-----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, KTxehAOMMWacJpP8QeiVSykfdNenwvVF0BvYjU59+XEB7o4LdJua6gI1vXk6TtKZ cZNCU127bg1wiwQEeZL4yQ== 0000083125-04-000029.txt : 20041115 0000083125-04-000029.hdr.sgml : 20041115 20041115165644 ACCESSION NUMBER: 0000083125-04-000029 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20040930 FILED AS OF DATE: 20041115 DATE AS OF CHANGE: 20041115 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: 041146312 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 fmfc9302004.txt FORM 10-Q FOR QUARTER ENDED SEPTEMBER 30, 2004 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 September 30, 2004 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: - ------------------------------------- 10,016,709 Common Shares, no par value, were outstanding as of November 15, 2004. Page 1 of 24 02 FIRST MONTAUK FINANCIAL CORP. FORM 10-Q SEPTEMBER 30, 2004 INDEX Page PART I. FINANCIAL INFORMATION: Item 1. Financial Statements Consolidated Statements of Financial Condition as of September 30, 2004 (unaudited) and December 31, 2003 .. 3 Consolidated Statements of Income (Loss) for the Nine Months and Three Months Ended September 30, 2004 (unaudited) and 2003 (unaudited) ............................................ 4 Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2004 (unaudited) and 2003 (unaudited) ... 5 Notes to Consolidated Financial Statements (Unaudited) ......... 6-10 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations .................11-17 Item 3. Risk Management ........................................ 16 Item 4. Controls and Procedures ................................ 17 PART II. OTHER INFORMATION: Item 1. Legal Proceedings ..................................... 18 Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities ..................... 18 Item 3. Defaults Upon Senior Securities ........................ 19 Item 4. Submission of Matters to a Vote of Securities Holders ................................. 19 Item 5. Other Information ...................................... 19 Item 6. Exhibits................................................ 19 Signatures ...................................................... 20 Officers' Certifications ........................................21-24 03 FIRST MONTAUK FINANCIAL CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION September 30, December 31, 2004 2003 ---- ---- (unaudited) ASSETS Cash and cash equivalents $ 1,199,079 $ 3,441,743 Due from clearing firm 4,450,829 5,219,267 Securities owned, at market value 626,645 169,534 Employee and broker receivables 662,988 1,046,749 Property and equipment - net 886,235 1,052,564 Other assets 1,716,148 1,661,351 -------------------- -------------------- Total Assets $ 9,541,924 $ 12,591,208 ==================== ==================== LIABILITIES AND STOCKHOLDERS' DEFICIT LIABILITIES Deferred income $ 5,323,868 $ 5,980,124 6% convertible debentures 3,135,000 3,135,000 Warrants subject to put options 330,981 479,066 Securities sold, not yet purchased, at market value 244,935 69,330 Commissions payable 2,391,796 4,077,803 Accounts payable 545,091 980,483 Accrued expenses 975,784 1,803,973 Capital leases payable 96,467 146,836 Other liabilities 4,356 6,032 -------------------- -------------------- Total liabilities 13,048,278 16,678,647 -------------------- -------------------- 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, 301,272 and 311,089 shares issued and outstanding, respectively; liquidation preference: $1,506,360 30,127 31,109 Common Stock, no par value, 30,000,000 shares authorized, 10,016,709 and 9,065,486 shares issued and outstanding, respectively 3,903,132 3,578,136 Additional paid-in capital 4,072,335 4,097,309 Accumulated deficit (11,375,938) (11,678,659) Less: Deferred compensation (136,010) (115,334) -------------------- -------------------- Total stockholders' deficit (3,506,354) (4,087,439) -------------------- -------------------- Total liabilities and stockholders' deficit $ 9,541,924 $ 12,591,208 ==================== ==================== See notes to financial statements.
04 FIRST MONTAUK FINANCIAL CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (LOSS) Nine months ended September 30, Three months ended September 30, 2004 2003 2004 2003 (unaudited) (unaudited) (unaudited) (unaudited) Revenues: Commissions $31,787,570 $30,193,458 $ 8,035,932 $11,302,047 Principal transactions 7,150,559 8,136,465 2,098,411 2,633,039 Investment banking 2,524,041 617,506 453,595 254,091 Interest and other income 3,348,229 3,082,756 1,159,371 982,371 ------------ ------------ ----------- ------------ Total Revenue 44,810,399 42,030,185 11,747,309 15,171,548 ------------ ------------ ----------- ------------ Expenses: Commissions, employee compensation and benefits 35,797,902 33,204,961 9,567,663 11,723,412 Clearing and floor brokerage 1,894,478 2,102,721 452,945 744,839 Communications and occupancy 2,024,567 2,021,361 639,723 647,213 Legal matters and related costs 1,995,462 4,385,437 213,458 1,540,317 Other operating expenses 2,561,609 2,291,296 760,170 758,103 Interest 233,660 123,762 73,449 46,205 ------------ ------------ ----------- ------------ Total Expenses 44,507,678 44,129,538 11,707,408 15,460,089 Net income (loss) $ 302,721 $(2,099,353) $ 39,901 $ (288,541) ============ ============ =========== ============ Net income (loss) applicable to common stockholders $ 234,628 $(2,124,192) $ 17,306 $ (288,541) ============ ============ =========== ============ Earnings (loss) per share: Basic $ 0.03 $ (0.25) $ 0.00 $ (0.03) Diluted $ 0.02 $ (0.25) $ 0.00 $ (0.03) Weighted average number of shares of stock outstanding: Basic 9,291,318 8,666,358 9,516,709 8,940,207 Diluted 15,713,258 8,666,358 9,618,770 8,940,207 See notes to financial statements.
05 FIRST MONTAUK FINANCIAL CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS Nine months ended September 30, 2004 2003 (unaudited) (unaudited) INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS Cash flows from operating activities: Net income (loss) $ 302,721 $ (2,099,353) Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Depreciation 389,531 379,274 Amortization 324,145 15,486 Common stock issued in legal settlement -- 160,000 Loss on disposition of property and equipment 4,692 - Increase (decrease) in cash attributable to changes in assets and liabilities: Due from clearing firm 768,438 (24,750) Securities owned (457,111) (598,917) Loans receivable - officers -- 19,521 Employee and broker receivables 383,761 182,051 Other assets (79,418) (674,429) Income tax refund receivable -- 212,300 Deferred income (656,256) (522,328) Warrants subject to put options (148,085) -- Securities sold, not yet purchased 175,605 112,359 Commissions payable (1,686,007) 1,464,040 Accounts payable (435,393) 280,104 Accrued expenses (828,189) (335,045) Other liabilities (1,676) (44,064) ------------ ------------ Net cash used in operating activities (1,943,242) (1,473,751) ------------ ------------ Cash flows from investing activities: Additions to property and equipment (227,891) (126,546) ------------- ------------ Net cash used in financing activities (227,891) (126,546) ------------- ------------ Cash flows from financing activities: Payment of notes payable -- (48,057) Payments of capital leases (119,954) (163,470) Proceeds from capital lease financing 69,585 Repurchase of common shares (21,162) -- Proceeds from issuance of 6% convertible debentures -- 210,000 Payments of preferred stock dividends -- (24,839) ------------- ------------- Net cash used in financing activities (71,531) (26,366) ------------- ------------- Net decrease in cash and cash equivalents (2,242,664) (1,626,663) Cash and cash equivalents at beginning of period 3,441,743 2,638,819 -------------- ------------- Cash and cash equivalents at end of period $ 1,199,079 $ 1,012,156 ============== ============= Supplemental disclosures of cash flow information: Cash paid during the period for: Interest $ 170,137 $ 120,658 ============== ============= Income taxes $ 85,724 $ (188,205) ============== ============= 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 (Unaudited) NOTE 1 - MANAGEMENT REPRESENTATION The accompanying financial statements are unaudited for the interim period, but include all adjustments (consisting only of normal recurring accruals) which management considers necessary to present fairly the financial position at September 30, 2004 and the results of operations and cash flows for all periods presented. The preparation of financial statements in conformity with GAAP requires the Company to make estimates and assumptions that affect the reported amounts of revenues and expenses during the reporting period. Actual results could vary from these estimates. These financial statements should be read in conjunction with the Company's Annual Report at, and for the year ended December 31, 2003, as filed with the Securities and Exchange Commission on Form 10-K. The results reflected for the nine-month and three-month periods ended September 30, 2004, are not necessarily indicative of the results for the entire fiscal year to end on December 31, 2004. NOTE 2 - STOCK-BASED COMPENSATION The Company periodically grants stock options to employees in accordance with the provisions of its stock option plans, with the exercise price of the stock options being set at the closing market price of the common stock on the date of grant. The Company accounts for stock-based compensation plans under Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees", and accordingly accounts for employee stock-based compensation utilizing the intrinsic value method. FAS No. 123, "Accounting for Stock-Based Compensation", establishes a fair value based method of accounting for stock-based compensation plans. The Company has adopted the disclosure only alternative under FAS No. 123, which requires disclosure of the pro forma effects on earnings and earnings per share as if FAS No. 123 had been adopted as well as certain other information. Stock options granted to non-employees are recorded at their fair value, as determined in accordance with FAS No. 123 and Emerging Issues Task Force Consensus No. 96-18, and recognized over the related service period. Deferred charges for options granted to non-employees are periodically re-measured until the options vest. The following table illustrates the effect on net earnings and EPS if the Company had applied the fair value recognition provisions of FAS 123 to measure stock-based compensation expense for outstanding stock option awards for the nine and three month periods ended September 30, 2004 and 2003: Nine months ended Three months ended September 30, September 30, 2004 2003 2004 2003 ---- ---- ---- ---- Net income (loss) applicable to common stockholders, as reported $234,628 $(2,124,192) $17,306 $(288,541) Deduct: Total stock based compensation expense determined under the fair value based method for all awards, net of tax (120,189) (65,798) (15,150) (25,127) --------- ------- -------- ------- Pro forma net income (loss) $114,439 $(2,189,990) $( 2,156) $ (313,668) ======== =========== ========== ======== Income (loss) per share: Basic - as reported $.03 $(0.25) $.00 $(.03) Basic - pro forma .01 (0.25) .00 (.04) Diluted - as reported .02 (0.25) .00 (.03) Diluted - pro forma .01 (0.25) .00 (.04)
07 The fair value of the options issued is estimated on the date of grant using the Black-Scholes Option Pricing Model with the following weighted-average assumptions used for grants for the nine months ended September 30, 2004: Dividend yield of 0%; expected volatility of 111%, risk free interest rate of 3.33%, and an expected life of 4 years. The weighted average fair value of options granted during the nine and three months ended September 30, 2004 was $.22 and $.17, respectively. NOTE 3 - ACCOUNTS PAYABLE Accounts payable at September 30, 2004 includes two insurance premium financing agreements with current balances of approximately $143,127 and $35,896. The first agreement is payable in one remaining installment of approximately $144,000; the other agreement is payable in three remaining installments of approximately $12,000. All installments include interest at the rate of 4.4% per annum. NOTE 4 - WARRANTS SUBJECT TO PUT OPTIONS In July 2003, the Company issued 750,000 five-year warrants to various claimants as part of a legal settlement (See Note 7). The warrants have been issued in three classes of 250,000 warrants each. The Class A warrants, which had an exercise price of $.40 per share, were redeemed for $200,000 during the third quarter. The Class B and Class C warrants each have an exercise price of $.25 per share. The settlement agreement provides that the Company may be obligated to make additional cash payments of up to $400,000 in the event that claimants elect to exercise the warrants on certain dates. Specifically, if a majority of then existing Class B warrant holders elected to exercise the outstanding warrants in their particular class during the month of June 2005 (the "Required Exercise Event"), the claimants, upon exercising their warrants, would be required to sell the shares in the open market. 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. This process will be repeated for outstanding Class C warrant holders during the month of June 2006. The Company will be required to redeem the warrants for $.80 per warrant in cash if the average market price of the underlying common shares during the ten trading days immediately preceding the date upon which the Company receives notice that the warrant holders of a particular class have elected to declare a Required Exercise Event, is less than or equal to the warrant exercise price. 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 with respect to that class. In accordance with the provisions of FAS 150, "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity," the Company has classified its obligations under the warrants as liabilities in the Statement of Financial Condition. The obligations embodied in the remaining warrants were initially valued at $269,123 using the discounted cash flow method, and assuming that the Company will be required to pay the full cash redemption cost of $400,000. The Company will re-measure the value of the warrant obligations as of the end of each reporting period using the discounted cash flow method until the obligations are settled. The recorded value at September 30, 2004 was $330,981. Changes in value are recognized in earnings as interest expense. NOTE 5 - SERIES A PREFERRED STOCK During the quarter ended June 30, 2003, the Company suspended the payment of cash dividends on its Series A Preferred stock. New Jersey Business Corporation Act prohibits the payment of any distribution by a corporation to, or for the benefit of its shareholders, if the corporation's total assets are less than its total liabilities. Unpaid preferred dividends 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 September 30, 2004 were approximately $141,000. 08 NOTE 6 - EMPLOYMENT AGREEMENTS Effective in January 2004, the board named William Kurinsky Chief Executive Officer, replacing Herb Kurinsky, who has retained the office of Chairman. The board also named Victor K. Kurylak President and Chief Operating Officer. In connection with these management changes, the Company entered into new employment agreements with the three executive officers. The agreements provide for annual base salaries of $200,000, $300,000 and $250,000, for the Chairman, CEO and President, respectively, customary fringe benefits, severance, and participation in an executive bonus pool and a corporate finance bonus pool. The agreements have terms of three, five and two years for the Chairman, CEO and President, respectively, each with a one-year extension provision. The agreements also provide for restricted stock and option grants for the three executives. The Chairman and CEO have each been granted 375,000 restricted shares of common stock with vesting provisions. The President has been granted 250,000 restricted shares of common stock and 500,000 stock options, each with vesting provisions. The Company is amortizing the unvested shares over the respective vesting periods. Amortization of deferred compensation related to these shares was $284,375 and $94,791 for the nine and three months ended September 30, 2004, respectively. NOTE 7 - LEGAL MATTERS On July 17, 2003, the Company and its broker-dealer subsidiary, First Montauk Securities Corp., entered into an agreement with certain claimants to settle pending arbitration proceedings. The arbitrations arose out of customer purchases of certain high-yield corporate bonds that declined in market value or defaulted. The settlement agreement covered eleven separate claims, which sought an aggregate of approximately $12.3 million in damages. Pursuant to the settlement agreement, the Company paid an aggregate of $1,000,000 cash, and issued to the claimants 500,000 shares of the Company's common stock valued at $160,000 based on the stock's quoted market price. The Company also issued to the claimants five-year warrants to purchase an aggregate of 750,000 common shares in three classes. The first class of 250,000 warrants was redeemed in the third quarter (see Note 4). The Company is a respondent or co-respondent in various legal proceedings, which are related to its securities business. Management is contesting these claims and believes that there are meritorious defenses in each case. However, litigation is subject to many uncertainties, and some of these actions and proceedings may result in adverse judgments. Further, the availability of insurance coverage is determined on a case-by-case basis by the insurance carrier, and is limited to the coverage limits within the policy for any individual claim and in the aggregate. After considering all relevant facts, available insurance coverage and consultation with litigation counsel, management believes that significant judgments or other unfavorable outcomes from pending litigation could have a material adverse impact on the Company's consolidated financial condition, results of operations, and cash flows in any particular quarterly or annual period, or in the aggregate, and could impair the Company's ability to meet the statutory net capital requirements of its securities business. 09 During the quarter, the Company settled, or otherwise resolved, arbitrations and lawsuits that required the payment of $726,000, a portion of which was accrued for in prior quarters. As of September 30, 2004, the Company has accrued litigation costs that are probable and can be reasonably estimated based on a review of existing claims, arbitrations and unpaid settlements. Management cannot give assurance that this amount will be adequate to cover actual costs that may be subsequently incurred. Further, it is not possible to predict the outcome of other matters pending against the Company. All such cases will continue to be vigorously defended. NOTE 8 - EARNINGS PER SHARE Basic earnings per share for the nine and three months ended September 30, 2004 and 2003 is based on the weighted average number of shares of common stock outstanding. Diluted earnings per share for the nine and three months ended September 30, 2004 is based on the weighted average number of shares of common stock and dilutive securities outstanding. The following table sets forth the weighted average number of shares of common stock and dilutive securities outstanding used in the computation of basic and diluted earnings per share: Nine months ended Three months ended September 30 September 30 2004 2003 2004 2003 ---- ---- ---- ---- Numerator - basic: Net income $ 302,721 $(2,099,353) $ 39,901 $ (288,541) Deduct: preferred stock dividends (68,093) (24,839) (22,595) -- -------- ---------- ---------- ---------- Numerator for basic earnings per share $ 234,628 $(2,124,192) $ 17,306 $ (288,541) ======= ========== ========== ========== Numerator - diluted: Numerator for basic earnings per share $ 234,628 $(2,124,192) $ 17,306 $ (288,541) Add: convertible debenture interest, net of tax 95,617 -- -- -- ------- ---------- ---------- ---------- Numerator for diluted $ 330,245 $(2,124,192) $ 17,306 $ (288,541) ======= ========== ========== ========== earnings per share Denominator: Weighted average common shares outstanding 9,291,318 8,666,358 9,516,709 8,940,207 Effect of dilutive securities: Stock options and warrants 151,939 -- 102,061 -- Restricted shares -- -- -- -- Convertible debentures 6,270,000 -- -- -- ---------- ---------- ---------- ------------ Denominator for diluted earnings per share 15,713,257 8,666,358 9,618,770 8,940,207 ========== ========== ========== ============
Potential common shares are excluded from the dilutive per share computation for the nine and three months ended September 30, 2003 due to operating losses. The following securities have been excluded from the dilutive per share computation for the nine and three months ended September 30, 2004, as they are antidilutive: 10 Nine months ended Three months ended September 30, 2004 September 30, 2004 ------------------ ------------------ Stock options 3,602,998 3,602,998 Warrants 3,385,946 3,385,946 Convertible debt -- 6,270,000 Convertible preferred stock 602,544 602,544 Restricted shares 500,000 500,000
NOTE 9 - NEW LEASE COMMITMENT During the quarter, the Company entered into an amendment to its master lease, for its headquarters located in Red Bank, New Jersey. The lease amendment provides for a five-year lease term for reduced rental space of 27,255 square feet commencing on February 1, 2005 at an annual basic rental payment of $609,149. NOTE 10 - SUBSEQUENT EVENTS Subsequent to the reporting period, holders of $120,000 of subordinated convertible debentures presented their debentures to the company for conversion. The company issued 240,000 shares of common stock and retired $120,000 of debt. Subsequent to the reporting period, the Company entered into a preliminary letter of intent for a merger or other similar combination with Olympic Cascade Financial Corporation. The letter of intent is subject to numerous conditions, including: satisfactory completion of due diligence, finalization of the terms of the combination and structure of the transaction; negotiation, preparation and execution of definitive transaction documents, compliance with state and federal securities laws and regulations, and corporate, shareholder and regulatory approvals. 11 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Factors Affecting "Forward-Looking Statements" From time to time, we may publish "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities and Exchange Act of 1934, as amended, or make oral statements that constitute forward-looking statements. These forward-looking statements may relate to such matters as anticipated financial performance, future revenues or earnings, business prospects, projected ventures, new products, anticipated market performance, and similar matters. The Private Securities Litigation Reform Act of 1995 provides a safe harbor for forward-looking statements. In order to comply with the terms of the safe harbor, we caution readers that a variety of factors could cause our actual results to differ materially from the anticipated results or other expectations expressed in our forward-looking statements. These risks and uncertainties, many of which are beyond our control, include, but are not limited to: (i) transaction volume in the securities markets, (ii) the volatility of the securities markets, (iii) fluctuations in interest rates, (iv) changes in regulatory requirements which could affect the cost of doing business, (v) fluctuations in currency rates, (vi) general economic conditions, both domestic and international, (vii) changes in the rate of inflation and related impact on securities markets, (viii) competition from existing financial institutions and other new participants in competition from existing financial institutions and other new participants in the securities markets, (ix) legal developments affecting the litigation experience of the securities industry, and (x) changes in federal and state tax laws which could affect the popularity of products sold by us. We do not undertake any obligation to publicly update or revise any forward-looking statements. The reader is referred to our previous filings with the Commission, including our Form 10-K for the year ended December 31, 2003 and our other periodic reports as filed with the Commission. Overview We are a New Jersey-based financial services holding company whose principal subsidiary, First Montauk Securities Corp., has operated as a full service retail and institutional securities brokerage firm since 1987. Since July 2000, First Montauk Securities Corp. has operated under the trade name "Montauk Financial Group". We provide a broad range of securities brokerage and investment services to a diverse retail and institutional clientele, insurance products through our subsidiary, Montauk Insurance Services, Inc., as well as corporate finance and investment banking services. Montauk Financial Group has approximately 396 registered representatives and services over 61,000 retail and institutional customers. With the exception of two corporate-leased branch offices, all of our other 146 branch office and satellite locations in 30 states are owned and operated by affiliates; independent owners who maintain all appropriate licenses and are responsible for all office overhead and expenses. Montauk Financial Group is registered as a broker-dealer with the Securities and Exchange Commission and the National Association of Securities Dealers. We are also a member of the Municipal Securities Rule Making Board, and the Securities Investor Protection Corporation and are 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, with various floor brokerage and specialist firms providing execution services. These arrangements provide Montauk Financial Group with back office support, transaction processing services on all principal, national and international securities exchanges, and access to other financial services and products. Results of Operations Three and Nine Months Ended September 30, 2004 Compared to Three and Nine Months Ended September 30, 2003 The results of operations for the three months ended September 30, 2004, (the "2004 quarter"), showed a 23% decrease in revenues over the same quarter in the prior year (the "2003 quarter"), decreasing to $11,747,000, from $15,172,000 in the 2003 quarter. Our revenues and operating results are influenced by general economic and market conditions, particularly conditions in the equity markets. Uncertainties about interest rates, the upcoming election and the continued threat of terrorism have all contributed to the lack of investor confidence in the markets and the resulting reduction in securities transaction volume. 12 For the third consecutive quarter, we have reported a profit. For the 2004 quarter, net income applicable to common stockholders was $17,306, or $0.00 per basic and diluted share, as compared to a net loss applicable to common stockholders reported in the 2003 quarter, of ($288,541) or ($0.03) per basic and diluted share. The results of operations for the nine months ended September 30, 2004, (the "2004 period"), showed a 7% increase in revenues over the same period in the prior year (the "2003 period"), increasing to $44,810,000, from $42,030,000 in the 2003 period. For the 2004 period, we reported net income applicable to common stockholders of $235,000, or $.03 per basic and $.02 per diluted share, as compared to a net loss applicable to common stockholders reported in the 2003 period, of ($2,124,000), or ($0.25) per basic and diluted share. The primary source of our revenue is commissions generated from securities transactions, mutual funds, insurance products and fees from managed accounts. Total revenues from commissions decreased $3,266,000, or 29%, to $8,036,000 for the 2004 quarter, from $11,302,000 for the 2003 quarter. In 2004, we reduced the number of our registered representatives, which combined with weaker equity markets, resulted in lower overall commission revenues. Revenues from agency transactions, which consist primarily of stocks and options, decreased $3,245,000, or 41%, from $7,841,000 in the 2003 quarter to $4,596,000 in the 2004 quarter. Agency commissions, as a percentage of total revenues, decreased to 39% from 52% in the 2003 quarter. For the first nine months of 2004, agency commissions were $20,698,000, as compared to $20,128,000, for the same period in 2003, an increase of 3%. Fees generated from managed accounts have continued to increase. Fee-based revenues increased to $628,000 for the 2004 quarter and $1,933,000 for the 2004 period, an increase of approximately 38% and 48%, respectively, when compared to the same periods in 2003. As more of our financial professionals continue to focus on transitioning their customer accounts from commission-based, transactional business to fees based on a percentage of asset value, this segment of our business has continued to grow. Total revenues from principal transactions, which include mark-ups/mark-downs on transactions in which we act as principal, proprietary trading, and the sale of fixed income securities, decreased $535,000, or 20%, from $2,633,000 for the 2003 quarter to $2,098,000 for the 2004 quarter. For the 2004 period, this same category decreased from $8,136,000 in the 2003 period, to $7,151,000 in the 2004 period, a decrease of 12%. This decline in revenue is also attributable to a smaller number of active registered representatives who conduct transactions on a principal basis. Investment banking revenues for the 2004 quarter increased from $254,000 in the 2003 quarter, to $454,000 in the 2004 quarter, an increase of 79%. Revenues for the 2004 period were $2,524,000, an increase of $1,906,000, or 309% over the 2003 period. This category includes new issues of equity and preferred stock offerings in which we participated as a selling group or syndicate member, and private offerings of securities in which we acted as placement agent. We have benefited by the resurgence of investment banking transactions by completing more private offerings during the three and nine month periods. Interest and other income for the 2004 quarter totaled $1,159,000, as compared to $982,000 for the 2003 quarter, and $3,348,000 versus $3,083,000 for the 2004 and 2003 periods, respectively. Interest income decreased 1%, or $9,600, in the 2004 quarter, when compared to the 2003 quarter, and increased 10%, or $189,000 in the 2004 period, when compared to the 2003 period. Other income increased $186,000 for the 2004 quarter and $76,000 for the 2004 period when compared to the same periods in 2003, and was primarily related to the decrease in recovery of bad debt write-offs, offset by the increase in recognition of deferred income. Cash advances that were received from our clearing firm, Fiserv Securities, Inc., are deferred and amortized on a straight-line basis over the remaining contract term. Other income included amortization of deferred revenue of approximately $219,000 and $174,000 in the 2004 and 2003 quarters, respectively and $656,000 and $522,000 in the 2004 and 2003 periods, respectively. Total expenses decreased by $3,753,000, or 24%, to $11,707,000 in the 2004 quarter. For the 2004 period, total expenses increased by 1%, to $44,508,000, from $44,129,000 in the 2003 period. Compensation and benefits expense for management, operations and clerical personnel increased for the 2004 quarter, to $1,753,000 (15% of total revenue) from $1,587,000 (10% of total revenue), an increase of $166,000 over the 2003 quarter. Included in this category are salaries, option compensation, health insurance premiums, payroll taxes and 401(k) contribution accruals. For the 2004 quarter, the increase was primarily attributable to the amortization of deferred stock compensation for senior management. For the 2004 period, this same category of expense was $5,453,000, compared to $4,859,000 for the 2003 period, representing 12% of total revenue for both years' nine month periods. Amortization of deferred stock compensation and severance payments accounted for the largest portion of the increase between the two periods. 13 Commission expense, consistently the largest expense category and which is directly related to commission revenue, decreased 23%, or $2,322,000, from $10,137,000 for the 2003 quarter to $7,815,000 for the 2004 quarter. The decrease in commission expense for the 2004 quarter, resulted from a reduction in registered representatives and overall transaction volume. However, the percentage of commission expense to total revenue has remained constant at approximately 67%. Commission expense for the 2004 period increased to $30,345,000, from $28,346,000 in the 2003 period, an increase of $1,999,000, or 7%. Clearing and floor brokerage costs, which are determined by the volume and type of transactions, decreased $292,000, to $453,000 for the 2004 quarter, from $745,000 for the 2003 quarter. For the 2004 period, these costs decreased $209,000 to $1,894,000, from the 2003 period costs of $2,103,000. The lower costs for the 2004 period is attributable to an overall volume reduction, as well as the mix of business and certain cost savings achieved through our clearing firm. Communications and occupancy costs decreased during the 2004 quarter, from $647,000 in the 2003 quarter to $640,000 in the 2004 quarter. For the nine months ended September 30, 2004, these costs increased slightly to $2,025,000 from $2,021,000 for the same period in 2003. It is anticipated that costs in this category will continue to decrease into the next fiscal year as a result of a reduction in space and partial rental abatement for our corporate headquarters in Red Bank, New Jersey. During the quarter, we entered into a new five-year lease extension providing for a reduced rental space of 27,255 square feet commencing on February 1, 2005 at an annual basic rental payment of $609,000, compared with our current annual base rent of $691,000. Additionally, one of our corporate-leased branch offices in New York City will be eliminated at the conclusion of the current lease term at the end of January 2005. The expense area in 2004 that had the most significant decrease was costs for legal matters and settlements. These costs decreased by $1,327,000, to $213,000 during the 2004 quarter, from $1,540,000 for the same quarter in 2003. For the nine-month period of 2004, the decrease was $2,390,000 compared to the same nine-month period in 2003. In 2004, we implemented new procedures related to the analysis, management and resolution of our outstanding claims and control over outside legal costs. We are a respondent or co-respondent in various legal proceedings that are related to our securities business. We are contesting these claims and believe that there are meritorious defenses in each case. However, litigation is subject to many uncertainties, and some of these actions and proceedings may result in adverse judgments. Further, the availability of insurance coverage is determined on a case-by-case basis by the insurance carrier, and is limited to the coverage limits within the policy for any individual claim and in the aggregate. After considering all relevant facts, available insurance coverage and consultation with litigation counsel, we believe that significant judgments or other unfavorable outcomes from pending litigation could have a material adverse impact on our consolidated financial condition, results of operations, and cash flows in any particular quarterly or annual quarter, or in the aggregate, and could impair our ability to meet the statutory net capital requirements of our securities business. As of September 30, 2004, we have accrued litigation costs that are probable and can be reasonably estimated based on a review with outside counsel of existing claims, arbitrations and unpaid settlements. We cannot give assurance that this amount will be adequate to cover actual costs that may be subsequently incurred. Further, it is not possible to predict the outcome of claims pending against us. Other operating costs increased $2,000, to $760,000 in the 2004 quarter, from $758,000 in the 2003 quarter. For the nine month period ending September 30, 2004 and 2003, these expenses were $2,561,000 and $2,291,000, respectively, an increase of $270,000. The increase for the nine-month period was partially attributable to annual NASD dues that were not deducted until the fourth quarter of 2003, in addition to a substantial increase in our errors and omission insurance premiums under the renewal of our policy that became effective in February 2003. 14 Liquidity and Capital Resources We maintain a highly liquid balance sheet with approximately 67% of our assets consisting of cash, securities owned, and receivables from our clearing firm and other broker-dealers. The balances in these accounts can and do fluctuate significantly from day to day, depending on general economic and market conditions, volume of activity, and investment opportunities. These accounts are monitored on a daily basis in order to ensure compliance with regulatory capital requirements and to preserve liquidity. Overall, cash and cash equivalents decreased during the period by $2,243,000. Net cash required by operating activities during the 2004 period was $1,944,000, as a result of the net income of $303,000, adjusted by non-cash charges including depreciation and amortization of $714,000, increase in securities sold of $175,000 and decreases in employee and broker receivables and in the amount owed from our clearing firm of $384,000 and $768,000, respectively. These increases in cash were offset by increases in securities owned of $457,000 and other assets of $79,000 and decreases in commissions' payable of $1,686,000, deferred income of $656,000, warrants subject to put options of $148,000, accrued expenses and accounts payable of $435,000 and $828,000 respectively. As of September 30, 2004, we have accrued litigation costs that are probable and can be reasonably estimated based on a review of existing claims, arbitrations and unpaid settlements. Management cannot give assurance that this amount will be adequate to cover actual costs that may be subsequently incurred. Further, it is not possible to predict the outcome of other matters pending against us. We will continue to vigorously defend against these claims. Additions to capital expenditures accounted for the entire use of cash from investing activities of $228,000 during the first nine months of 2004. We anticipate additions to capital expenditures for the remaining three months of 2004 to be about $75,000. Financing activities consumed cash of $72,000 for the 2004 period. Payments of capital leases were $120,000 offset by proceeds from capital lease financing of $69,000. In addition, during the period, we repurchased 60,217 unregistered shares of our common stock from various parties who had received the shares in a legal settlement for $21,162, including interest. In connection with a settlement agreement, we issued 750,000 five-year warrants in three classes of 250,000 warrants each, with varying exercise prices. The Class A warrants, which had an exercise price of $.40 per share, were redeemed for $200,000 during the third quarter of 2004. The settlement agreement provides that we may be obligated to make additional cash payments of up to $400,000 in the event that claimants elect to exercise the remaining Class B and Class C warrants during the months of June 2005 and June 2006, respectively. Specifically, we may be required to redeem the warrants for $.80 per warrant in cash if the average market price of the underlying common shares during the ten trading days immediately preceding the date upon which we receive notice that the warrant holders of a particular class have elected to declare a Required Exercise Event is less than or equal to the warrant exercise price. Premium financing agreements for the renewal of two of our insurance policies had balances at September 30, 2004 of approximately $143,000 and $36,000. The first agreement is payable in one remaining installment of approximately $144,000; the other agreement is payable in three remaining installments of approximately $12,000. All installments include interest at the rate of 4.4% per annum. During the quarter, we entered into an amendment to our master lease agreement, for our headquarters located in Red Bank, New Jersey. The lease amendment provides for a five-year lease term for reduced rental space of 27,255 square feet commencing on February 1, 2005 at an annual basic rental payment of $609,149. 15 Subsequent to the reporting period, holders of $120,000 of subordinated convertible debentures presented their debentures to the company for conversion. The company issued 240,000 shares of common stock and retired $120,000 of debt. As of September 30, 2004 Expected Maturity Date - ------------------------ -------------- ------------- ------------- ----------- ------------ ------------ --------------- Category 2004 2005 2006 2007 2008 After 2008 Total - ------------------------ ------------- ------------- ------------- ----------- ------------ ------------ --------------- - ------------------------ ------------- ------------- ------------- ----------- ------------ ------------ --------------- - ------------------------ ------------- ------------- ------------- ----------- ------------ ------------- --------------- - ------------------------ ------------- ------------- ------------- ----------- ------------ ------------- --------------- Debt Obligations 0 0 0 $1,030,000 $2,105,000 0 $3,135,000 - ------------------------ ------------- ------------- ------------- ----------- ------------ ------------- --------------- - ------------------------ ------------- ------------- ------------- ----------- ------------ ------------- --------------- Capital Lease $ 30,585 $ 56,772 $ 9,110 0 0 0 $ 96,467 Obligations - ------------------------ ------------- ------------- ------------- --- ------- ------------ ------------- --------------- - ------------------------ ------------- ------------- ------------- ----------- ------------ ------------- --------------- Operating Lease $ 316,245 $ 940,663 $787,587 $ 631,790 609,149 659,912 $3,945,346 Obligations - ------------------------ ------------- ------------- --- --------- ----------- ------------ ------------- --------------- - ------------------------ ------------- ------------- --- --------- ----------- ------------ ------------- --------------- Purchase Obligations 0 0 0 0 0 0 0 - ------------------------ ------------- ------------- ------------- ---- ------ ------------ ------------- --------------- - ------------------------ ------------- ------------- ------------- --- ------- ------------ ------------- --------------- Other Long-Term $ 218,752(2) $ 200,000(1) $200,000(1) $1,605,116(2) $ 400,000(1) Obligations Reflected $ 875,000(2) $875,000(2) $875,000(2) $ 875,000(2) $ 5,323,868(2) on Balance Sheet under GAAP - ------------------------ ------------- ------------- ------------- ----------- ------------ ------------- --------------- - ------------------------ ------------- ------------- ------------- ----------- ------------ ------------- --------------- - ------------------------ ------------ ------------- ------------- ----------- ------------ ------------- --------------- - ------------------------ ------------ ------------- ------------- ----------- ------------ ------------- --------------- Total $ 565,582 $2,072,435 $1,871,697 $2,536,790 $3,589,149 $2,265,028 $12,900,681 - ------------------------ ------------ ------------- ------------- ----------- ------------ ------------- ---------------
(1) Expected payment obligations embodied in the warrants subject to put options. For more detailed information please refer to Note 4 of the consolidated financial statements. (2) We are obligated to repay any unearned portion of payments received from our clearing firm in connection with the financing agreement entered into in November 2000, in the event we fail to achieve certain minimum performance criteria by the end of the agreement, or terminate the agreement under certain circumstances prior to expiration. Net Capital At September 30, 2004, Montauk Financial Group had net capital of $1,512,546, which was $1,238,878 in excess of its required net capital of $273,668, and the ratio of aggregate indebtedness to net capital was 2.7 to 1. Series A Preferred Stock In 1999, we issued 349,511 shares of Series A Convertible Preferred Stock in an exchange offering related to a settlement with holders of certain leases. Each share of the Preferred Stock is convertible into two shares of Common Stock and pays a quarterly dividend of 6%. Quarterly dividends were paid through the first quarter of 2003, at which time we suspended the dividend payments in accordance with applicable state law. (See Note 5 to the consolidated financial statements). As of September 30, 2004, we have 301,272 Series A Preferred shares issued and outstanding. The accrued cumulative dividends not yet declared as of September 30, 2004, is approximately $141,000. 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. Our management must use assumptions and estimates to apply these principles where actual measurement is not possible or practical. For a complete discussion of our significant accounting policies, which management does not feel has changed during the nine month period ended September 30, 2004, see "Management Discussion and Analysis" and "Notes to the Consolidated Financial Statements" in our 2003 Annual Report filed on Form 10-K. Certain policies are considered critical because they are highly dependent upon subjective or complex judgments, assumptions and estimates. Changes in such estimates may have a significant impact on the financial statements. Off-Balance Sheet Arrangements We execute securities transactions on behalf of our customers. If either the customer or a counter-party fail to perform, we, by agreement with our clearing broker may be required to discharge the obligations of the non-performing party. In such circumstances, we may sustain a loss if the market value of the security is different from the contract value of the transaction. We seek to control off-balance-sheet risk by monitoring the market value of securities held or given as collateral in compliance with regulatory and internal guidelines. Pursuant to such guidelines, our clearing firm requires additional collateral or reduction of positions, when necessary. We also complete credit evaluations where there is thought to be credit risk. Item 3. Risk Management Risk is an inherent part of our business and activities. The extent to which we properly and effectively identify, assess, monitor and manage the various types of risk involved in our activities is critical to our soundness and profitability. We seek to identify, assess, monitor and manage the following principal risks involved in our business activities: market, credit, operational and legal. Senior management takes an active role in the risk management process and requires specific administrative and business functions to assist in the identification, assessment and control of various risks. Our risk management policies and procedures are subject to ongoing review and modification. Market Risk. Certain of our business activities expose us to market risk. This market risk represents the potential for loss that may result from a change in value of a financial instrument as a result of fluctuations in interest rates, prices or changes in credit rating of issuers of debt securities. This risk relates to financial instruments we hold as investment and for trading. Securities inventories are exposed to risk of loss in the event of unfavorable price movements. Securities positions are marked to market on a daily basis. Market-making activities are client-driven, with the objective of meeting clients' needs while earning a positive spread. At September 30, 2004 and December 31, 2003, the balances of our securities positions owned and sold, not yet purchased were approximately $627,000 and $245,000, and $170,000 and $69,000, respectively. In our view, the potential exposure to market risk, trading volatility and the liquidity of securities held in the firm's inventory accounts could potentially have a material effect on its financial position. Credit Risk. Credit risk represents the loss that we would incur if a client, counterparty or issuer of securities or other instruments that we hold fails to perform its contractual obligations. Client activities involve the execution, settlement, and financing of various transactions on behalf of its clients. Client activities are transacted on either a cash or margin basis. Client activities may expose us to off-balance sheet credit risk. We may have to purchase or sell financial instruments at the prevailing market price in the event of the failure of a client to settle a trade on its original terms or in the event that cash and securities in the client margin accounts are not sufficient to fully cover the client losses. We seek to control the risks associated with client activities by requiring clients to maintain collateral in compliance with various regulations and company policies. Operational Risk. Operational risk generally refers to the risk of loss resulting from our operations, including, but not limited to, improper or unauthorized execution and processing of transactions, deficiencies in our operating systems, business disruptions and inadequacies or breaches in our internal control processes. We operate in diverse markets and rely on the ability of our employees and systems to process high numbers of transactions often within short time frames. In the event of a breakdown or improper operation of systems, human error or improper action by employees, we could suffer financial loss, regulatory sanctions or damage to our reputation. In order to mitigate and control operational risk, we have developed and continue to enhance policies and procedures that are designed to identify and manage operational risk at appropriate levels. Included in our operational risk management practice is disaster recovery for our critical systems. We believe that our disaster recovery program, including off-site back-up technology and operational facilities, is adequate to handle a reasonable business disruption. However, there can be no assurances that a disaster directly affecting our headquarters or operations center would not have a material adverse impact. Insurance and other safeguards might only partially reimburse us for our losses. 17 Legal Risk. Legal risk includes the risk of non-compliance with applicable legal and regulatory requirements. We are subject to extensive regulation in the different jurisdictions in which we conduct our business. We have various procedures addressing issues such as regulatory capital requirements, sales and trading practices, use of and safekeeping of customer funds, credit granting, collection activities, anti money-laundering and record keeping. In addition, our legal risk includes substantial risks of liability arising from litigation and arbitration. As an underwriter, a broker-dealer and an investment adviser, we may be exposed to substantial liability under federal and state securities and other laws, including those relating to underwriters' liability in securities offerings. Further, broker-dealers and asset managers may also be held liable by customers and clients for losses sustained on investments if it is found that they caused such losses. Item 4. Controls and Procedures Evaluation of Disclosure Controls and Procedures As of the end of the period covered by this report, we evaluated, under the supervision and with the participation of our management, including our chief executive officer and the chief financial officer, the effectiveness of the design and operation of our "disclosure controls and procedures" (as defined in the Securities Exchange Act of 1934, Rules 13a - 15(e) and 15d - 15(e)). Based on this evaluation our management, including our chief executive officer and chief financial officer, have concluded that as of the date of the evaluation our disclosure controls and procedures were effective to ensure that all material information required to be filed in this report has been made known to them. Changes in Internal Controls There have not been any changes in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. 18 PART II OTHER INFORMATION Item 1. Legal proceedings The Company is a respondent or co-respondent in various legal proceedings, which are related to its securities business. Management is contesting these claims and believes that there are meritorious defenses in each case. However, litigation is subject to many uncertainties, and some of these actions and proceedings may result in adverse judgments. Further, the availability of insurance coverage is determined on a case-by-case basis by the insurance carrier, and is limited to the coverage limits within the policy for any individual claim and in the aggregate. After considering all relevant facts, available insurance coverage and consultation with litigation counsel, management believes that significant judgments or other unfavorable outcomes from pending litigation could have a material adverse impact on the Company's consolidated financial condition, results of operations, and cash flows in any particular quarterly or annual period, or in the aggregate, and could impair the Company's ability to meet the statutory net capital requirements of its securities business. During the quarter, the Company settled, or otherwise resolved, arbitrations and lawsuits related to our securities business, that required the payment of $726,000, a portion of which was accrued for in prior quarters. As of September 30, 2004, the Company has accrued litigation costs that are probable and can be reasonably estimated based on a review of existing claims, arbitrations and unpaid settlements. Management cannot give assurance that this amount will be adequate to cover actual costs that may be subsequently incurred. Further, it is not possible to predict the outcome of other matters pending against the Company. All such cases will continue to be vigorously defended. Item 2. Unregistered Sales of Equity Securities and Use of Proceeds. (a) During the quarter ended September 30, 2004, we did not sell any equity securities that were not registered under the Securities Act of 1933, as amended. (b) Not applicable. (c) During the quarter ended September 30, 2004, we repurchased the following securities. - -------------------- ------------------ -------------------- ------------------------- ------------------------------- (c) Total Number of (d) Maximum Number (or (a) Total Shares Purchased as Approximate Dollar Value) Number of (b) Average Part of Publicly of Shares that May Yet Be Shares Price Paid per Announced Plans or Purchased Under the Plans Purchased Share Programs or Programs - -------------------- ------------------ -------------------- ------------------------- ------------------------------- - -------------------- ------------------ -------------------- ------------------------- ------------------------------- July, 2004 250,000(1) $.80 0 $400,000(2) - -------------------- ------------------ -------------------- ------------------------- ------------------------------- - -------------------- ------------------ -------------------- ------------------------- ------------------------------- Total 250,000 - -------------------- ------------------ -------------------- ------------------------- -------------------------------
(1) Represents our redemption of 250,000 Class A warrants as described in the notes to the financial statements and "Liquidity and Capital Resources" section of Item 2 of Part I of this Quarterly Report on Form 10-Q. (2) Represents the potential redemption of additional warrants as described in footnote no. 4. 19 Item 3. Defaults Upon Senior Securities. None. Item 4. Submission of Matters to a Vote of Security Holders. Not applicable. Item 5. Other Information. We have 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. Since the second quarter of 2003, we have been 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 accumulate 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. Arrearages must be fully paid before any distribution can be declared or paid on our common stock. Cumulative dividends in arrears at September 30, 2004 were approximately $141,000. During the quarter, we entered into an amendment to our master lease agreement, for our headquarters located in Red Bank, New Jersey. The lease amendment provides for a five-year lease term for reduced rental space of 27,255 square feet commencing on February 1, 2005 at an annual basic rental payment of $609,149. Subsequent to the reporting period, we entered into a preliminary letter of intent for a merger or other similar combination with Olympic Cascade Financial Corporation. The letter of intent is subject to numerous conditions, including: satisfactory completion of due diligence, finalization of the terms of the combination and structure of the transaction; negotiation, preparation and execution of definitive transaction documents, compliance with state and federal securities laws and regulations, and corporate, shareholder and regulatory approvals. Item 6. Exhibits: Exhibits The exhibits designated with an asterisk (*) are filed herewith. All other exhibits have been previously filed with the Commission and, pursuant 17 C.F.R. ss. 230.411, are incorporated by reference to the document referenced in brackets following the description of such exhibits. - ----------------- ---------------------------------------------------------------------------------------------------- *31.1 Certification of President and Chief Operating Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 - ----------------- ---------------------------------------------------------------------------------------------------- - ----------------- ---------------------------------------------------------------------------------------------------- *31.2 Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 - ----------------- ---------------------------------------------------------------------------------------------------- - ----------------- ---------------------------------------------------------------------------------------------------- *32.1 Certification of President and Chief Operating Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 - ----------------- ---------------------------------------------------------------------------------------------------- - ----------------- ---------------------------------------------------------------------------------------------------- *32.2 Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 - ----------------- ----------------------------------------------------------------------------------------------------
20 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 15, 2004 /s/ William J. Kurinsky ------------------------------------ William J. Kurinsky Secretary/Treasurer Chief Financial Officer and Principal Accounting Officer /s/ Victor K. Kurylak ------------------------------------ Victor K. Kurylak President 21 Exhibit 31.1 CERTIFICATION I, Victor K. Kurylak, President, certify that: 1. I have reviewed this quarterly report on Form 10-Q of First Montauk Financial Corp.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the quarter 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 quarters 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 quarter 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 quarter 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 15, 2004 /s/ Victor K. Kurylak - -------------------------------------------- VICTOR K. KURYLAK PRESIDENT 22 Exhibit 31.2 CERTIFICATION I, William J. Kurinsky, Chief Financial Officer, certify that: 1. I have reviewed this quarterly report on Form 10-Q of First Montauk Financial Corp.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the quarter 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 quarters 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 quarter 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 quarter 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 15, 2004 /s/ William J. Kurinsky - -------------------------------------------- WILLIAM J. KURINSKY CHIEF FINANCIAL OFFICER 23 Exhibit 32.1 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of FIRST MONTAUK FINANCIAL CORP. (the "Company") on Form 10-Q for the quarter ending September 30, 2004 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Victor K. Kurylak, President and Chief Operating Officer of the Company, certify, pursuant to 18 U.S.C. section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company. /s/ Victor K. Kurylak - -------------------------------------- Victor K. Kurylak President and Chief Operating Officer November 15, 2004 24 Exhibit 32.2 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of FIRST MONTAUK FINANCIAL CORP. (the "Company") on Form 10-Q for the quarter ending September 30, 2004 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 15, 2004 -----END PRIVACY-ENHANCED MESSAGE-----