SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
|X| ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended December 31, 2001 -----------------
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from _______________________ to
Commission File No. 0-6729
FIRST MONTAUK FINANCIAL CORP.
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(Exact name of registrant as specified in its charter)
New Jersey 22-1737915
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
328 Newman Springs Road, Red Bank, NJ 07701
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (732) 842-4700
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Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange on
Title of each class which registered
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, no par value
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(Title of class)
[Cover Page 1 of 2 Pages]
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(D) of the Exchange Act during the past 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
Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. [ X ]
The issuer's revenues for its most recent fiscal year: $51,220,000.
The aggregate market value of the voting stock held by non-affiliates
computed by reference to the price at which the stock was sold, or the average
bid and asked prices of such stock, as of bid and asked prices of such stock, as
of April 12, 2002, was $1,664,290.
The number of shares of Common Stock outstanding, as of April 15, 2002 was
8,625,284.
DOCUMENTS INCORPORATED BY REFERENCE
Not Applicable
[Cover Page 2 of 2 Pages]
1
PART I
Item 1. Business
Introduction
First Montauk Financial Corp. ("FMFC" or the "Company") is a New
Jersey-based financial services holding company whose principal subsidiary,
First Montauk Securities Corp. ("FMSC"), has operated as a full service retail
and institutional securities brokerage firm since 1987. FMSC provides a broad
range of securities brokerage and investment services to a diverse retail and
institutional clientele, as well as corporate finance and investment banking
services to corporations and businesses. In 1997, FMSC established Century
Discount Investments, a discount brokerage division through which it operates an
online brokerage operation. FMFC also sells insurance products through its
subsidiary Montauk Insurance Services, Inc. ("MISI").
FMSC has approximately 570 registered representatives and services over
60,000 retail and institutional customer accounts. With the exception of two
Company-leased branch offices, all of FMSC's 200 other branch office and
satellite locations in 33 states are owned and operated by affiliates,
independent owners who maintain all appropriate licenses and are responsible for
all office overhead and expenses. FMSC also employs registered representatives
directly at its corporate office and the Company-leased branch offices.
FMSC is registered as a broker-dealer with the Securities and Exchange
Commission ("SEC"), the National Association of Securities Dealers Regulation,
Inc. ("NASDR"), the Municipal Securities Rule Making Board ("MSRB"), and the
Securities Investor Protection Corporation ("SIPC") and is licensed to conduct
its brokerage activities in all 50 states, the District of Columbia, and the
Commonwealth of Puerto Rico. All securities transactions are cleared through
Fiserv Securities, Inc. of Philadelphia, PA. and execution services are provided
by various floor brokerage and specialist firms. These arrangements provide FMSC
with back office support, transaction processing services on all principal,
national and international securities exchanges, and access to many other
financial services and products which allows FMSC to offer products and services
comparable to large brokerage firms.
FMSC's revenues consist primarily of commissions and fee income from
individual and institutional securities transactions, market making activities
and investment banking services, such as private and public securities
offerings. The following table represents the percentage of revenues generated
by each of these activities during the last fiscal year:
Equities:
Listed 16%
Over-The-Counter 29%
Municipal and Government Bonds 3%
Corporate Bonds 2%
Unit Investment Trusts 2%
Mutual Funds 18%
Options 8%
Insurance and Annuities 19%
Corporate Finance 3%
---
Total (1) 100%
(1) Does not include interest and other income.
2
The following table reflects FMSC's various sources of revenues and the
percentage of total revenues for fiscal 2001. Revenues from agency transactions
in securities for individual customers of FMSC are shown as commissions.
Revenues from transactions in securities for individual customers where FMSC
acted in a principal capacity are reflected in principal transactions. Also
reflected in principal transactions are trading profits from market making and
proprietary trading activities.
Year Ended December 31, 2001
----------------------------
Amount Percent
------ -------
Agency commissions from
Equity Securities,
Options and Mutual Funds,
Variable insurance and management fees $37,808,000 74%
Principal Transactions in
Equity Securities, Municipal,
Government and Corporate Bonds $ 8,022,000 16%
Interest and other Income $ 3,907,000 7%
Investment Banking(1) $ 1,483,000 3%
----------- ---
Total Revenues $51,220,000 100%
(1) Investment banking revenues consist of commissions, selling
concessions, consulting fees and other income from underwriting and syndicate
activities and placement agent fees.
The Affiliate Program
FMSC's primary method of operation is through its affiliate program, which
allows registered representatives to operate as independent contractors. A
registered representative who becomes an affiliate of FMSC establishes his own
office and is solely responsible for the payment of all expenses associated with
the operation of the branch office, including rent, utilities, furniture,
equipment, stock quotation machines, and general office supplies. In return, the
affiliate representative is entitled to retain a significantly higher percentage
of the commissions generated by his sales than a registered representative is in
a traditional brokerage arrangement. The affiliate program is designed to
attract experienced brokers with existing clientele who desire to operate their
own offices, as well as other professionals in all facets of the financial
services industry.
Affiliates must possess a sufficient level of commission brokerage business
and experience to enable the individual to independently support his/her own
office. Financial professionals such as insurance agents, real estate brokers,
financial planners, and accountants, who already provide financial services to
their clients, can affiliate with FMSC and obtain the required licenses to
become registered representatives. Affiliation enables these professionals to
offer securities products and services to their clients through FMSC, and
insurance products through MISI, and earn commissions and fees for these
transactions.
FMSC provides full support services to each of the affiliates, including
access to stock and options execution and over-the-counter stock trading;
products such as insurance, mutual funds and investment advisory programs; and
research, compliance, supervision and related services.
Each affiliate is required to obtain and maintain in good standing each
license required by the SEC and NASDR to conduct the type of securities business
in which the affiliate will engage, and to register in the various states in
which he/she intends to service customers. FMSC is ultimately responsible for
supervising each affiliate and related registered representative. FMSC can incur
substantial liability from improper actions of any of the affiliate
representatives. The Company maintains a professional liability errors and
omissions insurance policy which provides coverage for certain actions taken by
the Company's registered representatives, employees and other agents in
connection with the purchase and sale of securities and the administration of
individual retirement plans.
3
Century Discount Investments
In June 1997, FMSC established a discount brokerage division, "Century
Discount Investments", to offer investors convenient and prompt retail brokerage
services at significantly reduced commission rates. Century is designed to serve
investors who do their own research and make their own investment decisions.
These customers seek to avoid the higher brokerage commissions for securities
research, investment recommendations or portfolio management associated with
full service brokerage accounts. FMSC believes that this market segment has
become increasingly significant to the brokerage industry and will continue to
grow in the future. Century's business concentrates on the execution of
unsolicited transactions, on an agency basis, from retail customers. Century is
able to offer customers reduced commission rates since its service is not
dependent on individual broker-customer relationships to generate orders.
Century does not assign customer accounts to individual brokers and all Century
registered representatives have immediate access to customer accounts and market
information necessary to respond to any customer inquiry and order.
Century, through its clearing firm, has developed the capability to offer
online, discount brokerage and related investment services. The online services
provide customers with automated securities order placement, market information
and research capabilities through the Internet. (see Competition").
Montauk Insurance Services
In 1991, FMFC formed Montauk Insurance Services, Inc ("MISI") for the
purpose of offering and selling variable annuity, variable life as well as
traditional life and health insurance products. Currently, MISI is licensed to
sell life insurance and annuities in 49 states. MISI derives revenue from the
sale of insurance-related products and services to the customers of FMSC's
registered representatives, who are also licensed to sell certain insurance
products. In fiscal year 2001, the Company earned gross commissions of $8
Million from the sale of insurance and annuity products.
Asset Management and Portfolio Advisory Services
FMSC is a SEC Registered Investment Adviser, providing investment advisory
services to clients through independent, third-party sponsored advisory programs
offered to individual and institutional clients. FMSC is registered or eligible
to conduct business as an investment adviser in 33 states.
Managed account programs generally require the client to pay a single fee
for portfolio advisory services, brokerage execution and custody and periodic
account performance evaluation, rather than a fee plus commissions. Revenues
from asset-managed accounts and portfolio advisory services are generated from
accounts that charge a fee based on a percentage of assets under management.
Investment Banking
FMSC participates in private and public offerings of equity securities and
provides general investment banking consulting services to various public and
private corporations. Historically, FMSC has not derived a significant amount of
its revenues from investment banking. The Company continues to review other
underwriting candidates and anticipates that it will engage in additional public
and private offerings in the future.
Recent Developments
Montauk Capital Markets Group
In March 2002, FMSC formed a new institutional brokerage division, Montauk
Capital Markets Group, which offers institutional clients specialized trading
and brokerage services and equity research. An institutional trader and research
analysist with over 20 years of experience who holds an MBA from Harvard
Business School, heads the division. Additional research analysts and traders
with substantial institutional experience assist him. In order to accommodate
this new division, the Company entered into a new sub-lease arrangement for
office space in Mid-town Manhattan. (See Item 2. "Properties")
4
New Clearing Arrangement
In May 2000, FMSC entered into a 10-year clearing agreement with Fiserv
Securities, Inc. under which Fiserv will act as FMSC's primary clearing broker.
In connection with the clearing agreement, FMSC and Fiserv also entered into a
financial agreement under which Fiserv provided a cash advance of $4,000,000 to
FMSC on the date of conversion to Fiserv. The funds, net of federal and state
income taxes, were used primarily to enable FMSC to pay for the cost of
conversion to Fiserv and expand FMSC's business. For financial reporting
purposes, the Company will earn the advance in accordance with an amortization
schedule established by the parties; however, FMSC will incur an income tax
liability at its effective tax rate on the entire advance in the year in which
it is received. FMSC is required to repay any unearned portion of the $4,000,000
in the event it fails to achieve certain minimum performance criteria, or
terminates the agreement under certain circumstances prior to the expiration
date, as well as penalties for early termination. Fiserv has also agreed to
provide certain additional advances to FMSC in the second, third and fourth
years of the agreement under similar conditions, provided FMSC achieves certain
performance criteria, and subject to certain other conditions. These advances,
if received, will also be amortized to income as earned during the term of the
clearing agreement.
In February 2001 FMSC and FMFC amended and restated the financial agreement
with Fiserv. Under the restated terms, FMFC, rather than FMSC, is and will
continue to be the recipient of any additional cash advances payable under the
financial agreement. In November 2001, FMFC received another scheduled cash
advance of $1,250,000 from Fiserv. FMFC has further assumed FMSC's obligation
with respect to the initial payment received in November 2000, and will be
solely responsible for any performance and early termination penalties. In
consideration of FMSC's release from its obligations under the financial
agreement and to secure Fiserv's interest, FMFC has granted to Fiserv a first
priority lien in all of the outstanding shares of FMSC stock that it owns.
New Trade Name
In July 2000 the broker/dealer adopted a new trade name and logo, "Montauk
Financial Group" to be used in advertising, marketing and communications with
customers. The new trade name was designed in connection with the expansion of
financial services from the general securities products and services which had
been the Company's core offering. It is anticipated that the new name and
modernized ship logo, will reflect the growth in all aspects of the Company's
financial services, including asset management, financial and estate planning
and insurance, in addition to general securities products and services.
Common Stock Repurchase Program
In August 1999, the Company's board of directors authorized the repurchase
of an unspecified number of the Company's outstanding common shares in market
transactions. In fiscal 2001, repurchases of 236,767 shares were made at a total
cost of $143,564. The repurchase of common shares on the open market has the
effect of reducing the number of outstanding common shares.
Extension of Class A Warrants
In December 2000, the Company's Board of Directors authorized the extension
of the Company's Class A Warrants for an additional two year period. The Class A
Warrants originally provided the holder with the right to purchase one share of
the Company's Common Stock at an exercise price of $3.00 per share until
February 17, 2001. With the two year extension, holders of Class A Warrants now
have the right to purchase one share of Common Stock at an exercise price of
$3.00 per share until February 17, 2003.
5
Competition
FMSC encounters intense competition in all aspects of its business and
competes directly with many other securities firms for clients, as well as
registered representatives. A significant number of such competitors offer their
customers a broader range of financial services and have substantially greater
resources. Retail firms such as Merrill Lynch Pierce Fenner & Smith
Incorporated, Salomon Smith Barney, Inc. and Morgan Stanley/Dean Witter dominate
the industry; however, the Company also competes with numerous regional and
local firms. FMSC also competes for experienced brokers with other firms
offering an independent affiliate program such as National Securities Corp.,
Raymond James Financial Services, Inc. and Linsco/Private Ledger Corp.
In addition, a number of firms offer discount brokerage services to
individual retail customers and generally effect transactions at substantially
lower commission rates on an "execution only" basis, without offering other
services such as investment recommendations and research. Moreover, there is
substantial commission discounting by full-service broker-dealers competing for
institutional and individual brokerage business. In 1997 the Company entered the
discount brokerage arena through its Century Discount Investments division.
Additionally, the emergence of online trading has further intensified the
competition for brokerage customers. The continued expansion of discount
brokerage firms and online trading could adversely affect the Company's retail
business.
Other financial institutions, notably commercial and savings banks offer
customers some of the same services and products presently provided by
securities firms. In addition, certain large corporations have entered the
securities industry by acquiring securities firms. While it is not possible to
predict the type and extent of competitive services that banks and other
institutions ultimately may offer to customers, FMSC may be adversely affected
to the extent those services are offered on a large-scale basis.
FMSC competes through its advertising and recruiting programs for
registered representatives interested in joining its affiliate program. FMSC
often offers incentives to qualified registered representatives to join the
Company. These incentives can include cash loans, both forgivable based on
duration of association and/or production levels, as well as non-forgivable,
incentive stock options and a higher payout. Through its clearing relationship,
FMSC has implemented on-line information systems to service its affiliates and
to attract new brokers. The systems will enable brokers at any office to
instantly access customer accounts, determine cash positions, send and receive
electronic mail, and receive research reports and compliance memoranda via the
firm's intranet component of its newly redesigned website.
Government Regulation
The securities industry in the United States is subject to extensive
regulation under various federal and state laws and regulations. The SEC is the
federal agency charged with the administration of most of the federal securities
laws. Much of the regulation of the securities industry, however, has been
assigned to various self-regulatory organizations ("SROs"), principally the
NASDR, and in the case of New York Stock Exchange, Inc. ("NYSE") member firms,
the NYSE. The SROs, among other things, promulgate regulations and provide
oversight in areas of (i) sales practices, (ii) trade practices among
broker-dealers, (iii) capital requirements, (iv) record keeping and (v) conduct
of employees and affiliates of member organizations. In addition to promulgating
regulations and providing oversight, the Commission and the SROs have the
authority to conduct administrative proceedings which can result in the censure,
fine, suspension or expulsion of a broker-dealer, its officers or employees.
Furthermore, new legislation, changes in the rules and regulations promulgated
by the Commission and SROs, or changes in the interpretation or enforcement of
existing laws and rules often directly affect the operation and profitability of
broker-dealers. The stated purpose of much of the regulation of broker-dealers
is the protection of customers and the securities markets rather than the
protection of creditors and shareholders of broker-dealers.
6
Employees
The Company currently has approximately 570 registered representatives of
which 490 are associated with affiliate offices. In addition, the Company
employs 105 support personnel in the areas of operations, compliance,
accounting, and administration. FMFC believes its relationship with its
employees is satisfactory.
Fidelity Bond
As required by the NASDR and certain other authorities, FMSC carries a
fidelity bond covering loss or theft of securities, as well as embezzlement and
forgery. The bond provides total coverage of $5,000,000 (with a $10,000
deductible provision per incident). In addition, the accounts of its customers
are protected by the Securities Investor Protection Corporation ("SIPC") for up
to $500,000 for each customer, subject to a limitation of $100,000 for claims
for cash balances, with an additional $99,000,000 of protection provided by a
private insurance company for the benefit of each customer. SIPC is funded
through assessments on registered broker-dealers. SIPC charges a flat annual fee
of $150.
Securities Broker/Dealer Professional Liability Insurance
FMSC carries a securities Broker/Dealer professional liability insurance
policy (the "Policy") underwritten by National Union First Insurance Company of
Pittsburgh, PA, a subsidiary of American International Companies. The Policy
provides coverage for any negligent act, error or omission by an insured
individual acting on behalf of the insured Broker/Dealer in providing securities
trading, investment management services, the giving of financial investment
advise and the purchase and/or sale of securities. The Policy excludes from
coverage certain types of business activity, including but not limited to,
claims involving the sale of penny stocks and limited partnerships, accounts
handled on a discretionary basis and deliberately fraudulent and/or criminal
acts. The Policy term is from January 31, 2001 to January 31, 2003, with a $1
Million limit of liability for each covered event and a $5 Million aggregate
liability limit. The Company is responsible for a $50,000 deductible payment per
claim, of which $10,000 is offset to the registered representative involved in
the claim. Our agent has advised us that the market for this type of insurance
coverage is contracting. We therefore have no assurance that the Policy will be
renewed when it expires next year, or that acceptable replacement coverage can
be obtained at an affordable price. It is therefore possible that after the
termination of this Policy period, that the Company may not have this type of
insurance protection which may adversely impact the financial condition of the
Company in the event of material claims in the future which may not be covered
by existing polices.
Executive and Organization Liability Insurance Policy
FMFC carries an executive and organization liability insurance policy (also
known as Directors and Officers liability insurance), which covers the Company's
executive officers, directors and counsel against any claims for monetary
damages arising from the covered individuals actual or alleged breach of duty,
neglect, error, misstatement, misleading statement or omission when acting in
the capacity of his/her position as an executive officer, director and/or
counsel on behalf of the Company. Policy exclusions include, but are not limited
to, claims made against covered individuals attributable to the committing of
any deliberate criminal or fraudulent acts, illegal or improper payments, and
others. The policy, underwritten by National Union First Insurance Company of
Pittsburgh, PA, a subsidiary of American International Companies, provides for
coverage in the amount of $3 Million with a deductible of $250,000 for
securities claims and $150,000 for all other claims, during the policy period
which runs from March 30, 2001 to March 30, 2002. The Company has excess
coverage for an additional $ 2 Million through Lloyd's of London that
supplements the primary policy. In March 2002 the Company purchased renewal
insurance through the Greenwich Insurance Company to take effect following the
conclusion of the current policy period.
7
Additional Considerations
The Company's business is inherently risky and it has suffered losses
For the years ended December 31, 2001, 2000 and 1999, the Company reported
revenues of $51,220,000, $59,330,000 and $57,585,000, respectively. It suffered
net losses of $5,208,000 and $689,000 for the fiscal years ended December 31,
2001 and 2000, respectively. The Company reported net income of $2,283,000 for
the year ended December 31, 1999. The Company may incur further losses in the
future, and such losses would necessarily affect the nature, scope and level of
the Company's future operations. The results of operations to date are not
necessarily indicative of the results of future operations. The securities
business, by its very nature, is subject to various risks and contingencies,
many of which are beyond the ability of the Company's management to control.
These contingencies include economic conditions generally and in particular
those affecting securities markets, interest rates, discretionary income
available for investment; losses which may be incurred from underwriting and
trading activities; customer inability to meet commitments, such as margin
obligations; customer fraud; and employee misconduct and errors. Further, the
nature and extent of underwriting, trading and market making activities, and
hence the volume and scope of the Company's business is directly affected by its
available net capital.
Fluctuations in securities volume and prices increase the potential for
future losses
The Company and the securities industry in general, are directly affected
by national and international economic and political conditions, broad trends in
business and finance, the level and volatility of interest rates, changes in and
uncertainty regarding tax laws and substantial fluctuations in the volume and
price levels of securities transactions. The Company and the securities industry
in general, are subject to other risks, including risks of loss from the
underwriting of securities, counter party (a party to which we have credit or
performance exposure) failures to meet commitments, customer fraud, employee
errors or misconduct and litigation. In addition, price fluctuations may cause
losses on securities positions. As the Company expands its investment banking
activities and more frequently serve as manager or co-manager of public
offerings of securities, it can expect to make increased commitments of capital
to market-making activities in securities of those issuers. The expected
additional concentration of capital in the securities of those issuers held in
inventory will increase the risk of loss from reductions in the market price.
Low trading volume or declining prices generally result in reduced revenues.
Under these conditions, profitability is adversely affected since many costs,
other than commission compensation and bonuses, are fixed. Heavy trading volume
has caused serious operating problems, including delays in clearing and
processing, for many securities firms in the past and may do so in the future.
Principal and brokerage transactions and lending activities expose the Company
to losses
The Company's trading, market making and underwriting activities involve
the purchase, sale or short sale of securities as a principal and, accordingly,
involve the risk of changes in the market prices of those securities and the
risk of a decrease in the liquidity of markets which would limit the Company's
ability to resell securities purchased or to repurchase securities sold in
principal transactions. FMSC's brokerage activities and principal transactions
are subject to credit risks. For example, a customer may not respond to a margin
call, and since the securities being held as collateral have diminished in
value, there is a risk that the Company may not recover the funds loaned to the
customer.
8
FMSC must comply with Net Capital Requirements
FMSC's business, like that of other securities firms, is capital intensive.
The SEC and the NASDR have stringent provisions with respect to net capital
requirements applicable to the operation of securities firms. A significant
operating loss or any charge against net capital could adversely affect the
Company's ability to significantly expand or, depending upon the magnitude of
the loss or charge, to maintain our present level of business.
There is a limited public market for the Company's securities
The Company's common stock and warrants are traded in the over-the-counter
market and reported by the National Daily Quotation Service published by the
National Quotation Bureau, Inc and the Electronic Bulletin board maintained by
the NASDR. Although the Company may apply for inclusion of its common stock in
the Nasdaq Smallcap Market and/or on the American Stock Exchange, it does not
currently satisfy the minimum listing requirements. Accordingly, there can be no
assurance that the Company will be successful in obtaining listing on Nasdaq or
on the Amex, or if obtained, that it will be able to maintain the Nasdaq or Amex
listing. The Broker-Dealer subsidiary faces limitations on trading and
market-making activities in the Company's securities
Due to regulatory positions and requirements of both the SEC and the NASDR
relating to the circumstances and extent to which a registered broker-dealer and
NASDR member may engage in market-making transactions in the securities of its
parent company, FMSC does not engage in trading or market-making activities
relating to the Company's common stock, units or warrants where FMSC would
speculate in, purchase or sell the Company's securities for its own account. The
purpose and effect of such limitation restricts FMSC from being a factor in the
determination of the market or price of the Company's securities. FMSC does,
however, execute transactions for its customers on an "agency basis" where it
does not acquire the Company's securities for its own trading account. It will,
however, earn usual and customary brokerage commissions in connection with the
execution of such brokerage transactions. If, under current or future
regulations of both the SEC and NASDR, FMSC is permitted to participate as a
market-maker, it may do so on the basis of showing a bid and offer for the
Company's securities at specified prices representing customer interest.
The Company has limited the liability of our directors
The Company has amended its certificate of incorporation to include
provisions eliminating the personal liability of its directors, except for
breach of a director's duty of loyalty to the company or to its shareholders,
acts or omissions not in good faith or which involve intentional misconduct or a
knowing violation of the law, and in respect of any transaction in which a
director receives an improper personal benefit. These provisions pertain only to
breaches of duty by directors as such, and not in any other corporate capacity,
e.g., as an officer. As a result of the inclusion of such provisions, neither
the company nor its shareholders may be able to recover monetary damages against
directors for actions taken by them which are ultimately found to have
constituted negligence or gross negligence, or which are ultimately found to
have been in violation of their fiduciary duties, although it may be possible to
obtain injunctive or other equitable relief with respect to such actions. If
equitable remedies are found not to be available to shareholders in any
particular case, shareholders may not have an effective remedy against the
challenged conduct.
The Company believes that, based upon recent developments in the market for
directors' and officers' liability insurance, such provisions are necessary to
attract and retain qualified individuals to serve as directors. In addition,
such provisions will allow directors to perform their duties in good faith
without concern for the application of monetary liability on a retroactive basis
in the event that a court determines their conduct to have been negligent or
grossly negligent. On the other hand, such provisions significantly limit the
potential remedies available to the company or a shareholder, and it is possible
that the protection afforded by such provisions may reduce the level of
diligence or care demonstrated by such directors. The Company's Certificate of
Incorporation and By-Laws contain provisions which may have an anti-takeover
effect
9
The Company's amended and restated certificate of incorporation and by-laws
contain provisions which may discourage certain transactions which involve an
actual or threatened change in control of the company. These provisions include
a classified or staggered board of directors. As permitted by the New Jersey
Corporation Law, the certificate of incorporation provides that a director or
officer of our company will not be personally liable to the company or its
stockholders for monetary damages for breach of the fiduciary duty of care as a
director, except under certain circumstances including a breach of the
director's duty of loyalty to the company or our stockholders or any transaction
from which the director derived an improper personal benefit. The provisions
referred to above may make the company a less attractive acquisition candidate.
They may also discourage or impede offers to acquire the business not approved
by the board of directors, including offers for some or all of the shares of any
class or series of capital stock at substantial premiums above the then current
market value of such shares.
Item 2. Properties
Offices and Facilities
The Corporate Headquarters
The Company maintains its corporate headquarters and executive offices at
Parkway 109 Office Center, 328 Newman Springs Road, Red Bank, New Jersey. In
March 1997, the Company entered into a seven-year lease (the "Master Lease"),
commencing February 1, 1998 for 22,762 square feet of gross rentable space. In
March 1998, the Company signed a First Amendment to the Master Lease
incorporating all of the other rented space in the Red Bank facility into the
March 1997 Master Lease. The Company pays as additional rent, a proportional
share of any increases in real estate taxes above the amount paid during the
2001 calendar year, insurance premiums relating to the premises, and all utility
charges relating to the use of the premises. The First Amendment to the Lease
covers an aggregate of 32,442 gross rentable square feet at a monthly rental
payment of $63,685, which includes all of the additional rent items, through
January 2005. The Master Lease and First Amendment also contain a six-year
option to renew providing for a base rental payment of approximately $65,000 per
month.
Company Leased Branch Offices
Commencing in June 1996 the Company leased 3,150 square feet of office
space in Paramus, New Jersey. Initially this office housed the Company's
insurance subsidiary, Montauk Insurance Service, Inc. In September 1997 the
insurance division relocated from Paramus to the Company's corporate offices in
Red Bank, New Jersey, and the Paramus office became the new home of Century
Discount Investments, the Company's discount brokerage division. In February
2000, the Company extended the lease term for an additional three years at a
monthly base rent of $6,890. In September 2001 Century Discount was relocated to
the Company's corporate offices in Red Bank, New Jersey, and the Paramus office
was sub-let to one of the Company's affiliates at the monthly rent of $4,500 for
the balance of the lease term. The Company pays the balance of the monthly rent
for this office.
In December 1999 FMSC entered into a 3-year lease commencing December 31,
1999 for 3,254 square feet of gross rentable area in the Vantage Ponte Building,
Glen Allen, Virginia for offices for its former Montauk Affinity Marketing Corp.
and for an affiliate retail brokerage office. The base rent for the premises is
$4,474 per month and in addition to the base rent, the company is responsible
for additional rent escalators comprised of an operating expense pass-through of
approximately 5% annually. During October 2000, the company terminated its
affiliation with Montauk Affinity Marketing Corp. and the lease premises became
entirely used by an affiliate for retail brokerage. The Company recoups a
portion of the rental payment from a percentage of the affiliates' monthly
commissions.
In March 2001, the Company entered into a lease assignment and assumption
agreement for a 3-year lease for 3,272 gross rentable square feet for a branch
office in Boca Raton, Florida. The rent for the premises is $7,433 per month,
which includes in the base rate common area, maintenance charges, and taxes. The
affiliated registered representatives who utilize this office contribute towards
the office expenses.
10
In June 2001 the Company entered into a sub-lease agreement for 4,269
square feet of office space on Wall Street in New York City that is utilized by
registered representatives. The sub-lease term runs until January 31, 2005 with
a monthly rent payment of $16,009.
In January 2002 the Company entered into a sub-lease agreement for 4,520
square feet of office space in Midtown Manhattan which is utilized by
institutional and retail sales representatives, as well as a new institutional
research group. The sub-lease term runs until September 29, 2006 and provides
for a monthly rent payment of $18,830 until January 31, 2004 and thereafter
increases to $19,963 for the balance of the sub-lease term.
Item 3. Legal Proceedings
Many aspects of the Company's business involve substantial risks of
liability. In recent years, there has been an increasing incidence of litigation
and arbitration involving the securities industry.
FMSC is a respondent in a customer arbitration filed in 2001 with the NASDR
department of arbitration that seeks rescissionary damages of approximately $9.5
million including statutory interest, plus punitive damages. The claimant
alleges violations of various provisions of the federal and state securities
laws. FMSC believes it has meritorious defenses to these claims and is
vigorously defending against the action. FMSC is also a respondent in several
claims arising from customer purchases of high yield corporate bonds which
declined in market value after the purchases were made, and which include claims
for alleged unsuitable recommendations and/or improper use of margin. The
Company intends to vigorously defend these actions.
FMSC is also a respondent or co-respondent in various other legal
proceedings which it believes are incidental to its securities business. FMSC is
contesting these claims and believes that there are meritorious defenses in each
case.
In view of the inherent difficulty of predicting the outcome of litigation,
management is unable to derive a meaningful estimate of the amount or range of
possible loss that may arise out of pending legal proceedings in any particular
quarterly or annual period, or in the aggregate. However, it is possible that
the ultimate outcome of these matters could have a material adverse impact on
the Company's financial condition, results of operations, and cash flows.
Therefore, as of December 31, 2001, the Company has established a loss provision
in the accompanying financial statements for any liability that may result from
these contingencies.
Item 4. Submission of Matters on a Vote of Security Holders
Not Applicable.
11
PART II
Item 5. Market of and Dividends on the Company's Common Equity and
Related Stockholder Matters
A. Principal Market
The Company's Common Stock is traded in the over-the-counter market.
Trading in the Company's Common Stock is reported on the NASDR Bulletin Board
system and in the pink sheets published by Pink Sheets LLC. The Company believes
that there is an established public trading market for the Company's Common
Stock based on the volume of trading in the Company's Common Stock and the
existence of market makers who regularly publish quotations for the Company's
Common Stock. The Company's Class A, Class B and Class C Warrants commenced
trading in the over-the-counter market upon their issuance in March 1998.
B. Market Information
The Company's Common Stock commenced trading in the over-the-counter market
in 1987. On April 12, 2002, the Company's common stock had a high and low bid
price of $.22 and $.18, respectively.
The following is the range of high and low bid prices for such securities
for the periods indicated below:
Common Stock
Fiscal Year 2001 High Bid Low Bid
1st Quarter $ .85 $ .60
2nd Quarter .64 .45
3rd Quarter .60 .45
4th Quarter .44 .45
Fiscal Year 2000 High Bid Low Bid
1st Quarter $ 1.97 $ 1.13
2nd Quarter 1.75 1.25
3rd Quarter 1.56 1.00
4th Quarter 1.22 0.60
Fiscal Year 1999 High Bid Low Bid
1st Quarter $ 3.75 $ 1.4375
2nd Quarter 3.00 1.5938
3rd Quarter 2.7188 1.5313
4th Quarter 1.9375 1.1250
C. Number of Record Holders.
The approximate number of record holders of the Company's common stock as
of April 15, 2002 was 478. Such number of record holders was determined from the
Company's stockholder records, and does not include beneficial owners of the
Company's common stock whose shares are held in the names of various security
holders, dealers and clearing agencies. The Company believes there are in excess
of 2,700 beneficial holders of the Company's common stock.
12
D. Dividend Policy
We have not paid any dividends upon our Common Stock since our inception.
We do not expect to pay any dividends upon our Common Stock in the foreseeable
future and plan to retain earnings, if any, to finance the development and
expansion of our business.
E. Sales of Unregistered Securities
In 1999, the Company completed a private offering of Series A Convertible
Preferred Stock in connection with the settlement with holders of leases of
Global Financial Corp. Under the terms of the offering, each Global lease
investor who participated in the offering received one share of Preferred Stock
in exchange for every $5 of lease investment value that the investor was
entitled to receive from Global after certain adjustments. Each leaseholder was
required to assign their interest in all lease payments to which they were
entitled. Each share of the Preferred Stock is convertible into two shares of
the Company's Common Stock and pays a quarterly dividend of $.075 per Preferred
Share. Pursuant to the offering, the Company issued an aggregate of 349,511
shares of Series A Preferred Stock. The offering was exempt from registration
pursuant to Sections 4(2) and 4(6) of the Securities Act of 1933, as amended,
and Regulation D, promulgated thereunder. In 1999, the Company also issued an
aggregate of $690,526 principal amount of convertible promissory notes and
warrants to purchase 25,000 shares of its Common Stock, exercisable at $1.75 per
share, to certain investors holding Global leases. The convertible notes issued
by the Company are payable in thirty-six monthly non-interest bearing
installments of $16,404, plus balloon payments of $112,000, including interest
calculated on the basis of 8% of the balloon amount beginning in month nineteen
of the note term. For more information see the discussion provided in "Liquidity
and Capital Resources."
13
Item 6. Selected Financial Data
Year ended December 31,
2001 2000 1999 1998 1997
---- ---- ---- ---- ----
Operating results:
Revenues:
Commissions $37,807,870 $46,529,771 $40,516,625 $30,741,404 $ 27,018,244
Principal transactions 8,021,887 7,131,079 14,000,680 8,795,599 7,257,576
Investment banking 1,483,210 2,416,711 439,065 767,312 1,433,100
Insurance recovery -- -- -- 650,000 --
Interest and other income 3,907,448 3,252,325 2,628,246 1,572,063 1,383,713
--------- --------- --------- --------- ---------
Total revenues $51,220,415 $59,329,886 $57,584,616 $41,876,378 $ 37,742,633
---------- ---------- ---------- ---------- ----------
Expenses:
Commissions, employee
compensation and
benefits 42,356,207 46,800,661 42,137,968 31,766,060 26,785,205
Clearing and floor
brokerage 3,247,219 4,003,345 4,109,961 3,674,859 3,021,709
Communications and
occupancy 3,249,389 2,731,681 2,697,433 2,557,313 1,860,350
Legal matters and
related costs 2,415,374 1,181,115 1,395,008 2,377,336 1,452,001
Write-down of Note
Receivable - Global
Financial Corp. -- 239,183 100,000 1,775,000 --
Loss on Global lease
Settlements -- -- 600,416 3,524 --
Other operating expenses 5,076,806 4,862,158 3,545,308 2,958,450 2,093,670
Interest 174,632 160,230 166,104 131,215 84,695
---------- ---------- ---------- ---------- ----------
Total expenses 56,519,627 59,978,373 54,752,198 45,243,757 35,297,630
---------- ---------- ---------- ---------- ----------
Income (loss) before
income taxes (5,299,212) (648,487) 2,832,418 (3,367,379) 2,445,003
Provision for income taxes
(income tax benefit) (90,989) 6,721 549,140 (604,532) 968,178
---------- ---------- ---------- ---------- ----------
Income (loss) before
extraordinary loss $ (5,208,223) $ (655,208) $2,283,278 $(2,762,847) $ 1,476,825
Extraordinary loss -
extinguishment of debt,
net of tax -- 34,200 -- -- --
---------- ---------- ---------- ---------- ----------
Net income (loss) $ (5,208,223) $ (689,408) $ 2,283,278 $(2,762,847) $ 1,476,825
========== =========== ========== ========== ==========
Net income (loss)
available to
common stockholders $ (5,306,976) $ ( 792,136) $ 2,215,528 $(2,762,847) $ 1,476,825
========== =========== ========== ========== ==========
14
Item 6. Selected Financial Data
(continued)
Year ended December 31,
2001 2000 1999 1998 1997
---- ---- ---- ---- ----
Per share of
Common Stock:
Basic $ (.61) $ (.08) $ .22 $ (.28) $ .17
Diluted $ (.61) $ (.08) $ .21 $ (.28) $ .14
Weighted average
common shares
outstanding
- Basic 8,704,355 9,450,055 9,878,129 9,725,116 8,788,734
========= ========= ========= ========= =========
Weighted average
common and common
equivalent shares
outstanding
- Diluted 8,704,355 9,450,055 11,262,708 9,725,116 10,351,032
========= ========= ========== ========= ==========
Financial condition:
Total assets $ 14,227,562 $ 16,913,063 $17,059,184 $11,543,734 $11,971,934
Total liabilities $ 11,934,884 $ 9,203,672 $ 7,429,046 $ 5,320,107 $ 4,732,467
Common Stock issued
with guaranteed
selling price $ 6,500 $ 6,500 $ 36,500 $ 36,500 $ 346,500
Stockholders'
equity $ 2,286,181 $ 7,702,891 $ 9,593,638 $ 6,187,127 $ 6,892,967
15
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Results of Operations-Three Years Ended December 31, 2001
Fiscal year 2001 proved to be a difficult year for the Company and the
securities industry in general. The decline in investor confidence that began in
2000 continued through 2001 as corporate earnings continued to fall short of
Wall Street expectations, unemployment continued to rise and the global economy
remained sluggish. As a result, the Company's results reflect the declining
trading volume in the U.S. financial markets and the generally bearish investor
sentiment. Total revenues for the twelve months ended December 31, 2001
decreased $8,025,000 or 13.5% to $51,220,000 as compared to the twelve months
ended December 31, 2000.
Year Ended December 31,
----------------------------------------------------------------------
2001 2000 1999
----------------------------------------------------------------------
------------- ------------ ------------- ------------- -------------
Revenues: (000's) Change (000's) Change (000's)
------------- ------------ ------------- ------------- -------------
Commissions
37,808 (19) 46,530 15 40,517
Principal Transactions
8,022 12 7,131 (49) 14,001
Investment Banking
1,483 (39) 2,417 451 439
Interest/Other
3,907 20 3,252 24 2,628
------------- ------------- -------------
Total Revenues
51,220 (14) 59,330 3 57,585
============= ============= =============
The Company's primary source of revenue is derived from commissions
generated from listed and over-the counter securities and other agency
transactions. The decline in commissions from 2000 to 2001 resulted from an
$11,063,000 or 29% decrease in revenues related to general securities and mutual
fund transactions that were partially offset by a $3,253,000 or 55% increase in
insurance products and management fee income. Insurance revenues increased in
2001 primarily due to annuity sales of one registered representative, which is
not expected to continue.
Comparing 2000 to 1999, the revenue growth resulted from increased
commissions from general securities transactions and insurance related products,
particularly from the sale of variable annuities. The overall increase in
commission revenue was due primarily to the addition of new affiliated
representatives, a direct result of the increase in, and maturation of, our
recruiting and marketing efforts. The Company also benefited from the
exceptional performance in the equities markets of the first quarter of 2000,
during which we earned 41% of our total revenues for the year.
16
Gains from proprietary trading and market-making activities increased 12%,
or $891,000, over the 2000 period. Decreased revenues from principal sales of
corporate bonds offset unrealized gains in the Company's proprietary accounts.
During 2001, the Company reduced and consolidated its market-making and
proprietary accounts, thereby reducing personnel costs and market data services.
The Company also reduced its inventory by almost $2.8 Million during 2000, thus
significantly reducing the Company's regulatory capital charges and its exposure
to market volatility. The Company has taken steps to reduce its risk exposure in
this area, which has improved the management of risk during the 2001 period. The
50% decrease in revenues from $14 million in 1999 to $7.1 million in 2000 was
due to investment and trading losses primarily in Nasdaq and other securities
held in the firm's proprietary accounts.
Investment banking revenues for 2001 decreased $934,000 to $1,483,000, down
from $2,417,000 in 2000. Revenues for 1999 were $439,000. For the year 2000,
investment banking revenues included commissions and fees from an initial public
offering completed in the first quarter of 2000. The decline in revenues in 2001
reflects the absence of new offerings coming to the market in which the Company
may participate. In an effort to mitigate this decline, the Company has enhanced
the corporate finance department by creating investment banking relationships
with corporations to act as a consultant in exchange for investment banking
fees. Although still in its development stage, the Company continues to support
this effort. Also included in this category are commissions earned from the sale
of registered offerings of collateralized medical receivables, which the Company
began selling during the second half of 2001.
Interest and other income increased $655,000 to $3,907,000 in 2001 from
$3,252,000 in 2000. In 1999 interest and other income was $1,572,000. The
increase in interest revenue is consistent with large cash and money fund
balances being maintained by customers in reaction to the uncertainty of the
market. This, combined with the more favorable interest sharing arrangement with
the Company's clearing firm (see below for a more detailed discussion of the
Fiserv agreement), contributed to the overall increase in this category. Also
reflected in this category is the amortization of deferred revenue resulting
from the financial agreement with the clearing firm.
Year Ended December 31,
----------------------------------------------------------------
2001 2000 1999
----------------------------------------------------------------
----------- ----------- ------------ ------------ ------------
(000's) % Change (000's) % Change (000's)
----------- ----------- ------------ ------------ ------------
Expenses:
Commissions, employee
compensation and benefits
42,356 (9) 46,801 11 42,138
Clearing and floor brokerage
3,247 (19) 4,003 (3) 4,110
Communications and occupancy
3,249 19 2,732 1 2,697
Legal matters and related costs
2,416 105 1,181 (15) 1,395
Write-down on Note receivable-
Global Financial Corp. ---
(100) 239 139 100
Loss on lease settlements --- ---
(100) (100) 600
Other operating expenses
5,077 4 4,862 37 3,546
Interest
175 9 160 (4) 166
----------- ------------ ------------
Total expenses
56,520 (6) 59,978 10 54,752
=========== ============ ============
17
Total expenses decreased by $3,458,000 or 6% to $56,520,000 for 2001, down
from $59,978,000 in 2000. Commission expense has a direct relationship to
commission revenue and subsequently represented the largest decrease in
expenses. Although commissions as a percentage of total revenues remained
constant, averaging 66% in both 2000 and 2001, the dollar decrease was
$5,231,000 or 13%. Commissions in 2000 increased approximately $4,000,000 over
1999 due to the increase in commission revenue as well as an increase in
commission payout percentages. For 2001, the Company paid salaries and benefits
of $8,267,000 (16% of revenues) for management, operations and clerical
personnel, as compared to $7,512,000 in 2000 (13% of revenues) and $6,636,000
(12% of revenues) in 1999. During the second half of 2000, the Company hired
additional management and support staff for various departments, primarily in
sales, recruiting and compliance as well as adding employees to its mutual fund
and insurance departments, and on the equity order desk. In 2001, the Company
implemented certain cost cutting measures in response to the decrease in
revenues and trading activity. These measures included a reduction in executive
officers' salaries and personnel layoffs in the trading and operations
departments. The full extent of these cost reductions will not be realized until
the second quarter of 2002. The Company employed approximately 106 salaried
employees as of December 31, 2001, 120 salaried employees as of December 31,
2000, and 78 salaried employees as of December 31, 1999.
Clearing costs, which are associated with the level of transaction volume
and type, decreased $756,000 to $3,247,000 in 2001 from $4,003,000 in 2000,
which was relatively unchanged from the 1999 expense of $4,110,000. As a percent
of revenues, clearing costs have remained fairly constant at 6% in 2001, 7% in
2000 and 7% in 1999. The percentage of clearing costs to gross revenues can, and
does, fluctuate depending upon the product mix. Certain transactions, such as
options and bonds, have a higher execution and clearing cost than others.
Communications and occupancy costs increased 19% or $517,000 to $3,249,000
in 2001 from $2,732,000 in 2000. As a percent of revenue, communications and
occupancy increased from 5% to 6%. During the third quarter of 2001, the Company
entered into two new leases for branch offices in Boca Raton, Florida and New
York City. In fourth quarter 2001, the Company sublet its office space in
Paramus, New Jersey, which formerly housed the operations of Century Discount
Investments ("CDI"). CDI was relocated to the Red Bank headquarters. As a result
of opening these new offices and general rent increases on current office space,
rent increased by approximately $258,000. Data processing costs also increased
by $102,000 over 2000 due to the addition of services to support these new
corporate offices. Communications and occupancy costs were relatively unchanged
from 1999 to 2000, increasing only $35,000.
Other operating costs increased $215,000 to $5,077,000 in 2001 from
$4,862,000 in 2000. The increase is due primarily to increased customer and
broker bad debts, as well as a reserve for payments previously made to a vendor
for the development of applications software. The Company is seeking restitution
from this vendor for breach of contract. From 1999 to 2000 other operating
expenses increased from $3,546,000 to $4,861,000, respectively, an increase of
37%. The increase is due primarily to the write-off of the balance of the
receivable from Global Financial Corp. and various broker loan receivables;
costs associated with the conversion to the new clearing firm, and increased
sales and marketing initiatives.
Legal fees and litigation settlements increased $1,235,000 to $2,415,000 in
2001 from $1,181,000 in 2000, an increase of 104%. The increase is due to a
larger volume of cases, significant settlement costs, and the establishment of a
$945,000 reserve for future litigation costs. The Company is a respondent in a
customer arbitration seeking rescissionary damages of approximately $9.5 million
including statutory interest, plus punitive damages. The Company is currently a
respondent in various other customer arbitrations and lawsuits arising in the
normal course of its securities business. In view of the inherent difficulty of
predicting the outcome of litigation, management is unable to derive a
meaningful estimate of the amount or range of possible loss that may arise out
of pending legal proceedings in any particular year or in the aggregate.
However, it is possible that the ultimate outcome of these matters could have a
material adverse impact on the Company's financial condition, results of
operations, and cash flows. Legal matters and related costs decreased $214,000
from $1,395,000 in 1999 to $1,181,000 in 2000.
In December 1999, the Company accepted a $500,000 cash payment in
settlement of an arbitration claim against another securities firm. The Company
commenced the arbitration in an effort to recover customer settlements that it
had previously paid on claims arising from the activities of a former affiliate
office. The settlement was received in February 2000.
18
The Company's effective tax rate in 2001 was higher than expected because
of an increase of $1,877,000 in the deferred tax valuation allowance. Management
remains uncertain as to the ability of the Company to realize most of its
deferred tax benefits. The Company has filed for federal and state tax refunds
of approximately $1,076,000. The rate in 2000 was higher than expected because
of the effect of non-deductible expenses and an increase in the tax valuation
allowance during the year. Management increased the tax valuation allowance in
2000 to offset tax benefits arising from state tax loss carryforwards and
stock-based compensation because their realization is uncertain. The rate in
1999 was lower than expected because income tax expense was offset by the
reversal of a valuation allowance established against deferred tax assets
(principally reserves and net operating losses) in 1998.
For the year 2001, the Company reported a net loss available to common
stockholders of $5,307,000, or $.61 per basic and diluted share, as compared to
the net loss available to common stockholders reported in 2000 of $792,000, or
$.08 per basic and diluted share. For 1999, the Company reported net income
available to common stockholders of $2,216,000, or $.22 per basic share and $.21
per diluted share.
Liquidity and Capital Resources
The Company maintains a highly liquid balance sheet with approximately 50%
of the Company's assets consisting of cash and cash equivalents, securities
owned, and receivables from the Company's clearing firm and other
broker-dealers. As of December 31, 2001, this balance was $7,138,000. The
balances in the Company's cash, inventory and clearing firm accounts can and do
fluctuate significantly from day to day, depending on general economic and
market conditions, volume of activity, and investment opportunities. The Company
monitors these accounts on a daily basis in order to ensure compliance with
regulatory capital requirements and to preserve liquidity.
Net cash used in operating activities during 2001 was $1,408,000 primarily
as a result of the Company's net loss for 2001 of $5,208,000, adjusted by
non-cash charges including the reserve for software development cost of
$500,000, depreciation and amortization of $564,000, decreases in securities
held for trading and investment, and commissions payable and taxes payable of
$2,776,000, $2,009,000 and $869,000, respectively. Cash was also generated in
both 2001 and 2000 by advances received under the financial agreement with
Fiserv.
The Company received cash under the Fiserv agreement of $1,250,000 in 2001
and $4,000,000 in 2000. For financial reporting purposes, the Company will earn
the advance on a straight-line basis over the term of the clearing agreement.
Amortization can be accelerated based on performance. Advances are subject to
income taxes in the year of receipt. Fiserv has agreed to provide additional
advances of $1,250,000 in each of the next two years, provided the Company meets
certain performance and other criteria. Also impacting operating cash flows is
the increase in employee and broker receivables of $496,000. In an effort to
compete with other broker-dealers for registered representatives, FMSC has
increasingly made loans to brokers as an inducement to join the Company. Some of
these loans are forgivable if the registered representative remains licensed
with the Company for an agreed upon period of time, generally 1-2 years, and/or
meets specified productions goals. Other loans to registered representatives are
payable in installments, generally over periods from 1-2 years, with interest
rates ranging from 0% to 8% per annum. The balance of these loans at December
31, 2001 was $2,106,000.
Investing activities required cash of $318,000 in 2001. Additions to
capital expenditures and increased security deposits consumed $308,000 and
$237,000, respectively, while collections of notes and Global lease receivables
contributed $186,000. As of the first quarter 2002, all expected collections
from Global lease receivables have been received.
In 1999, the Company completed a private offering of Series A Convertible
Preferred Stock with the majority of the Global lease investors. Under the terms
of the offering, each Global lease investor who participated in the offering
received one share of Preferred Stock in exchange for every $5 of lease
investment value that the investor was entitled to receive from Global after
certain adjustments. Each leaseholder was required to assign their interest in
all lease payments to which they were entitled. Each share of the Preferred
Stock is convertible into two shares of the Company's Common Stock and pays a
quarterly dividend of $.075 per Preferred Share.
19
Financing activities used cash of $195,000 in 2001. A total of $606,000 of
proceeds was received from capital lease financing. This was offset by notes and
capital lease repayments of $559,000 and dividend payments to preferred
shareholders of $99,000. In addition, a total of $144,000 was used to repurchase
236,737 of the Company's outstanding shares pursuant to a stock repurchase
program.
At December 31, 2001, the Company's broker-dealer subsidiary had net
capital of $1,039,165 which was $726,396 in excess of its required net capital
of $ 312,769, and the ratio of aggregate indebtedness to net capital was 4.51 to
1.
In 1998, the Company issued convertible promissory notes in the aggregate
amount of $570,000 to a private investor and his affiliated entities in
connection with a Global lease settlement. The principal amount was originally
due in October 2003. In 2000, the Company redeemed the notes for 110% of the
note principal, and recorded an extraordinary loss of $57,000 before income
taxes from the early extinguishment.
In 1999, the Company issued additional convertible notes in the original
aggregate amount of $690,526 to several private investors in connection with a
Global lease settlement. The notes are payable in thirty-six monthly
non-interest bearing installments of $16,404, plus balloon payment of $112,000,
which include interest of $12,000 calculated on the basis of 8% of the balloon
amount beginning in month nineteen of the note term. The Company had recorded a
loan discount on the notes of $64,609, which is being amortized over the note
terms using the interest method. The notes are convertible into 245,263 shares
of the Company's common stock based on a conversion price of $2.00 per share.
Once the underlying shares are registered, the Company can request that the
noteholders convert their shares. Proceeds from the sale of the shares must be
applied towards the unpaid principal of the notes. Any excess proceeds or unsold
shares will be returned to the Company.
As of December 31, 2001, the Company had an aggregate of $50,000 of
subordinated notes outstanding with interest at 8% per annum. The final $50,000
payment was due and paid in January 2002.
Impact of Inflation
Management of the Company believes that the impact of inflation has an
effect upon the amount of capital generally available for investment purposes
and also may affect the attitude or willingness of investors to buy and sell
securities. The nature of the business of the Company's broker-dealer subsidiary
and the securities industry in general is directly affected by national and
international economic and political conditions, broad trends in business and
finance and volatility of interest rates, changes in and uncertainty regarding
tax laws, and substantial fluctuation in the volume and price levels of
securities transactions and the securities markets. To the extent inflation
results in higher interest rates and has other adverse effects on the securities
markets and the value of securities held in inventory, it may adversely affect
the Company's financial position and results of operations.
Factors Affecting "Forward Looking Statements"
From time to time, the Company may publish "forward-looking statements"
within the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities and Exchange Act of 1934, as amended, or make oral
statements that constitute forward-looking statements. These forward-looking
statements may relate to such matters as anticipated financial performance,
future revenues or earnings, business prospects, projected ventures, new
products, anticipated market performance, and similar matters. The Private
Securities Litigation Reform Act of 1995 provides a safe harbor for
forward-looking statements. These risks and uncertainties, many of which are
beyond the Company's control, include, but are not limited to: (I) transaction
volume in the securities markets, (ii) the volatility of the securities markets,
(iii) fluctuations in interest rates, (iv) changes in regulatory requirements
which could affect the cost of doing business, (v) fluctuations in currency
rates, (vi) general economic conditions, both domestic and international, (vii)
changes in the rate of inflation and related impact on securities markets,
(viii) competition from existing financial institutions and other 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 the
Company. The Company does not undertake any obligation to publicly update or
revise any forward-looking statements.
20
Effects of Recently Issued Accounting Pronouncement(s)
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("FAS 133"), "Accounting for
Derivative Instruments and Hedging Activities", which became effective for the
Company during the first quarter of 2001. FAS 133 requires the recognition of
all derivatives as either assets or liabilities in the Company's balance sheet
and measurement of those instruments at fair value. To date, the Company ahs not
entered into any derivative or hedging activities, and, as such, the adoption of
FAS 133, as amended, has not had a material effect on its consolidated financial
statements.
In June 2001, the Financial Accounting Standards Board finalized the FASB
Statements No. 141, Business Combinations ("FAS 141"), and No. 142, Goodwill and
Other Intangible Assets ("FAS 142"). FAS 141 requires the use of the purchase
method of accounting and prohibits the use of the pooling-of-interest method of
accounting for business combinations initiated after June 30, 2001. FAS 141 also
requires that the Company recognize acquired intangible assets apart from
goodwill if the acquired intangible assets meet certain criteria. FAS 141
applies to all business combinations initiated after June 30, 2001 and for
purchase business combinations completed on or after July 1, 2001. It also
requires, upon adoption of FAS 142, that the Company reclassifies, if necessary,
the carrying amounts of intangible assets and goodwill based on the criteria in
FAS 141.
FAS 142 requires, among other things, that companies no longer amortize
goodwill, but instead test goodwill for impairment at least annually. In
addition, FAS 142 requires that the Company identify reporting units for the
purposes of assessing potential future impairments of goodwill, reassess the
useful lives of other existing recognized intangible assets, and cease
amortization of intangible assets with an indefinite useful life. An intangible
asset with an indefinite useful life should be tested for impairment in
accordance with the guidance in FAS 142. FAS 142 is required to be applied in
fiscal years beginning after December 15, 2001 to all goodwill and other
intangible assets recognized at that date, regardless of when those assets were
initially recognized. FAS 142 requires the Company to complete a transitional
goodwill impairment test six months from the date of adoption. The adoption of
FAS 141 and 142 has not had a material impact on the Company's financial
statements.
In August 2001, the FASB issued FASB Statement No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets ("FAS 144"). The new guidance
resolves significant implementation issues related to FASB Statement No. 121,
Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed Of ("FAS 121"). FAS 144 supersedes FAS 121, but it retains its
fundamental provision. It also amends Account Research Bulletin No. 51,
Consolidated Financial Statements, to eliminate the exception to consolidate a
subsidiary for which control is likely to be temporary. FAS 144 retains the
requirement of FAS 121 to recognize an impairment loss only if the carrying
amount of a long-lived asset within the scope of FAS 144 is not recoverable from
its undiscounted cash flows and exceeds its fair value.
FAS 144 is effective for fiscal years beginning after December 15, 2001,
and interim periods within those fiscal years, with early application
encouraged. The Company adopted the provisions of FAS 144 with no impact on its
financial statements.
21
Market Risk
Certain of the Company's business activities expose it to market risk. This
market risk represents the potential for loss that may result from a change in
value of a financial instrument as a result of fluctuations in interest rates,
equity prices or changes in credit rating of issuers of debt securities. This
risk relates to financial instruments held by the company as investment and for
trading.
The Company's securities inventories are exposed to risk of loss in the
event of unfavorable price movements. The Company's securities inventories are
marked to market on a daily basis. The Company's market-making activities are
client-driven, with the objective of meeting clients' needs while earning a
positive spread. At December 31, 2001 and December 31, 2000, the balances of the
Company's equity securities positions owned and sold but not yet purchased were
approximately $1,199,102 and $245,000 and $3,975,000 and $386,000, respectively.
In the opinion of management, the potential exposure to market risk, trading
volatility and the liquidity of securities held in the firm's inventory
accounts, could potentially have a material effect on the Company's financial
position.
The Company's client activities involve the execution, settlement, and
financial of various transactions on behalf of its clients. Client activities
are transacted on either a cash or margin basis. The Company's client activities
may expose it to off-balance sheet credit risk. The Company may have to purchase
or sell financial instruments at the prevailing market price in the event of the
failure of a client to settle a trade on its original terms or in the event that
cash and securities in the client margin accounts are not sufficient to fully
cover the client losses. The Company seeks to control the risks associated with
client activities by requiring clients to maintain collateral in compliance with
various regulations and Company policies.
Item 8. Financial Statements
See Financial Statements attached hereto.
Item 9. Disagreements on Accounting and Financial Disclosure
Not Applicable.
22
PART III
Item 10. Directors and Executive Officers
The Directors and Executive Officers of the Company and its subsidiaries
are as follows:
Name Age Position
Herbert Kurinsky 70 Director, President and Chief Executive
Officer of FMFC and of FMSC and Registered
Options Principal of FMSC
William J. Kurinsky 41 Director, Vice President, Chief
Operating and Chief Financial Officer
And Secretary of FMFC and of FMSC and
Financial/Operations Principal of FMSC
Robert I. Rabinowitz, Esq. 44 General Counsel, FMFC, Chief
Administrative Officer, Vice President
And General Securities Principal of FMSC
Dave M. McCoy 40 Director of Retail Sales, FMSC
Norma Dopey 62 Director, Vice President of Operations, FMSC
Ward R. Jones, Jr. 71 Director
David I. Postman 61 Director
Barry D. Shapiro, C.P.A. 59 Director
The Company's Certificate of Incorporation provides for the classification
of the Board of Directors into three classes of Directors, each class as nearly
equal in number as possible but not less than one Director, each director to
serve for a three-year term, staggered by class. The Certificate of
Incorporation further provides that a Director or the entire Board of Directors
may be removed only for cause and only by the affirmative vote of the holders of
at least 70% of the combined voting power of the Company's voting stock, with
vacancies on the Board being filled only by a majority vote of the remaining
Directors then in office. "Cause" is defined as the willful failure of a
director to perform in any substantial respect such Director's duties to the
Corporation (other than any such failure resulting from incapacity due to
physical or mental illness), willful malfeasance by a Director in the
performance of his duties to the Corporation which is materially and
demonstrably injurious to the Corporation, the commission by a Director of an
act of fraud in the performance of his duties, the conviction of a Director for
a felony punishable by confinement for a period in excess of one year, or the
ineligibility of a Director for continuation in office under any applicable
rules, regulations or orders of any federal or state regulatory authority.
All officers serve at the discretion of the Board of Directors. Family
relationships exist among the following officers and directors: Mr. Herbert
Kurinsky is the uncle of Mr. William J. Kurinsky. Mr. Robert I. Rabinowitz is
the brother-in-law of Mr. William J. Kurinsky.
Herbert Kurinsky became a Director and the President of the Company on
November 16, 1987. Mr. Kurinsky is a co-founder of First Montauk Securities
Corp. and has been its President, one of its Directors and its Registered
Options Principal since September of 1986. From March 1984 to August 1986, Mr.
Kurinsky was the President of Homestead Securities, Inc., a New Jersey
broker/dealer. From April 1983 to March 1984, Mr. Kurinsky was a branch office
manager for Phillips, Appel & Waldon, a securities broker/dealer. From February
1982 to March 1983, Mr. Kurinsky was a branch office manager for Fittin,
Cunningham and Lauzon, a securities broker/dealer. From November 1977 to
February 1982, he was a branch office manager for Advest Inc., a securities
broker/dealer. Mr. Kurinsky received a B.S. degree in economics from the
University of Miami, Florida in 1954.
William J. Kurinsky became Vice President, a Director and Financial and
Operations Principal of the Company on November 16, 1987. He is a co-founder of
First Montauk Securities and has been one of its Vice Presidents, a Director and
its Financial/Operations Principal since September of 1986. Prior to that date,
Mr. Kurinsky was Treasurer, Chief Financial Officer and Vice President of
Operations of Homestead Securities, Inc., a securities broker/dealer. Mr.
Kurinsky received a B.S. from Rutgers University in 1984. He is the nephew of
Herbert Kurinsky.
23
Robert I. Rabinowitz, Esq. is General Counsel of the Company since 1987. He
concurrently served as General Counsel of First Montauk Securities from 1986
until 1998 when a new general counsel was named. Thereafter, he became the Chief
Administrative Officer of FMSC as well as a General Securities Principal. From
January 1986 until November 1986, he was an associate attorney for Brodsky,
Greenblatt & Renahan, a private practice law firm in Rockville, Maryland. Mr.
Rabinowitz is an attorney at law licensed to practice in New Jersey, Maryland
and the District of Columbia, and is a member of the Board of Arbitrators for
the National Association of Securities Dealers, Department of Arbitration. Mr.
Rabinowitz's wife is a niece of Mr. Herbert Kurinsky and a sister of Mr. William
Kurinsky.
Dave M. McCoy was director of retail sales since June 2000, until his
resignation in March 2002. Prior to that he was an affiliated registered
representative with First Montauk Securities Corp. in the Boca Raton, Florida
branch office since August 1992. From October 1991 through August 1992, Mr.
McCoy was a Manager at Chelsea Street Securities, and from October 1990 through
October 1991, he was a trader/manager in Biltmore Securities, both in Boca
Raton, FL. Mr. McCoy holds a General Securities Agent and Principal licenses.
Norma L. Doxey has been a Director of the Company since December 6, 1988.
Ms. Doxey has been a Vice President of Operations and a Registered
Representative with First Montauk Securities Corp. since September 1986. From
August September, 1986, she was operation's manager and a Registered
Representative with Homestead Securities, Inc. From July 1984 through August
1985 she held the same position with Marvest Securities.
Ward R. Jones, Jr. has been a director of the Company since June 1991. From
1955 through 1990, Mr. Jones was employed by Shearson Lehman Brothers as a
registered representative, eventually achieving the position of Vice President.
Mr. Jones is currently a registered representative of First Montauk Securities
Corp., but does not engage in any securities business.
David I. Portman has been a director of the Company since June 15, 1993.
From 1978 to the present, Mr. Portman served as the President of Triad Property
Management, Inc., a private corporation which builds, invests in and manages
real estate properties in the State of New Jersey. Mr. Portman was a Director of
Ultra Med, Inc. from 1986 to 1991, a high tech medical equipment manufacturer.
Mr. Portman also serves as a director and officer of Pacific Health
Laboratories, Inc., a position he has held since August 1995. In 1997, FMSC
underwrote an initial public offering of the common stock of Pacific Health
Laboratories, Inc., and is currently a market maker in the stock.
Barry D. Shapiro, C.P.A. has been a director of the Company since December
6, 2000. From October 2000 to the present, Mr. Shapiro is a shareholder of the
accounting firm, Withum, Smith + Brown in its Red Bank office. Mr. Shapiro was a
partner of Shapiro & Weisman C.P.A.'s P.A. from 1976 thru 1996 when he became a
partner of Rudolf, Cinnamon & Calafato, P.A. until joining Withum Smith + Brown.
Mr. Shapiro was previously employed with the Internal Revenue Service from 1965
thru 1971, where he was responsible for audit, review and conference functions.
Mr. Shapiro is a member of the New Jersey Society of Certified Public
Accountants, where he currently participates on the IRS Co-Op and State Tax
Committees. Mr. Shapiro is a past Trustee, Treasurer and Vice President of the
NJSCPA. He has been involved and is in many civic and community activities, as
well as charitable organizations, including the Monmouth County New Jersey
Chapter of the American Cancer Society and the Ronald McDonald House of Long
Branch, New Jersey. Mr. Shapiro received a B.S. in accounting from Rider
University in 1965.
Significant Employees
Paul L. Lieberman, Esq., 53, is general counsel for First Montauk
Securities Corp. since January 1998, and special counsel from June 1997. From
1990 to 1997, he was Senior Vice President and Associate General Counsel at
Tucker, Anthony, Inc. a securities broker/dealer. Prior to that, Mr. Lieberman
served as Vice President and Senior Attorney for Citicorp/Citibank as well as
the New York Stock Exchange and the Securities and Exchange Commission. Mr.
Lieberman is an attorney at law.
Mark D. Lowe, 43, has been President of Montauk Insurance Services, Inc.
since October 1998. From 1982 to 1998 Mr. Lowe was a Senior Consultant with
Congilose & Associates, a financial services firm specializing in insurance and
estate planning. Mr. Lowe became a Certified Financial Planner (CFP) in July
1991. Mr. Lowe attended Ocean County College in Toms River, NJ. Mr. Lowe is the
Treasurer of the Estate and Financial Planning Council of Central New Jersey.
Mindy A. Horowitz, C.P.A., 44, has been Vice President of Finance for First
Montauk Securities Corp. since September, 1995. Prior to that, Ms. Horowitz was
a tax partner with and held other positions at the accounting firm of Broza,
Block & Rubino from 1981 through 1995 when she joined First Montauk Securities
Corp. Ms. Horowitz is a Certified Public Accountant.
24
Certain Reports
No person who, during the fiscal year ended December 31, 2001, was a
Director, officer or beneficial owner of more than ten percent of the Company's
Common Stock (which is the only class of securities of the Company registered
under Section 12 of the Securities Exchange Act of 1934 (the "Act") (a
"Reporting Person") failed to file on a timely basis, reports required by
Section 16 of the Act during the most recent fiscal year or prior years. The
foregoing is based solely upon a review by the Company of Forms 3 and 4 during
the most recent fiscal year as furnished to the Company under Rule 16a-3(d)
under the Act, and Forms 5 and amendments thereto furnished to the Company with
respect to its most recent fiscal year, and any representation received by the
Company from any reporting person that no Form 5 is required.
Item 11. Executive Compensation
Summary of Cash and Certain Other Compensation
The following table provides certain information concerning all Plan and
Non-Plan (as defined in Item 402 (a)(ii) of Regulation S-K) compensation awarded
to, earned by, paid or accrued by the Company during the years ended December
31, 2001, 2000 and 1999 to each of the named executive officers of the Company.
SUMMARY COMPENSATION TABLE
Long Term
Annual Compensation Compensation
------------------- ------------
Securities
Underlying
Name & Principal Other Annual Options/ SARs
Position Year Salary Bonus Compensation Granted
-------- ---- ------ ----- ------------ -------
Herbert Kurinsky 2001 $233,140 $ - $ 2,000 (4) 200,000(1)
Chairman, Chief 2000 $256,217 $ 29,306 $ 2,000 (4) 125,000 (1)
Executive Officer(7) 1999 $232,925 $100,000 $ 925 (4) 0
William J. Kurinsky 2001 $233,140 $ - $ 1,000 (5) 200,000 (2)
Vice President, 2000 $256,217 $ - $ 2,000 (5) 125,000 (2)
Chief Operating and 1999 $232,925 $100,000 $ 1,925 (5) 0
Financial Officer
and Secretary (8)
Robert I. Rabinowitz 2001 $146,154 $ - $ 2,000 (6) 43,750 (3)
General Counsel, FMFC, 2000 $150,000 $24,234 $ 2,000 (6) 60,000 (3)
Chief Administrative 1999 $125,000 $25,000 $ 1,200 (6) 0
Officer, FMSC (9)
Dave McCoy,
Director of Retail Sales 2001 $179,436 $27,787 $ - 0
FMSC (10) 2000(11) $ 59,231 $50,000 $ 14,676 200,000 (12)
1999 $ N/A $N/A $ N/A 0
- ----------------------------
1) In 2001 The Compensation Committee of the Board of Directors (the
"Committee) authorized an option grant to Mr. Herbert Kurinsky to purchase
200,000 shares of Common Stock at an exercise price of $.75 per share for 5
years. In 2000, the Committee authorized an option grant to Mr. Herbert Kurinsky
to purchase 125,000 shares of Common Stock at an exercise price of $2.00 per
share. See "Aggregated Options/Sar Exercises in Last Fiscal Year and Fy-End
Option/Sar Values."
25
2) In 2001 The Compensation Committee of the Board of Directors (the
"Committee) authorized an option grant to Mr. William J. Kurinsky to purchase
200,000 shares of Common Stock at an exercise price of $.83 per share for 5
years. In 2000 the Committee authorized an option grant to Mr. William J.
Kurinsky to purchase 125,000 shares of Common Stock at an exercise price of
$2.00 per share. See "Aggregated Options/Sar Exercises in Last Fiscal Year and
Fy-End Option/Sar Values."
3) In 2001 The Compensation Committee of the Board of Directors (the
"Committee) authorized an option grant to Mr. Robert Rabinowitz to purchase
43,750 shares of Common Stock at an exercise price of $1.50 per share for 5
years. In 2000 the Committee authorized an option grant to Mr. Robert Rabinowitz
to purchase 60,000 shares of Common Stock at an exercise price of $2.00 per
share. See "Aggregated Options/Sar Exercises in Last Fiscal Year and Fy-End
Option/Sar Values."
4) Includes: (i) for 2001, automobile allowance of $2000; ii) for 2000,
automobile allowance of $2000 (iii) for 1999, auto allowance of $925.
5) Includes: (i) for 2001, automobile allowance of $1,000; (ii) for 2000,
automobile allowance of $2,000; (iii) for 1999, auto allowance of $1,928.
6) Includes (i) for 2001, automobile allowance of $2,000; (ii) for 2000,
automobile allowance of $2,000; (iii) for 1999, automobile allowance of $1,200.
7) Mr. Herbert Kurinsky is the beneficial owner of 56,518 shares of the
Company's Common Stock as of December 31, 2001, which shares had a market value
of $24,868 as of that date, without giving effect to the diminution in value
attributable to the restriction on said shares.
8) Mr. William Kurinsky is the beneficial owner of 1,110,823 shares of the
Company's Common Stock as of December 31, 2000, which shares had a market value
of $488,762 as of that date, without giving effect to the diminution in value
attributable to the restriction on said shares.
9) Mr. Robert I. Rabinowitz is the beneficial owner of 29,500 shares of the
Company's Common Stock as of December 31, 2001, which shares had a market value
of $12,980 as of that date, without giving effect to the diminution in value
attributable to the restriction on said shares.
10) Mr. Dave McCoy is the beneficial owner of 141,250 shares of the
Company's Common Stock as of December 31, 2001, which shares had a market value
of $62,150 as of that date.
11) Mr. McCoy became employed by the Company in June 2000 as Director of
Retail Sales. The salary, bonus and option grant was provided pursuant to his
compensation package. The commissions paid were earned by Mr. McCoy in his
capacity as a registered representative prior to the commencement of his
salaried position.
Compensation of Directors
The Company pays directors, who are not employees of the Company, a
retainer of $250 per meeting of the Board of Directors attended and for each
meeting of a committee of the Board of Directors not held in conjunction with a
Board of Directors meeting. Directors employed by the Company are not entitled
to any additional compensation as such. During fiscal year 2001, the Board of
Directors met on three (3) occasions and all directors were present, either in
person or by telephonic conference call.
Committees of the Board of Directors
The Board of Directors has established an Audit Committee comprised of Ward
R. Jones, David Portman and Barry Shapiro. The Audit Committee met on one (1)
occasion during fiscal year 2001. The Audit Committee reviews (i) the Company's
audit functions, (ii) the finances, financial condition, and interim financial
statements of the Company with management, and (iii), the year end financial
statements of the Company with the Company's independent auditors. Members of
the Audit Committee do not receive additional compensation for such service.
Compensation Committee Report on Executive Compensation
In fiscal 1995, the Corporation established a compensation committee,
composed of two non-executive directors, for the purpose of negotiating and
reviewing all employment agreements for executive officers of the Corporation
and for administering the Senior Management Plan and the Incentive Stock Option
Plan, as amended. At present, Ward R. Jones, Jr. and David I. Portman are the
members of the compensation committee. This committee met on one (1) occasion
during fiscal 2001.
26
The compensation committee and the Board of Directors have established the
following ongoing principles and objectives for determining the Corporation's
executive compensation: o provide compensation opportunities that will help
attract, motivate and retain highly motivated qualified managers and executives.
- link executive total compensation to the Corporation's performance and
individual job performance.
- provide a balance between incentives based upon annual business
achievements and longer term incentives linked to increases in shareholder
value.
During the last fiscal year, except as discussed below, the cash
compensation portions of the Chief Executive Officer and the Chief Operating
Officer were not reviewed by the compensation committee as the terms of the
compensation were governed by the terms of their employment agreements which
were entered into in January 2000. Shareholders are directed to the discussion
of these agreements under the heading "Employment Agreements" appearing
elsewhere in this Annual Report on Form 10-K.
During the last fiscal year, neither the Chief Executive Officer nor the
Chief Operating Officer received any cash bonuses or compensation outside of a
$2,000 and $1,000 automobile expense allowance for the Chief Executive Officer
and the Chief Operating Officer, respectively. Total cash compensation for both
of the executive officers was voluntarily reduced by $23,000 in fiscal 2001 as
compared to 2000, rather than increased by 10%, as provided in each of their
employment agreements.
During the last fiscal year, the compensation committee authorized the
grant of options to purchase 200,000 shares of the Company's Common Stock to
each of Messrs. Herbert Kurinsky and William Kurinsky. See "Option Grants in
Last Fiscal Year."
The Compensation Committee:
Ward R. Jones Jr.
David I. Portman
Compensation Committee Interlocks and Insider Participation
There are no compensation committee interlocks between the members of the
Corporation's compensation committee and any other entity. None of the members
of the Board's compensation committee are executive officers of the Corporation.
Mr. Jones is a registered representative of the Corporation's broker-dealer
subsidiary, First Montauk Securities Corp., but does not engage in any
securities business.
OPTION/SAR GRANTS IN LAST FISCAL YEAR
The following table contains information with respect to the named
executive officers concerning options granted during the year ended December 31,
2001.
Potential Realizable Value At
Number of % of Total Assumed Rates of Stock Price
Underlying Granted to Exercise Appreciation For Options Term
Options/SAR Employees in or Base Expiration
Name Granted(#) Fiscal Year (1) Price($Sh) Date 5%($) 10%($)
Herbert Kurinsky 200,000 18.3% 0.66 1/4/06 18,469 62,587
William J. Kurinsky 200,000 18.3% 0.66 1/4/06 2,469 46,587
Robert I. Rabinowitz 43,750 4.0% 0.66 1/4/06 -- --
<FN>
- --------------------------
(1) Includes options granted to non-employee registered representatives under
the 1992 Incentive Stock Option Plan, as amended.
</FN>
27
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR
AND FY-END OPTION/SAR VALUES
Value of
Shares Number of Unexercised
Acquired Unexercised In-the-money
on Value Options as of Options at
Name Exercise Realized December 31, 2001 December 31, 2001 (1)
---- -------- -------- ----------------- ---------------------
Exercisable/Unexercisable Exercisable/Unexercisable
Herbert Kurinsky -- $0 475,000/0 $0/$0
William J. Kurinsky -- $0 500,000/0 $0/$0
Robert I. Rabinowitz -- $0 328,750/0 $0/$0
Dave McCoy -- $0 369,500/180,500 $0/$0
(1) Based upon the closing bid price of the Company's Common Stock on
December 31, 2001 ($.44 per share), less the exercise price for the aggregate
number of shares subject to the options.
Employment Agreements
In January 2000, the Company entered into new three-year employment
contracts with Herbert Kurinsky, as President and William J. Kurinsky, as
Executive Vice President. The contracts provide for base salaries of $256,218
for the first year of the agreement for each, increasing in each case at the
rate of 10% per year. Each will also be entitled to receive a portion of a bonus
pool consisting of 10% of the pre-tax profits of the Company, to be determined
by the executive management (e.g. Herbert Kurinsky and William J. Kurinsky). The
bonus pool would require a minimum of $500,000 pretax profit per year in order
to become effective. Each is also entitled to receive commissions at the same
rate as paid to other non-affiliate registered representatives of the Company.
They are also entitled to purchase from FMSC, up to 20% of all underwriters
and/or placement agent warrants or options that are granted to FMSC upon the
same price, terms and conditions afforded to FMSC as the underwriter or
placement agent. Each employee also receives health insurance benefits and life
insurance as generally made available to regular full-time employees of the
Company, and reimbursement for expenses incurred on behalf of the Company and
the use of an automobile, or in the alternative, an automobile allowance. The
contracts also provide for severance benefits equal to three times the previous
year's salary in the event either of the employees is terminated or their duties
significantly changed after a change in management of the Company as defined in
the agreement.
Incentive Stock Option Plan
In 1992, the Company adopted the 1992 Incentive Stock Option Plan (the
"1992 Plan") which provides for the grant of options to purchase up to 6,000,000
shares of the Company's Common Stock by employees of the Company and
consultants. Under the terms of the Plan, options granted thereunder may be
designated as options which qualify for incentive stock option treatment
("ISOs") under Section 422A of the Code, or options which do not so qualify
("Non-ISOs").
The Plan is administered by the Board of Directors which has the discretion
to determine the eligible employeesto whom, and the times and the price at
which, options will be granted; whether such options shall be ISOs or Non-ISOs;
the periods during which each option will be exercisable; and the number of
shares subject to each option. The Board has full authority to interpret the
Plan and to establish and amend rules and regulations relating thereto.
Under the Plan, the exercise price of an option designated as an ISO shall
not be less than the fair market value of the Common Stock on the date the
option is granted. However, in the event an option designated as an ISO is
granted to a ten percent stockholder (as defined in the Amended Plan) such
exercise price shall be at least 110% of such fair market value. Exercise prices
of Non-ISO options may be less than such fair market value. The aggregate fair
market value of shares subject to options granted to a participant which are
designated as ISOs which become exercisable in any calendar year may not exceed
$100,000.
28
The Board may, in its sole discretion, grant bonuses or authorize loans to
or guarantee loans obtained by an optionee to enable such optionee to pay any
taxes that may arise in connection with the exercise or cancellation of an
option. Unless sooner terminated, the Plan will expire in 2002.
In June 2000 at the Company's Annual Meeting of Shareholders, a resolution
was passed amending the Incentive Stock Option Plan to increase the number of
shares reserved for issuance from 6,000,000 to 8,000,000. To date, options to
purchase a total of 4,612,698 shares of the Company's Common Stock have been
issued under the 1992 Plan.
Director Plan
In September 1992, the Company adopted the Non-Executive Director Stock
Option Plan (the "Director Plan"). The Director Plan provides for issuance of a
maximum of 1,000,000 shares of Common Stock upon the exercise of stock options
granted under the Director Plan. Options are granted under the Director Plan
until 2002 to non-executive directors who are not full time employees of the
Company or any of its subsidiaries. The Director Plan provides that each
non-executive director will automatically be granted an option to purchase
20,000 shares each September 1, provided such person has served as a director
for the 12 months immediately prior to such September 1st.
The exercise price for options granted under the Director Plan shall be
100% of the fair market value of the Common Stock on the date of grant. Until
otherwise provided in the Stock Option Plan the exercise price of options
granted under the Director Plan must be paid at the time of exercise, either in
cash, by delivery of shares of Common Stock of the Company or a combination of
both. The term of each option commenced on the date it is granted and unless
terminated sooner as provided in the Director Plan, expires five years from the
date of grant. The Director Plan is administered by a committee of the board of
directors composed of not fewer than three persons who are officers of the
Company (the "Committee"). The Committee has no discretion to determine which
non-executive director will receive options or the number of shares subject to
the option, the term of the option or the exercisability of the option. However,
the Committee will make all determinations of the interpretation of the Director
Plan. Options granted under the Director Plan are not qualified for incentive
stock option treatment. To date, a total of 360,000 options have been granted to
the Company's Non-Executive members of the Board of Directors.
Senior Management Plan
In 1996, the Company adopted the 1996 Senior Management Incentive Plan (the
"Management Plan"). The Management Plan provides for the issuance of up to
2,000,000 shares of Common Stock either upon issuance of options issued under
the Plan or grants of restricted stock or incentive stock rights. Awards may be
granted under the Management Plan to executive management employees by the Board
of Directors or a committee of the board, if one is appointed for this purpose.
The Management Plan provides for four types of awards: stock options, incentive
stock rights, stock appreciation rights ("SARs"), and restricted stock purchase
agreements. The stock options granted under the Management Plan can be either
ISOs or non-ISOs similar to the options granted under the Employee Stock Option
Plan, except that the exercise price of non-ISOs shall not be less than 85% of
the fair market value of the Common Stock on the date of grant. Incentive stock
rights consist of incentive stock units equivalent to one share of Common Stock
in consideration for services performed for the Company. If services of the
holder terminate prior to the incentive period, the rights become null and void
unless termination is caused by death or disability. Stock appreciation rights
allow a Grantee to receive an amount in cash equal to the difference between the
fair market value of the stock and the exercise price, payable in cash or shares
of Common Stock. The Board or committee may grant limited SARs, which become
exercisable upon a "change of control" of the Company. A change of control
includes the purchase by any person of 25% or more of the voting power of the
Company's outstanding securities, or a change in the majority of the Board of
Directors.
29
Awards granted under the Management Plan are also entitled to certain
acceleration provisions that cause awards granted under the Plan to immediately
vest in the event of a change of control or sale of the Company. Awards under
the Management Plan may be made until 2006.
In June 2000 at the Company's Annual Meeting of Shareholders, a resolution
was passed amending the Senior Management Stock Option Plan to increase the
number of shares reserved for issuance from 2,000,000 to 4,000,000. To date,
options to purchase a total of 2,127,500 shares of the Company's Common Stock
have been issued under the Senior Management Plan.
Item 12. Security Ownership of Certain
Beneficial Owners and Management
The following table sets forth, as of April 12, 2002, the number and
percentage of outstanding shares of Common Stock beneficially owned by each
person known by the Company to own beneficially more than 5% of the Company's
outstanding shares of Common Stock and Common Stock Warrants, by each director
of the Company, and by all directors and officers of the Company as a group.
Directors, Officers Amount and Percentage and 5% Shareholders (1) of Beneficial
Ownership (1)
Number of Shares Percent
---------------- -------
Herbert Kurinsky 561,518(2) 6.2%
Parkway 109 Office Center
328 Newman Springs Road
Red Bank, NJ 07701
William J. Kurinsky 1,680,823(3) 18.4%
Parkway 109 Office Center
328 Newman Springs Road
Red Bank, NJ 07701
Robert I. Rabinowitz, Esq. 375,749(4) 4.2%
Parkway 109 Office Center
328 Newman Springs Road
Red Bank, NJ 07701
Dave M. McCoy 691,250(5) 7.7%
20197 Ocean Key Drive
Boca Raton, Fl. 33498
Ward R. Jones 110,000(6) 1.3%
7 Leda Lane
Guilderland, NY 12084
Norma Doxey 74,900(7) *
Parkway 109 Office Center
328 Newman Springs Road
Red Bank, NJ 07701
David I. Portman 219,800(8) 2.5%
300 Ocean Avenue, Apt. 6A
Long Branch, NJ 07740
Barry Shapiro, C.P.A. 0 N/A
Parkway 109 Office Center
328 Newman Springs Road
Red Bank, NJ 07701
All Directors and 3,714,040 35%
Officers as a group
(8 persons in number)
* Indicates less than 1%
30
(1) Unless otherwise indicated below, each director, officer and 5%
shareholder has sole voting and sole investment power with respect to all shares
that he beneficially owns.
(2) Includes vested and presently exercisable options of Mr. Herbert
Kurinsky to purchase 475,000 shares of Common Stock.
(3) Includes vested and presently exercisable options of Mr. William J.
Kurinsky to purchase 500,000 shares of Common Stock.
(4) Includes vested and presently exercisable options of Mr. Robert
Rabinowitz to purchase 328,750 shares of Common Stock; 50,000 of which are owned
by Mr. Rabinowitz's wife. Mr. Rabinowitz's children own 2,000 shares of Common
Stock. Mr. Rabinowitz also owns 5,833 Class A Warrants 5,833 Class B Warrants
and 5,833 Class C Warrants.
(5) Includes vested and presently exercisable option of Mr. McCoy to
purchase 369,500 shares of Common Stock, and 180,500 non-vested options.
(6) Includes vested and presently exercisable options of Mr. Ward Jones to
purchase 100,000 shares of Common Stock.
(7) Includes vested and presently exercisable options of Ms. Norma Doxey to
purchase 50,500 shares of Common Stock, and 12,000 non-vested stock options.
(8) Includes vested and presently exercisable options of Mr. David Portman
to purchase 100,000 shares of Common Stock. Mr. Portman also owns 16,600 Class A
Warrants, 16,600 Class B Warrants and 16,600 Class C Warrants.
NOTE: All Class A Warrants are exercisable at $3.00 per share for a period
of five (5) years from February 17, 1998.
All Class B Warrants are exercisable at $5.00 per share for a
period of five (5) years from February 17, 1998.
All Class C Warrants are exercisable at $7.00 per share for a
period of seven (7) years from February 17, 1998.
Item 13. Certain Relationships and Related Transactions
For information concerning the terms of the employment agreements entered
into between the Company and Messrs. Herbert Kurinsky and William J. Kurinsky,
see "Executive Compensation".
31
PART IV
Item 14. Exhibits, Financial Statements
and Reports on Form 8-K
(A) 1. Financial Statements
See Financial Statements Attached Hereto.
2. Exhibits
Incorporated by reference to the Exhibit Index at the end of this report.
(B) Reports on Form 8-K
During the last quarter of the period covered by this Report, there were no
reports filed on Form 8-K.
32
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Company has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
FIRST MONTAUK FINANCIAL CORP.
By /s/ Herbert Kurinsky
---------------------
Dated April 15, 2002 Herbert Kurinsky, President
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of the Company
and in the capacities and on the dates indicated.
/s/ Herbert Kurinsky
- -------------------- April 15, 2002
Herbert Kurinsky
President, Chief Executive
Officer and Director
/s/ William J. Kurinsky
- ----------------------- April 15, 2002
William J. Kurinsky
Vice-President, Chief Operating
and Chief Financial Officer, and
Principal Accounting Officer,
Secretary and Director
/s/ Norma Doxey
- --------------- April 15, 2002
Norma Doxey, Director
/s/ Ward R. Jones, Jr.
- ---------------------- April 15, 2002
Ward R. Jones, Jr., Director
/s/ David I. Portman
- -------------------- April 15, 2002
David I. Portman, Director
/s/ Barry Shapiro
- ----------------- April 15, 2002
Barry Shapiro, Director
33
EXHIBITS INDEX
The exhibits designated with an asterisk (*) have previously been filed
with the Commission in connection with the Company's Registration Statement on
Form S-l, File No. 33-24696, those designated (**) have been filed with the
Company's Form 10-KSB for the fiscal year ended December 31, 1993, those
designated (***) have been previously filed with the Company's Registration
Statement on Form S-3, File No. 33-65770. Those designated (****) denotes
exhibits which have been filed with the Company's Form 10-KSB for the fiscal
year ended December 31, 1994. Those designated (******) denotes exhibits which
have been filed with the Company's Proxy Statement dated May 30, 1996. Those
designated (*******) denotes exhibits which have been filed with the Company's
Form 10-KSB for the fiscal year ended December 31, 1996. Those designated
(*******) denotes exhibits which have been filed with the Company's Form 10-KSB
for the fiscal year ended December 31, 1997, (++) denotes exhibits filed with
the Company's Form 10-K for the fiscal year ended December 31, 1998. Those
designated (+++) denotes exhibits which have been filed with the Company's Proxy
Statement dated May 23, 2000 and are incorporated by reference herewith. Those
designated (++++) denotes exhibits which have been filed with the Company's Form
10-K for the fiscal year ended December 31, 2000, and pursuant to 17 C.F.R.
Sections 201.24 and 240.12b-32, are incorporated by reference to this document.
Those designated (+++++) denotes exhibits which have been filed herewith.
Exhibit No. Description
3.1* Amended and Restated Certificate of Incorporation adopted at 1989 Special
Meeting in lieu of Annual Meeting of Shareholders.
3.2* Amended and Restated By-Laws.
10.8* Clearing Agreement between the Registrant and Wertheim
Schroder & Co., Incorporated dated January 21, 1991.
10.17******* Office Lease Agreement between First Montauk Securities Corp. and River
Office Equities dated March 5, 1997.
10.17.1 First Amendment to Office Lease Agreement dated March 5, 1997 between First Montauk
Securities Corp. and River Office Equities dated March 3, 1998 (previously filed under
28.8 in Form 10-K for the fiscal year ended December 31, 1998).
10.18++ Employment Agreement between First Montauk Securities Corp. and Mark Lowe
dated October 15, 1998.
10.19++ Employment Agreement between First Montauk Securities Corp. and Seth Rosen
dated January 25, 1999.
10.20++++ Employment Agreement between First Montauk Financial Corp. and Herbert
Kurinsky dated January 1, 2000.
10.21++++ Employment Agreement between First Montauk Financial Corp. and William J.
Kurinsky dated January 1, 2000.
10.22++++ Clearing Agreement dated May 8, 2000 between Fiserv Securities, Inc. and First
Montauk Securities Corp.
10.23++++ Financial Agreement dated May 8, 2000 between Fiserv Securities, Inc. and
First Montauk Securities Corp.
10.24++++ Amended and Restated Financial Agreement dated February 1, 2001 between Fiserv
Securities, Inc., First Montauk Financial Corp. and First Montauk Securities
Corp.
10.25++++ Security Agreement dated February 1, 2001 between Fiserv Securities, Inc. and
First Montauk Financial Corp.
34
Exhibit No. Description
- ----------- -----------
10.26+++++ Sublease Agreement between Eloquent, Inc. and First Montauk Financial Corp.
dated May 31, 2001.
10.27+++++ Sublease Agreement between Aimnet Solutions, Inc. and First Montauk Financial Corp.
dated January 15, 2002.
11+++++ Computation of Earnings Per Share.
28.1* 1992 Incentive Stock Option Plan.
28.2* 1992 Non-Executive Director Stock Option Plan.
28.3****** Amended and Restated 1992 Incentive Stock Option Plan.
28.4****** Non-Executive Director Stock Option Plan - Amended and Restated June 28, 1996
28.5****** 1996 Senior Management Incentive Stock Option Plan.
28.6+++ Second Amended and Restated 1992 Incentive Stock Option Plan.
28.7+++ 1996 Senior Management Incentive Plan Amended as of June 23, 2000.
F-1
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders
First Montauk Financial Corp.
We have audited the accompanying consolidated statements of financial
condition of First Montauk Financial Corp. and subsidiaries as of December 31,
2001 and 2000, and the related consolidated statements of income (loss), changes
in stockholders' equity, and cash flows for each of the three years in the
period ended December 31, 2001. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of First Montauk Financial
Corp. and subsidiaries as of December 31, 2001 and 2000, and the results of
their operations and their cash flows for each of the three years in the period
ended December 31, 2001 in conformity with accounting principles generally
accepted in the United States of America.
Schneider & Associates LLP
Jericho, New York
March 25, 2002
F-2
FIRST MONTAUK FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
December 31,
2001 2000
---- ----
ASSETS
Cash and cash equivalents $ 1,779,554 $ 3,701,010
Due from clearing firms 4,146,410 2,405,666
Trading and investment account securities 1,199,102 3,975,309
Employee and broker receivables 2,105,620 1,609,666
Global leases receivable 6,491 174,661
Notes receivable -- 18,000
Due from officers 202,964 175,068
Property and equipment - net 1,631,801 2,304,533
Income tax refunds receivable 1,069,442 --
Deferred income taxes - net 930,000 1,721,262
Other assets 1,156,178 827,888
---------- ----------
Total assets $14,227,562 $16,913,063
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Deferred income $ 4,783,333 $ 3,933,333
Securities sold, but not yet purchased, at market 245,078 386,459
Notes payable 277,376 559,179
Commissions payable 3,647,170 1,637,733
Accounts payable 490,845 450,974
Accrued expenses 1,434,885 840,578
Income taxes payable 7,111 875,786
Capital leases payable 542,210 138,995
Other liabilities 506,876 380,635
---------- ---------
Total liabilities 11,934,884 9,203,672
---------- ---------
Temporary equity - stock subject to redemption 6,500 6,500
Commitments and contingencies (See Notes)
STOCKHOLDERS' EQUITY
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,
331,190 and 349,511 shares issued and outstanding, respectively;
liquidation preference: $1,655,950 and $1,747,555, respectively 33,119 34,951
Common Stock, no par value, 30,000,000 shares
authorized, 8,622,284 and 9,309,309 shares issued,
8,622,284 and 8,822,409 shares outstanding, respectively 3,434,642 4,063,397
Additional paid-in capital 3,950,542 4,253,765
Retained earnings (accumulated deficit) (5,076,055) 230,921
Less: Deferred compensation (56,067) (393,120)
Less: Treasury stock, at cost (-0- and 486,900
shares, respectively) -- (487,023)
---------- ----------
Total stockholders' equity 2,286,181 7,702,891
---------- ----------
Total liabilities and stockholders' equity $14,227,565 $16,913,063
=========== ===========
See notes to consolidated financial statements.
F-3
FIRST MONTAUK FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (LOSS)
Years ended December 31,
2001 2000 1999
---- ---- ----
Revenues:
Commissions $37,807,870 $46,529,771 $40,516,625
Principal transactions 8,021,887 7,131,079 14,000,680
Investment banking 1,483,210 2,416,711 439,065
Interest and other income 3,907,448 3,252,325 2,628,246
---------- --------- ---------
Total revenues 51,220,415 59,329,886 57,584,616
========== ========== ==========
Expenses:
Commissions, employee compensation
and benefits 42,356,207 46,800,661 42,137,968
Clearing and floor brokerage 3,247,219 4,003,345 4,109,961
Communications and occupancy 3,249,389 2,731,681 2,697,433
Legal matters and related costs 2,415,374 1,181,115 1,395,008
Write down of Notes Receivable - Global
Financial Corp. -- 239,183 100,000
Loss on Global lease settlements -- -- 600,416
Other operating expenses 5,076,806 4,862,158 3,545,308
Interest 174,632 160,230 166,104
---------- ---------- ----------
Total expenses 56,519,627 59,978,373 54,752,198
---------- ---------- ----------
Income (loss) before income taxes (5,299,212) (648,487) 2,832,418
Provision for income taxes (income tax benefit) (90,989) 6,721 549,140
--------- ---------- ----------
Income (loss) before extraordinary loss (5,208,223) (655,208) 2,283,278
Extraordinary loss - extinguishment of debt,
net of tax -- (34,200) --
---------- ---------- ----------
Net income (loss) $(5,208,223) $ (689,408) $ 2,283,278
=========== =========== ===========
Net income (loss) available to common
stockholders $(5,306,976) $ (792,136) $ 2,215,528
=========== =========== ===========
Per share of Common Stock:
Basic:
Before extraordinary loss $ (.61) $ (0.08) $ 0.22
Extraordinary loss -- -- --
------------ ------------- -----------
Net income (loss) $ (.61) $ (0.08) $ 0.22
============ ============= ===========
Diluted:
Before extraordinary loss $ (.61) $ (0.08) $ 0.21
------------ ------------- -----------
Extraordinary loss -- -- --
Net income (loss) $ (.61) $ (0.08) $ 0.21
============ ============= ===========
Weighted average common shares
outstanding - basic 8,704,355 9,450,055 9,878,129
============ ============= ===========
Weighted average common and common
equivalent shares outstanding - diluted 8,704,355 9,450,055 11,262,708
============ ============= ===========
See notes to consolidated financial statements.
F-4
FIRST MONTAUK FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE PERIOD FROM JANUARY 1, 1999 TO DECEMBER 31, 2001
Series A Convertible Additional
Common Stock Preferred Stock Paid-in
Shares Amount Shares Amount Capital
------ ------ ------ ------ -------
Balances at December 31, 1998 9,801,493 $4,980,977 -- $ -- $2,979,831
Exercise of stock options 234,450 204,841 -- -- --
Deferred compensation -- -- -- -- 122,925
Amortization of deferred
compensation -- -- -- -- --
Repurchase of common stock -- -- -- -- --
Issuance of common stock
purchase warrants -- -- -- -- 27,382
Issuance of preferred stock -- -- 349,511 34,951 950,592
Payment of dividends -- -- -- -- --
Net income for the year -- -- -- -- --
---------- --------- ------- ------ ---------
Balances at December 31, 1999 10,035,943 5,185,818 349,511 34,951 4,080,730
Exercise of stock options 57,000 55,920 -- -- --
Transfer from temporary equity 15,000 18,000 -- -- --
Deferred compensation -- -- -- -- 173,035
Amortization of deferred
compensation -- -- -- -- --
Repurchase of common stock -- -- -- -- --
Cancellation of treasury shares (798,634) (1,196,341) -- -- --
Payment of dividends -- -- -- -- --
Net loss for the year -- -- -- -- --
--------- --------- ------- ------ ---------
Balances at December 31, 2000 9,309,309 4,063,397 349,511 34,951 4,253,765
Reversal of deferred compensation -- -- -- -- (303,223)
Amortization of deferred compensation -- -- -- -- --
Repurchase of common stock -- -- -- -- --
Cancellation of treasury shares (723,667) (630,587) -- -- --
Conversion of preferred stock
into common stock 36,642 1,832 (18,321) (1,832) --
Payment of dividends -- -- -- -- --
Net loss for the year -- -- -- -- --
--------- --------- -------- ------- ---------
Balances at December 31, 2001 8,622,284 $3,434,642 331,190 $33,119 $3,950,542
========= ========== ======= ======= ==========
F-5
FIRST MONTAUK FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE PERIOD FROM JANUARY 1, 1999 TO DECEMBER 31, 2001
Retained
Earnings
(Accumulated Deferred Treasury Stock Stockholders'
Deficit) Compensation Shares Amount Equity
-------- ------------ ------ ------ ------
Balances at December 31, 1998 $(1,192 ,471) $(581,210) -- $ -- ` $6,187,127
Exercise of stock options -- -- -- -- 204,841
Deferred compensation -- (122,925) -- -- --
Amortization of deferred
compensation -- 195,841 -- -- 195,841
Repurchase of common stock -- -- (180,500) (222,624) (222,624)
Issuance of common stock
purchase warrants -- -- -- -- 27,382
Issuance of preferred stock -- -- -- -- 985,543
Payment of dividends (67,750) -- -- -- (67,750)
Net income for the year 2,283,278 -- -- -- 2,283,278
--------- -------- -------- -------- ---------
Balances at December 31, 1999 1,023,057 (508,294) (180,500) (222,624) 9,593,638
Exercise of stock options -- -- -- -- 55,920
Transfer from temporary equity -- -- -- -- 18,000
Deferred compensation -- (173,035) -- -- --
Amortization of deferred
compensation -- 288,209 -- -- 288,209
Repurchase of common stock -- -- (1,105,034) (1,460,740) (1,460,740)
Cancellation of treasury shares -- -- 798,634 1,196,341 --
Payment of dividends (102,728) -- -- -- (102,728)
Net loss for the year (689,408) -- -- -- (689,408)
------- -------- -------- -------- ---------
Balances at December 31, 2000 230,921 (393,120) (486,900) (487,023) 7,702,891
Reversal of deferred compensation -- 303,223 -- -- --
Amortization of deferred compensation -- 33,830 -- -- 33,830
Repurchase of common stock -- -- (236,767) (143,564) (143,564)
Cancellation of treasury shares -- -- 723,667 630,587 --
Conversion of preferred stock
into common stock -- -- -- -- --
Payment of dividends (98,753) -- -- -- (98,753)
Net loss for the year (5,208,223) -- -- -- (5,208,223)
---------- -------- ------- ------- ----------
Balances at December 31, 2001 $(5,076,055) $(56,067) -- $ -- $ 2,286,181
========== ======== ======= ======= ==========
F-6
FIRST MONTAUK FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31,
2001 2000 1999
---- ---- ----
Cash flows from operating activities:
Net income (loss) $(5,208,223) $ (689,408) $ 2,283,278
Adjustments to reconcile net income (loss)
to net cash provided by (used in)
operating activities:
Depreciation and amortization 563,685 600,626 539,306
Amortization of deferred compensation 33,830 288,209 195,841
Amortization of bond discount 18,033 31,736 10,988
Amortization of deferred gain 11,350 -- --
Loan reserves and write-offs 500,000 389,823 100,000
Loss on Global lease settlements -- -- 377,667
Other -- (1,448) --
Increase (decrease) in cash attributable to
changes in assets and liabilities:
Due from clearing firms (1,740,744) 4,056,680 (3,586,144)
Trading and investment account securities 2,776,207 (499,418) (742,631)
Employee and broker receivables (495,954) (1,157,381) 145,927
Due from officers (27,896) (42,314) (1,253)
Income tax refund receivable (1,069,442) -- --
Deferred income taxes - net 791,262 (1,057,006) 36,499
Other assets (132,241) 651,005 (247,885)
Deferred income 850,000 3,933,333 --
Securities sold, but not yet purchased (141,381) 206,179 (146,767)
Commissions payable 2,009,437 (1,073,003) 1,179,092
Accounts payable 39,868 (74,835) (276,689)
Accrued expenses 594,307 (231,974) 167,398
Income taxes payable (868,675) 365,560 510,226
Other liabilities 88,094 (363,337) 378,631
--------- --------- ---------
Total adjustments 3,799,740 6,022,435 (1,359,794)
--------- --------- ----------
Net cash provided by (used in)
operating activities (1,408,483) 5,333,027 923,484
---------- --------- -------
Cash flows from investing activities:
Issuance of notes receivable -- -- (207,000)
Collection of notes receivable 18,000 74,708 102,197
Payment for Global leases receivable -- -- (12,532)
Collection of Global leases receivable 168,170 649,652 619,497
Additions to property and equipment (308,061) (722,205) (658,342)
Other assets (196,049) (39,150) (23,867)
-------- ------- -------
Net cash used in investing activities (317,940) (36,995) (180,047)
-------- ------- -------
(continued)
See notes to consolidated financial statements.
F-7
FIRST MONTAUK FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(continued)
Years ended December 31,
2001 2000 1999
---- ---- ----
Cash flows from financing activities:
Payments of notes payable (299,836) (896,364) (227,943)
Proceeds from capital lease financing 606,195 -- --
Repurchase of common stock (143,564) (1,460,740) (222,624)
Payments of capital leases payable (259,075) (122,669) (111,915)
Payment of preferred stock dividends (98,753) (102,728) (67,750)
Proceeds from exercise of stock
options and warrants -- 55,920 204,841
Other assets -- 244,579 (244,579)
---------- ---------- ---------
Net cash used in financing activities (195,033) (2,282,002) (669,970)
---------- ---------- --------
Net increase (decrease) in cash and
cash equivalents (1,921,456) 3,014,030 73,467
Cash and cash equivalents at beginning of
year 3,701,010 686,980 613,513
---------- --------- --------
Cash and cash equivalents at end of year $ 1,779,554 $ 3,701,010 $ 686,980
========== ========= ========
Supplemental disclosures of cash flow information: Cash paid during the period
for:
Interest $ 174,632 $ 160,230 $ 166,104
Income taxes $ 894,852 $ 725,800 $ 5,232
Debt issued in exchange for Global leases
receivable $ -- $ -- $ 266,054
Preferred stock issued in exchange for
Global leases receivable $ -- $ -- $ 985,543
Common stock purchase warrants issued in
exchange for Global leases receivable $ -- $ -- $ 27,382
Property and equipment financed under
capital leases $ 662,290 $ -- $ --
Transfer of temporary equity to
permanent capital $ -- $ 18,000 $ --
See notes to consolidated financial statements.
F-8
FIRST MONTAUK FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - NATURE OF BUSINESS
First Montauk Financial Corp. (the Company) is a holding company whose
principal subsidiary, First Montauk Securities Corp. (FMSC), is engaged in
securities brokerage, investment banking and trading. FMSC is a broker-dealer
registered with the Securities and Exchange Commission and the National
Association of Securities Dealers, Inc. Through FMSC, the Company executes
principal and agency transactions, makes markets in over-the-counter securities,
and performs underwriting and investment banking services. Customers are located
throughout the United States. Montauk Insurance Services, Inc. (MISI) sells a
range of insurance products. Montauk Advisors, Inc. (MAI) previously sold
investments in equipment leases, but is no longer active. The Company operates
in one business segment.
FMSC clears all customer transactions on a fully disclosed basis through an
independent clearing firm. Accordingly, FMSC does not carry securities accounts
for customers nor does it perform custodial functions related to those
securities.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The consolidated financial statements include the accounts of the Company
and its subsidiaries. All intercompany accounts and transactions have been
eliminated in consolidation.
Certain items in the 2000 and 1999 financial statements have been
reclassified to conform with the current year's presentation.
Revenue Recognition
Securities transactions, commission income and related expenses are
recorded on a trade date basis. Underwriting fees are recorded at the time the
underwriting is completed and the income is reasonably determinable. Sales
concessions from participation in syndicated offerings are recorded on
settlement date.
Securities owned and securities sold but not yet repurchased are stated at
quoted market value with unrealized gains and losses included in earnings.
Investment account securities not readily marketable are carried at estimated
fair value as determined by management with unrealized gains and losses included
in earnings.
Advances received under the Company's financial agreement with its clearing
firm (see Note 3) are deferred and amortized over the remaining term of the
agreement on a straight-line basis.
Advertising
Advertising costs are expensed as incurred and totaled $67,000, $348,000,
and $398,000 in 2001, 2000, and 1999, respectively.
Depreciation and Amortization
Furniture and equipment and leasehold improvements are stated at cost.
Depreciation of furniture and equipment and amortization of capital leases are
computed generally on a straight-line basis over the estimated useful lives of
the assets, ranging from three to seven years or terms of the leases,
respectively. Leasehold improvements are amortized over the shorter of either
the asset's useful life or the related lease term.
Cash Equivalents
For purposes of the Statement of Cash Flows, the Company considers all
highly liquid debt instruments purchased with an original maturity of three
months or less to be cash equivalents. Cash equivalents consisted of money
market funds at December 31, 2001 and 2000.
F-9
Net Income (Loss) per Share
Basic EPS is computed by dividing net income or net loss by the
weighted_average number of common shares outstanding for the period. Diluted EPS
reflects the potential dilution from the exercise or conversion of other
securities into common stock, but only if dilutive. The following securities
have been excluded from the dilutive per share computation as they are
antidilutive:
Year ended December 31,
2001 2000 1999
---- ---- ----
Stock options 5,243,998 4,509,698 --
Warrants 9,242,338 9,242,338 9,242,338
Convertible debt (as
if converted) 345,263 345,263 --
Convertible preferred
stock (as if converted) 662,380 699,022 --
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the year.
Actual results could differ from those estimates.
Long-lived assets
The Company records impairment losses on long-lived assets used in
operations when events and circumstances indicate that the assets might be
impaired and the undiscounted cash flows estimated to be generated by those
assets are less than the carrying amounts of those assets.
Income Taxes
The Company uses the liability method to determine its income tax expense
as required under Statement of Financial Accounting Standards No. 109 (SFAS
109). Under SFAS 109, deferred tax assets and liabilities are computed based on
differences between financial reporting and tax basis of assets and liabilities,
and are measured using the enacted tax rates and laws that will be in effect
when the differences are expected to reverse.
Deferred tax assets are reduced by a valuation allowance if, based on the
weight of the available evidence, it is more likely than not that all or some
portion of the deferred tax assets will not be realized. The ultimate
realization of the deferred tax asset depends on the Company's ability to
generate sufficient taxable income in the future.
The Company and its subsidiaries file a consolidated federal income tax
return and separate state returns.
Stock-based Compensation
The Company accounts for stock-based compensation in accordance with APB
Opinion No. 25, "Accounting for Stock Issued to Employees" and FASB
Interpretation 44, "Accounting for Certain Transactions Involving Stock
Compensation". Pursuant to these accounting standards, the Company records
deferred compensation for share options granted to employees at the date of
grant based on the difference between the exercise price of the options and the
market value of the underlying shares at that date. Deferred compensation is
amortized to compensation expense over the vesting period of the underlying
options. No compensation expense is recorded for fixed stock options that are
granted to employees and directors at an exercise price equal to the fair market
value of the common stock at the time of the grant.
For variable stock options, compensation expenses are recognized over the
vesting period based on the difference, if any, between the quoted market price
of the Company's stock on the last trading day of each reporting period and the
exercise price of the option.
See Note 16 for pro forma disclosures required in accordance with SFAS No.
123, "Accounting for Stock-Based Compensation".
Stock options granted to non-employees are recorded at their fair value, as
determined in accordance with SFAS No. 123 and Emerging Issues Task Force
Consensus No. 96-18, and recognized over the related service period. Deferred
compensation charges for options granted to non-employees are periodically
re-measured during the option vesting periods.
F-10
Recent pronouncements of the Financial Accounting Standards Board
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("FAS 133"), "Accounting for
Derivative Instruments and Hedging Activities", which became effective for the
Company during the first quarter of 2001. FAS 133 requires the recognition of
all derivatives as either assets or liabilities in the Company's balance sheet
and measurement of those instruments at fair value. To date, the Company has not
entered into any derivative or hedging activities, and, as such, the adoption of
FAS 133, as amended, has not affected its consolidated financial statements.
In June 2001, the Financial Accounting Standards Board finalized FASB
Statements No. 141, Business Combinations ("FAS 141"), and No. 142, Goodwill and
Other Intangible Assets ("FAS 142"). FAS 141 requires the use of the purchase
method of accounting and prohibits the use of the pooling-of-interest method of
accounting for business combinations initiated after June 30, 2001. FAS 141 also
requires that the Company recognize acquired intangible assets apart from
goodwill if the acquired intangible assets meet certain criteria. FAS 141
applies to all business combinations initiated after June 30, 2001 and for
purchase business combinations completed on or after July 1, 2001. It also
requires, upon adoption of FAS 142, that the Company reclassifies, if necessary,
the carrying amounts of intangible assets and goodwill based on the criteria in
FAS 141.
FAS 142 requires, among other things, that companies no longer amortize
goodwill, but instead test goodwill for impairment at least annually. In
addition, FAS 142 requires that the Company identify reporting units for the
purposes of assessing potential future impairments of goodwill, reassess the
useful lives of other existing recognized intangible assets, and cease
amortization of intangible assets with an indefinite useful life. An intangible
asset with an indefinite useful life should be tested for impairment in
accordance with the guidance in FAS 142. FAS 142 is required to be applied in
fiscal years beginning after December 15, 2001 to all goodwill and other
intangible assets recognized at that date, regardless of when those assets were
initially recognized. FAS 142 requires the Company to complete a transitional
goodwill impairment test six months from the date of adoption. The adoption of
FAS 141 and 142 has not had a material impact on the Company's financial
statements.
In August 2001, the FASB issued FASB Statement No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets ("FAS 144"). The new guidance
resolves significant implementation issues related to FASB Statement No. 121,
Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of ("FAS 121"). FAS 144 supersedes FAS 121, but it retains its
fundamental provisions. It also amends Account Research Bulletin No. 51,
Consolidated Financial Statements, to eliminate the exception to consolidate a
subsidiary for which control is likely to be temporary. FAS 144 retains the
requirement of FAS 121 to recognize an impairment loss only if the carrying
amount of a long-lived asset within the scope of FAS 144 is not recoverable from
its undiscounted cash flows and exceeds its fair value.
FAS 144 is effective for fiscal years beginning after December 15, 2001,
and interim periods within those fiscal years, with early application
encouraged. The Company adopted the provisions of FAS 144 in 2001 with no impact
on its financial statements.
NOTE 3 - AMENDED AND RESTATED FISERV FINANCIAL AGREEMENT
In May 2000, FMSC entered into a ten-year clearing agreement with Fiserv
Securities, Inc. ("Fiserv"). In connection with the clearing agreement, FMSC and
Fiserv also entered into a financial agreement under which Fiserv was to provide
cash advances to FMSC under certain terms and conditions. Upon the conversion of
FMSC's accounts to Fiserv in November 2000, it received an initial cash advance
of $4,000,000. As of February 1, 2001, the Company and FMSC amended and restated
the financial agreement with Fiserv. Under the restated terms, the Company,
rather than FMSC, will be the recipient of any additional cash advances payable
under the financial agreement. The Company has further assumed FMSC's obligation
with respect to the initial payment received in November 2000, and will be
solely responsible for any performance and early termination penalties without
recourse to FMSC. In consideration of FMSC's release from its obligations under
the financial agreement and to secure Fiserv's interest, the Company has granted
to Fiserv a first priority lien in all of the outstanding shares of FMSC that it
owns. The Company received another scheduled cash advance of $1,250,000 in
November 2001.
F-11
NOTE 4 - TRADING AND INVESTMENT SECURITIES
December 31,
2001 2000
---- ----
Sold but Sold but
not yet not yet
Owned Purchased Owned Purchased
----- --------- ----- ---------
Marketable:
Municipal obligations $ 51,813 $ -- $ 5,995 $ --
Stocks 1,001,705 230,923 3,490,353 110,113
Corporate bonds 37,031 -- 191,362 --
Options 5,120 14,155 163,867 276,346
Other 34,223 -- 35,249 --
Nonmarketable securities 69,210 -- 88,483 --
--------- ------- --------- -------
$1,199,102 $245,078 $3,975,309 $386,459
========== ======== ========== ========
Securities owned, and securities sold, but not yet purchased consist of
trading securities at quoted market values. Nonmarketable securities
consist of investment securities recorded at estimated fair value that
cannot be publicly offered or sold unless registration has been effected
under the Securities Act of 1933.
NOTE 5 - EMPLOYEE AND BROKER RECEIVABLES
December 31,
2001 2000
---- ----
Commission advances $ 611,896 $ 251,512
Forgivable loans 1,148,624 606,473
Other loans 345,100 751,681
--------- ---------
$2,105,620 $1,609,666
========== ==========
The Company has an arrangement with certain registered representatives to
forgive their loans if they remain licensed with the Company for an agreed upon
period of time, generally one to two years. The loans are being amortized to
expense for financial reporting purposes over the term of the loan. Loan
amortization expense was $483,651, $129,986 and $88,253 in 2001, 2000 and 1999,
respectively.
Other loans to employees and registered representatives are payable in
installments generally over periods of one to two years with interest rates
ranging from 0% to 8% per annum.
NOTE 6 - PROPERTY AND EQUIPMENT
December 31,
2001 2000
---- ----
Computer and office equipment $ 2,611,856 $ 2,793,518
Furniture and fixtures 1,195,186 1,140,170
Leasehold improvements 802,790 785,190
--------- ---------
4,609,832 4,718,878
Less: Accumulated depreciation
and amortization (2,978,031) (2,414,345)
---------- ----------
$ 1,631,801 $ 2,304,533
========== ==========
Depreciation expense was $563,685, $600,626 and $539,306 in 2001, 2000 and
1999, respectively.
F-12
During 2001, the Company established a $500,000 reserve against payments
previously made to a vendor for the development of applications software. The
Company is currently seeking to recover its payments due to the vendor's failure
to complete the project.
NOTE 7 - NOTES RECEIVABLE
2001 2000
---- ----
Global Financial Corp. $ -- $18,000
====== ======
From 1997 through 1999, the Company provided working capital loans of
approximately $2.3 million to Global, an independent company that packaged and
sold lease investments through MAI. During 2000 and 1999, the Company recorded
loan impairment charges of $239,000 and $100,000, respectively, based on an
evaluation of collectibility.
NOTE 8 - DUE FROM OFFICERS
Advances to officers are unsecured and currently bear interest at the rate
of 6% per annum. These loans are due on demand.
NOTE 9 - NOTES PAYABLE
2001 2000
---- ----
a) Notes payable - bank $ -- $ 52,994
b) Convertible promissory notes, net of discount 227,376 406,185
c) Subordinated notes payable 50,000 100,000
------- -------
$277,376 $559,179
======= =======
a) Term loans bearing interest at the prime rate (9.5% at December 31,
2000); payable in monthly installments of $7,994, plus interest; collateralized
by equipment.
b) Notes in the original aggregate amount of $690,526 issued to private
investors in connection with a Global lease settlement (see Note 10). The notes
are payable in thirty-six monthly non-interest bearing installments of $16,404
through September 2002, plus balloon payments of $112,000, which include
interest of $12,000 calculated on the basis of 8% of the balloon amount
beginning in month nineteen of the note term. The Company has recorded a loan
discount on the notes of $64,609, which is being amortized over the note terms
using the interest method. The notes are convertible into 345,263 common shares
of the Company's common stock based on a conversion price of $2.00. Once the
underlying shares are registered, the Company can request that the noteholders
convert their shares. Proceeds from the sale of the shares must be applied
towards the unpaid principal of the notes. Any excess proceeds or unsold shares
will be returned to the Company. The Company has not registered the underlying
shares.
c) Final note installment of $50,000 payable in January 2002 with interest
at 8% per annum. The note is subordinated to the claims of FMSC's general
creditors under a subordination agreement approved by the NASD.
F-13
NOTE 10 - GLOBAL LEASE SETTLEMENTS
During 1999, the Company entered into settlement agreements with various
Global lease investors. Under terms of those agreements, the Company exchanged
$235,282 in cash payments, 25,000 common stock purchase warrants valued at
$27,382, and convertible note principal of $690,526 (see Note 9) for the
assignment of Global leases. The difference between the cash, debt and warrant
consideration issued by the Company, and the present value of the lease
receivables assigned in the exchange was accounted for as a charge to operations
of $600,416.
Also in 1999, the Company completed a private offering of its Series A
Convertible Preferred Stock (see Note 17 for rights and privileges of the
preferred shares). Under terms of the offering, each Global lease investor that
subscribed to the offering received one share of Preferred Stock in exchange for
every $5.00 of lease investment value that the investor was entitled to receive
from Global after certain adjustments. The Company issued a total of 349,511
preferred shares, which were valued at $985,543, the present value of the lease
receivables assigned in the offering.
NOTE 11 - INCOME TAXES
The provision for income taxes (income tax benefit) consists of the
following:
Year ended December 31,
2001 2000 1999
---- ---- ----
Currently payable (refundable):
Federal $(893,978) $ 838,225 $ 301,058
State 11,727 225,502 211,583
------- --------- -------
(882,251) 1,063,727 512,641
------- --------- -------
Deferred:
Federal 483,978 (817,223) 138,673
State 307,284 (239,783) (102,174)
------- --------- --------
791,262 (1,057,006) 36,499
------- --------- --------
Provision for income taxes
(income tax benefit) $ (90,989) $ 6,721 $ 549,140
======= ========= ========
Following is a reconciliation of the income tax provision (benefit) with
income taxes based on the federal statutory rate:
December 31,
2001 2000 1999
---- ---- ----
Expected federal tax at statutory rate $(1,802,142) $(220,319) $ 963,421
Non-deductible expenses 65,400 32,219 20,998
State taxes, net of federal tax effect (230,898) (44,355) 172,956
Other -- -- (66,395)
Change in valuation allowance 1,876,651 239,176 (541,840)
--------- ------- --------
$ (90,989) $ 6,721 $ 549,140
========= ======= ========
F-14
The tax effects of the temporary differences that give rise to significant
portions of the deferred tax assets and liabilities as of December 31, 2001 and
2000 are:
December 31,
2001 2000
---- ----
Deferred tax assets:
Deferred income $ 1,913,333 $1,573,333
Reserves and allowances 849,213 75,188
Tax loss carryforwards 165,163 180,986
Stock-based compensation 270,092 247,819
Other 37,655 72,741
----------- ----------
Sub total 3,235,456 2,150,067
Valuation allowance (2,305,456) (428,805)
----------- ----------
Net deferred tax assets $ 930,000 $1,721,262
=========== ==========
The Company has recorded valuation allowances to offset tax benefits
arising from deferred revenue, reserves, state tax loss carryforwards and
stock-based compensation because their realization is uncertain.
The Company has approximately $2.7 million of state net operating loss
carryforwards available to offset future taxable income.
NOTE 12 - COMMITMENTS AND CONTINGENT LIABILITIES
Leases
The Company leases office facilities and equipment under operating leases
expiring at various dates through 2005. The lease for the Company's headquarters
has a six-year renewal option through 2011.
During the year, the Company entered into two capital leases under a
sale/leaseback arrangement with a leasing company. The transactions resulted in
a gain of approximately $45,000, which has been deferred and will be amortized
on a straight-line basis over the related lease terms. The leases are together
payable in 36 monthly installments of $21,000 and an additional 12 installments
of $3,900.
Future minimum lease payments as of December 31, 2001 are as follows:
Capital Operating
Leases Leases
------ ------
2002 $248,916 $1,348,200
2003 248,916 1,106,446
2004 114,396 1,060,517
2005 15,711 295,341
2006 -- 169,500
------- ---------
Total minimum lease payments 627,939 $3,980,004
==========
Less: Amount representing
interest on capital leases (85,729)
-------
$542,210
=======
Operating lease expense for 2001, 2000 and 1999 totaled $1,253,711, $955,866 and
$947,732, respectively.
F-15
Employment agreements
In January 2001, the Company entered into new employment agreements with
its President and Vice-President. The agreements run for three years and provide
for annual increases in base salaries, and customary fringe benefits. The
officers are also entitled to share in a bonus pool equal to 10% of the net
pre-tax profit of the Company, as defined.
Legal matters
FMSC is a respondent in a customer arbitration seeking rescissionary
damages of approximately $9.5 million including statutory interest and punitive
damages. The claimant alleges violations of various provisions of federal and
state securities laws. FMSC is vigorously defending against this claim.
FMSC is also a respondent in several claims arising from customer purchases
of certain high yield corporate bonds which declined in market value after the
purchases were made. The claims allege, among other charges, unsuitable
recommendations and/or improper use of margin, and seek aggregate damages of
approximately $2,500,000. FMSC is vigorously defending these actions.
FMSC is also a respondent or co-respondent in various other legal
proceedings which are incidental to its securities business. FMSC is contesting
these claims and believes that there are meritorious defenses in each case.
After considering all relevant facts, available insurance coverage and the
advice of counsel, management believes that significant adverse judgments
against FMSC from pending litigation could have a material impact on the
Company's financial condition, results of operations, and cash flows in any
particular quarterly or annual period, or in the aggregate. As of December 31,
2001, the Company has established a $995,000 reserve for litigation costs that
are probable and can be reasonably estimated. The reserve is included in accrued
liabilities. Management cannot give assurance that this reserve will be adequate
to abosrb actual costs that are subsequently incurred.
NOTE 13 - FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK and
CONCENTRATIONS OF CREDIT RISK
The Company executes securities transactions on behalf of its customers. If
either the customer or a counter-party fail to perform, the Company by agreement
with its clearing broker may be required to discharge the obligations of the
non-performing party. In such circumstances, the Company may sustain a loss if
the market value of the security is different from the contract value of the
transaction.
F-16
The Company seeks 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, the Company's
clearing firm requires additional collateral or reduction of positions, when
necessary. The Company also completes credit evaluations where there is thought
to be credit risk.
The Company has sold securities that it does not currently own and will
therefore be required to purchase such securities at a future date. The Company
has recorded these obligations in the financial statements at market values of
the related securities ($245,078 and $386,459 at December 31, 2001 and 2000,
respectively) and will incur a loss if the market value of the securities
increases subsequent to year-end.
Financial instruments that potentially subject the Company to significant
concentrations of credit risk consist principally of cash and securities
inventories. The Company maintains all inventory positions and a significant
portion of its cash balances at its clearing firm. Asset balances may
periodically exceed insurance coverage.
NOTE 14 - 401(k) PLAN
The Company sponsors a defined contribution pension plan covering all
participating employees. The Company may elect to contribute up to 100% of each
participant's annual contribution to the plan. Employer contributions for 2001,
2000 and 1999 were $-0-, $-0- and $74,132, respectively.
NOTE 15 - TEMPORARY EQUITY - STOCK SUBJECT TO REDEMPTION
From time to time, the Company has issued unregistered shares of its Common
Stock in settlement of various customer claims and invoices for legal services.
With respect to these shares, the Company provides a guarantee to pay to the
selling stockholder the difference between a target price and the actual selling
price of the shares upon expiration of the statutory holding period. The holders
of the shares may elect to retain the shares once the holding period lapses.
Such an election will release the Company from any further obligation to the
stockholders.
The Company has established a temporary equity account to record its
maximum liability from the guarantees. Payment of any shortfall is charged to
this account. Any balance remaining at the end of the respective holding periods
is credited to permanent capital. Following is a schedule of activity in this
account for the year ended December 31, 2000 (there was no activity during
2001):
Shares Amount
------ ------
Balances, December 31, 1999 18,000 $ 36,500
Payments -- (12,000)
Transfer to permanent capital (15,000) (18,000)
------- --------
Balances, December 31, 2000 and December 31, 2001 3,000 $ 6,500
======= ========
F-17
NOTE 16 - STOCK OPTION PLANS
The Company currently has three option plans in place: The 1992 Incentive
Stock Option Plan (the "1992 Plan"), the 1992 Non-Executive Director Stock
Option Plan (the "Director Plan"), and the 1996 Senior Management Incentive Plan
(the "1996 Plan").
In June 2000, the Company's stockholders approved an amendment to the 1992
Plan to increase the number of shares reserved for issuance from 6,000,000 to
8,000,000 shares. Under the 1992 Plan, options may be granted to employees,
consultants and registered representatives of the Company, but only options
issued to employees will qualify for incentive stock option treatment (ISOs).
The exercise price of an option designated as an ISO may not be less than the
fair market value of the Common Stock on the date of grant. However, ISOs
granted to a ten percent stockholder must have an exercise price of at least
110% of such fair market value. At the time an option is granted, the Board of
Directors will fix the period within which it may be exercised. Such exercise
period may not be less than one year nor more than ten years from the date of
grant. The 1992 plan will expire in May 2002.
The Company has reserved 1,000,000 shares of its Common Stock for issuance
under the Director Plan. Options to purchase 20,000 shares of Common Stock are
granted to each Non-Executive Director on August 1 of each year, provided such
individual has continually served as a Non-Executive Director for the
twelve-month period immediately preceding the date of grant. The options will
expire in five years from the date of grant. The exercise price of such options
shall be equal to the fair market value of the Company's Common Stock on the
date of grant. The Director Plan will terminate in May 2002.
In June 2000, the Company's stockholders approved an amendment to the 1996
Plan to increase the number of shares reserved for issuance to key management
employees from 2,000,000 to 4,000,000 shares. Awards can be granted through the
issuance of incentive stock rights, stock options, stock appreciation rights,
limited stock appreciation rights, and shares of restricted Common Stock. The
exercise price of an option designated as an ISO may in no event be less than
100% of the then fair market price of the stock (110% with respect to ten
percent stockholders), and not less than 85% of the fair market price in the
case of other options. The 1996 Plan will terminate in June 2006.
F-18
A summary of the activity in the Company's stock option plans for the
three-year period ended December 31, 2001 is presented below:
Weighted
Average
Exercise
Shares Prices
------ ------
Options outstanding, December 31, 1998 3,253,300 1.61
Granted 710,000 2.01
Canceled (209,150) 2.45
Exercised (234,450) .91
--------
Options outstanding, December 31, 1999 3,519,700 1.68
Granted 2,014,498 1.87
Canceled (967,500) 1.37
Exercised (57,000) .98
---------
Options outstanding, December 31, 2000 4,509,698 1.84
Granted 1,130,000 1.29
Canceled (395,700) 1.69
---------
Options outstanding, December 31, 2001 5,243,998 1.73
=========
Additional information with respect to options under the Company's
option plans is as follows:
Shares of common stock available
for future grant 5,899,802
Weighted-average grant date fair value of options
granted during each year using the Black-Scholes
option pricing model
1999 $.70
2000 $.49
2001 $.21
The Company applies APB No. 25 in accounting for employee stock options.
Accordingly, compensation is recognized in the financial statements only for the
fair value of options issued to consultants and affiliate brokers. Such
compensation is amortized to expense over the related options' vesting periods.
Compensation expense recognized in 2001, 2000 and 1999 totaled $33,830, $288,209
and $195,841, respectively.
F-19
Pro forma net income (loss) and EPS information, as required by SFAS No.
123, have been determined as if the Company had accounted for employee stock
options under the fair value method. The fair value of these options was
estimated at grant date using a Black-Scholes option pricing model with the
following weighted-average assumptions for 2001, 2000 and 1999:
2001 2000 1999
---- ---- ----
Risk free interest rates 4.46% 6.07% 5.76%
Expected option lives 2.4 years 2.4 years 2.5 years
Expected volatilities 83% 72% 48.5%
Expected dividend yields 0% 0% 0%
The Company's pro forma information follows:
Net income (loss) 2001 2000 1999
---- ---- ----
As reported $(5,208,223) $ (689,408) $2,283,278
Pro forma (5,676,242) (1,152,958) 2,109,706
Basic income (loss) per share
As reported $ (.61) $ (.08) $ .22
Pro forma $ (.65) $ (.13) $ .21
Diluted income (loss) per share
As reported $ (.61) $ (.08) $ .21
Pro forma $ (.65) $ (.13) $ .19
The full impact of calculating compensation expense for stock options under
SFAS No. 123 is not reflected in pro forma net income, since such expense is
amortized over the vesting period of those options as they vest.
Deferred compensation resulting from the issuance of nonemployee stock
options of approximately $56,067 at December 31, 2001 will be charged to expense
over the remaining vesting period of the related options. Amortization of
deferred compensation totaled $33,830, $288,209, and $195,841 in 2001, 2000 and
1999, respectively.
Additional information as of December 31, 2001 with respect to all
outstanding options is as follows:
Options Outstanding Options Exercisable
------------------- -------------------
Weighted
Average Weighted Weighted
Remaining Average Average
Number Contractual Exercise Number Exercise
Range of prices Outstanding Life Price Exercisable Price
--------------- ----------- ---- ----- ----------- -----
$0.44 - $0.67 134,000 5.51 $0.54 58,800 $0.55
$0.70 - $1.09 865,000 2.33 0.90 853,000 0.90
$1.20 - $1.80 1,353,998 2.44 1.53 942,899 1.52
$1.94 - $2.75 2,891,000 3.04 2.13 1,786,000 2.17
--------- ---- ---- --------- ----
$0.44 - $2.75 5,243,998 2.83 $1.73 3,640,699 $1.68
========= ==== ==== ========= ====
F-20
NOTE 17 - STOCKHOLDERS' EQUITY
Rights offering
In February 1998, the Company completed an offering of 3,072,779 Units,
each Unit consisting of one Class A Redeemable Common Stock Purchase Warrant,
one Class B Redeemable Common Stock Purchase Warrant, and one Class C Redeemable
Common Stock Purchase Warrant. The Warrants have the following exercise prices
and terms:
Exercise Price Exercise Period
Warrant Per Share from Date of Issuance
------- --------- ---------------------
Class A $3.00 Three years (see below)
Class B 5.00 Five years
Class C 7.00 Seven years
Each shareholder of record as of December 15, 1997 received three rights
for each share of Common Stock held as of the record date, with three rights
required to subscribe for a single Unit at a price of $.45 per Unit. There are
currently 3,072,446 Class A, Class B and Class C warrants outstanding,
respectively.
In December 2000, the Company's board of directors approved a two-year
extension of the Class A Warrants to February 17, 2003.
Preferred Stock
In 1999, the Company's board of directors authorized the issuance of up to
625,000 shares of a Series A Convertible Preferred Stock with the following
features:
Par value: $.10 per share
Dividends: 6% payable quarterly at the rate of
$.075 per share until conversion
Voting rights: None
Liquidation preference: $5.00 per share
Conversion: Automatic conversion into two shares of
Common Stock at $2.50 per share once the
closing price for the Common Stock is
$3.50 or above for 20 consecutive
trading days, and the shares are
registered for public sale.
During 1999, the Company issued 349,511 Series A shares in a private
exchange offering to Global lease investors (see Note 10). During 2001, 18,321
preferred shares were converted into 36,642 shares of common stock.
The Company is presently authorized to issue 4,375,000 additional shares of
Preferred Stock, none of which has been issued at December 31, 2001. The rights
and preferences, if any, to be given to these preferred shares will be
designated at the time of issuance.
F-21
Stock Repurchase Program
During 2001 and 2000, the Company repurchased 236,767 and 1,105,034 shares
for $143,564 and $1,460,740, respectively, under a stock repurchase program
authorized by the board of directors.
Warrants
During 1999, the Company issued 25,000 common stock purchase warrants in
connection with a Global lease settlement. The warrants are exercisable at $1.75
per share for a five-year period. The Company valued the warrants at $27,382
using the Black-Scholes option pricing model.
NOTE 18 - FAIR VALUE OF FINANCIAL INSTRUMENTS
Substantially all of the Company's financial instruments at December 31,
2001 and 2000, consisting primarily of marketable equity securities, amounts due
from FMSC's clearing firms, and notes payable are carried at, or approximate
fair value due to their short-term nature, or the use of mark-to-market
accounting for marketable securities.
NOTE 19 - NET CAPITAL REQUIREMENTS
FMSC is subject to the Securities and Exchange Commission Uniform Net
Capital Rule (Rule 15c3-1), which requires FMSC to maintain minimum net capital,
as defined. At December 31, 2001, FMSC had net capital of $1,039,165, which was
$726,396 in excess of its required net capital of $312,769. FMSC's ratio of
aggregate indebtedness to net capital was 4.51 to 1.
NOTE 20 - UNAUDITED QUARTERLY RESULTS OF OPERATIONS
March 31, June 30, September 30, December 31,
2001 2001 2001 2001
---- ---- ---- ----
Revenues $11,712,547 $14,608,537 $12,192,917 $12,706,414
Expenses 12,331,999 15,391,658 14,267,380 14,437,601
Net loss (619,452) (783,121) (2,074,463) (1,731,187)
Net loss available to common
stockholders (642,918) (807,961) (2,099,303) (1,756,794)
Loss per common share:
Net loss available to common
stockholders - basic (.07) (.09) (.24) (.20)
Net loss available to common
stockholders - diluted (.07) (.09) (.24) (.20)
March 31, June 30, September 30, December 31,
2000 2000 2000 2000
---- ---- ---- ----
Revenues $24,486,906 $13,346,260 $12,671,033 $ 8,825,687
Expenses 22,598,586 13,202,413 13,061,206 11,122,889
Net income (loss) 1,888,320 109,647 (390,173) (2,297,202)
Net income (loss) available to
common stockholders 1,862,781 84,107 (414,876) (2,324,148)
Income (loss) per common share:
Basic:
Income (loss) before extraordinary
loss .19 .01 (.04) (.25)
Net income (loss) available
to common stockholders .19 .01 (.04) (.25)
Diluted:
Income (loss) before extraordinary
loss .17 .01 (.04) (.25)
Net income (loss) available
to common stockholders .17 .01 (.04) (.25)
F-22
NOTE 21 - VALUATION AND QUALIFYING ACCOUNTS
Additions
Balance at Charged to Charged to Balance at
beginning costs and other end
of period expenses accounts Deductions of period
--------- -------- -------- ---------- ---------
Valuation allowance for deferred tax assets:
Year ended December 31, 2001 $ 428,805 $1,876,651 $-- $ -- $2,305,456
Year ended December 31, 2000 189,629 239,176 -- -- 428,805
Year ended December 31, 1999 731,469 -- -- (541,840) 189,629
Reserve for notes receivable:
Year ended December 31, 2001 $ -- $ -- $-- $ -- $ --
Year ended December 31, 2000 -- 239,000 -- (239,000) --
Year ended December 31, 1999 1,775,000 100,000 -- (1,875,000) --
EXHIBIT 10.26
SUBLEASE
Sublease dated as of May 31, 2001 between ELOQUENT, INC., having an office
at 2000 Alameda de las Pulges, Suite 100, San Mateo, California 94403
("Sublessor") and FIRST MONTAUK FINANCIAL CORP., a New York corporation, having
an office at 328 Newman Springs Road, Red Bank, New Jersey 07741("Subtenant").
In consideration of Ten ($10.00) Dollars, in hand paid, each to the other,
the receipt and sufficiency of which is hereby acknowledged, Sublessor and
Subtenant agree as follows:
1. Demise and Term.
(a) Sublessor hereby Subleases to Subtenant, and the Subtenant hereby hires
from Sublessor, the premises consisting of a portion of the twenty-fifth (25th)
floor (the "Subleased Premises") in the building known as 40 Wall Street, New
York, New York (the "Building") being the entire premises that has been leased
to Sublessor under a lease dated as of January 5, 2000 between 40 Wall Street,
LLC, as landlord (herein, "Landlord"), and Sublessor, as tenant (herein the
"Prime Lease").
(b) The term of this Sublease (herein, the "Term") shall commence on the
date hereof (herein, the "Commencement Date") and shall expire on January 30,
2005 (the "Expiration Date"), unless sooner canceled or otherwise terminated as
provided in this Sublease.
2. Rent.
(a)
(i) Subtenant shall pay to Sublessor fixed rent (the "Fixed Rent") at the
rate of One Hundred Ninety-Two Thousand One Hundred Five Dollars and 00/100
($192,105.00) per annum ($16,008.75 per month);
(ii) The Fixed Rent shall be paid in equal monthly installments of Sixteen
Thousand Eight and 75/100 Dollars ($16,008.75), payable in advance on the first
day of each calendar month during the Term, commencing on June 1, 2001, and
shall be, at Subtenant's option, either (1) delivered to Sublessor at
Sublessor's address as set forth above (or such address as Sublessor shall
designate by written notice) or (2) sent to Sublessor via wire transfer in
immediately available federal funds to such account in such bank as Sublessor
shall designate, from time to time, except that the sum of $16,008.75 shall be
paid by Subtenant to Sublessor on the execution and delivery of this Sublease
and shall be applied by Sublessor to the first monthly installment of Fixed Rent
becoming due hereunder on June 1, 2001. Subtenant shall provide Sublessor with
at least thirty (30) days' prior written notice if elects to change its method
of paying Fixed Rent, as provided in clauses (1) and (2) above. Notwithstanding
the foregoing, provided that Subtenant is not then in default beyond any
applicable grace period of any of its obligations or covenants under this
Sublease, Subtenant shall not be required to pay its monthly installment of
Fixed Rent due on June 1, 2002.
(b)
(i) Subtenant shall further pay to Sublessor any and all amounts
("Additional Rent") payable by Sublessor to Landlord pursuant to the provisions
of the Prime Lease, as hereby modified, for all periods occurring within or
attributable to the Term or otherwise to be paid by Subtenant pursuant to this
Sublease. Such Additional Rent shall be (1) payable, at Subtenant's option,
pursuant to the methods set forth in clauses 2(a)(1) and 2(a)(2) above, and (2)
due (10) days after notice from Sublessor or five (5) days prior to the due date
of such Additional Rent under the Prime Lease, whichever is later. Subtenant
shall provide Sublessor with at least thirty (30) days' prior written notice if
elects to change its method of paying Additional Rent. Upon Sublessor's receipt
of any backup documentation relating to Additional Rent, Sublessor shall furnish
Subtenant with copies thereof. For purposes of determining the amounts payable
as Additional Rent by Subtenant pursuant to this paragraph 2(b)(i), any of the
aforesaid amounts payable by Sublessor under the Prime Lease which cover a
fiscal or other period any part of which occurs before the Commencement Date or
after the Expiration Date, shall be apportioned according to the number of days
in such period which occur within the portion of the Term of this Sublease.
(ii) Subtenant shall pay all charges specifically attributable to the
Subleased Premises under the Prime Lease and Subtenant's use and occupancy
thereof, including without limitation, all charges for cleaning, electricity,
supplemental or after hours air-conditioning (whether or not any such
supplemental air-conditioning equipment is existing in the Demised Premises as
of the Commencement Date), condenser water charges, and all other fees, charges
and expenses payable separately to Landlord under the Prime Lease to the extent
requested, caused or necessitated by Subtenant or its agents, employees,
designees, contractors or invitees and which are not furnished by Landlord
without additional charge. Such charges may be billed to Subtenant either by
Sublessor or directly by the Landlord. If billed by Subtenant, such bill shall
include a copy of the invoice, if any, provided by Landlord.
(c)
(i) All amounts required to be paid under this Sublease by Subtenant shall
be deemed "rent".
(ii) All rent shall be paid by Subtenant to Sublessor in lawful money of
the United States, without notice (except as may be specifically provided in
this Sublease) or demand therefor, and without setoff, abatement, counterclaim,
or other deduction of any amount for any reason whatsoever (except as may be
expressly permitted under this Sublease), at the address of Sublessor set forth
at the beginning of this Sublease or to such other person and/or at such other
address as Sublessor shall have then designated by notice to Subtenant.
(iii) No payment by Subtenant or receipt by Sublessor of an amount less
than the amount required to be paid hereunder shall be deemed other than on
account of the earliest unpaid rent; nor shall any endorsement or statement on
any check, letter, or other document be deemed an accord and satisfaction, and
Sublessor may accept any check or payment without prejudice to Sublessor's
rights under this Sublease, including Sublessor's right to recover the balance
due or to pursue any other right or remedy available to Sublessor.
(d) Any provision in the Prime Lease referring to "fixed rent" or
"additional rent" incorporated herein by reference shall be deemed to refer to,
respectively, the Fixed Rent and Additional Rent due under this Sublease.
(e) If Subtenant fails to pay in a timely manner any rent under this
Sublease and said rent shall not be paid by the tenth (10th) day after the same
become due and payable, (i) interest shall accrue on the amount overdue, from
the date on which that amount became due and payable until paid, at the rate set
forth in Article 48 of the Prime Lease, and (ii) a late charge of three (3%)
percent shall accrue and be payable by Subtenant to the Sublessor on the amount
overdue to compensate Sublessor for the administrative burden and expense
incurred in connection with any such late payment. Nothing contained in this
subsection, and no acceptance of interest or late charges by Sublessor, shall be
construed to extend or change the time for payment of rent or to impair, limit,
or otherwise affect any other rights or remedies Sublessor may have as the
result of Subtenant's failure to timely pay rent.
(f) Subtenant agrees to pay directly to the applicable authority, all use
and occupancy taxes assessed or imposed on the rents payable by Subtenant under
this Sublease, to file all applicable returns and filings in connection
therewith and to provide Sublessor with copies and evidence thereof upon
request.
3. Subject To Prime Lease:
(a) This Sublease is and shall be subject and subordinate to the Prime
Lease and to all matters to which the Prime Lease is and shall be subject and
subordinate.
(b) If for any reason the term of the Prime Lease shall end prior to the
Expiration Date, then the Term of this Sublease shall thereupon automatically
terminate, and, unless such termination shall be due to the Sublessor not paying
the rent payable under the Prime Lease at a time when the Subtenant has paid all
rents due and payable under this Sublease, Sublessor shall not be liable to
Subtenant by reason thereof.
(c) Notwithstanding anything to the contrary contained in this Sublease,
Subtenant does not have any right in respect of the Subleased Premises greater
than Sublessor's rights under Prime Lease.
4. Incorporation by Reference.
(a)
(i) The provisions, terms, conditions and covenants of the Prime Lease are
incorporated by reference into this Sublease such that, except to the extent
that they are inapplicable or specifically modified by the provisions of this
Sublease for the purposes of incorporation by reference, each and every
provision, term, condition and covenant of the Prime Lease binding upon or
inuring to the benefit of the Landlord thereunder shall, in respect of this
Sublease, bind or inure to the benefit of Sublessor, and each provision of the
Prime Lease binding upon or inuring to the benefit of the "Tenant" or "Lessee"
thereunder shall, in respect of this Sublease, bind or inure to the benefit of
Subtenant, with the same force and effect as though those provisions were
completely set forth in this document except Sublessor shall not be obligated to
perform any of the obligations of the Landlord thereunder.
(ii) For the purpose of incorporation by reference of provisions of the
Prime Lease into this Sublease: (A) the words "Landlord" and "Tenant", or words
of similar import, wherever used in the Prime Lease, shall be construed to mean,
respectively, the Sublessor and Subtenant under this Sublease, (B) the word
"lease" or words of similar import, wherever they appear in the Prime Lease,
shall be construed to mean this Sublease, (C) the word "rent" and words of
similar import, wherever used in the Prime Lease, shall be construed to mean the
rent payable under this Sublease, and (D) the words "Term", "Commencement Date",
and "Expiration Date", or words of similar import, wherever used in the Prime
Lease, shall be construed to mean, respectively, the term of this Sublease and
the dates set for the beginning and the end of the term of this Sublease.
(iii) To the extent possible, the provisions of the Prime Lease
incorporated by reference into this Sublease shall be construed as consistent
with and complementary to the other provisions of this Sublease. If any of the
express provisions of this Sublease shall conflict with any of the provisions
incorporated by reference, such conflict shall be resolved in every instance in
favor of the express provisions of this Sublease.
(b) In order to facilitate the coordination of the provisions of this
Sublease with those of the Prime Lease, the time periods contained in provisions
of the Prime Lease that are incorporated by reference into this Sublease and for
which the same action must be taken under both the Prime Lease and this Sublease
(such as, for example and without limitation, the time period for the curing of
a default under this Sublease that is also a default under the Prime Lease or
for the response to a request by Subtenant for consent to an action for which
the consent of Landlord is also required), are changed for the purpose of
incorporation by reference by shortening or lengthening that period in each
instance by five (5) days so that in each instance Subtenant shall have that
much less time to observe or perform hereunder than Sublessor has as the tenant
under the Prime Lease and Sublessor shall have that much more time to observe,
perform, consent, approve, or otherwise act hereunder than the Landlord has
under the Prime Lease. In instances in which the same action is not required
under both the Prime Lease and this Sublease, the time periods contained in
provisions of the Prime Lease that are incorporated by reference are not
changed.
(c) To the extent that the Prime Lease requires that Sublessor, as tenant,
obtain the written consent of Landlord, Subtenant shall be required to obtain
both the prior written consent of Landlord and Sublessor. Sublessor shall be
under no obligation to consent to or approve any matter unless consent or
approval with regard to that matter shall have already been obtained from
Landlord, or unless such consent is simultaneously obtained, whether or not the
Prime Lease, as incorporated by reference herein, requires that such consent
shall not be unreasonably withheld or delayed. Nothing herein contained however
shall be deemed to require Sublessor to grant its consent or approval to any
matter even where Landlord's consent or approval has been obtained or where
Landlord's consent is not to be unreasonably withheld or delayed.
5. Services.
(a) All systems and facilities serving and services furnished to the
Subleased Premises and all maintenance, repairs, replacements, restorations,
alterations, and other work pertaining to the Subleased Premises, if any, are
not to be furnished or made by or otherwise be the obligation of Sublessor, and
Subtenant shall look solely to Landlord for the furnishing of those items to the
extent of Landlord's obligations under the Prime Lease. Without limiting the
generality of the foregoing, (1) Sublessor shall not be responsible for any
failure or interruption, for any reason whatsoever, of any of the services
supplied at the Subleased Premises or the property of which the Subleased
Premises is a part by Landlord, and (2) no failure to furnish, or impairment,
diminution or interruption of, any of such services by Landlord under the Prime
Lease shall give rise to any (a) abatement, diminution, or reduction of
Subtenant's obligations under this Sublease, or (b) constructive eviction, in
whole or in part, or (c) liability on the part of Sublessor. The foregoing
notwithstanding, if Sublessor shall actually receive any abatement of all or
part of the rents payable under the Prime Lease due to any of the foregoing,
Subtenant shall similarly receive a corresponding and proportionate abatement of
the rents payable hereunder.
(b) Any obligation of Sublessor contained in this Sublease by the
incorporation by reference of provisions of the Prime Lease may and shall be
deemed to be fully observed or performed by Sublessor's using good faith
efforts, upon request of Subtenant, to cause the Landlord to observe and/or
perform such corresponding obligation of the Landlord under the Prime Lease, and
Sublessor shall not be required to make any payment (other than to pay the rent
due under the Prime Lease if Subtenant shall have timely paid all the rent then
due under this Sublease) or to take any action, and shall not otherwise have any
liability to Subtenant with respect to such obligations. Without limiting the
generality of the foregoing, the obligation of Sublessor to use good faith
efforts to cause the observance or performance by Landlord of Landlord's
obligations under the Prime Lease shall not be construed as requiring Sublessor
to pay any money or incur any cost or liability beyond that for which it is
obligated under the Prime Lease or to institute or prosecute any legal action or
proceeding or to withhold any rent or risk any threat of litigation. All costs
reasonably incurred by Sublessor at the direction or with the knowledge of
Subtenant in seeking to cause the Landlord to perform its obligations under the
Prime Lease with respect to the Subleased Premises shall be promptly paid
directly by Subtenant or reimbursed by Subtenant to Sublessor, as Sublessor may
direct.
(c) In the event the Landlord shall fail to perform any of its obligations
with respect to the Subleased Premises, then Subtenant shall give Sublessor
prompt written notice thereof and Sublessor shall, at Subtenant's expense,
exercise and enforce its rights under the Prime Lease to cause the Landlord to
observe and/or perform such obligations. Subtenant shall indemnify and hold
harmless Sublessor from and against claims made against and losses, costs,
damages and liabilities (including reasonable attorneys' fees) incurred by
Sublessor in connection with any such claim, action or proceeding instituted or
prosecuted by Sublessor on behalf of the Subtenant.
6. Use.
(a) Subtenant shall use and occupy the Subleased Premises only for
executive and general offices and for no other purpose. Without limiting the
generality of the foregoing, Subtenant shall not allow the use of the Subleased
Premises or any part thereof for (i) the preparation and/or sale of food for on
or off premises consumption or (ii) use by a foreign or domestic governmental
agency.
(b) Subtenant shall not make or cause, suffer or permit the making of any
addition, change, replacement, installation, or other alteration in or to the
Subleased Premises without obtaining the prior written consent of Sublessor in
each instance. Sublessor shall not unreasonably withhold or delay its consent to
non-structural alterations in or to the Subleased Premises, provided that such
alterations shall have been consented to by the Landlord if the Landlord's
consent is required under the terms of the Prime Lease, and provided that
Subtenant shall remove such alterations and restore the Subleased Premises, to
the condition required pursuant to the terms of the Prime Lease upon the
expiration of the term of the Prime Lease and provide Sublessor with adequate
security therefor.
(c) Subtenant shall not, without first obtaining the prior written consent
of both Landlord as provided, and if required, in the Prime Lease and of
Sublessor, either (i) assign, mortgage or encumber its interest in this
Sublease; (ii) permit this Sublease to be assigned by operation of law or
otherwise; or (iii) sublet all or permit the subletting of any part of the
Subleased Premises or permit the occupancy thereof by any person, party or
entity other than Subtenant.
(d) Subtenant shall maintain and repair the Subleased Premises in the
condition required by the Prime Lease and otherwise perform all other
obligations of the tenant or lessee under the Prime Lease insofar as they relate
to the Subleased Premises during the Term of this Sublease.
(e) Subtenant shall not do, or permit to be done with respect to the
Subleased Premises, anything that would constitute a breach or violation of any
term, covenant, or condition of the Prime Lease or other default under Prime
Lease on the part of the tenant or lessee thereunder.
(f) In the event Subtenant shall be in default of any covenant of, or shall
fail to honor any obligation under this Sublease, Sublessor shall have available
to it all of the remedies available to the Landlord under the Prime Lease, in
the event of a like default thereunder.
7. Condition of Subleased Premises.
(a) Subtenant is leasing and accepts the Subleased Premises "AS
IS"condition as of the date hereof, the removal of Sublessor's personal property
and reasonable wear and tear between the date hereof and the Commencement Date
excepted. Without limiting the generality of the foregoing, Sublessor shall have
no obligation to make, supply, or perform any alterations, services, material,
fixtures, equipment or decorations to the Subleased Premises. In entering into
this Sublease, Subtenant has relied solely on such investigations, examinations
and inspections as Subtenant has chosen to make. Subtenant acknowledges that
Sublessor has afforded Subtenant the opportunity for full and complete
investigations, examinations and inspections. The taking of possession by
Subtenant shall be deemed conclusive evidence that the same were in satisfactory
condition as of the Commencement Date.
(b) So long as Subtenant shall not be in default under this Sublease and
this Sublease shall be in full force and effect, Subtenant shall have the right
to use the items of personal property described on Schedule "I" attached hereto
as and to the extent the same exist in the Subleased Premises as of the
Commencement Date (herein, the "Items"). Subtenant acknowledges that: (1)
Sublessor has made no representations or warrantees with respect to the Items;
(ii) Subtenant agrees to accept the Items in their "as is" condition as of the
Commencement Date and assumes all risk of the condition, operation, fitness or
suitability of the same; (iii) Subtenant shall operate, maintain, repair and/or
replace the Items to the extent required, at Subtenant's sole cost and expense,
including without limitation, making all payments and arrangements under any
required service contracts and operating agreements, it being understood that
Sublessor shall not be required to incur any cost or expense to allow Subtenant
to utilize any of the Items or to repair, restore or replace the same; (iv)
Subtenant shall indemnify and hold the Sublessor harmless from and against any
and all claims, loss, cost, damage, liability or expense (including reasonable
attorney's fees and expenses) which Sublessor may sustain or incur by reason of
Subtenant's and its employees, agents, guests or invitees use of the Items,
whether or not based, in whole or in part, upon any claim of negligence on the
part of the Sublessor; (v) during the term of this Sublease, the Items shall be
the property of Sublessor and shall not be removed from the Subleased Premises,
and (vi) upon the expiration of this Sublease, and provided that Subtenant has
paid to Sublessor all fees due and payable by Subtenant under this Sublease, the
Items shall become the property of Subtenant and all rights of Sublessor therein
or thereto shall be extinguished. Subtenant's right to use the Items shall be
deemed automatically revoked upon the expiration or termination of this
Sublease. To the extent with respect to any of the Items, any existing service
contracts or operating agreements shall be in effect, the same shall either be
(x) terminated by Sublessor prior to the Commencement Date, or (y) if assignable
to Subtenant and Subtenant desires the same to be assigned to Subtenant and
Sublessor desires to do so, assigned by Sublessor to Subtenant, in which event
Sublessor shall pay all charges unpaid and accrued thereunder up to, but not
including, the Commencement Date.
8. Insurance. Subtenant shall obtain and keep in full force and effect
during the entire term of this Sublease, at its sole cost and expense, such
insurance as is required to be carried under the Prime Lease and in compliance
with the provisions thereof. Subtenant shall, in addition to the parties to be
named as additional insureds under the Prime Lease, cause Sublessor to be named
as additional named insured thereunder. Upon execution and delivery of this
Sublease by Subtenant, Subtenant shall deliver to Sublessor a certificate of
insurance complying with the foregoing requirements.
9. Fire and Other Casualty. In the event of any fire or other casualty in
or to the Subleased Premises, the respective rights of Subtenants and Sublessor
shall be governed by Article 9 of the Prime Lease.
10. Changes. This Sublease cannot be changed or terminated orally or in any
manner other than by a written agreement executed by both parties, which
agreement is consented to by the Landlord, if required by the terms of the Prime
Lease.
11. Successors And Assigns. Except as may be otherwise specifically
provided in this Sublease, the provisions of this Sublease shall extend to,
bind, and inure to the benefit of the parties hereto and their respective
personal representatives, heirs, successors, and assigns.
12. Brokerage. Sublessor and Subtenant hereby represent to each other that
each such party, for itself only, has not dealt with any broker in connection
with this Sublease other than Cushman & Wakefield, Inc. (the "Broker") nor does
it have any knowledge of any other broker who has been or has claimed to have
been involved or instrumental in any way in bringing about this Sublease. Each
party shall indemnify, defend, and hold harmless the other from and against all
losses, damages, costs, and liabilities (including, without limitation,
reasonable attorneys' fees and expenses) arising in connection with any claims
for a brokerage commission made by any broker or other person (other than the
Broker) against the other party based upon any dealings such party may have had
with the claimant. In reliance on the foregoing, Sublessor will pay the
commission payable to the Broker on account of this transaction pursuant to a
separate agreement. The provisions of this Article 12 shall survive the
termination of this Sublease.
13. Notices. All notices, requests, approvals, waivers, consents,
deliveries, or other communications ("Notices") that either party is required or
desires to send to the other in connection with this Sublease shall be in
writing, duly executed by the party sending the Notice, and sent by registered,
or certified mail, return receipt requested (with postage prepaid) or reputable
guaranteed overnight carrier (such as Federal Express), securely wrapped and
addressed as follows: (a) if to Subtenant, to Subtenant at the Subleased
Premises or such other address as Subtenant shall then have designated for that
purpose by Notice to Sublessor, with a copy to Paul Lieberman, Esq., First
Montauk Securities Corp., 328 Newman Springs Road, Red Bank, New Jersey 07741
and (b) if to Sublessor, to Sublessor's address set forth at the beginning of
this Sublease or to such other address as Sublessor shall then have designated
for that purpose by notice to Subtenant, with a copy to Abby Wenzel, Esq., Wolf,
Block, Schorr and Solis-Cohen LLP, 250 Park Avenue, New York, New York 10177.
Except in any instance where it maybe otherwise specifically provided in this
Sublease, Notices shall be deemed given or served three (3) days following the
date delivery of the Notice is tendered by the postal service or one (1)
business day following delivery to reputable guaranteed overnight courier.
14. Interpretation.
(a) This Sublease shall be governed by and construed in accordance with the
of the State of New York or the State of California.
(b) If any provision of this Sublease or the application thereof to any
person or circumstance shall, for any reason and to any extent, be invalid or
unenforceable, the remainder of this Sublease and the application of that
provision to other persons or circumstances shall not be affected but rather
shall be enforced to the extent permitted by law.
(c) The captions, headings and titles contained in this Sublease, if any,
are solely for convenience of reference and shall not affect its interpretation.
(d) This Sublease shall be construed without regard to any presumption or
other rule requiring construction against the party causing this Sublease to be
drafted.
(e) Each covenant in this Sublease shall be construed as a separate and
independent covenant, not dependent on any other provision of this Sublease.
(f) All words and terms used in this Sublease, regardless of the number or
gender in which they are used, shall be construed to include any other number
and any other gender as the context may require.
(g) When used in this Sublease, the following words or terms shall have
respective meanings indicated:
(i) "person" shall mean any individual, corporation, partnership, limited
liability company, joint venture, trust, or other business or legal entity;
(ii) "including", shall be construed as though it were followed by the
words "without limitation" or "but not limited to";
(iii) "provision" shall be construed as including any agreement condition,
or other term; and
(iv) "rent" shall be construed as including all Fixed Rent, Additional
Rent, and other charges payable under this Sublease, however designated.
(h) Nothing contained in this Sublease shall be construed to create privity
of estate or of contract between Subtenant and the Landlord.
(i) All obligations under this Sublease that shall arise, accrue, or
otherwise relate to the period prior to the end of the term of this Sublease
shall survive the end of the term of this Sublease.
15. Consent of Landlord.
(a) Notwithstanding anything contained in this Sublease to the contrary,
this Sublease is subject to and conditioned upon obtaining the written consent
of Landlord (the "Consent") to this Sublease in accordance with the provisions
of the Prime Lease. Sublessor shall promptly request such consent and Sublessor
and Subtenant use all reasonable efforts to obtain such consent on or before the
Commencement Date. In the event that the Consent is not obtained by the
Commencement Date, or is otherwise denied, either party may cancel this Sublease
upon five (5) days' written notice to the other.
(b) Neither Sublessor nor Subtenant shall be obligated to take any action
or to incur any cost (other than its own attorneys' fees) or liability in order
to obtain the Consent, other than Sublessor requesting the same of the Landlord.
(c) Subtenant agrees that it will reasonably cooperate with Sublessor and
Landlord, diligently and in good faith in order to obtain the Consent. In such
regard, Subtenant shall promptly provide such information as the Landlord may
reasonably request and, if required, shall execute and deliver the Consent in
the form reasonably required by Landlord or any other agreement that the
Landlord shall reasonably require promptly following Sublessor's request,
provided such Consent or other agreement does not materially increase
Subtenant's obligations or reduce Subtenant's rights under this Sublease.
(d) If the Sublease shall be so canceled, then this Sublease, except for
the provisions of Article 12, shall have no further force or effect.
16. Waiver of Jury Trial and Right To Counterclaim. Both parties hereby
waive all right to trial by jury in any summary or other action, proceeding or
counterclaim arising out of or in any way connected with this Sublease, the
relationship of Sublessor and Subtenant, the Subleased Premises and the use and
occupancy thereof, and any claim of injury or damages. Except for compulsory
counterclaims, Subtenant also hereby waives all fight to assert or interpose a
counterclaim in any summary proceeding or other action or proceeding to recover
or obtain possession of the Subleased Premises.
17. Complete Agreement. There are no representations, agreements,
arrangements or understandings, oral or written between the parties relating to
the subject matter of this Sublease which are not fully expressed in this
Sublease.
18. Execution and Delivery. This submission to Subtenant of this Sublease
shall not constitute an option or offer for the leasing of the Subleased
Premises, and the execution and/or delivery of this Sublease by Subtenant shall
have no binding force or effect on Sublessor or Subtenant unless and until
Sublessor and Subtenant shall have executed this Sublease and a fully executed
counterpart thereof shall have been unconditionally delivered to Subtenant.
19. Security Deposit.
(a) Simultaneously with Subtenant's execution of this Sublease, Subtenant
shall deposit with Sublessor the sum of $64,035.00 as security for the faithful
performance and observance by Subtenant of the terms, provisions and conditions
of this Sublease. Subtenant agrees to sign a written acknowledgment, prepared by
Subtenant, of receipt of such funds. In the event Subtenant defaults in respect
of any of the terms, provisions and conditions of this Sublease, including, but
not limited to, the payment of rent, Sublessor may use, apply or retain the
whole or any part of the security so deposited to the extent required to expend
or may be required to expend by reason of Subtenant's default in respect of any
of the terms, covenants and conditions of this Sublease, including but not
limited to, any damages or deficiency accrued before or after summary
proceedings or other re-entry by Sublessor. In the event Sublessor applies or
retains any portion or all of the security deposited, Subtenant shall forthwith
restore the amount so applied or retained so that at all times the amount
deposited shall be $64,035.00.
(b) Subtenant covenants that it will not assign or encumber, or attempt to
assign or encumber, the monies deposited hereunder as security, and that neither
Sublessor nor its successors or assigns shall be bound by any such assignment,
encumbrance, attempted assignment, or attempted encumbrance.
IN WITNESS WHEREOF, the parties have executed this Sublease as of the date
first written above.
Sublessor:
Witness: ELOQUENT, INC.
_____________________________ By: /s/ Eloquent, Inc.
---------------------------------
By: __________________________
Witness: Subtenant:
FIRST MONTAUK FINANCIAL CORP.
______________________________ By: /s/ William J. Kurinsky
--------------------------------
WILLIAM J. KURINSKY
By: ___________________________ EXECUTIVE VICE PRESIDENT
SCHEDULE I
The Items
[To be added]
EXHIBIT 10.27
SUBLEASE
SUBLEASE made as of the 15th day of January , 2002, between AIMNET
SOLUTIONS, INC., a Delaware corporation having an office at 401 Merritt Seven,
Norwalk, Connecticut 06851 (the "Landlord"), and FIRST MONTAUK FINANCIAL CORP.,
a New York corporation having its headquarters at 328 Newman Springs Road, Red
Bank, New Jersey 07701 (the "Tenant").
W I T N E S S E T H
Landlord and Tenant agree as follows:
1. Subleasing. Subject to all the terms, covenants, conditions and
provisions of that certain Lease (hereinafter referred to as the "Main Lease")
dated as of January 2, 2001, between Royal Realty Corp., as landlord
(hereinafter referred to as the "Main Landlord"), and AimNet Solutions, Inc., as
tenant, a copy of which Main Lease has been delivered to and examined by Tenant,
Tenant hereby hires and takes from Landlord that certain space (hereinafter
referred to as the "Subleased Premises") consisting of Room 1416-20 in the 14th
floor of the building known as 655 Third Avenue, New York, New York (the
"Building"), comprising approximately 4,520 rentable square feet and shown on
the floor plan contained in Exhibit A attached hereto and made a part hereof.
2. Commencement and Expiration Dates. The Subleased Premises are demised
for a term which shall begin on the later of (a) January 31, 2002 and (b) the
date on which the Main Landlord grants the approvals described in Article 26
hereof (Approval of Main Landlord) (the "Sublease Commencement Date"), and shall
expire on September 29, 2006 (hereinafter referred to as the "Sublease
Expiration Date").
3. Base Rent. Tenant shall pay rent ("Base Rent") to Landlord for the
Subleased Premises, beginning thirty (30) days following the Sublease
Commencement Date, at the annual rate of $212,440.00 (that is, the number of
square feet of rentable area contained in the Subleased Premises, 4,520,
multiplied by $47.00, plus, $13,560 for electricity pursuant to Article 10
hereof) , subject to adjustment as hereinafter provided.
Beginning as of January 31, 2004, and continuing thereafter for the balance
of the term of this Sublease, the annual rate of Base Rent shall be increased to
$226,000.00 (that is, the number of square feet of rentable area contained in
the Subleased Premises, 4,520, multiplied by $50.00, plus, $13,560 for
electricity pursuant to Article 10 hereof).
Base Rent shall be inclusive of costs payable by Tenant for electrical
services to the Subleased Premises payable pursuant to Article 10 (Electricity)
hereof and shall be payable in advance in equal monthly installments on the
first day of each calendar month during the term of this Sublease. Base Rent
shall be in addition to all other sums payable hereunder, which other sums shall
constitute additional rent. All rent shall be paid at the office of Landlord or
such other place as Landlord may designate, without any setoff or deduction
whatsoever (except as to the extent expressly provided for in Article 19 hereof
(Damage or Condemnation)).
4. Rights and Obligations of Tenant. Tenant shall conform to, and use the
Subleased Premises in accordance with, all the terms, covenants and conditions
of the Main Lease (except those terms, covenants and conditions described in the
third paragraph of this Article 4, which do not apply to the rights or
obligations of Tenant under this Sublease), and will do no act, nor permit any
act, which will result in a violation of such terms, covenants and conditions.
Tenant shall perform all of the terms, covenants and conditions of the Main
Lease on the part of the tenant therein named to be performed (except for
payment of the rent and certain additional rent provided for in the Main Lease,
which shall remain the obligation of Landlord as the tenant under the Main
Lease, and except for those terms, covenants and conditions described in the
third paragraph of this Article 4 which do not apply to, or are modified by,
this Sublease).
Except as otherwise provided in the third paragraph of this Article 4,
Tenant shall be entitled to the rights of AimNet Solutions, Inc. ("AimNet"), as
tenant under the Main Lease. AimNet shall have no liability by reason of any
default of the Main Landlord, it being understood that if AimNet shall fail to
fulfill any obligation of the Landlord hereunder and if such failure is caused
by the failure of the Main Landlord to comply with its obligations under the
Main Lease, then AimNet shall have no obligation or liability by reason of such
failure, but in such event Tenant shall be subrogated to the rights of AimNet to
enforce the obligations of the Main Landlord. Without limiting the generality of
the foregoing, Tenant understands that the supplying of heat, light, water, air
conditioning, electricity and other utilities, janitorial, cleaning, window
washing and elevator services, and building maintenance and repair are the
obligations of the Main Landlord, and that Landlord has no control thereof, and
assumes no responsibility in connection therewith, and shall not be liable in
any way with respect to the failure of or interference with any of such
services.
Notwithstanding anything to the contrary contained herein, the following
provisions of the Main Lease do not apply to Tenant, and Tenant shall not be
entitled to the rights of AimNet thereunder nor bound by any obligations of
AimNet thereunder: Articles 1 and 37 (Commencement Date, Expiration Date, Fixed
Rent), Article 17 (Default), Article 18 (Remedies of Owner and Waiver of
Redemption), Article 24 (Failure to Give Possession); Article 28 (Bills and
Notices), Articles 34 and 60 (Security Deposit), Article 41 (Brokerage), Article
43 (Initial Work) and Article 55 (Remedies). Also, Tenant shall not be obligated
to furnish an estoppel certificate with respect to the Main Lease as required of
AimNet under Article 35 (Estoppel Certificate) of the Main Lease; however, upon
request by either Landlord or the Main Landlord, Tenant shall furnish an
estoppel certificate with respect to this Sublease, within the time period
provided in said Article 35 of the Main Lease, and in substantially the same
form and containing the same information as the certificate described in said
Article 35 of the Main Lease.
If the Main Landlord shall default in the performance of any of its
obligations with respect to the Subleased Premises, Landlord shall take such
steps as Tenant may reasonably request to cooperate in causing the Main Landlord
to perform its obligations and provide the services specified in the Main Lease,
including bringing an action or proceeding or taking other steps which may be
reasonably necessary to enforce the rights of Landlord as tenant under the Main
Lease. However, Tenant shall indemnify and hold harmless AimNet and all of its
officers, directors, shareholders, employees, agents, predecessors, successors,
assigns and legal representatives, and all parties claiming by, through or under
any of the above, from and against any loss, damage, claim, cost or expense
(including attorneys' fees) incurred by any such indemnitee in connection with
or by reason of any proceedings commenced or any action taken by or at the
request of Tenant to enforce the obligations of the Main Landlord. Tenant will
indemnify, defend and hold harmless Landlord from and against all loss(es),
costs, damages, expenses and liability, including but not limited to reasonable
attorneys' fees, that Landlord may incur by reason of any injuries to person or
property occurring in, on or about the Subleased Premises during the term of
this Sublease, or by reason of any breach or default hereunder on Tenant's part,
or by reason of any work done in or to the Subleased Premises by or on behalf of
Tenant or any act or negligence on the part of Tenant. Tenant shall in no case
have any rights in respect of the Subleased Premises greater than Landlord's
rights under the Main Lease, and Landlord shall have no liability to Tenant for
any matter whatsoever for which Landlord does not have at least coextensive
rights, as tenant, against Main Landlord under the Main Lease.
Landlord represents that (i) the Main Lease is in full force and effect,
(ii) the expiration date of the term of the Main Lease is September 30, 2006,
and (iii) to the best of its knowledge, Landlord is not in default in the
performance of its obligations as tenant under the Main Lease beyond any
applicable notice and cure period.
Landlord agrees that it will not agree with Main Landlord to the
cancellation or termination of the Main Lease or to the further modification,
annulment or supplementation of the Main Lease in a manner that would prevent or
limit Tenant's use of the Subleased Premises or adversely affect such use or
shorten the term of this Sublease or increase any charges payable by Tenant
hereunder or in any other way increase Tenant's obligations or decrease its
rights under this Sublease.
5. Use. Tenant shall use the Subleased Premises only for executive and
general offices in connection with the operation of Tenant's business, and such
ancillary uses as may be permitted under Article 2 (Occupancy) of the Main
Lease, and for no other purpose.
As provided in Article 4 hereof (Rights and Obligations of Tenant), Tenant
shall not use the Subleased Premises for any purpose which is prohibited under
Article 2 (Occupancy) of the Main Lease.
6. Alterations. Tenant shall not make any alterations, installations,
additions or improvements in or to the Subleased Premises without the prior
written consent of Landlord in each instance. Landlord agrees not to
unreasonably withhold or delay such consent provided the Main Landlord shall
have consented as required under the Main Lease.
Also, as provided in Article 4 hereof (Rights and Obligations of Tenant),
Tenant shall not make any alterations, installations,, additions or improvements
in or to the Subleased Premises without complying with the provisions of
Articles 3 and 54 (Tenant Alterations) of the Main Lease.
7. No Assignment or Subletting. Tenant may not assign this Sublease, nor
further sublet the Subleased Premises, nor permit the same to be occupied by
others, without the prior written consent of Landlord in each instance. Landlord
agrees not to unreasonably withhold or delay such consent provided the Main
Landlord shall have consented as required under the Main Lease.
Also, as provided in Article 4 hereof (Rights and Obligations of Tenant),
any proposed assignment or further subletting shall be subject to the provisions
of Article 11 (Assignment, Mortgaging, Etc.) and Article 46 (Assignment,
Mortgaging and Subletting) of the Main Lease, and all of the rights of the Main
Landlord thereunder.
If Tenant assigns this Sublease, or further sublets the Subleased Premises,
in whole or in part, Tenant shall deliver to Landlord a true copy of each
executed assignment or sublease within seven (7) days after the date of
execution and delivery thereof, and Tenant shall pay to Landlord an amount equal
to any rent or other consideration paid to Tenant by any assignee or subtenant
in excess of the rent payable by Tenant to Landlord pursuant to this Sublease;
in computing the amount of excess rent or other consideration which Tenant must
pay to Landlord, Tenant may first subtract the amount of any actual documented
bona fide brokerage commissions and attorneys' fees incurred in connection with
the assignment or subletting, provided however that in all events the amount
payable by Tenant to Landlord pursuant to this paragraph shall be not less than
the amount which Landlord (as the tenant under the Main Lease) is required to
pay to the Main Landlord in connection with such assignment or subletting. All
sums payable by Tenant pursuant to this paragraph shall be paid to Landlord, as
additional rent, on the first day of the month following the receipt thereof by
Tenant.
Tenant shall pay to Landlord, promptly upon demand therefor, all
out-of-pocket costs and expenses (including, without limitation, reasonable
attorneys' fees and disbursements payable by Landlord to its own attorneys and
all costs and expenses for which Landlord is required to reimburse the Main
Landlord) incurred by Landlord in connection with any assignment of this
Sublease or sub-sublease of all or any part of the Subleased Premises.
For the purposes hereof, any transfer of a majority of the outstanding
voting stock of Tenant shall be deemed an assignment.
Notwithstanding anything to the contrary contained herein, Tenant may,
without Landlord's prior written consent (but only with the consent of Main
Landlord if required by the Main Lease),(i) sublet all or part of the Subleased
Premises to any corporations or other business entities which control, are
controlled by, or are under common control with Subtenant (herein referred to as
an "affiliated entity") for any of the purposes permitted to an affiliated
entity, subject, however, to compliance with Tenant's obligations under this
Sublease or (ii) assign all of its right title and interest in this Sublease to
an affiliated entity. No such sub-subletting shall be deemed to vest in any such
related corporation any right or interest in this Sublease or the Subleased
Premises nor shall it relieve, release, impair or discharge any of Tenant's
obligations hereunder.
8. Default. (a) Any one or more of the following events shall constitute an
Events of Default hereunder:
(i) if Tenant shall default in the payment when due of any installment of
Base Rent or in the payment when due of any additional rent, and such default
shall continue for a period of five (5) days after notice by Landlord to Tenant
of such default; or if Tenant shall default in the observance or performance of
any term, covenant or condition of this Sublease on Tenant's part to be observed
or performed (other than the covenants for the payment of rent and additional
rent) and Tenant shall fail to remedy such default within fifteen (15) days
after notice by Landlord to Tenant of such default, or if such default is of
such a nature that it cannot be completely remedied within such period of
fifteen (15) days and Tenant shall not commence within such period of fifteen
(15) days, or shall not thereafter continuously and diligently prosecute to
completion, all steps necessary to remedy such default; or
(ii) if Tenant shall file a voluntary petition in bankruptcy or insolvency,
or shall be adjudicated a bankrupt or insolvent, or shall file any petition or
answer seeking any reorganization, arrangement, composition, readjustment,
liquidation, dissolution or similar relief under the present or any future
federal bankruptcy act or any other present or future applicable federal, state
or other statute or law, or shall make an assignment for the benefit of
creditors or shall seek or consent to or acquiesce in the appointment of any
trustee, receiver or liquidator of Tenant or of all or any part of Tenant's
property; or
(iii) if, within thirty (30) days after the commencement of any proceeding
against Tenant, whether by the filing of a petition or otherwise, seeking any
reorganization, arrangement, composition, readjustment, liquidation, dissolution
or similar relief under the present or any future federal bankruptcy act or any
other present or future applicable federal, state or other statute or law, such
proceeding shall not have been dismissed, or if, within thirty (30) days after
the appointment of any trustee, receiver or liquidator of Tenant, or of all or
any part of Tenant's property, without the consent or acquiescence of Tenant,
such appointment shall not have been vacated or otherwise discharged, or if any
execution or attachment shall be issued against Tenant or any of Tenant's
property pursuant to which the Subleased Premises shall be taken or occupied or
attempted to be taken or occupied; or
(iv) if the Subleased Premises shall become abandoned; then Landlord, at
any time thereafter, at Landlord's option, may give to Tenant five (5) days'
notice of termination of this Sublease and the term hereof shall come to an end
and expire upon the expiration of said five (5) days with the same effect as if
the date of expiration of said five (5) days were the expiration date of this
Sublease, but Tenant shall remain liable for damages as provided in this
Article.
(b) If an Event of Default occurs, or if this Sublease and the term hereof
shall expire and come to an end as hereinabove provided:
(i) Landlord or Landlord's agents or servants may immediately, or at any
time after such Event of Default or after the date upon which this Sublease and
the term hereof shall expire and come to an end, re-enter the Subleased Premises
or any part thereof, without notice, either by summary proceedings or by any
other applicable action or proceeding, or by force or otherwise (without being
liable to indictment, prosecution or damages therefor), and may repossess the
Subleased Premises and dispossess Tenant and any other persons from the
Subleased Premises and remove any and all of their property and effects
therefrom without incurring any liability to Tenant or any other person for such
repossession or removal; and
(ii) Landlord, at Landlord's option, may relet the whole or any part or
parts of the Subleased Premises from time to time, either in the name of
Landlord or otherwise, to such tenant or tenants, for such term or terms ending
before, on or after the expiration date of this Sublease, at such rental or
rentals and upon such other conditions, which may include concessions and free
rent periods, as Landlord, in Landlord's sole discretion, may determine.
Landlord shall have no obligation to relet the Subleased Premises or any part
thereof and in no event shall be liable for refusal or failure to relet the
Subleased Premises or any part thereof, or, in the event of any such reletting,
for refusal or failure to collect any rent due upon any such reletting, and no
such refusal or failure shall operate to relieve Tenant of any liability under
this Sublease or otherwise to affect any such liability. Landlord, at Landlord's
option, may make such repairs, replacements, alterations, additions,
improvements, decorations and other physical changes in and to the Subleased
Premises as Landlord, in Landlord's sole discretion, considers advisable or
necessary in connection with any such reletting or proposed reletting, without
relieving Tenant of any liability under this Sublease or otherwise affecting any
such liability.
(c) Tenant hereby waives the service of any notice of intention to re-enter
or to institute legal proceedings to that end which may otherwise be required to
be given under any present or future law. Tenant, on Tenant's own behalf and on
behalf of all persons claiming through or under Tenant, including all creditors,
does further hereby waive any and all rights which Tenant and all such persons
might otherwise have under any present or future law to redeem the Subleased
Premises, or to re-enter or repossess the Subleased Premises, or to restore the
operation of this Sublease, after (i) Tenant shall have been dispossessed by a
judgment or by warrant of any court or judge, or (ii) any re-entry by Landlord,
or (iii) any expiration or termination of this Sublease and the term hereof,
whether such dispossession, re-entry, expiration or termination shall be by
operation of law or pursuant to the provisions of this Sublease. The words
"reenter", "re-entry" and "re-entered" as used in this Sublease shall be
construed in their broadest sense and shall not be deemed to be restricted to
their technical legal meanings. In the event of a breach or threatened breach by
Tenant, or any person claiming through or under Tenant, of any term, covenant or
condition of this Sublease on Tenant's part to be observed or performed,
Landlord shall have the right to enjoin such breach and the right to invoke any
other remedy allowed by law or in equity as if re-entry, summary proceedings and
other special remedies were not provided in this Sublease for such breach.
Acceptance of rent by Landlord with knowledge of any default, or the failure of
Landlord to seek redress for any default, or to insist upon the strict
performance of any term, covenant, condition or obligation of this Sublease
shall not constitute a waiver thereof, and Landlord shall have all remedies
provided herein and by applicable law with respect to any subsequent act or
omission which would have originally constituted a default. Landlord's remedies
for any default which are available to it under this Sublease, or at law or in
equity, shall be cumulative, and Landlord's decision to pursue any particular
remedy following any default shall not affect the availability of any other
remedy for such default or for any subsequent default.
(d) If this Sublease and the term hereof shall expire and come to an end as
provided in this Article, or by or under any summary proceeding or any other
action or proceeding, or if Landlord shall re-enter the Subleased Premises as
provided in this Article, then, in any of these events:
(i) Tenant shall pay to Landlord all rent, additional rent and other
charges payable under this Sublease by Tenant to Landlord to the date upon which
this Sublease and the term hereof shall have expired and come to an end or to
the date of re-entry upon the Subleased Premises by Landlord, as the case may
be; and
(ii) Tenant shall also be liable for and shall pay to Landlord, as damages,
any deficiency (referred to as the "Deficiency") between the rent reserved in
this Sublease for the period which otherwise would have constituted the
unexpired portion of the term hereof and the net amount, if any, of the rents
collected under any reletting effected pursuant to the provisions of this
Article for any part of such period (first deducting from the rents collected
under any such reletting all of Landlord's expenses in connection with the
termination of this Sublease or Landlord's re-entry upon the Subleased Premises
and with such reletting including, without limitation, all repossession costs,
brokerage commissions, legal expenses, attorneys' fees, alteration costs and
other expenses of preparing the Subleased Premises for such reletting). Any such
Deficiency shall be paid in monthly installments by Tenant on the days specified
in this Sublease for payment of monthly installments of rent. Landlord shall be
entitled to recover from Tenant each monthly Deficiency as the same shall arise,
and no suit to collect the amount of the Deficiency for any month shall
prejudice Landlord's right to collect the Deficiency for any subsequent month by
a similar proceeding; and
(iii) At any time after the term hereof shall have expired and come to an
end or Landlord shall have reentered upon the Subleased Premises, as the case
may be, whether or not Landlord shall have collected any monthly Deficiencies as
aforesaid, Landlord shall be entitled to recover from Tenant, and Tenant shall
pay to Landlord, on demand, in lieu of further Deficiencies, as and for
liquidated and agreed final damages, a sum equal to the amount by which the rent
reserved in this Sublease for the period which otherwise would have constituted
the unexpired portion of the term hereof (less any portion of such period for
which Tenant shall have paid Deficiencies to Landlord pursuant to subsection (b)
of this paragraph) exceeds the then fair and reasonable rental value of the
Subleased Premises for the same period, both discounted to present worth at the
rate of eight percent (8%) per annum. If, before presentation of proof of such
liquidated damages to any court, commission or tribunal, the Subleased Premises,
or any part thereof, shall have been relet by Landlord for the period which
otherwise would have constituted the unexpired portion of the term hereof, or
any part thereof, the amount of rent reserved upon such reletting shall be
deemed, prima facie, to be the fair and reasonable rental value for the part or
the whole of the Subleased Premises so relet during the term of the reletting.
(e) Tenant shall in no event be entitled to any rents collected or payable
under any reletting, whether or not such rents shall exceed the rent reserved in
this Sublease. Nothing contained in this Article shall be deemed to limit or
preclude the recovery by Landlord from Tenant of the maximum amount allowed to
be obtained as damages by any statute or rule of law, or of any sums or damages
to which Landlord may be entitled in addition to the damages set forth in this
Article.
9. Escalation Charges. If the rent payable by the Tenant under the Main
Lease shall be increased pursuant to Article 39 (Escalations) of the Main Lease
by reason of any increase or increases in "Taxes" above the Taxes payable for
the "Tax Year" commencing on July 1, 2001 and expiring on June 30, 2002 (as
those terms are defined in subsection 39.A of the Main Lease), then Tenant shall
pay to Landlord, as additional rent, an amount equal to any such increase. In
addition, if the rent payable by the tenant under the Main Lease shall be
increased pursuant to said Article 39 by reason of any increase or increases in
"Operating Expense Rate" (as that term is defined in subsection 39.A.6 of the
Main Lease) above the Base Rate paid or incurred for the calendar year 2002,
then Tenant shall pay to Landlord, as additional rent, an amount equal to any
such increase. Accordingly, Tenant shall pay to Landlord on the first day of
each month (or, in the case of payments requiring notice, within ten (10) days
after such notice), in addition to all other sums payable hereunder, an amount
equal to that portion of the total sum payable with respect to such month by the
tenant under the Main Lease which is attributable to any such increase or
increases in Taxes and Expenses. Landlord shall furnish Tenant with copies of
any relevant notices, statements, supporting data and other information and
materials which Landlord may from time to time receive from the Main Landlord
with respect to such increases in Taxes and Operating Expense Rate.
10. Electricity. As provided in Article 4 hereof (Rights and Obligations of
Tenant), Tenant agrees that the Subleased Premises will be provided with
electricity on a "rent inclusion" basis in accordance with Article 38
(Electricity) of the Main Lease. Base Rent hereunder includes an electric
inclusion factor of $13,560 per annum, and consequently, Tenant shall be
responsible for payment of charges for electricity under the Main Lease only to
the extent set forth in Article 38 (Electricity) thereof.
Landlord will cooperate with Subtenant, at no expense to Landlord, in
Tenant's efforts, consistent with the Main Lease, to ensure that it is being
billed for electricity in a manner that complies with the Main Lease. If and to
the extent that Main Landlord ceases furnishing electricity to Landlord pursuant
to Paragraph 38.D of the Main Lease, then Landlord will have no obligation to
furnish electricity to Tenant, Tenant shall have the rights set forth in the
Main Lease to arrange for electricity directly from the public utility at no
cost to Landlord and the Base Rent then in effect shall be reduced by $13,560
per annum.
11. Additional Charges. Tenant shall direct all requests for additional
services to the Main Landlord. If Tenant shall request freight elevator
facilities, heat, cooled air, mechanical ventilation or other services for which
a charge is imposed, pursuant to Article 29 (Services Provided by Owner) and
Article 44 (After Hours HVAC; Condenser Water) of the Main Lease or otherwise,
Tenant shall promptly furnish Landlord with copies of all purchase orders and/or
similar documentation with respect to each such request, and Tenant shall pay
the full amount of such charge to Landlord (or as Landlord may direct) within
fifteen (15) days after demand.
In addition, Tenant shall pay to Landlord (or as Landlord may direct),
within fifteen (15) days after demand, the full amount of any and all other
charges imposed under the Main Lease; provided however that Tenant shall not be
required to pay the rent provided for in Articles 1 and 37 (Rent) of the Main
Lease, or escalation charges provided for in Article 39 (Escalations) of the
Main Lease (except to the extent set forth in Article 9 (Escalation Charges) of
this Sublease), or interest or late charges imposed under the Main Lease by
reason of any failure by Landlord to make a timely payment thereunder (except to
the extent that such failure shall have been caused by a failure on the part of
Tenant to make a corresponding payment hereunder when due), or any fee or charge
imposed under the Main Lease for the review and approval of this Sublease
pursuant to Articles 11 and 46 thereof (as contrasted with any fee or charge
imposed by the Main Landlord for the review and approval of Plans and
Specifications for Tenant's alterations, which shall be the responsibility of
Tenant).
12. Payment of Charges. As provided in Article 3 hereof (Base Rent), Tenant
shall pay Landlord the full amount of the charges referred to in Articles 9
(Escalation Charges) and 11 (Additional Charges) hereof, and all other
additional rent, without any set-off or deduction whatsoever (except to the
extent expressly provided for in Article 19 hereof (Damage or Condemnation).
Without limiting the generality of the foregoing, Tenant shall not be entitled
to set off against the rent payable hereunder by reason of any alleged
inaccuracy of impropriety of any charge imposed under the Main Lease with
respect to the Subleased Premises. Landlord shall, upon request, use reasonable
efforts to obtain from the Main Landlord supporting information and data
relating to any such charge imposed under the Main Lease with respect to the
Subleased Premises (provided that Tenant shall, as set forth in the fourth
paragraph of Article 4 hereof (Rights and Obligations of Tenant), indemnify and
hold harmless Landlord and the other parties described therein from and against
any loss, damage, claim, cost or expense (including attorneys' fees) incurred in
connection therewith). If Landlord shall receive a refund for any such charge
which shall have been paid by Tenant, Landlord shall promptly remit such refund
(less the amount of any costs reasonably incurred by Landlord in connection
therewith) to Tenant.
13. Access. Main Landlord or Main Landlord's agents shall have the right to
enter the Subleased Premises at all reasonable times, upon giving Tenant
reasonable advance notice (except in the case of any emergency, in which case no
notice shall be required), to examine the Subleased Premises, to maintain and
repair any improvements installed therein by or on behalf of Main Landlord, and
to show the Subleased Premises to prospective assignees of Main Landlord's
interest under the Main Lease or, during the last six (6) months of the term
hereof, to prospective subtenants of the Subleased Premises.
14. Self-Help. If Tenant shall default in the performance of any of its
obligations hereunder beyond any applicable grace period (except in the case of
an emergency, or in order to prevent the occurrence of an event of default under
the Main Lease, in which events Landlord need not wait for the expiration of any
such grace period), Landlord at its option (but without any obligation to do so)
may perform such obligations and, if necessary, enter the Subleased Premises for
such purpose. Tenant shall pay to Landlord, within ten (10) days after demand,
the amount of all costs and expenses incurred by Landlord in the performance of
any such obligations. Any action taken by Landlord pursuant to this Article 14
shall not constitute a waiver of any of Landlord's other rights and remedies
hereunder.
15. Interest. If Tenant shall fail to pay any installment of rent or
additional rent (other than interest pursuant to this Article 15) when due,
Tenant shall pay interest thereon at an annual rate equal to three percent (3%)
above the Prime Rate (hereinafter defined) or the maximum rate permitted by law,
whichever is less, from the date on which such payment is due to the date of
payment thereof. The "Prime Rate" at any time shall mean the rate of interest
established and approved by Citibank, N.A., New York, New York, from time to
time as its interest rate charged for unsecured loans to its corporate customers
but in no event greater than the highest lawful rate from time to time in
effect.
16. Surrender of Subleased Premises. Upon the expiration or termination of
this Sublease or the termination of Tenant's right of possession to the
Subleased Premises, Tenant shall surrender and vacate the Subleased Premises,
remove all of the Personal Property (hereinafter defined) and deliver the
Subleased Premises to Landlord in accordance with Articles 22 (End of Term) of
the Main Lease.
17. Initial Tenant Work. The Subleased Premises are demised to Tenant in
the condition which shall exist on the Sublease Commencement Date "as is"
including (i) the existing improvements and all built-in furnishings and (ii)
the furniture (including all desks, chairs, filing cabinets and conference
tables) presently located therein (collectively, the "Furniture") (collectively
with the items set forth above in subsection (i) of this Article 17, the
"Personal Property") being more particularly described on Exhibit "B" annexed
hereto, it being understood and agreed that Landlord shall not be required to
make any improvements, and it being further understood that neither Landlord nor
the Main Landlord shall be obligated to perform any work or make any
installation to prepare the Subleased Premises or the Personal Property for
occupancy and/or use by Tenant, as the case may be. Landlord and Tenant
expressly acknowledge that the telephone system currently located at the
Subleased Premises shall not be included from the Personal Property and shall be
removed by Landlord prior to the Sublease Commencement Date. At the expiration
of the Term, all of the Personal Property shall become the property of Tenant
Tenant is subleasing the Subleased Premises from the Landlord after having
an opportunity to fully inspect the Subleased Premises and the right not to
execute this Sublease if the results of said inspection are unacceptable.
Therefore, Tenant hereby agrees that the term "as is" means that upon approving
or having been deemed to have approved said inspection, it will sublease the
Subleased Premises, without warranty or representation, either oral or written,
or expressed or implied, as to the physical condition of the Subleased Premises
and the Personal Property and/or the compliance of same with building, fire,
health and zoning codes and other applicable laws, ordinances and regulations.
Landlord hereby expressly disclaims any and all warranties or representations
made to Tenant, whether same were made by any officer, director or employee of
Landlord or any other agent of same, such as a broker, unless such warranty or
representation is contained in writing as a part of this Sublease.
All work necessary to prepare the Subleased Premises for occupancy by
Tenant (the "Initial Tenant Work") shall be performed by Tenant at its sole cost
and expense, subject to and in accordance with the provisions of Articles and 54
(Tenant Alterations) of the Main Lease.
18. Insurance. As provided in Article 4 hereof (Rights and Obligations of
Tenant), Tenant shall maintain the insurance required under Article 6
(Requirements of Law, Fire Insurance, Flood Loads) and Article 51 (Insurance) of
the Main Lease, in coverage amounts and with minimum limits on liability not
less than those provided for in said Articles 6 and 51, and issued by an
insurance company which satisfies the standards and ratings set forth in said
Articles 6 and 51 and which (unless otherwise approved by Landlord) has its
principal office in the continental United States. All insurance required by the
Main Lease to be maintained by the tenant thereunder shall be maintained by
Tenant for the benefit of, and shall name as insureds both Landlord and Main
Landlord as well as any other parties required to be named under the Main Lease
19. Damage or Condemnation. If Landlord shall elect to terminate the Main
Lease pursuant to Article 9 (Destruction, Fire and Other Casualty) or Article 10
(Eminent Domain) thereof, this Sublease shall also terminate. In any such event,
Tenant shall have no claim (against Landlord or otherwise) by reason of such
termination, and Tenant shall have no interest in any insurance proceeds (other
than proceeds from its own policies) or any condemnation award.
In the event Landlord shall have the right to terminate the Main Lease by
reason any casualty or condemnation pursuant to the provisions of Articles 9 or
10 thereof, then Tenant shall have a corresponding right to terminate this
Sublease by giving written notice to Landlord not later than ten (10) days prior
to the date by which Landlord must exercise its right to terminate the Main
Lease pursuant to the provisions thereof.
If a casualty or condemnation shall occur and Landlord shall not elect to
terminate the Main Lease pursuant to said Articles 9 or 10 thereof, and if
Tenant shall not elect to terminate this Sublease pursuant to the preceding
paragraph, this Sublease shall remain in full force and effect and neither
Landlord nor Tenant shall have the right to terminate this Sublease by reason of
such casualty or condemnation (but Tenant shall be entitled to an abatement of
rent to the extent, if any, provided under the Main Lease). Tenant hereby
expressly waives the provisions of Section 227 of the Real Property Law or any
successor statute of similar import and agrees that the foregoing provisions of
this Article 19 shall govern and control in lieu thereof.
20. Brokers. Landlord and Tenant each represent to the other that they have
dealt with no brokers in connection with this transaction, other than Cushman &
Wakefield, Wall Street Plaza, New York, NY 10005, and NewMark Real Estate, 125
Park Avenue, New York, NY 1001 and Landlord and Tenant shall each indemnify and
hold the other harmless from and against any and all claims, liabilities, costs
and expenses of any kind and nature (including attorneys' fees) arising from or
related to a breach of the foregoing representation. Any commissions or other
compensation due Cushman & Wakefield and MB Real Estate and NewMark shall be
paid by Landlord pursuant to a separate agreement.
21. Successors and Assigns. This Sublease shall be binding upon, and inure
to the benefit of, the parties hereto and their respective successors and
assigns.
22. Notices. All notices, demands, statements and communications required
hereunder shall be in writing and shall be sent by registered or certified mail,
if to Landlord, addressed to Landlord at the address set forth on the first page
of the Sublease, with a copy thereof to Kelley Drye & Warren LLP, 101 Park
Avenue, New York, NY 10178, Attention: Salvatore J. Vitiello, Esq.; and if to
Tenant, addressed to Tenant at: the address set forth on the first page of this
Sublease to the attention of General Counsel; or to such other address as shall
from time to time be designated by written notice by either party to the other
party as herein provided, and shall be deemed given on the third (3rd) business
day after being so mailed.
23. Security Deposit. Upon the execution and delivery of this Sublease,
Tenant has deposited with Landlord the sum of $70,814.00 as security for the
faithful performance by Tenant of the terms, covenants and conditions of this
Sublease.
Landlord shall hold such security deposit (subject to the terms of this
Sublease) in Landlord's own name, in an interest-bearing money market account at
a reputable bank, trust company or other financial institution; provided Tenant
is not in default hereunder, interest earned on the security deposit shall be
paid to Tenant on an annual basis.
In the event Tenant is in default under Article 8 hereof, Landlord may
retain such sum or any part thereof and apply such amount to the satisfaction of
any obligation of Tenant to pay any sum of money due hereunder, or expend such
amount to the extent required to fulfill any obligation of Landlord as tenant
under the Main Lease resulting from such default, or expend such amount to pay
any brokerage commissions or fees which are payable in respect of this Sublease,
or expend such amount for any purpose specified in Article 8 hereof, including
without limitation the preparation of the Subleased Premises for reletting. If
Landlord shall apply any portion of the security deposit as hereinabove
described, Tenant shall, within ten (10) days after receiving notice thereof,
deposit with Landlord the amount so applied so that the total amount held by
Landlord as security pursuant to this Article 23 shall at all times be not less
than the sum hereinabove set forth.
If Tenant shall fully and faithfully comply with all of its obligations
hereunder, any security then held by Landlord shall be returned to Tenant after
this Sublease terminates, upon Tenant's fully vacating the Subleased Premises
and delivering possession thereof to Landlord. In the event Landlord assigns or
otherwise transfers its interest in the Main Lease or the Subleased Premises,,
Landlord may transfer the security to the assignee or transferee and Landlord
shall thereupon be released from liability for the return of such security, and
Tenant shall look solely to such assignee or transferee, as the new Landlord,
for the return of such security. Tenant further covenants that it will not
assign or encumber, or attempt to assign or encumber, the funds deposited as
security and that neither Landlord nor its successors or assigns shall be bound
by any such actual or attempted assignment or encumbrance.
At any time during the term hereof, Tenant may furnish to Landlord, in lieu
of the cash deposit referred to above, a letter of credit which satisfies the
following terms and conditions. Any letter(s) of credit which Tenant delivers to
Landlord pursuant to this paragraph (i) must be irrevocable, (ii) must be in an
amount equal to the cash deposit required under this Article 23, (iii) must be
payable to Landlord upon presentation of Landlord's sight draft signed by an
officer of Landlord, and no other documentation, (iv) must provide that it is
payable in multiple drafts without restriction as to the amount or number of
such drafts, (v) must be issued by a New York Clearing House bank and (vi) must
otherwise be in form reasonably satisfactory to Landlord. Tenant shall maintain
such letter(s) of credit (or a renewal or replacement thereof) in effect at all
times until the term of this Sublease has terminated and Tenant has fully
vacated the Subleased Premises and delivered possession thereof to Landlord. If
such letter(s) of credit (or renewal or replacement thereof) shall be due to
expire at any time before the events set forth in the preceding sentence shall
have occurred, Tenant shall obtain and deliver to Landlord, thirty (30) days
prior to such date of expiration, an amendment or advice in proper form
extending such date of expiration, or a renewal or replacement letter of credit
containing the same terms and conditions as the expiring letter(s) of credit. If
Tenant shall fail to deliver an amendment or advice in proper form extending
such date of expiration, or a renewal or replacement letter of credit, at least
thirty (30) days prior to the expiration of such letter(s) of credit as
aforesaid, Landlord shall be entitled to draw the full amount of the credit(s)
and hold the proceeds thereof as security in accordance with the provisions of
this Article 23. Landlord may draw under the letter(s) of credit from time to
time (without limitation as to the number of drafts or the amount of such
drafts) and apply the proceeds in the same manner as is permitted under the
first paragraph of this Article 23 and, within five (5) days notice from
Landlord that Landlord has drawn under any letter(s) of credit, Tenant shall
furnish Landlord with a new letter of credit so as to restore the letter of
credit security deposit to the full amount required under this Article 23.
24. Entire Agreement. This Sublease embodies the entire understanding of
the parties and there are no further agreements or understandings, written or
oral, in effect between the parties relating to the subject matter hereof.
25. Quiet Enjoyment. Provided Tenant shall perform its obligations
hereunder and shall comply with all of the terms, covenants and conditions of
this Sublease, Tenant's quiet enjoyment and use of the Subleased Premises shall
not be disturbed by reason of any default on the part of Landlord as tenant
under the Main Lease, or by reason of any other act or omission on the part of
Landlord.
26. Approval of Main Landlord. This Sublease is subject to the written
approval of the Main Landlord pursuant to Article 11 (Assignment, Mortgage,
Etc.) or Article 46 (Assignment and Subletting) of the Main Lease. Landlord
shall promptly apply to the Main Landlord for such approval. Landlord shall
promptly notify Tenant of the granting or denial of such approvals. In the event
the Main Landlord disapproves this Sublease, or disapproves the matters
described in clauses (i) and (ii) above, or fails to grant such approvals by
January 15, 2002 (which date may be extended by mutual agreement between
Landlord and Tenant), or exercises its right to terminate the Main Lease in
accordance with subsection 46.C thereof, all sums theretofore paid to Landlord
by Tenant shall be returned to Tenant without interest, and neither party shall
have any further rights or liabilities hereunder (except that Landlord and
Tenant shall remain liable for their respective representations contained in
Article 20 hereof (Brokers).
27. Modifications. This Sublease may not be modified orally.
28. Separability. Each provision contained in this Sublease shall be
separate and independent and the breach of any such provision by Landlord shall
not discharge or relieve Tenant from its obligation to perform each obligation
of this Sublease to be performed by Tenant. If any provision of this Sublease or
the application thereof to any person or circumstance shall to any extent be
invalid and unenforceable, the remainder of this Sublease, or the application of
such provision to persons or circumstances other than those as to which it is
invalid or unenforceable, shall not be affected thereby, and each provision-of
this Sublease shall be valid and shall be enforceable to the extent permitted by
law.
29. Waiver of Trial by Jury. To the extent permitted by law Landlord and
Tenant hereby waive trial by jury in any litigation brought by either of the
parties hereto against the other on any matter arising out of or in any way
connected with this Sublease.
30. No Warranties or Representations. Tenant acknowledges that Landlord has
not made, and Tenant has not relied on, any representations or warranties,
express or implied, with respect to the Subleased Premises, the Personal
Property, this Sublease or any related matter, except as expressly set forth
herein.
31. Termination of Main Lease. If for any reason the term of the Main Lease
is terminated prior to the Expiration Date of this Sublease, this Sublease shall
thereupon be terminated, and Landlord shall not be liable to Tenant by reason
thereof unless said termination was effected because of the breach or default of
Landlord (not caused by the parallel default of Tenant hereunder) under the Main
Lease.
32. Miscellaneous. (a) The headings to the various paragraphs of this
Sublease shall not define, limit or expand the express provisions of this
Sublease. (b) This Sublease shall apply to and bind the respective successors
and assigns of the parties hereto but this Section shall not be construed as a
consent to any assignment or subletting by Subtenant.
(c) In the event Tenant shall hold over after the expiration of the term,
the parties hereby agree that Tenant's occupancy of the Subleased Premises after
the expiration of the term shall be upon all of the terms set forth in this
Sublease except that Tenant shall pay as a use and occupancy charge for the
holdover period an amount equal to the higher of (A) an amount equal to 150% of
the pro rata Base Rent and additional rent payable by Tenant during the term; or
(B) an amount equal to the then market rental value for the Subleased Premises.
(d) This Sublease may be executed in multiple counterparts, each of which
shall be considered to be an original document, but all of which, taken
together, shall be deemed to constitute a single instrument.
33. Governing Law. This Sublease is governed by the laws of the State of
New York.
34. No Waiver. The failure of either party to this Sublease to insist upon
strict performance of any of the terms and conditions of this Sublease shall not
be deemed a waiver of any such terms or conditions, and shall not be deemed a
waiver of any subsequent breach or default of the terms and conditions herein
contained.
[signature page to follow]
IN WITNESS WHEREOF, the undersigned have duly executed this Agreement the
day and year first above set forth.
AIMNET SOLUTIONS, INC.
/s/ Jack A. Orlando
By:-----------------------
Name: Jack A. Orlando
Title: Director of Finance
FIRST MONTAUK FINANCIAL CORP.
/s/ William J. Kurinsky
By:-----------------------
Name: William J. Kurinsky
Title: Executive Vice President
~36~
EXHIBIT "B"
[The Subleased Premises]
EXHIBIT "B"
[The Personal Property]
35
EXHIBIT 11
FIRST MONTAUK FINANCIAL CORP.
COMPUTATION OF EARNINGS PER SHARE
Year ended December 31,
2001 2000 1999
---- ---- ----
Basic:
Income (loss) before extraordinary loss $(5,208,223) $(655,208) $2,283,278
Extraordinary loss -- (34,200) --
----------- -------- ---------
Net income (loss) (5,208,223) (689,408) 2,283,278
Less: Preferred stock dividends (98,753) (102,728) (67,750)
Net income (loss) for basic computation $(5,306,976) $ (792,136) $ 2,215,528
=========== ========== ===========
Weighted average common shares outstanding 8,704,355 9,450,055 9,878,129
========= ========= =========
Per share - basic:
Before extraordinary loss $(.61) $(.08) $.22
Extraordinary loss -- -- --
----- ----- ----
Net income (loss) $(.61) $ .08 $.22
===== ===== ====
Diluted:
Net income (loss) for basic computation $(5,306,976) $(792,136) $ 2,215,528
Additions:
Preferred stock dividends -- -- 67,750
Interest on convertible debt, net of taxes -- -- 28,384
----------- --------- ---------
Net income (loss) for diluted computation $(5,306,976) $(792,136) $ 2,311,662
=========== ========= ===========
Weighted average common shares outstanding 8,704,355 9,450,055 9,878,129
Additions:
Incremental shares from assumed
conversion of stock options and warrants
using the treasury stock method -- -- 691,759
Incremental shares from assumed conversion
of convertible debt and preferred stock
using the if-converted method -- -- 692,820
--------- --------- ----------
Weighted average common and common
equivalent shares outstanding - diluted 8,704,355 9,450,055 11,262,708
========= ========= ==========
Per share - diluted:
Before extraordinary loss $(.61) $(.08) $.21
Extraordinary loss -- -- --
--------- --------- ----------
Net income (loss) $(.61) $(.08) $.21
===== ===== ====
See notes to consolidated financial statements.