agreement, and issued 197,824 shares of FMFC
Series B Convertible Redeemable Preferred Stock at a deemed price of $1,000,000,
convertible into 1,978,240 shares of our common stock, with voting privileges.
We also executed a promissory note for $200,000 with interest of 8% per annum,
paid him a lump-sum cash payment of $136,000, issued 200,000 options to purchase
common stock at $0.83 per share for three years, vesting over two years, and
cancelled 325,000 options with various exercise prices. In addition, all
restricted common shares not previously vested were automatically vested upon
his termination.
14
In February 2005, the President and Chief Operating Officer ("COO") was
appointed the role of CEO of the Company. We entered into an employment
agreement with the new CEO, which superseded his existing agreement, and issued
him 1,000,000 shares of our common stock, with vesting provisions, as a bonus
payment for our performance for the year ended December 31, 2004, and in
consideration of him being appointed to CEO.
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.
On October 24, 2005, we and Olympic Cascade Financial Corporation
("Olympic") jointly announced the agreement to terminate the Amended and
Restated Agreement and Plan of Merger, by and among the Company, Olympic,
and OLY Acquisition Corporation, a wholly owned subsidiary of the Company. Under
the terms of the letter agreement terminating the Amended and Restated Merger
Agreement, the parties shall have no further obligation to each other arising
out of the Merger Agreement, the Merger, and the transactions contemplated
thereby, and each party agreed to bear its own expenses.
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 is effective as of April 21, 2005.
RESULTS OF OPERATIONS
Revenues by Source
The following provides a breakdown of total revenues by source for the
three-month periods ended September 30, 2005 and 2004 (in thousands of dollars).
Three Months Ended
-----------------------------------------------------------------
------------------------------ --- ------------------------------
September 30, 2005 September 30, 2004
------------------------------ ------------------------------
Amount % of Total Amount % of Total
Revenues Revenues
Commissions
Equities $ 5,219 42% $ 4,341 37%
Mutual Funds 1,564 12% 1,471 12%
Insurance 1,073 8% 1,019 9%
Alternative Products 952 8% 540 5%
Investment Advisory 766 7% 626 5%
Fixed Income 20 <1% 38 <1%
-------------- --------------- -------------- ---------------
Total 9,594 77% 8,035 68%
Principal Transactions 1,468 12% 2,098 18%
Investment Banking 395 3% 454 4%
Interest and Other
Interest 605 4% 664 6%
Deferred revenue -- -- 219 2%
Other 462 4% 277 2%
-------------- --------------- -------------- ---------------
Total 1,067 8% 1,160 10%
-------------- --------------- -------------- ---------------
Total revenues $ 12,524 100% $ 11,747 100%
============== =============== ============== ==============
15
The following provides a breakdown of total revenues by source for the
nine-month periods ended September 30, 2005 and 2004 (in thousands of dollars).
Nine Months Ended
---------------------------------------------------------------
------------------------------ --- ----------------------------
September 30, 2005 September 30, 2004
------------------------------ ----------------------------
Amount % of Total Amount % of Total
Revenues Revenues
-------------- --------------- ------------ ----------------
Commissions
Equities $ 15,361 34% $ 20,198 45%
Mutual Funds 4,820 11% 4,558 10%
Insurance 3,402 8% 3,269 7%
Investment Advisory 2,410 5% 1,888 4%
Alternative Products 2,083 5% 1.691 4%
Fixed Income 55 <1% 154 <1%
------------- ---------------- ------------ ----------------
Total 28,131 63% 31,758 70%
Principal Transactions 4,375 10% 7,150 16%
Investment Banking 4,221 9% 2,524 6%
Interest and Other
Interest 1,962 4% 2,097 5%
Deferred revenue 5,105 11% 656 2%
Other 877 2% 625 1%
-------------- ----------------- ------------ ----------------
Total 7,944 18% 3,378 8%
-------------- ----------------- ------------ ----------------
Total revenues $ 44,671 100% $ 44,810 100%
============== ================= ============ ================
Three Months Ended September 30, 2005 Compared to Three Months Ended
September 30, 2004
Overview
Revenues increased $777,000, or 7%, for the three months ended
September 30, 2005 (the "2005 quarter"), to $12.5 million, compared to $11.7
million for the three months ended September 30, 2004 (the "2004 quarter"). The
increase was primarily due to a $1.55 million, or 19% increase in commission
income as detailed in the table above, partially offset by a $630,000, or 30%
decrease in principal transactions; a $59,000, or 13% decrease in investment
banking; and a $93,000, or 8% decrease in interest and other income. Expenses
increased $1.5 million, or 13%, for the 2005 quarter, to $13.2 million, compared
to $11.7 million for the 2004 quarter. Commission expense and clearing and floor
brokerage, which are directly related to commission revenue, increased $1.0
million, or 12%, from $8.3 million for the 2004 quarter, to $9.3 million for the
2005 quarter. Net income (loss) decreased $697,000, from a profit of $40,000 for
the 2004 quarter to a loss of $657,000 for the 2005 quarter. Included in the
2005 loss is the write-off of $368,000 of costs related to the proposed merger
with Olympic Cascade Financial Corporation ("Olympic"), which was previously
capitalized and included in other assets. As a result of the termination of the
merger with Olympic on October 24, 2005, the Company expensed these costs in the
2005 quarter. In addition, we settled six legal claims during the 2005 quarter
totaling in excess of $175,000 and expensed compensation of $98,000 related to
the 2005 stock grants to several officers. Net loss applicable to common
stockholders for the 2005 quarter was approximately $700,000, or ($0.05) and
(0.04) per basic and diluted share, respectively, compared to a net income
applicable to common stockholders of $17,000, or $0.00 per basic and diluted
share for the 2004 quarter.
Commission Revenue
Commission revenue is composed of equities, fixed income, mutual funds,
insurance, asset management fees and alternative products, all of which
increased over the 2004 quarter. Commission revenue for the 2005 quarter was
$9.6 million, up 19% from the 2004 quarter. The increase in commission revenue
for the 2005 quarter was due to stronger equity markets and an overall increase
in investor participation.
16
Principal Transactions
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 $630,000, or 30%, from $2.1 million for the
2004 quarter to $1.5 million for the 2005 quarter. Revenues from all fixed
income sources, which include municipal, government, corporate bonds and unit
investment trusts decreased for the 2005 quarter by $812,000, from $1.8 million
in the 2004 quarter to $1.0 million in the 2005 quarter, while revenues from
riskless principal trades of equity securities increased $220,000.
Investment Banking
Investment banking revenues for the 2005 quarter decreased $58,000 from
$454,000 in the 2004 quarter, to $395,000 in the 2005 quarter. 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.
Interest and Other Income
Interest and other income for the 2005 quarter totaled $1.1 million, as
compared to $1.2 million for the 2004 quarter. Interest income decreased by
$57,000, when compared to the 2004 quarter. In the 2004 quarter, we recognized
deferred income of $219,000 from cash advances received from Fiserv in previous
years. The remaining unamortized cash advances received from Fiserv were
recognized in full in April 2005 and therefore there was no deferred income
recognized during the 2005 quarter. Other income for the 2005 quarter increased
by $185,000 primarily due to the recovery of bad debts previously written off of
$109,000 and unrealized gains on investments of $130,000.
Commissions, Employee Compensation and Benefits
Commission expense, consistently the largest expense category and
directly related to commission revenue, increased 11%, or $896,000, from $7.8
million for the 2004 quarter, to $8.7 million for the 2005 quarter. Commissions
as a percentage of commissionable revenues increased from 74% to 76% for the
2005 quarter reflecting a change in the type and volume of transactions during
the quarter. Compensation and benefits expense for management, operations and
clerical personnel decreased for the 2005 quarter, to $1.60 million (13% of
total revenues) from $1.76 million (15% of revenues), a decrease of $158,000
over the 2004 quarter. Included in this category are salaries, stock and option
compensation, health insurance premiums, payroll taxes and bonus accruals.
Salaries and related payroll taxes decreased by $214,000 from $1.43 million to
$1.22 million. The decrease for the 2005 quarter was primarily attributable to
reductions in the workforce during 2005. The decrease in salary related costs
was partially offset by increases in health insurance premiums of $24,000 and
stock and option compensation costs of $45,000.
Clearing and Floor Brokerage
Clearing and floor brokerage costs which are determined by the volume
and type of transactions, increased $160,000, to $613,000 for the 2005 quarter,
from $453,000 for the 2004 quarter. As a percentage of operating revenues,
clearing costs increased to 5.4% for the 2005 quarter, from 4.3% in the 2004
quarter. The increase for the 2005 quarter is primarily due to the change in the
type and volume of transactions, as well as the discontinuance of expense
rebates provided by our prior clearing firm. Clearing costs, as a percentage of
gross revenues, fluctuate depending upon the product mix.
Communications and Occupancy
Communications and occupancy costs decreased $41,000 during the 2005
quarter, from $640,000 in the 2004 quarter to $599,000 in the 2005 quarter.
Reductions in occupancy and related costs of $78,000, which was 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, was partially offset by increases in
data services.
Legal matters and related costs
Legal matters and related settlement costs increased $516,000, from
$213,000 for the 2004 quarter to $729,000 for the 2005 quarter. During the 2005
quarter we settled six legal claims totaling in excess of $175,000. In addition,
we expensed legal fees of $245,000 related to the proposed merger with Olympic
which was terminated on October 24, 2005. These fees were previously deferred
and carried as other assets on our statement of financial condition. Management
continues to closely monitor our outstanding claims and control the costs
associated with defending these matters.
17
Other Operating Expenses
Other operating costs increased $129,000, to $893,000 in the 2005
quarter, from $764,000 in the 2004 quarter. Included in operating costs are
accounting and consulting fees of $123,000 expensed in the 2005 quarter as a
result of the termination of the proposed merger with Olympic.
Interest Expense
Interest expense for the 2005 quarter decreased by $45,000 compared to
the 2004 quarter. This reduction is primarily attributable to the conversion of
$1,765,000 of our 6% convertible debentures on which interest is no longer paid.
Nine Months Ended September 30, 2005 Compared to Nine Months Ended
September 30, 2004
Overview
Overall, revenues decreased $140,000 for the nine months ended
September 30, 2005 (the "2005 period"), to $44.67 million, compared to $44.81
million for the nine months ended September 30, 2004 (the "2004 period").
Included in total revenue for the 2005 period is the recognition of deferred
revenue of $4,886,000 in connection with the termination of our Financial
Agreement with Fiserv Securities, Inc., our prior clearing firm. Excluding this
one-time revenue, operating revenues decreased approximately $4.8 million, or
11%, compared to the 2004 period. Our results for the first six months of 2005
were negatively impacted by rising interest rates and higher oil prices which
had an adverse impact on investor confidence. Although revenues increased during
the three months ended September 30, 2005, it was insufficient to reverse the
effect from lower revenues during the first six months of 2005. In addition, our
revenues for the 2005 period were affected by a net reduction in excess of 50
registered representatives during the first nine months of 2005.
Excluding our one-time recognition of deferred revenue, the decrease in
revenues was due to a $3.6 million, or 11%, decrease in commission revenue and a
$2.8 million, or 39%, decrease in principal transactions, partially offset by a
$1.7 million, or 67% increase in investment banking. Expenses decreased $2.7
million, or 6% for the 2005 period, to $41.8 million, compared to $44.5 million
for the 2004 period.
There were one-time and non-operational items of expense that had an
adverse affect on the net income for the 2005 period. In February 2005, we
expensed approximately $1,450,000 in connection with a separation agreement with
our former CEO. Additionally, during the 2005 period we had compensation expense
of $509,000 related to stock grants issued in February 2005 to several senior
executives. In September 2005, we expensed $368,000 of costs related to the
proposed merger with Olympic Cascade Financial Corporation ("Olympic"), which
was previously capitalized and included in other assets on our statement of
financial condition. As a result of the announced termination of the merger with
Olympic on October 24, 2005, we expensed these costs in September 2005.
Net income applicable to shareholders increased $2.34 million, from
$235,000 for the 2004 period to $2.57 million for the 2005 period. Our earnings
per share also increased for the 2005 period from $0.03 and $0.02 per basic and
diluted share, respectively, for the 2004 period to $0.19 and $0.14 per basic
and diluted share, respectively, for the 2005 period.
Commission Revenue
Revenue from agency equity transactions decreased $4.8 million, or 24%,
to $15.3 million for the 2005 period, in part due to the reduction in the
number of registered representatives whose business mix was more transactional
in nature. This decrease was partially offset by increases in mutual funds,
insurance, asset management fees and alternative products of $1.3 million for
the 2005 period.
Principal Transactions
Principal transactions decreased $2.8 million, or 39%, from $7.2
million for the 2004 period to $4.37 million for the 2005 period. Revenues from
all fixed income sources, which include municipal, government, and corporate
bonds and unit investment trusts decreased for the 2005 period by $757,000, from
$4.0 million in the 2004 period to $3.2 million in the 2005 period. Revenues
from riskless principal trades of equity securities decreased $1.5 million, from
$2.5 million in the 2004 period to $954,000 for the 2005 period.
18
Investment Banking
Investment banking revenues for the 2005 period increased $1.7 million,
or 67%, from $2.5 million in the 2004 period, to $4.2 million in the 2005
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 in
investment banking revenues was primarily due to several larger private
offerings of securities than we had during the 2004 period. During the 2004
period, revenues from this type of offering were $1.8 million compared to $3.4
million for the 2005 period.
Interest and Other Income
Interest and other income for the 2005 period totaled $7.9 million, as
compared to $3.4 million for the 2004 period, an increase of $4.5 million. Most
of the increase is attributable to the $4.9 million of deferred income
recognized during the second quarter of 2005 in connection with the termination
of our Financial Agreement with our prior clearing firm. Interest income
decreased $134,000 for the 2005 period, when compared to the 2004 period. Other
income for the 2005 period increased by $251,000 primarily due to the recovery
of bad debts previously written off of $169,000 and unrealized gains on
investments of $85,000.
Commissions, Employee Compensation and Benefits
Commission expense, consistently the largest expense category and which
is directly related to commission revenue, decreased 9%, or $2.6 million, from
$30.3 million for the 2004 period, to $27.7 million for the 2005 period.
Commissions as a percentage of commissionable revenues increased from 73% to 75%
for the 2005 period reflecting a change in the type and volume of transactions
during the period. Compensation and benefits expense for management, operations
and clerical personnel remained basically unchanged for the 2005 period at $5.5
million. Included in this category are salaries and payroll taxes, stock and
option compensation, health insurance premiums, and bonuses. Salaries and
related payroll taxes decreased by $679,000, from $4.57 million to $3.89
million. The decrease for the 2005 period was primarily attributable to
reductions in the workforce during 2005. Stock and option compensation costs
increased $361,000 during the 2005 period in connection with stock grants issued
in February 2005 to several senior executives. The net cost of health insurance
premiums for the 2005 period decreased by $13,000 over the 2004 period. Bonuses
for the 2005 period, which includes accruals for estimated year-end bonuses,
increased by $356,000 over the 2004 period, to $508,000.
Executive Separation
During the 2005 period, we recorded compensation expense of
approximately $1,433,000 in connection with a separation agreement with our
former CEO.
Clearing and Floor Brokerage
Clearing and floor brokerage costs decreased $442,000, from $1.9
million for the 2004 period, to $1.5 million for the 2005 period. As a
percentage of operating revenues, clearing costs decreased to 4% for the 2005
period, from 4.6% for the 2004 period. The reduction in 2005 is primarily due to
the change in the type and volume of transactions, as well as expense rebates
provided by our clearing firm which began in August 2004 and continued until May
2005. Clearing costs, as a percentage of gross revenues, fluctuate depending
upon the product mix.
19
Communications and Occupancy
Communications and occupancy costs decreased $123,000 during the 2005
period, from $2.0 million in the 2004 period to $1.9 million in the 2005 period.
Reductions in occupancy and related costs of $209,000, which was 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, was partially offset by increases in
data services.
Legal matters and related costs
Legal matters and related settlement costs decreased $952,000, from
$1.99 million for the 2004 period to $1.04 million for the 2005 period. The
reduction for the nine month period of 2005 is attributable to a decline in the
number of customer complaints and arbitration claims during the 2005 period. In
addition, legal costs for the 2005 period include $245,000 of fees related to
the proposed merger with Olympic which was terminated on October 24, 2005. These
fees were previously deferred and carried as other assets on our statement of
financial condition. Management continues to closely monitor our outstanding
claims and control the costs associated with defending these matters.
Other Operating Expenses
Other operating costs increased $142,000, to $2.69 million in the 2005
period, from $2.54 million in the 2004 period. Due to the exercise of the
majority of our outstanding convertible debentures, we accelerated $130,000 of
the amortization of the costs related to these debentures during the six months
ended June 30, 2005. Also included in operating costs are accounting and
consulting fees of $123,000 expensed in September 2005 as a result of the
termination of the proposed merger plans with Olympic.
Interest Expense
Interest expense for the 2005 period decreased by $162,000 when
compared to the 2004 comparable period. This reduction is primarily attributable
to the conversion of $1,765,000 of our 6% convertible debentures on which
interest is no longer paid.
LIQUIDITY AND CAPITAL RESOURCES
We maintain a highly liquid balance sheet with approximately 75% 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 decreased during the period by
$717,000. Net cash used in operating activities during the 2005 period was
$728,000, as a result of the net income of $2,857,000, adjusted by non-cash
charges including depreciation and amortization of $1,206,000 and $1,000,000
from the issuance of stock in connection with a separation agreement, 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 accrued
expenses of $264,000, note payable of $200,000, and a decrease in receivables
from brokers of $164,000. These increases in cash were offset by decreases in
commissions' payable, securities sold and warrants subject to put options of
$317,000, $150,000 and $122,000, respectively and increases in prepaid expenses
of $287,000, receivable from clearing firm of $269,000 and securities owned of
$121,000.
The New Jersey Bureau of Securities is conducting an inquiry into First
Montauk Securities Corp.'s sale of certain high-yield bonds to the firm's
clients from 1998 to 2001, and the subsequent resale of those securities to
other customers in 2001. Since the Bureau has not commenced any formal
proceedings or made any formal demands in this matter, our management is unable
at this time to determine whether the outcome of this inquiry will have a
material adverse affect on the Company's financial condition.
As of September 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 $38,000 during the first nine months of 2005.
20
Financing activities provided net cash of $48,000 for the nine month
period. Cash increased $340,000 from the proceeds of 555,198 exercised stock
options, offset by payments of preferred stock dividends of $240,000 and capital
leases of $52,000.
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 nine months of 2005, 174,388
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 $60,490 for the outstanding Class C warrants during the month
of June 2006.
During the year, 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 September 30, 2005 there is an aggregate principal amount of
$1,250,000 of debentures outstanding convertible at $.50 per common share, due
to mature in 2007 and 2008 as follows: 2007 - $480,000; 2008 - $770,000.
Premium financing agreements for the renewal of our errors and
omissions insurance policy had a balance at September 30, 2005 of approximately
$117,000, payable in one remaining installment, including 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 September 30, 2005.
This table does not include any projected payment amounts related to our
potential exposure to arbitrations and other legal matters.
As of September
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 $2,166 $8,555 0
0 0 0 $10,721
- -------------------------- ---------------- ----------------- ---------------- ---------------- -------------- --------- -----------
Operating Lease
Obligations $240,854 $861,104 $644,840 $609,149 $609,419 0 $2,965,096
- -------------------------- ---------------- ----------------- ---------------- ---------------- -------------- --------- -----------
0 $200,000 0 0 0 0 $200,000
Note Payable
- -------------------------- ---------------- ----------------- ---------------- ---------------- -------------- --------- -----------
Other Long-Term
Obligations Reflected on
Balance Sheet under GAAP 0 $60,490(1) 0 0 0 0 $60,490(1)
- -------------------------- ---------------- ----------------- ---------------- ---------------- -------------- --------- -----------
Total $243,020 $1,130,149 $1,124,840 $1,379,149 $609,149 0 $4,486,307
- -------------------------- ---------------- ----------------- ---------------- ---------------- -------------- --------- -----------
(1) Expected payment obligations embodied in the warrants subject to put
options. For more detailed information please refer to Note 7 of the
consolidated financial statements.
Net Capital
At September 30, 2005, First Montauk Securities Corp., our
broker-dealer subsidiary, had net capital of $2,979,450, which was $2,729,450 in
excess of its required net capital of $250,000, and the ratio of aggregate
indebtedness to net capital was 1.12 to 1.
21
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.
Accordingly, during the 2005 quarter, dividends in arrears in the amount of
$210,879 were paid on the Company's Series A Preferred Stock.
Subsequent to the reporting date, an additional payment of $22,903 was
distributed for dividends declared through September 30, 2005. (See Note 8 to
the consolidated financial statements). As of September 30, 2005, we have
305,369 Series A Preferred shares issued and outstanding.
Series B Convertible Redeemable Preferred Stock
In February 2005, in connection with a Separation Agreement we entered
into with Mr. William J. Kurinsky, our former CEO, 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 9 to the consolidated financial
statements).
During the quarter ended September 30, 2005, we declared a dividend to
be paid to our Series B preferred stockholder. Subsequent to the reporting date,
dividends of $20,000 on Series B Preferred stock were paid.
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 nine month period ended
September 30, 2005, see "Management Discussion and Analysis" and "Notes to the
Consolidated Financial Statements" in our 2004 Annual Report filed on Form 10-K.
Certain policies are considered critical because they are highly dependent upon
subjective or complex judgments, assumptions and estimates. Changes in such
estimates may have a significant impact on the financial statements.
Off-Balance Sheet Arrangements
We execute securities transactions on behalf of our customers. If
either the customer or 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.
22
Item 3. Quantitative and Qualitative Disclosures about Market Risk
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 September 30, 2005 and
December 31, 2004, the balances of our securities positions owned and our
securities positions sold, but not yet purchased, were approximately $492,000
and $24,000, 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.
23
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 that evaluation, our chief executive officer and chief financial
officer concluded that, as of the date of their evaluation, our disclosure
controls and procedures are effective to ensure that information we are required
to disclose in reports that we file or submit under the Exchange Act is
recorded, processed, summarized and reported within the time periods specified
by the Securities and Exchange Commission, and that such information is
accumulated and communicated to our management, including our chief executive
officer and chief financial officer, as appropriate, to allow timely decisions
regarding required disclosure.
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.
24
PART II
OTHER INFORMATION
Item 1. Legal Proceedings
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.
The New Jersey Bureau of Securities is conducting an inquiry into First
Montauk Securities Corp.'s sale of certain high-yield bonds to the firm's
clients from 1998 to 2001, and the subsequent resale of those securities to
other customers in 2001. Since the Bureau has not commenced any formal
proceedings or made any formal demands in this matter, our management is unable
at this time to determine whether the outcome of this inquiry will have a
material adverse affect on the Company's financial condition.
During the quarter ended September 30, 2005, the Company settled three
of four customer arbitrations involving the sale of high-yield bonds referenced
in the Company's Form 10-K for the year ended December 31, 2004 as well as the
previous quarterly filings for 2005, as amended. Management believes that we
have sufficiently accrued for any probable costs related to the one remaining
customer arbitration related to the sale of the high-yield bonds.
As of September 30, 2005, we have accrued litigation costs that are
probable and can be reasonably estimated based on a review of existing claims,
arbitrations and unpaid settlements. Management cannot give assurance that this
amount will be adequate to cover actual costs that may be subsequently incurred.
Further, it is not possible to predict the outcome of other matters pending
against us. All such cases will continue to be vigorously defended.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
(a) For the three months ended September 30, 2005, we issued 1,200 shares in
connection with the exercise of incentive stock options and 16,498 in connection
with the exercise of Class B and Class C warrants. 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. 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.
(b) Not applicable.
(c) Not applicable.
Item 3. Defaults upon Senior Securities
None.
25
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable
Item 5. Other Information
Termination of Merger with Olympic Cascade Financial Corporation
On October 24, 2005, we and Olympic Cascade Financial Corporation
("Olympic") jointly announced that we have agreed to terminate the Amended and
Restated Agreement and Plan of Merger, dated as of June 27, 2005 (the "Amended
and Restated Merger Agreement") by and among the Company, Olympic, and OLY
Acquisition Corporation, a wholly owned subsidiary of the Company. Under the
terms of the letter agreement terminating the Amended and Restated Merger
Agreement, the parties shall have no further obligation to each other arising
out of the Merger Agreement, the merger, and the transactions contemplated
thereby, and each party agreed to bear its own expenses.
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.
- ---------------- --------------------------------------------------------------------------------------------
10.1 Letter Agreement dated as of October 24, 2005 terminating the
Amended and Restated Agreement and Plan of Merger, dated June
27, 2005, by and among Olympic Cascade Financial Corporation,
OLY Acquisition Corporation and First Montauk Financial Corp.
(Filed as Exhibit 10.1 to Current Report on Form 8-K dated
October 25, 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: November 14, 2005 /s/ Mindy Horowitz
-----------------------------
Mindy 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 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: November 14, 2005
/s/ Victor K. Kurylak
- --------------------------------------------
VICTOR K. KURYLAK
CHIEF EXECUTIVE OFFICER
28
Exhibit 31.2
CERTIFICATION
I, Mindy Horowitz, Acting Chief Financial Officer, certify that:
1. I have reviewed this quarterly report on Form 10-Q of First Montauk
Financial Corp.;
2. Based on my knowledge, this report does not contain any untrue
statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period
covered by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows
of the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the
registrant and have:
a) designed such disclosure controls and procedures, or caused
such disclosure controls and procedures to be designed under
our supervision, to ensure that material information relating
to the registrant, including its consolidated subsidiaries, is
made known to us by others within those entities, particularly
during the period in which this report is being prepared;
b) (Not applicable).
c) Evaluated the effectiveness of the registrant's disclosure
controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls
and procedures, as of the end of the period covered by this
report based on such evaluation; and
d) Disclosed in this report any change in the registrant's
internal control over financial reporting that occurred during
the registrant's most recent fiscal quarter (the registrant's
fourth fiscal quarter in the case of an annual report) that
has materially affected, or is reasonably likely to materially
affect, the registrant's internal control over financial
reporting; and
5. The registrant's other certifying officer(s) and I have disclosed,
based on our most recent evaluation of internal control over financial
reporting, to the registrant's auditors and the audit committee of the
registrant's board of directors (or persons performing the equivalent
functions):
a) all significant deficiencies and material weaknesses in the
design or operation of internal control over financial
reporting which are reasonably likely to adversely affect the
registrant's ability to record, process, summarize and report
financial information; and
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal control over financial reporting.
Date: November 14, 2005
/s/ Mindy Horowitz
- -----------------------------------
MINDY 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 for the period ending September 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
November 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 for the period ending September 30, 2005 as
filed with the Securities and Exchange Commission on the date hereof (the
"Report"), I, Mindy Horowitz, Acting Chief Financial Officer of the Company,
certify, pursuant to 18 U.S.C. section 1350, as adopted pursuant to Section 906
of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of
Section 13(a) or 15(d) of the Securities Exchange Act of 1934;
and
(2) The information contained in the Report fairly presents, in
all material respects, the financial condition and result of
operations of the Company.
/s/ Mindy Horowitz
- ----------------------------------
Mindy Horowitz
Acting Chief Financial Officer
November 14, 2005
31