-----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, AlKcBjf3KvbaydQijNWGtZcTtjgdO4WPcXkCBlQRdwiUDHgdFXyh6eLQ9bJLtG+j 9GHEUF6Br0HLO0LdRWxymg== 0000083125-03-000027.txt : 20031114 0000083125-03-000027.hdr.sgml : 20031114 20031114171146 ACCESSION NUMBER: 0000083125-03-000027 CONFORMED SUBMISSION TYPE: 10-Q/A PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20030630 FILED AS OF DATE: 20031114 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/A SEC ACT: 1934 Act SEC FILE NUMBER: 000-06729 FILM NUMBER: 031005851 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/A 1 amend2june2003.txt AMENDMENT NO. 2 TO FORM 10-Q 6/30/03 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q/A AMENDMENT NO. 2 X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 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: ------------------------------------- 8,945,484 Common Shares, no par value, were outstanding as of November 14, 2003. Page 1 of 22 02 Explanatory Note This Amendment No. 2 to the Quarterly Report on Form 10-Q/A of First Montauk Financial Corp. for the fiscal quarter ended June 30, 2003 is being filed in order to restate the Company's consolidated financial statements as of and for the three and six months ended June 30, 2003 to adjust the valuation of certain warrants issuable by the Company. The restatement had the effect of increasing stockholders' deficit and the net loss for the three and six months ended June 30, 2003 as originally reported by $88,000. All information in this Form 10-Q/A is as of June 30, 2003 and does not reflect any subsequent information or events other than the aforementioned restatement. In addition, this Amendment No. 2 to the Quarterly Report on Form 10-Q/A includes amendments to Item 2 of Part I, Management's Discussion and Analysis of Financial Condition and Results of Operations, to account for the aforementioned adjustments to the consolidated financial statements. 03 FIRST MONTAUK FINANCIAL CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION June 30, December 31, 2003 2002 ---- ---- (restated) (unaudited) ASSETS Cash and cash equivalents $ 2,562,673 $ 2,638,819 Due from clearing firm 5,146,894 4,591,701 Trading and investment account securities 489,993 183,944 Employee and broker receivables 1,132,159 1,070,087 Loans receivable - officers 165,620 178,936 Property and equipment - net 1,193,502 1,396,892 Income tax refund receivable 212,300 212,300 Deferred income taxes - net 460,000 460,000 Other assets 1,785,551 692,827 ----------- ------------ Total assets $13,148,692 $11,425,506 ========== ========== LIABILITIES AND STOCKHOLDERS' DEFICIT LIABILITIES Deferred income $ 5,108,104 $ 5,456,323 Securities sold, not yet purchased, at market value 412,288 -- Notes payable -- 48,057 Commissions payable 4,727,239 2,681,128 Accounts payable 1,317,931 577,225 Accrued expenses 2,656,441 1,987,871 Capital leases payable 236,169 343,682 6% convertible debentures 1,240,000 1,030,000 Other liabilities 57,136 78,910 ------------- ------------- Total liabilities 15,755,308 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 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 3,942,124 3,918,930 Accumulated deficit (9,971,428) (8,135,777) Less: Deferred compensation (26,557) (10,088) -------------- ----------- Total stockholders' deficit (2,606,616) (777,690) ---------- ----------- Total liabilities and stockholders' deficit $13,148,692 $11,425,506 ========== ========== See notes to financial statements.
04 FIRST MONTAUK FINANCIAL CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF LOSS Six months Three months ended June 30, ended June 30, 2003 2002 2003 2002 ---- ---- ---- ---- (restated) (restated) (unaudited) (unaudited) Revenues: Commissions $18,891,411 $20,114,309 $11,242,152 $10,430,603 Principal transactions 5,503,426 3,630,583 3,242,096 1,510,044 Investment banking 363,415 103,020 168,087 39,985 Interest and other income 2,100,385 1,777,285 1,250,135 896,097 ---------- ---------- ---------- ----------- Total revenues 26,858,637 25,625,197 15,902,470 12,876,729 ---------- ---------- ---------- ---------- Expenses: Commissions, employee compensation and benefits 21,481,549 21,309,105 12,383,927 10,831,326 Clearing and floor brokerage 1,357,882 1,367,085 789,612 686,171 Communications and occupancy 1,374,148 1,554,198 680,569 877,913 Legal matters and related costs 2,845,120 639,941 2,444,054 372,785 Other operating expenses 1,533,193 1,969,017 904,032 1,059,927 Interest 77,557 54,645 39,744 21,739 ----------- ------------ ----------- ----------- Total expenses 28,669,449 26,893,991 17,241,938 13,849,861 ---------- ---------- ---------- ---------- Net loss $(1,810,812) $(1,268,794) $(1,339,468) $ (973,132) ========== ========== ========== ======== Net loss applicable to common stockholders $(1,835,651) $(1,318,473) $(1,339,468) $ (997,971) ========== ========== ========== ========== Per share of Common Stock: Basic and diluted $ (0.21) $ (0.15) $ (0.16) $ (0.12) ========= ========= ========== ========== Number of common shares used in basic and diluted loss per share 8,527,164 8,579,173 8,527,164 8,534,075 ========== ========== ========== ========== See notes to financial statements.
05 FIRST MONTAUK FINANCIAL CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS Six months ended June 30, 2003 2002 ---- ---- (restated) (unaudited) Cash flows from operating activities: Net loss $(1,810,812) $(1,268,794) ---------- ---------- Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 260,077 259,290 Amortization 11,304 11,254 Increase (decrease) in cash attributable to changes in assets and liabilities: Due from clearing firm (555,193) (905,486) Trading and investment account securities (306,049) 221,756 Loans receivable - officers 13,316 (30,067) Employee and broker receivables (62,072) 424,642 Other assets (1,097,303) 144,006 Income tax refund receivable -- 996,681 Deferred income (348,219) (281,775) Securities sold not yet purchased 412,288 (162,906) Commissions payable 2,046,111 163,004 Accounts payable 740,706 238,632 Accrued expenses 668,570 72,485 Other liabilities (21,774) (277,104) -------- ---------- Total adjustments 1,761,762 874,412 --------- ---------- Net cash used in operating activities (49,050) (394,382) ------------ --------- Cash flows from investing activities: Additions to property and equipment (56,687) (124,726) ----------- ------------ Cash flows from financing activities: Payments of notes payable (48,057) (148,421) Payments of capital lease (107,513) (96,616) Proceeds from issuance of 6% convertible debentures 210,000 -- Payments toward purchase of treasury stock -- (25,016) Payments of preferred stock dividends (24,839) (49,679) ------------ ----------- Net cash provided by (used in) financing activities 29,591 (319,732) ------------ ----------- Net decrease in cash and cash equivalents (76,146) (838,840) Cash and cash equivalents at beginning of period 2,638,819 1,779,554 ---------- ---------- Cash and cash equivalents at end of period $ 2,562,673 $ 940,714 ========== =========== Supplemental disclosures of cash flow information: Cash paid (received) during the period for: Interest $ 62,146 $ 54,645 =========== ============ Income taxes $ 20,170 $(1,047,257) =========== ========== Noncash financing activity: Warrants charged to deferred financing costs in connection with debenture offering $ 2,178 $ -- =========== =============== See notes to financial statements.
06 FIRST MONTAUK FINANCIAL CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 - MANAGEMENT REPRESENTATION The accompanying financial statements are unaudited for the interim periods, but include all adjustments (consisting only of normal recurring accruals) which management considers necessary for the fair presentation of results at June 30, 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 six-month and three-month periods ended June 30, 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: Six months ended June 30, 2003 2002 ---- ---- Stock options 3,900,498 4,439,498 Warrants 3,221,446 9,242,338 Convertible debt 2,480,000 66,404 Convertible preferred stock 660,500 662,380 NOTE 3 - OTHER ASSETS Other assets consist of the following: June 30, December 31, 2003 2002 ---- ---- Prepaid insurance $ 900,782 $256,215 Other assets 778,808 436,612 ------- ------- $1,679,590 $692,827 ========= ======= Prepaid insurance includes unamortized premiums for various corporate insurance policies. The June 2003 balance reflects a significant increase over the prior year for errors and omissions (E&O) coverage for the annual policy period that commenced January 31, 2003. NOTE 4 - ACCOUNTS PAYABLE Accounts payable at June 30, 2003 includes a balance of $506,105 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. 07 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 $64,000 have been capitalized and are being amortized on a straight-line basis over the term of the debentures. 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: Six months ended June 30, Three months ended June 30, 2003 2002 2003 2002 ---- ---- ---- ---- Net loss applicable to common stockholders, as reported $(1,835,651) $(1,318,473) $(1,339,468) $ (997,971) Deduct: Total stock based compensation expense determined under the fair value based method for all awards, net of tax (40,671) (77,299) (18,359) (41,749) ---------- ----------- ----------- --------- Pro forma net loss $(1,876,322) $(1,395,772) $(1,357,827) $(1,039,720) ========== ========== ========== =========== Loss per share: Basic and diluted - as reported (0.21) (0.15) (0.16) (0.12) Basic and diluted - pro forma (0.21) (0.16) (0.16) (0.12)
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. 08 NOTE 7 - LEGAL MATTERS FMSC is a respondent in arbitrations arising from customer purchases of high yield corporate bonds which declined in market value or defaulted. The claims allege, among other charges, unsuitable recommendations and/or improper use of margin. Some of the claims seek punitive damages and the recovery of various costs. As discussed in Note 11 - Subsequent Events, the Company entered into a global settlement with a number of these claimants in July 2003. There are currently nine other arbitrations pending representing approximately $1.7 million in asserted damages plus interest. 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 claims. FMSC is also a respondent or co-respondent in other legal proceedings 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 June 30, 2003, the Company has accrued approximately $2,218,000, including the cost of the July 2003 settlement, 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 any 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 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 or received. NOTE 8 - INCOME TAXES The Company has reported an effective tax rate of 0% for all periods presented due to net operating losses. The tax benefits of these losses and other temporary differences have been offset by increases in the Company's tax valuation allowance due to management's uncertainty 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. In connection with the convertible debenture offering, the Company issued 124,000 common stock purchase warrants as compensation to registered representatives. 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. 09 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. Cumulative dividends in arrears at June 30, 2003 were approximately $25,000. Note 11 - RESTATEMENT Subsequent to the issuance of the Company's unaudited consolidated financial statements for the quarter ended June 30, 2003, the Company discovered a computational error in the valuation of certain warrants issued in July 2003, but accrued for as of June 30, 2003. The correction resulted in an increase of $88,000 in Legal matters and related costs in the Statement of Operations for the three and six months ended June 30, 2003. A summary of the significant effects of the restatement is as follows: June 30, 2003 ------------- As Previously Reported As Restated -------- ----------- Accrued expenses $ 2,568,441 $ 2,656,441 Total liabilities 15,667,308 15,755,308 Accumulated deficit (9,883,428) (9,971,428) Total stockholders' deficit (2,518,616) (2,606,616) For the Three Months Ended June 30, 2003 ------------- As Previously Reported As Restated -------- ----------- Legal matters and related costs $ 2,356,054 $ 2,444,054 Total expenses 17,153,938 17,241,938 Net loss (1,251,468) (1,339,468) Net loss applicable to common stockholders (1,251,468) (1,339,468) Net loss per share - basic and diluted $ (.15) $ (.16) For the Six Months Ended June 30, 2003 ------------- As Previously Reported As Restated -------- ----------- Legal matters and related costs $ 2,757,120 $ 2,845,120 Total expenses 28,581,449 28,669,449 Net loss (1,722,812) (1,810,812) Net loss applicable to common stockholders (1,747,651) (1,835,651) $ (.20) (.21) 10 NOTE 12- SUBSEQUENT EVENT On July 17, 2003, the Company entered into an agreement with certain claimants in order to settle pending arbitration proceedings. The litigation arose out of customer purchases of certain high-yield corporate bonds that declined in market value or defaulted. The settlement agreement covers eleven separate claims which sought an aggregate of approximately $12.3 million in damages. In exchange for the consideration provided by the Company, each claimant granted a general release of claims in favor of the Company and all individual respondents, with the exception of the former registered representative who had handled the claimants' accounts. The Company paid an aggregate of $1,000,000 cash, and agreed to issue to the claimants 500,000 shares of the Company's common stock and five-year warrants to purchase an aggregate of 750,000 additional common shares. The Company has agreed to register all shares of common stock underlying the warrants and fifty percent of the shares of common stock issued outright. The warrants are expected to be issued in three classes of 250,000 warrants each. The first class will have an exercise price of $.40 per share; the other two classes will have an exercise price of $.25 per share. In addition, the settlement agreement provides that the Company may be obligated to make additional payments of up to $600,000, in the event that claimants elect to exercise the warrants on certain dates. Specifically, upon the election of the majority of then existing warrant holders of a particular class to exercise up to a maximum of 250,000 warrants, respectively, during the months of June 2004, June 2005 and June 2006 (the "Required Exercise Events"), the claimants, upon exercising their warrants, will be required to sell the shares in the open market. In the alternative, the Company may elect or be required to redeem the warrants depending upon the then prevailing market price of the Company's Common Stock. If the warrants are exercised, and the shares sold, the Company would pay to the claimants up to an aggregate amount of $200,000 less the amount received by the claimants from the sale of their shares net of commissions. In the event that warrant holders of a particular class elect not to declare a Required Exercise Event, the Company's guarantee will be canceled for that year. While the basic warrant exercise terms have been agreed to by the Company and the claimants, the specific procedures by which the warrants may be exercised and/or redeemed may still be modified based upon further negotiations between the Company and the claimants. As of June 30, 2003, the Company has accrued the cash settlement of $1,000,000, the value of the stock issuances of $160,000 based on the stock's quoted market price, and the fair value of the warrants in the amount of $441,000 determined using the discounted cash flow method. In accordance with the provisions of FAS 150, "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity," the Company will re-measure the fair value of the warrants as of the end of each reporting period until the Company's obligations with respect to the warrants are resolved. Changes in fair value will be recognized in earnings. 11 Item 2. 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 period ended March 31, 2003 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 476 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 185 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. 12 RESULTS OF OPERATIONS The results of operations for the six months and three months ended June 30, 2003 (the "2003 period" and the "2003 quarter," respectively) showed an increase in revenues over the same periods in the prior year (the "2002 period" and the "2002 quarter," respectively). Total revenue for the 2003 quarter reflects the single highest revenue quarter since March 31, 2000. The continued lower interest rate environment, combined with the end to the major conflict in Iraq, positively affected investor confidence, and aided in their decision to once again return to investing in the equity markets. The Company's primary source of revenue is derived from commissions generated on agency transactions, including the sales of listed and over-the-counter stocks and options. Revenues from agency transactions increased $727,000, or 11%, from $6,722,000 to $7,449,000 during the 2003 quarter. For the six months ended June 30, 2003, there was a slight decrease in these revenues, from $12,912,000 in the 2002 period, to $12,287,000 in the 2003 period. Revenues from mutual fund commissions decreased for both the 2003 quarter and the 2003 period. Mutual fund revenues decreased $474,000, from $3,275,000 in the 2002 period to $2,801,000, in the 2003 period, a decrease of 14%, and $221,000 from $1,811,000 to $1,590,000 in the 2002 and 2003 quarters, respectively, a decrease of 12%. Revenues from insurance commissions decreased $301,000, from $2,409,000 in the 2002 period, to $2,108,000 in the 2003 period, a decrease of 12%. For the 2003 quarter, there was a slight increase of $96,000 over the 2002 quarter. On the other hand, total revenues from principal transactions, which include mark-ups/mark-downs on transactions in which the company acts as principal, proprietary trading, syndicate commissions and fixed income securities, showed significant increases during both periods in 2003. For the 2003 quarter, gross revenue from mark-ups/mark-downs on principal transactions increased $795,000, from $487,000 to $1,282,000, an increase of 163% over the 2002 quarter. For the 2003 period, the increase was virtually the same as it was during the 2003 quarter. The significant increase in syndicate revenues of $644,000 for the 2003 quarter and $593,000 for the 2003 period, as compared to the comparable periods in 2002 reflects a heightened investor desire for new offerings. Trading in the firm's equity trading accounts increased for the 2003 quarter by $213,000 when compared to the 2002 quarter, as new policies and procedures governing firm trading operations and risk management was fully implemented during the year. Revenues from principal transactions in the fixed income sector increased during both 2003 periods. Revenues from all fixed income sources, which includes municipal, government, corporate bonds and unit investment trusts increased to $1,041,000 from $822,000 and $2,201,000 from $1,569,000 for the 2003 quarter and 2003 period, respectively. Unrealized gains in securities inventory increased by $132,000; from an unrealized loss of $121,000 for the 2002 quarter to an unrealized gain of $11,000 for the 2003 quarter. 13 Investment banking revenues for the 2003 quarter were $168,000, an increase of $128,000, over the 2002 quarter. During the six month period ended June 30, 2003, revenues increased to $363,000 from $103,000 during the first six months of 2002, an increase of $260,000. Interest and other income for the 2003 quarter totalled $1,250,000 as compared to $896,000 in the 2002 quarter. For the six month period ended June 30, 2003, interest and other income increased to $2,100,000 from $1,777,000 for the first six months of 2002. While interest income remained relatively constant, the increase is primarily attributable to a recovery of bad debt write-offs and increases in charges to customers during the 2003 quarter. Compensation expense increased $1,553,000, or 14%, to $12,384,000 in the 2003 quarter, from $10,831,000 in the 2002 quarter. Commission expense, which is directly related to commissionable revenues, increased 18%, or $1,656,000, from $8,956,000 in the 2002 quarter, to $10,612,000 in the 2003 quarter. Salaries and benefits expense decreased $103,000, or 5%, from $1,875,000 in the 2002 quarter, to $1,772,000 in the 2003 quarter due to staff reductions implemented in 2002 and 2003. Compensation expense showed a slight increase of $173,000, or 1%, to $21,482,000 in the 2003 period, from $21,309,000 in the 2002 period. Commission expense increased 2%, or $339,000, from $17,623,000 in the 2002 period to $17,962,000 in the 2003 period. Salaries and benefits expense decreased $166,000, or 5%, from $3,686,000 in the 2002 period, to $3,520,000 in the 2003 period due to the same reasons described above. Communication and occupancy expenses decreased $198,000, or 22%, from $878,000 in the 2002 quarter to $680,000 in the 2003 quarter. The decrease is attributable to a one-time credit for excess CAM charges on the corporate headquarters' lease; the elimination of two company leased branch offices and their related costs and equipment rental expenses. Legal matters and related costs increased $2,071,000 to $2,444,000 during the 2003 quarter as compared to $373,000 in the 2002 quarter. This increase is primarily attributable to the costs to defend and settle asserted claims of approximately $13 million arising from customer purchases of high-yield corporate bonds. As discussed in Footnote 12 - Subsequent Events, the Company entered into a global settlement with a number of these claimants in July 2003. As of June 30, 2003, the Company has accrued approximately $2,218,000, including the cost of the July 2003 settlement, for litigation costs that are probable and can be reasonably estimated based on a review of existing claims, arbitrations and unpaid settlements. In addition to those claims settled in July, there remain nine additional arbitrations representing approximately $1.7 million in asserted damages arising from the same or similar allegations. 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 claims. 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 to $904,000 in the 2003 quarter, from $1,060,000 in the 2002 quarter. For the six month period ending June 30, 2003 and 2002, these expenses decreased to $1,533,000 from $1,969,000, respectively. Bad debt expenses decreased from $219,000 during the 2002 quarter to $3,000 in the 2003 quarter, and from $361,000 for the first six months of 2002 to $1,000 for the six month period ended June 30, 2003. The cost for errors and omission insurance increased by $153,000 for the 2003 six-month period, resulting from the substantial increase in premiums from the Company's policy renewal in January 2003. 14 The Company has reported an effective tax rate of 0% for all periods presented due to net operating losses. The tax benefits of these losses and other temporary differences have been offset by increases in the tax valuation allowance due to management's uncertainty as to the ultimate realization of such benefits. For the six month period ended June 30, 2003, the Company reported a net loss applicable to common stockholders of $1,836,000 or $.21 per basic and diluted share, as compared to the net loss applicable to common stockholders reported for the same period in 2002 of $1,318,000 or $.15 per basic and diluted share. For the three months ended June 30, 2003, the Company reported a net loss applicable to common stockholders of $1,339,000, or $.16 per basic and diluted share, as compared to a net loss applicable to common stockholders of $998,000, or $.12 per basic and diluted share for the second quarter of 2002. LIQUIDITY AND CAPITAL RESOURCES As with most financial firms, the Company maintains a highly liquid balance sheet with 62% 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 six months of 2003 by $76,000, to $2,563,000. Net cash used in operating activities was $49,000 for the 2003 period. The primary components of the decrease are the loss of $1,811,000 and an increase in other assets, comprised mainly of an increase in prepaid insurance of $1,097,000, offset by an increase in commissions payable of $2,046,000. 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. Additions to capital expenditures accounted for the entire use of cash from investing activities of $57,000 during the first quarter of 2003. The Company projects $150,000 in capital expenditures over the next twelve months. Financing activities provided cash of $30,000 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, $107,000 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. 15 Consolidated Contractual Obligations and Lease Commitments The tables below summarize information about the consolidated contractual obligations as of June 30, 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 June 30, 2003 are as follows: Operating Leases 2003 $ 555,003 2004 1,103,126 2005 296,302 2006 169,500 --------- Total minimum lease payments $2,123,931 ========= Future minimum lease payments as of June 30, 2003 are as follows: Capital Leases 2003 $124,458 2004 114,396 2005 15,711 2006 -- -------- Total minimum lease payments 254,565 Less: Amount representing interest (18,397) -------- $236,168 ======== 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. The Company has suspended the 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.) 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. 16 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 and 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. 17 PART II OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K. (a) Exhibits Exhibit 31.1 - Section 302 Certification of Herbert Kurinsky, President Exhibit 31.2 - Section 302 Certification of William J. Kurinsky, Chief Financial Officer Exhibit 32.1 - Certification pursuant to Section 1350 pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 by Herbert Kurinsky Exhibit 32.2 - Certification pursuant to Section 1350 pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 by William J. Kurinsky 18 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, 2003 /s/ William J. Kurinsky ------------------------------- William J. Kurinsky Secretary/Treasurer Chief Financial Officer and Principal Accounting Officer /s/ Herbert Kurinsky ------------------------------- Herbert Kurinsky President 19 Exhibit 31.1 CERTIFICATION I, Herbert Kurinsky, President, certify that: 1. I have reviewed this quarterly report on Form 10-Q/A of First Montauk Financial Corp.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officers 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, 2003 /s/ Herbert Kurinsky - --------------------------------- HERBERT KURINSKY PRESIDENT 20 Exhibit 31.2 CERTIFICATION I, William J. Kurinsky, Chief Financial Officer, certify that: 1. I have reviewed this quarterly report on Form 10-Q/A of First Montauk Financial Corp.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officers 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, 2003 /s/ William J. Kurinsky - --------------------------------- WILLIAM J. KURINSKY CHIEF FINANCIAL OFFICER 21 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 Amendment No. 2 to the Quarterly Report of FIRST MONTAUK FINANCIAL CORP. (the "Company") on Form 10-Q for the period ending June 30, 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 November 14, 2003 22 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 Amendment No. 2 to the Quarterly Report of FIRST MONTAUK FINANCIAL CORP. (the "Company") on Form 10-Q for the period ending June 30, 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 November 14, 2003 -----END PRIVACY-ENHANCED MESSAGE-----