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