-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Hs4K/JYejOhnZS4PNDYKT9IgJbzr5GgyNb3sszBxEXJct19+OIM5uREwf4GCK4mL S8+ujIqeCIQIebmIFqs6Nw== 0000083125-03-000009.txt : 20030515 0000083125-03-000009.hdr.sgml : 20030515 20030515171701 ACCESSION NUMBER: 0000083125-03-000009 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20030331 FILED AS OF DATE: 20030515 FILER: COMPANY DATA: COMPANY CONFORMED NAME: FIRST MONTAUK FINANCIAL CORP CENTRAL INDEX KEY: 0000083125 STANDARD INDUSTRIAL CLASSIFICATION: SECURITY BROKERS, DEALERS & FLOTATION COMPANIES [6211] IRS NUMBER: 221737915 STATE OF INCORPORATION: NJ FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-06729 FILM NUMBER: 03706084 BUSINESS ADDRESS: STREET 1: 328 NEWMAN SPRINGS RD STREET 2: PKWY 109 OFFICE CTR CITY: RED BANK STATE: NJ ZIP: 07701 BUSINESS PHONE: 7328424700 MAIL ADDRESS: STREET 1: 328 NEWMAN SPRINGS RD STREET 2: PKWY 109 OFFICE CTR CITY: RED BANK STATE: NJ ZIP: 07701 FORMER COMPANY: FORMER CONFORMED NAME: MCC PRESIDENTIAL INC DATE OF NAME CHANGE: 19871203 FORMER COMPANY: FORMER CONFORMED NAME: RENAULT WINERY INC DATE OF NAME CHANGE: 19740725 FORMER COMPANY: FORMER CONFORMED NAME: PRESIDENTIAL APARTMENTS INC DATE OF NAME CHANGE: 19740327 10-Q 1 form10q33103.txt FORM 10-Q FOR QUARTER ENDED MARCH 31, 2003 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 2003 OR TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from --------------- to ------------------- Commission File No. 0-6729 FIRST MONTAUK FINANCIAL CORP (Exact name of registrant as specified in its charter) New Jersey 22-1737915 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) Parkway 109 Office Center, 328 Newman Springs Rd., Red Bank, NJ 07701 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (732) 842-4700 Former name, former address and former fiscal year, if changed since last report. Indicate by check mark whether the Registrant (l) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No Indicate by check whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes No X APPLICABLE ONLY TO CORPORATE ISSUERS: - ------------------------------------- 8,527,164 Common Shares, no par value, were outstanding as of May 12, 2003. Page 1 of 21 2 FIRST MONTAUK FINANCIAL CORP FORM 10-Q MARCH 31, 2003 INDEX Page PART I. FINANCIAL INFORMATION: Item 1. Financial Statements Consolidated Statements of Financial Condition as of March 31, 2003 and December 31, 2002 ......... 3 Consolidated Statements of Operations for the Three Months ended March 31, 2003 and 2002 ........... 4 Consolidated Statements of Cash Flows for the Three Months ended March 31, 2003 and 2002 ...... 5 Notes to Consolidated Financial Statements ............ 6-8 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations ...... 9-13 Item 3. Market Risk ................................... 13 Item 4. Controls and Procedures ....................... 14 PART II. OTHER INFORMATION: Item 1. Legal Proceedings ............................ 15 Item 2. Changes in Securities and Use of Proceeds .... 15 Item 3. Defaults Upon Senior Securities .............. 15 Item 4. Submission of Matters to a Vote of Security Holders ...................................... 15 Item 5. Other Information............................. 16 Item 6. Exhibits and Reports on Form 8-K.............. 16 Signatures ............................................ 17 Officers' Certifications .............................. 18-19 3 FIRST MONTAUK FINANCIAL CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION March 31, December 31, 2003 2002 (unaudited) ASSETS Cash and cash equivalents $ 1,971,788 $ 2,638,819 Due from clearing firm 4,075,210 4,591,701 Trading and investment account securities 442,821 183,944 Employee and broker receivables 1,091,003 1,070,087 Loans receivable - officers 172,340 178,936 Property and equipment - net 1,284,923 1,396,892 Income tax refunds receivable 212,300 212,300 Deferred income taxes - net 460,000 460,000 Other assets 1,971,702 692,827 ---------- ---------- Total assets $11,682,087 $11,425,506 ========== ========== LIABILITIES AND STOCKHOLDERS' DEFICIT LIABILITIES Deferred income $ 5,282,213 $ 5,456,323 Securities sold, not yet purchased, at market value 229,629 -- Notes payable -- 48,057 Commissions payable 2,956,812 2,681,128 Accounts payable 1,586,681 577,225 Accrued expenses 1,304,857 1,987,871 Capital leases payable 290,645 343,682 6% convertible debentures 1,240,000 1,030,000 Other liabilities 62,199 78,910 ---------- ---------- Total liabilities 12,953,036 12,203,196 ---------- ---------- Commitments and contingencies (See Notes) STOCKHOLDERS' DEFICIT Preferred Stock, 4,375,000 shares authorized, $.10 par value, no shares issued and outstanding -- -- Series A Convertible Preferred Stock, 625,000 shares authorized, $.10 par value, 330,250 and 331,190 shares issued and outstanding, respectively; liquidation preference: $1,651,250 33,025 33,025 Common Stock, no par value, 30,000,000 shares authorized, 8,527,164 shares issued and outstanding 3,416,220 3,416,220 Additional paid-in capital 3,921,108 3,918,930 Accumulated deficit (8,631,960) (8,135,777) Less: Deferred compensation (9,342) (10,088) ---------- ---------- Total stockholders' deficit (1,270,949) (777,690) ---------- ---------- Total liabilities and stockholders' deficit $11,682,087 $11,425,506 ========== ========== See notes to financial statements.
4 FIRST MONTAUK FINANCIAL CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS Three months ended March 31, 2003 2002 (unaudited) (unaudited) Revenues: Commissions $ 7,649,259 $ 9,683,706 Principal transactions 2,261,330 2,120,539 Investment banking 195,328 63,035 Interest and other income 850,250 881,188 ---------- ---------- Total revenues 10,956,167 12,748,468 ---------- ---------- Expenses: Commissions, employee compensation and benefits 9,097,622 10,477,779 Clearing and floor brokerage 568,270 680,914 Communications and occupancy 693,579 676,285 Legal matters and related costs 401,066 267,156 Other operating expenses 629,161 909,090 Interest 37,813 32,906 ---------- ---------- Total expenses 11,427,511 13,044,130 ---------- ---------- Net Loss $ (471,344) $ (295,662) ========== ========== Net loss applicable to common stockholders $ (496,183) $ (320,502) ========== ========== Per share of Common Stock: Basic and diluted $ (0.06) $ (0.04) ========== ========== Number of common shares used in basic and diluted loss per share 8,527,164 8,622,284 ========== ========== See notes to financial statements.
5 FIRST MONTAUK FINANCIAL CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS Three months ended March 31, 2003 2002 (unaudited) (unaudited) INCREASE (DECREASE) IN CASH Cash flows from operating activities: Net loss $ (471,344) $ (295,662) --------- ---------- Adjustments to reconcile net loss to net cash used in operating activities: Depreciation 133,997 128,689 Amortization 3,563 4,852 Increase (decrease) in cash attributable to changes in assets and liabilities: Due from clearing firm 516,491 (2,330,485) Trading and investment account securities (258,877) 388,215 Loans receivable - officers 6,596 (45,445) Employee and broker receivables (20,916) 266,521 Other assets (1,279,514) (66,158) Deferred income (174,110) (146,729) Securities sold but not yet purchased 229,629 863,754 Commissions payable 275,684 104,679 Accounts payable 1,009,456 (123) Accrued expenses (683,014) (260,186) Income taxes payable -- (7,111) Other liabilities (16,711) (52,321) ---------- ----------- Total adjustments (257,726) (1,151,848) ---------- ----------- Net cash used in operating activities (729,070) (1,447,510) ---------- ----------- Cash flows from investing activities: Additions to property and equipment (22,028) (45,104) ---------- ----------- Cash flows from financing activities: Payment of notes payable (48,057) (99,210) Payments of capital lease (53,037) (47,664) Proceeds from issuance of 6% convertible debentures 210,000 -- Payments of preferred stock dividends (24,839) (24,840) ---------- ----------- Net cash provided by (used in) financing activities 84,067 (171,714) ---------- ----------- Net decrease in cash and cash equivalents (667,031) (1,664,328) Cash and cash equivalents at beginning of period 2,638,819 1,779,554 ---------- ----------- Cash and cash equivalents at end of period $1,971,788 $ 115,226 ========== =========== Supplemental disclosures of cash flow information: Cash paid during the period for: Interest $ 19,625 $ 32,906 ========== =========== Income taxes $ 20,170 $ 4,704 ========== =========== Noncash financing activity: Warrants charged to deferred financing costs in connection with debenture offering $ 2,178 $ -- ========== =========== See notes to financial statements.
6 FIRST MONTAUK FINANCIAL CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 - MANAGEMENT REPRESENTATION The accompanying financial statements are unaudited for the interim period, but include all adjustments (consisting only of normal recurring accruals) which management considers necessary for the fair presentation of results at March 31, 2003 and 2002. The preparation of financial statements in conformity with GAAP requires the Company to make estimates and assumptions that affect the reported amounts of revenues and expenses during the reporting period. Actual results could vary from these estimates. These financial statements should be read in conjunction with the Company's Annual Report at, and for the year ended December 31, 2002, as filed with the Securities and Exchange Commission on Form 10-K. The results reflected for the three-month period ended March 31, 2003, are not necessarily indicative of the results for the entire fiscal year to end on December 31, 2003. NOTE 2 - NET LOSS PER SHARE Basic loss per share is computed by dividing net loss by the weighted-average number of common shares outstanding for the period. Diluted loss per share reflects the potential dilution from the exercise or conversion of other securities into common stock, but only if dilutive. The following securities have been excluded from the dilutive per share computation as they are antidilutive: Three months ended March 31, 2003 2002 Stock options 3,961,998 4,630,498 Warrants 3,221,446 9,242,338 Convertible debt 2,480,000 90,201 Convertible preferred stock 660,500 662,380 NOTE 3 - OTHER ASSETS Other assets consist of the following: March 31, December 31, 2003 2002 Prepaid insurance $1,264,421 $256,215 Other assets 707,281 436,612 --------- ------- $1,971,702 $692,827 ========= ======= Prepaid insurance includes unamortized premiums for various corporate insurance policies. The March 2003 balance reflects a significant increase for errors and omissions (E&O) coverage for the policy period that commenced January 31, 2003. NOTE 4 - ACCOUNTS PAYABLE Accounts payable at March 31, 2003 includes a balance of $880,847 due under an insurance premium finance agreement. The balance is payable in seven monthly installments of $127,687, including interest at the rate of 4.4% per annum. NOTE 5 - 6% CONVERTIBLE DEBENTURES In December 2002 and January 2003, the Company raised gross proceeds of $1,240,000 in a private placement of 6% convertible debentures. The debentures are convertible into 2,480,000 shares of common stock at $.50 per share, subject to adjustment for stock dividends and stock splits, and mature five years from the date of issuance unless previously converted. Interest is payable in cash on a semi-annual basis until maturity or conversion, commencing on April 1, 2003. In the event that the closing bid price of the Company's common stock is 200% of the conversion price for the twenty (20) consecutive trading days prior to the date of notice of conversion or prepayment, the Company, at its option, may upon thirty (30) days written notice to the holders, demand the conversion of some or all of the debentures, or prepay some or all of the debentures at the following prepayment prices: 130% of the principal amount if prepaid from the date of issuance until the first anniversary of the date of issuance; 120% of the principal amount if prepaid anytime thereafter. The debentures contain certain covenants which, among other things, prevent the sale of all or substantially all of the Company's assets without provision for the payment of the debentures from such sales proceeds, and making loans to any executive officers or 5% stockholders. Offering costs of approximately $46,000 have been capitalized and are being amortized on a straight-line basis over the term of the debentures. 7 NOTE 6 - STOCK OPTIONS In December 2002, the FASB issued Statement of Financial Accounting Standards No. 148, "Accounting for Stock-Based Compensation -- Transition and Disclosure" ("FAS 148"), which (i) amends FAS Statement No. 123, "Accounting for Stock-Based Compensation," to provide alternative methods of transition for an entity that voluntarily changes to the fair value based method of accounting for stock-based employee compensation; (ii) amends the disclosure provisions of, FAS 123 to require prominent disclosure about the effects on reported net income of an entity's accounting policy decisions with respect to stock-based employee compensation; and iii) amends APB opinion No. 28, "Interim Financial Reporting," to require disclosure about those effects in interim financial information. Items (ii) and (iii) of the new requirements in FAS 148 are effective for financial statements for fiscal years ending after December 15, 2002. The Company has adopted FAS 148 for the fiscal year ended December 31, 2002 and continues to account for stock-based compensation utilizing the intrinsic value method. The additional disclosures required by FAS 148 are as follows: Three months ended March 31, 2003 2002 Net loss applicable to common stockholders, as reported $(496,183) $(320,502) Add: Stock based employee compensation expense included in reported net loss, net of tax 746 4,852 Deduct: Total stock based employee compensation expense determined under the fair value based method for all awards, net of tax (23,058) (40,402) --------- --------- Pro forma net loss $(518,495) $(356,052) ========= ========= Loss per share: Basic and diluted - as reported $(0.06) $ (0.04) Basic and diluted - pro forma $(0.06) $ (0.04)
Pro forma net loss and loss per share information, as required by SFAS No. 123, have been determined as if the Company had accounted for employee stock options under the fair value method. There were no options granted during the three months ended March 31, 2003 and 2002. NOTE 7 - LEGAL MATTERS FMSC is a respondent in numerous arbitrations arising from customer purchases of high yield corporate bonds which declined in market value after the purchases were made. The claims allege, among other charges, unsuitable recommendations and/or improper use of margin, and seek aggregate compensatory damages in excess of $12 million. Some of the claims seek punitive damages and the recovery of various costs. The Company is vigorously defending these actions and believes that there are meritorious defenses in each case. There is no remaining insurance coverage available for the payment of settlements and/or judgments that may result from these particular claims. FMSC is also a respondent or co-respondent in various other legal proceedings which are related to its securities business. FMSC is contesting these claims and believes there are meritorious defenses in each case. The availability of insurance coverage in any particular case is determined on a case by case basis by the insurance carrier, and is limited to the coverage limits within the policy for any individual claim and in the aggregate. As of March 31, 2003, the Company has accrued $972,500 for litigation costs that are probable and can be reasonably estimated based on a review of existing claims, arbitrations and unpaid settlements. Management cannot give assurance that this accrual will be adequate to cover actual costs that may be subsequently incurred. It is not possible to predict the outcome of other matters pending against FMSC. All such cases are, and will continue to be, vigorously defended. 8 However, litigation is subject to many uncertainties, and some of these actions and proceedings may result in adverse judgments. After considering all relevant facts, available insurance coverage and the advice of litigation counsel, it is possible that the Company's consolidated financial condition, results of operations, or cash flows could be materially affected by unfavorable outcomes or settlements of certain pending litigation. FMSC has also filed a claim against one of its competitors for raiding, unfair competition and use of proprietary and confidential information. The Company has obtained temporary injunctive relief from the Supreme Court of New York, as well as a consent injunctive order from an NASD arbitration panel. A hearing will be held later this year to determine the damages portion of the Company's claims. Management is unable to determine at this time what damages, if any, might be awarded. NOTE 8 - INCOME TAXES For the 2003 and 2002 periods, the effective tax rate of 0% was higher than the expected tax rate of approximately (39%) and (37%), respectively, due to an increase in the tax valuation allowance to offset the benefits of each period's operating losses and other temporary differences because management is uncertain as to the ultimate realization of such benefits. NOTE 9 - WARRANTS The Company's 3,072,446 Class A warrants and 3,072,446 Class B warrants expired on February 17, 2003. The Company issued 124,000 common stock purchase warrants as compensation to registered representatives in connection with the convertible debenture offering. The Company valued the warrants at approximately $13,500 using the Black-Scholes option pricing method, and included the warrant value in deferred financing costs. NOTE 10 - SUSPENSION OF PREFERRED STOCK DIVIDENDS The Company has suspended the payment of cash dividends on its Series A Preferred stock. New Jersey Business Corporation Act prohibits the payment of any distribution by a corporation to, or for the benefit of its shareholders, if the corporation's total assets would be less than its total liabilities. Unpaid preferred dividends will continue to accumulate at 6% per annum. Arrearages must be fully paid before any distribution can be declared or paid on the Company's common stock. 9 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Factors Affecting "Forward-Looking Statements" From time to time, the Company may publish "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities and Exchange Act of 1934, as amended, or make oral statements that constitute forward-looking statements. These forward-looking statements may relate to such matters as anticipated financial performance, future revenues or earnings, business prospects, projected ventures, new products, anticipated market performance, and similar matters. The Private Securities Litigation Reform Act of 1995 provides a safe harbor for forward-looking statements. In order to comply with the terms of the safe harbor, the Company cautions readers that a variety of factors could cause the Company's actual results to differ materially from the anticipated results or other expectations expressed in the Company's forward-looking statements. These risks and uncertainties, many of which are beyond the Company's control, include, but are not limited to: (i) transaction volume in the securities markets, (ii) the volatility of the securities markets, (iii) fluctuations in interest rates, (iv) changes in regulatory requirements which could affect the cost of doing business, (v) fluctuations in currency rates, (vi) general economic conditions, both domestic and international, (vii) changes in the rate of inflation and related impact on securities markets, (viii) competition from existing financial institutions and other participants in competition from existing financial institutions and other participants in the securities markets, (ix) legal developments affecting the litigation experience of the securities industry, and (x) changes in federal and state tax laws which could affect the popularity of products sold by the Company. The Company does not undertake any obligation to publicly update or revise any forward-looking statements. The reader is referred to the Company's previous filings on Form 10-Q for the periods ended March 31, 2002, June 30, 2002, September 30, 2002 and Form 10-K for the year ended December 31, 2002. Overview First Montauk Financial Corp. ("FMFC" or the "Company") is a New Jersey-based financial services holding company whose principal subsidiary, First Montauk Securities Corp. ("FMSC"), has operated as a full service retail and institutional securities brokerage firm since 1987. FMSC provides a broad range of securities brokerage and investment services to a diverse retail and institutional clientele, as well as corporate finance and investment banking services to corporations and businesses. In 1997, FMSC established Century Discount Investments, a discount brokerage division. FMFC also sells insurance products through its subsidiary Montauk Insurance Services, Inc. FMSC has approximately 500 registered representatives and services over 60,000 retail and institutional customer accounts. With the exception of two Company-leased branch offices, all of FMSC's 150 other branch office and satellite locations in 33 states are owned and operated by affiliates, independent owners who maintain all appropriate licenses and are responsible for all office overhead and expenses. FMSC also employs registered representatives directly at its corporate office and the Company-leased branch offices. FMSC is registered as a broker-dealer with the Securities and Exchange Commission, the National Association of Securities Dealers Regulation, Inc., the Municipal Securities Rule Making Board, and the Securities Investor Protection Corporation and is licensed to conduct its brokerage activities in all 50 states, the District of Columbia, and the Commonwealth of Puerto Rico. All securities transactions are cleared through Fiserv Securities, Inc. of Philadelphia, PA. and various floor brokerage and specialist firms provide execution services. These arrangements provide FMSC with back office support, transaction processing services on all principal, national and international securities exchanges, and access to many other financial services and products which allows FMSC to offer products and services comparable to large brokerage firms. Results of Operations The results of operations for the quarter ended March 31, 2003 (the "2003 period") showed a decrease in revenues over the same period in the prior year (the "2002 period"). The continued lack of investor confidence in the U.S. equity markets and the gloomy economic forecast combined with global political uncertainties, have continued to negatively impact revenues, thus reducing the net cash available to cover fixed costs and overhead. 10 For the 2003 period, the Company reported a net loss applicable to common stockholders of $496,000, or $0.06 per basic and diluted share, as compared to the net loss applicable to common stockholders reported in the 2002 period, of $321,000, or $0.04 per basic and diluted share. The Company's primary source of revenue is derived from commissions from the sale of securities, both listed and over-the-counter executed on an agency basis, mutual funds, variable insurance and managed accounts. Revenues from these sources decreased $2,035,000, to $7,649,000 in the 2003 period, from $9,684,000 in the 2002 period. As a percent of total revenues, commissions were 70% in the 2003 period, as compared to 76% in the 2002 period. A decrease in registered representatives, from 568 at the end of the 2002 period to 484 at the end of the 2003 period, contributed to this decline. A significant number of terminated brokers are the subjects of an arbitration proceeding against one of the company's competitors, more fully discussed below. Agency commissions declined $1,353,000, from $6,191,000 in the 2002 period, to $4,838,000 in the 2003 period. Mutual funds and insurance also contributed to the decline, posting decreases of $253,000 and $397,000, respectively, to $1,211,000 and $887,000, respectively, in the 2003 period. Revenues from principal transactions increased $140,000, from $2,121,000 in the 2002 period, to $2,261,000 in the 2003 period. Principal transaction revenue includes gains or losses from both equity and fixed income proprietary trading, riskless principal commissions, and unrealized gains or losses on inventory held in the firm's proprietary accounts. Revenues in the firm's equity proprietary accounts decreased by approximately $266,000 in the 2003 period, as compared to the 2002 period. Overall, revenues from principal transactions in the fixed income sector increased $414,000 from the 2002 period, to $1,160,000 in the 2003 period. Revenues from corporate, municipal and government agency bonds all increased as investors sought more secure, income-producing investments. Included in the fixed income sector is a substantial increase in revenues from the corporate bond market of $326,000, from $142,000 in the 2002 period, to $468,000 in the 2003 period. Interest and other income decreased by $31,000, from $881,000 in the 2002 period, to $850,000 in the 2003 period. Commissions, employee compensation and benefits decreased $1,380,000, or 13%, to $9,098,000 in the 2003 period, from $10,478,000 in the 2002 period. Commission expense, which accounts for the largest dollar amount in this category, decreased 15%, or $1,317,000, from $8,667,000 in the 2002 period, to $7,350,000 in the 2003 period, primarily as a result of lower commission-based revenues. Employee compensation and benefits expense decreased $63,000, or 3%, from $1,811,000 in the 2002 period, to $1,748,000 in the 2003 period. This decrease was primarily due to the continuation of staff reductions implemented during the latter part of 2002 and into 2003, partially offset by an increase in benefits due to increases in health care and long-term disability insurance premiums. For both quarterly periods, compensation expense was reduced by reversals of 2002 and 2001 401(k) employer matching contributions of $86,000 and $100,000, respectively. Communication and occupancy expenses increased $17,000, from $676,000 for the 2002 period, to $693,000 for the 2003 period. Charges for customer on-line account access, implemented by the Company's clearing firm in the 2003 period, amounted to $15,000, while increases in rent expense of $43,000 was offset by a decrease of $46,000 for market data services. Rent expense increased due to the addition of a second Company-leased branch office in New York City, which opened in the second quarter of 2002, while market data service costs decreased due to elimination of several services. Legal matters and related costs increased $134,000, from $267,000 in the 2002 period, to $401,000 in the 2003 period, a 50% increase. The 2003 expense includes approximately $120,000 of additional reserves for legal settlements; with the balance related to the costs of counsel fees and other litigation costs. FMSC is currently a respondent in numerous arbitrations arising from customer purchases of high yield corporate bonds, which either have defaulted or declined in market value. The claims allege, among other charges, unsuitable recommendations and/or improper use of margin, and seek aggregate compensatory damages in excess of $12 million. In addition, some of the claims seek punitive damages and the recovery of various costs. The Company is vigorously defending these actions and believes that there are meritorious defenses in each case. There is no remaining insurance coverage available for the payment of settlements and/or judgments that may result from these particular claims. FMSC is also a respondent or co-respondent in various other legal proceedings related to our securities business. FMSC is contesting these claims and believes there are meritorious defenses in each case. The availability of insurance coverage in any particular case is determined on a case by case basis by our insurance carrier, and is limited to the coverage limits within the policy for any individual claim and in the aggregate. 11 As of March 31, 2003, the Company has recorded a liability of $972,500 for litigation costs that are probable and can be reasonably estimated based on a review of existing claims, arbitrations and unpaid settlements. Management cannot give assurance that this accrual will be adequate to cover actual costs that may be subsequently incurred. It is not possible to predict the outcome of other matters pending against FMSC. All such cases are, and will continue to be, vigorously defended. However, litigation is subject to many uncertainties, and some of these actions and proceedings may result in adverse awards or judgments. After considering all relevant facts, available insurance coverage and consultation with litigation counsel, it is possible that the Company's consolidated financial condition, results of operations, or cash flows could be materially affected by unfavorable outcomes or settlements of certain pending litigation. FMSC has also filed a claim against one of its competitors for raiding, unfair competition and use of proprietary and confidential information. The Company has obtained temporary injunctive relief from the Supreme Court of New York, as well as a consent injunctive order from an NASD arbitration panel. A hearing will be held later this year to determine the damages portion of the Company's claims. Management is unable to determine at this time what damages, if any, might be awarded. Other operating expenses decreased $280,000, from $909,000 in the 2002 period, to $629,000 in the 2003 period. Bad debt expense decreased $144,000, from $142,000 in the 2002 period, to a recovery of $2,000 in the 2003 period. The 2002 period included an accrual of $140,000 for bad debts related to broker loans. There was no additional accrual or write-off for this expense in the 2003 period. However, the Company continually monitors broker loans for collectibility. Professional fees and office expenses also decreased from the 2002 period by $40,000 and $47,000, respectively, for the 2003 period, while errors and omissions insurance increased by $44,000 from the 2002 period to the 2003 period due to an increase in the premium. Professional liability insurance premiums have substantially increased in fiscal 2003 due to a hardening in the market for broker-dealer professional liability and directors and officers insurance coverages. Many insurance carriers have eliminated these types of coverages, while others have substantially increased premiums and deductible limits. The Company's registered representatives have historically paid the cost of errors and omission insurance. However, to stay competitive in the marketplace for registered representatives, the Company will absorb a portion of these premiums for fiscal 2003. The amount of this cost will be determined by the number of registered representatives associated with the Company throughout the year. The Company did not incur any income tax liabilities during the three-month periods ended March 31, 2003 and 2002 due to operating losses. For the 2003 and 2002 periods, the effective tax rate of 0% was lower than the expected tax rate of approximately (39%) and (37%), respectively, due to an increase in the tax valuation allowance to offset the benefits of each period's operating losses and other temporary differences because management is uncertain as to the ultimate realization of such benefits. Liquidity and Capital Resources As with most financial firms, the Company maintains a highly liquid balance sheet with 56% of the Company's assets consisting of cash, securities owned, and receivables from the Company's clearing firm and other broker-dealers. The balances in the Company's cash, inventory and clearing firm accounts can and do fluctuate significantly from day to day, depending on market conditions, daily trading activity, and investment opportunities. The Company monitors these accounts on a daily basis in order to ensure compliance with regulatory capital requirements and to preserve liquidity. Cash and cash equivalents decreased during the first three months of 2003 by $667,000, to $1,972,000. Net cash used in operating activities was $709,000 for the 2003 period. The primary components of the decrease in cash are the net operating loss of $471,000, decreases in accrued expenses and deferred income of $857,000, and increases in the value of securities and other assets of $1,538,000. These reductions are offset by a decrease in the amount due from clearing firm of $516,000, increases in commissions payable, accounts payable and securities sold short of $1,515,000 and non-cash adjustments of $138,000. Under the financing agreement with Fiserv, the Company is eligible to receive its fourth and final advance of $1,250,000 in November 2003, subject to meeting certain performance criteria. Advances are subject to income taxes in the year of receipt. 12 Additions to capital expenditures accounted for the entire use of cash for investing activities of $22,000 during the 2003 period. The Company projects $150,000 in capital expenditures over the next twelve months. Financing activities provided cash of $84,000 during the 2003 period. The Company received gross proceeds of $210,000 from the second closing of its private offering of 6% convertible debentures. This was offset by payments of notes payable, capital leases and preferred stock dividends of $48,000, $53,000 and $25,000, respectively. During fiscal 2001, the Company entered into two capital leases under a sale-leaseback financing with a leasing company. The sale of the fixed assets resulted in a gain of approximately $45,000, which has been deferred and is being amortized over the related lease terms. The leases, totaling $662,000, are together payable in 36 monthly installments of $21,000 and an additional 12 installments of $3,900. The Company has suspended the $25,000 quarterly payments of its Series A Preferred Stock dividend in accordance with applicable state law (See Note 10 to the financial statements and Part II Item 5.) Consolidated Contractual Obligations and Lease Commitments The tables below summarize information about the consolidated contractual obligations as of March 31, 2003 and the effects these obligations are expected to have on the Company's consolidated liquidity and cash flows in future years. These tables do not include any projected payment amounts related to the Company's potential exposure to arbitrations and other legal matters. Future minimum operating lease payments as of March 31, 2003 are as follows: Operating Leases 2003 $ 841,097 2004 1,103,126 2005 296,302 2006 169,500 --------- Total minimum lease payments $2,410,025 ========= Future minimum lease payments as of March 31, 2003 are as follows: Capital Leases 2003 $186,687 2004 114,396 2005 15,711 2006 -- ------- Total minimum lease payments 316,794 Less: Amount representing interest (26,150) ------- $290,644 ======= In 1999, the Company completed a private offering of Series A Convertible Preferred Stock in connection with the settlement with holders of leases of Global Financial Corp. Under the terms of the offering, each Global lease investor who participated in the offering received one share of Preferred Stock in exchange for every $5 of lease investment value that the investor was entitled to receive from Global after certain adjustments. Each leaseholder was required to assign their interest in all lease payments to which they were entitled. Each share of the Preferred Stock is convertible into two shares of Common Stock and pays a quarterly dividend of 6%. Pursuant to the offering, the Company issued an aggregate of 349,511 shares of Series A Preferred Stock. The offering was exempt from registration pursuant to Sections 4(2) and 4(6) of the Securities Act of 1933, as amended, and Regulation D, promulgated thereunder. 13 In October 2002, the Company commenced a private offering of up to $3,000,000 of 6% convertible debentures to accredited investors. Each debenture is convertible at an initial conversion price of $0.50 per share, subject to adjustment for stock dividends, combinations, splits, recapitalizations, and like events. Interest on the debentures accrues at the rate of 6% per annum and is payable in cash on a semi-annual basis on April 1st and October 1st of each year until maturity or conversion. Each debenture is due and payable five (5) years from issuance, unless previously converted into shares of Common Stock. The offering expired on March 1, 2003. In the offering, the Company sold an aggregate amount of $1,240,000 of debentures, $1,030,000 in fiscal 2002 and $210,000 in fiscal 2003. The proceeds of the financing will be used to satisfy general working capital needs. The debentures have not been registered for offer or sale under the Securities Act; such securities are being issued on the basis of the statutory exemption provided by Section 4(2) of the Securities Act, as amended, and/or Rule 506 of Regulation D, promulgated thereunder relating to transactions by an issuer not involving any public offering. For more information, see a discussion of the debentures under the captions "Item 1. Business -- Debenture Offering" and "Item 5. Sale of Unregistered Securities." Application of Critical Accounting Policies Generally accepted accounting principles are complex and require management to apply significant judgments to various accounting, reporting and disclosure matters. Management of the Company must use assumptions and estimates to apply these principles where actual measurement is not possible or practical. For a complete discussion of the Corporation's significant accounting policies, see "Management Discussion Analysis" and "Notes to the Consolidated Financial Statements" in the Company's 2002 Annual Report filed on Form 10-K. Certain policies are considered critical because they are highly dependent upon subjective or complex judgments, assumptions and estimates. Changes in such estimates may have a significant impact on the financial statements. Item 3. Market Risk. Certain of the Company's business activities expose it 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 held by the company as investment and for trading purposes. The Company's securities inventories are exposed to risk of loss in the event of unfavorable price movements. The Company's securities inventories are marked to market on a daily basis. The Company's market-making activities are client-driven, with the objective of meeting clients' needs while earning a positive spread. The Company has significantly curtailed its market-making activities during the current fiscal year. At March 31, 2003 and December 31, 2002, the balances of the Company's securities positions owned and securities positions sold but not yet purchased were approximately $443,000 and $230,000 and $184,000 and $0, respectively. In the opinion of management, 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 the Company's financial position. The Company's activities involve the execution of various financial transactions on behalf of its clients. Client activities are transacted on either a cash or margin basis. The Company's client activities may expose it to off-balance sheet credit risk. The Company 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. The Company seeks to control the risks associated with client activities by requiring clients to maintain collateral in compliance with various regulations and Company policies. 14 Item 4. Controls and Procedures. Evaluation of Disclosure Controls and Procedures The Company's management, under the supervision and with the participation of the chief executive officer and chief financial officer, conducted an evaluation of the Company's "disclosure controls and procedures" (as defined in Securities Exchange Act of 1934 (the "Exchange Act") Rules 13a-14(c)) within 90 days of the filing date of this Quarterly Report on Form 10-Q (the "Evaluation Date"). Based on their evaluation, the chief executive officer and chief financial officer have concluded that as of the Evaluation Date, the Company's disclosure controls and procedures are effective to ensure that all material information required to be filed in this Quarterly Report on Form 10-Q has been made known to them in a timely fashion. Changes in Internal Controls There have been no significant changes (including corrective actions with regard to significant deficiencies or material weaknesses) in our internal controls or in other factors that could significantly affect these controls subsequent to the Evaluation Date set forth above. 15 PART II OTHER INFORMATION Item 1. Legal Proceedings. Not applicable. Item 2. Changes in Securities and Use of Proceeds. The Company completed a private offering of its securities as of March 1, 2003. In the offering, First Montauk sold an aggregate of $1,240,000 of convertible debentures to certain "accredited investors" only. The offering consisted of up to $3,000,000 principal amount of 6% convertible debentures. First Montauk issued $1,030,000 of debentures on December 12, 2002 and an additional $210,000 of debentures on January 7, 2003. The proceeds of the financing will be used to satisfy the general working capital needs of the Company. Each debenture earns interest at the rate of 6% per annum, payable semi-annually, and is convertible at an initial conversion price of $0.50 per share, subject to adjustment for stock dividends, combinations, splits, recapitalizations, and like events. Each holder shall have the right to convert its debentures, at the option of such holder, at any time, into shares of First Montauk common stock at the then applicable conversion price. In addition, First Montauk at its option, may demand the holders convert some or all of the debentures into shares of common stock in the event that the closing bid price of its common stock is 200% of the conversion price for the twenty consecutive trading days prior to the date of the notice of conversion. Further, First Montauk, at its option, may prepay some or all of the debentures in the event that the closing bid price of its common stock is 200% of the conversion price for the twenty consecutive trading days prior to the date of the notice of prepayment. The prepayment amount shall be 130% of the principal amount of the debentures from the date of issuance until the first anniversary of the date of issuance, together with accrued and unpaid interest. Thereafter, the prepayment amount shall be equal to 120% of the principal amount of the debentures, together with accrued and unpaid interest through the date of prepayment. Holders of debentures shall have notice of and the right to include the shares of common stock issuable upon conversion of the debentures in a registration statement filed by the First Montauk other than a registration statement on Form S-4 or S-8, or a successor form. First Montauk Securities Corp. served as the exclusive agent for the sale of the debentures. The Placement Agent received commissions of 10% of the principal amount of debentures sold in the oOffering and warrants to purchase such number of shares of common stock as equals 10% of the principal amount of debentures sold . These warrants are exercisable for a period of five years at an exercise price of equal to the conversion price of the debentures. The debentures have not been registered for offer or sale under the Securities Act; such securities are being issued on the basis of the statutory exemption provided by Section 4(2) of the Securities Act, as amended, and/or Rule 506 of Regulation D, promulgated thereunder relating to transactions by an issuer not involving any public offering; and the transaction has not been reviewed by, passed on or submitted to any Federal or state agency or self-regulatory organization where an exemption is being relied upon. The securities may not be sold, assigned or transferred unless (i) the sale, assignment or transfer of such securities is registered under the Securities Act, or (ii) the securities are sold, assigned or transferred in accordance with all the requirements and limitations of Rule 144 under the Securities Act. Item 3. Defaults Upon Senior Securities Not applicable. Item 4. Submission of Matters to a Vote of Security Holders. Not applicable. 16 Item 5. Other Information. Suspension of Preferred Stock Dividend The Company has declared and paid dividends on its Series A Preferred Stock at the rate of 6% per annum on a quarterly basis since the third quarter of 1999. Currently, the Company is unable to continue to pay such dividends pursuant to the New Jersey Business Corporation Act. The New Jersey Business Corporation Act prohibits a corporation from paying dividends if its total assets would be less than its total liabilities. Dividends will continue to accrue on the outstanding shares of Series A Preferred Stock and will be paid when the Company is legally authorized to do so under the New Jersey Business Corporation Act. Expiration of Class A and Class B Warrants The Company's 3,072,446 Class A warrants and 3,072,446 Class B warrants expired on February 17, 2003. Item 6. Exhibits and Reports on Form 8-K. (a) Exhibits 99.1 Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 99.2 Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (b) Reports on Form 8-K. Date of Report: March 27, 2003 Item Reported: Item 5 and Item 9, disclosing private placement of debentures. 17 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. FIRST MONTAUK FINANCIAL CORP. (Registrant) Dated: May 15, 2003 /s/ William J. Kurinsky ---------------------------------- William J. Kurinsky Secretary/Treasurer Chief Financial Officer and Principal Accounting Officer /s/ Herbert Kurinsky ---------------------------------- Herbert Kurinsky President 18 CERTIFICATIONS I, Herbert Kurinsky, Chief Executive Officer of First Montauk Financial Corp. certify that: 1. I have reviewed this quarterly report on Form 10-Q of First Montauk Financial Corp.; 2. Based on my knowledge, this quarterly 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 annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly 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 quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d- 14) for the registrant and have: (a) designed such disclosure controls and procedures 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 annual report is being prepared; (b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and (c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): (a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and (b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: May 15, 2003 /s/ Herbert Kurinsky - ------------------------------------------- Herbert Kurinsky, Chief Executive Officer First Montauk Financial Corp. 19 CERTIFICATIONS I, William J. Kurinsky, Chief Financial Officer of First Montauk Financial Corp. certify that: 1. I have reviewed this quarterly report on Form 10-Q of First Montauk Financial Corp.; 2. Based on my knowledge, this quarterly 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 annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly 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 quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d- 14) for the registrant and have: (a) designed such disclosure controls and procedures 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 annual report is being prepared; (b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and (c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): (a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and (b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: May 15, 2003 /s/ William J. Kurinsky - --------------------------------------------- William J. Kurinsky, Chief Financial Officer First Montauk Financial Corp. 20 Exhibit 99.1 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of FIRST MONTAUK FINANCIAL CORP. (the "Company") on Form 10-Q for the period ending March 31, 2003 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Herbert Kurinsky, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company. /s/ Herbert Kurinsky - ----------------------------------- Herbert Kurinsky Chief Executive Officer May 15, 2003 21 Exhibit 99.2 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of FIRST MONTAUK FINANCIAL CORP. (the "Company") on Form 10-Q for the period ending March 31, 2003 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, William J. Kurinsky, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company. /s/ William J. Kurinsky - ----------------------------------- William J. Kurinsky Chief Financial Officer May 15, 2003 -----END PRIVACY-ENHANCED MESSAGE-----