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
For the fiscal year ended December 31, 2003
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OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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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
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None
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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 ]
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Exchange Act during the preceding 12
months (or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days. Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not 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 ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined by rule 12b-2 of the Act) Yes __ No X
State the aggregate market value of the voting and non-voting common equity held
by non-affiliates computed by reference to the price at which the common equity
was last sold, or the average bid and asked price of such common equity, as of
the last business day of the registrant's most recently completed second fiscal
quarter (June 30, 2003): $2,168,591.
APPLICABLE ONLY TO CORPORATE REGISTRANTS
Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of the latest practicable date: 10,065,486 as of
March 30, 2004.
DOCUMENTS INCORPORATED BY REFERENCE
List hereunder the following documents if incorporated by reference and
the Part of the Form 10-K (e.g., Part I, Part II, etc.) into which the document
is incorporated: (1) Any annual report to security holders; (2) Any proxy or
information statement; and (3) Any prospectus filed pursuant to Rule 424(b) or
(c) under the Securities Act of 1933.
Not Applicable
[Cover Page 2 of 2 Pages]
Table of Contents
PART I
PAGE
Item 1. Business 1
Item 2. Properties 11
Item 3. Legal Proceedings 12
Item 4. Submission of Matters to a Vote of Security Holders 12
PART II
Item 5. Market For the Company's Common Equity and Related Stockholder Matters 13
Item 6. Selected Financial Data 15
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 17
Item 7A. Quantitative and Qualitative Disclosures About Market Risk 26
Item 8. Financial Statements and Supplemental Data 27
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure 27
Item 9A. Controls and Procedures 27
PART III
Item 10. Directors and Executive Officers of the Registrant 28
Item 11. Executive Compensation 31
Item 12. Security Ownership of Certain Beneficial Owners and Management 39
Item 13. Certain Relationships and Related Transactions 41
Item 14. Principal Accounting Fees and Services 41
PART IV
Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K 42
01
PART I
Item 1. Business
Introduction
First Montauk Financial Corp. is a New Jersey-based financial services
holding company whose principal subsidiary, First Montauk Securities Corp. has
operated as a full service retail and institutional securities brokerage firm
since 1987. Since July 2000, First Montauk Securities Corp. has operated under
the registered tradename "Montauk Financial Group". References in this Annual
Report on Form 10-K to Montauk Financial Group shall refer solely to our
subsidiary First Montauk Securities Corp. Montauk Financial Group 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, Montauk Financial Group
established Century Discount Investments, a discount brokerage division. First
Montauk Financial Corp. also sells insurance products through its subsidiary
Montauk Insurance Services, Inc.
Montauk Financial Group has approximately 439 registered representatives
and services over 60,000 retail and institutional customer accounts, which
comprises over $2 billion of customer assets. With the exception of two branch
offices leased by First Montauk Financial Corp., all of Montauk Financial
Group's 113 other branch office and satellite locations in 28 states are owned
and operated by affiliates, independent owners who maintain all appropriate
licenses and are responsible for all office overhead and expenses. Montauk
Financial Group also employs registered representatives directly at its
corporate office and the branch offices leased by First Montauk Financial Corp.
Montauk Financial Group is registered as a broker-dealer with the
Securities and Exchange Commission, the National Association of Securities
Dealers, the Municipal Securities Rule Making Board, and the Securities Investor
Protection Corporation and is licensed to conduct its brokerage activities in
all 50 states, the District of Columbia, and the Commonwealth of Puerto Rico.
All securities transactions are cleared through Fiserv Securities, Inc. of
Philadelphia, Pennsylvania and various floor brokerage and specialist firms
provide execution services. These arrangements provide Montauk Financial Group
with back office support, transaction processing services on all principal,
national and international securities exchanges, and access to many other
financial services and products which allows Montauk Financial Group to offer
products and services comparable to large brokerage firms.
Montauk Financial Group'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 & Over-The-Counter Stocks 56%
Debt Instruments:
Municipal, Government, Corporate Bonds and
Unit Investment Trusts 8%
Mutual Funds 10%
Options: Equity & Index 4%
Insurance and Annuities 7%
Corporate Finance and Investment Banking 4%
Investment Advisory Fees 3%
Miscellaneous (1) 8%
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Total 100%
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(1) Miscellaneous includes interest income, amortization of deferred revenue
and recovery of bad debts.
02
The following table reflects Montauk Financial Group's various sources of
revenues and the percentage of total revenues for fiscal 2003. Revenues from
agency transactions in securities for individual customers of Montauk Financial
Group are shown as commissions. Montauk Financial Group also executes customer
orders on a riskless principal basis, as well as conducts trading activity on
behalf of its own accounts. Revenues from such transactions are shown as
Principal Transactions on the table below. Also reflected in Principal
Transactions are revenues derived from market making activities.
Year Ended December 31, 2003
Amount Percent
Agency commissions from equity securities,
options and mutual funds, variable insurance
and management fees...................... $41,950,392 72%
Riskless Principal trades in equity and fixed
income securities on behalf of customers.................. $7,779,213 13%
Proprietary trading................... $1,687,146 3%
Interest and other Income........... $4,370,787 8%
Investment Banking(1)............... $2,439,144 4%
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Total Revenues........................ $58,226,682 100%
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(1) Investment banking revenues consist of commissions, selling concessions,
consulting fees and other income from underwriting and syndicate activities
and placement agent fees.
Affiliated Registered Representative Program
Montauk Financial Group's primary method of operations is through its
affiliated registered representatives, who operate as independent contractors. A
registered representative who becomes affiliated with Montauk Financial Group
establishes his/her 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. Under this program, the affiliated representatives retain a
significantly higher percentage of the commissions and fees generated by his/her
sales than a registered representative 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.
Affiliated representatives must possess a sufficient level of sales 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 become registered with Montauk Financial Group to provide
securities products and services to their clients.
Montauk Financial Group provides full support services to each of the
affiliated representatives, including access to stock and options execution and
over-the-counter stock trading; products such as insurance, mutual funds, unit
trusts and investment advisory programs; and research, compliance, supervision,
accounting and related services.
Each affiliated representative is required to obtain and maintain in good
standing each license required by the SEC and NASD 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. Montauk Financial
Group is ultimately responsible for supervising each affiliated registered
representative. Montauk Financial Group can incur substantial liability from
improper actions of any of the affiliated representatives. Montauk Financial
Group maintains a professional liability errors and omissions insurance policy
which provides coverage for certain actions taken and/or omissions made by its
registered representatives, employees and other agents in connection with the
purchase and sale of securities and other financial products and services.
03
Revenue Sources
Through our affiliate program we derive a substantial portion of our
revenues from customer commissions on brokerage transactions in equity and debt
securities for domestic and international investors such as investment advisors,
banks, mutual funds, insurance companies, hedge funds, and pension and profit
sharing plans. In addition, in the regular course of our business, we take
securities positions as a market maker to facilitate customer transactions and
for investment purposes. In making markets and when trading for its own account,
we expose our own capital to the risk of fluctuations in market value. Trading
profits (or losses) depend primarily upon the skills of the employees engaged in
market making and position taking, the amount of capital allocated to positions
in securities and the general trend of prices in the securities markets. We
monitor our risk by maintaining our securities positions at or below certain
pre-established levels. These levels reduce certain opportunities to realize
profits in the event that the value of such securities increases. However, they
also reduce the risk of loss in the event of a decrease in such value and result
in controlled interest costs incurred on funds provided to maintain such
positions.
Montauk Insurance Services
In 1991, we formed Montauk Insurance Services, Inc. for the purpose of
offering and selling variable annuity, variable life as well as traditional life
and health insurance products. Currently, Montauk Insurance is licensed to sell
life insurance and annuities in 49 states. Montauk Insurance derives revenue
from the sale of insurance-related products and services to the customers of
Montauk Financial Group's registered representatives, who are also licensed to
sell certain insurance products. In fiscal year 2003, we earned gross
commissions of $4.2 Million from the sale of insurance and annuity products.
Asset Management Advisory Services
Montauk Financial Group is registered as an Investment Adviser with the SEC
and provides investment advisory services to clients through independent,
third-party sponsored advisory programs. Montauk Financial Group is registered
or eligible to conduct business as an investment adviser in 37 states and the
District of Columbia.
Managed account programs generally require the client to pay a fee for
portfolio advisory services, brokerage execution and custody and periodic
account performance reports. These fees are calculated as a percentage of client
assets under management. Historically, we have only derived a relatively small
percentage of our overall revenues from this business line. Management is
currently evaluating various business strategies relative to the future
operation of this segment.
Investment Banking
Montauk Financial Group participates in private and public offerings of
equity and debt securities and provides general investment banking consulting
services to various public and private corporations. Historically, Montauk
Financial Group has not derived a significant amount of its revenues from
investment banking. We continue to review investment banking opportunities and
anticipate that we will engage in additional public and private offerings in the
future as business and market conditions warrant. Our investment banking
services include bridge and senior loan financing, private placements and public
offerings of debt and equity securities, and exclusive sales advice. Under
circumstances where we act as an underwriter, we may assume greater risk than
would normally be assumed in our normal trading activity. Under the federal
securities laws, an underwriter is subject to substantial potential liability
for material misstatements or omissions in prospectuses and other communications
with respect to underwritten offerings. Further, underwriting commitments
constitute a charge against net capital and our underwriting commitments may be
limited by the requirement that we must, at all times, be in compliance with the
Uniform Net Capital Rule 15c3-1 of the Securities and Exchange Commission.
Montauk Capital Markets Group
As discussed below under the caption "Recent Events," we ceased operation
of this division in January 2004. From its inception in March 2002 through the
end of the 2003 fiscal year, this division offered market commentary, equity
research and specialized brokerage services to its institutional clientele.
Clearing Arrangement
In May 2000, Montauk Financial Group entered into a 10-year clearing
agreement with Fiserv Securities, Inc. under which Fiserv will act as Montauk
Financial Group's primary clearing broker. In February we entered into an
amended and restated financial agreement with Fiserv whereby Montauk Financial
Group's rights and obligations under the agreement were assigned to us. In
connection with this amendment, we granted Fiserv a first priority lien in all
04
of the outstanding shares of Montauk Financial Group stock. In connection with
the clearing agreement, Montauk Financial Group and Fiserv also entered into a
financial agreement under which Fiserv provided an aggregate of $7.75 Million in
cash advances to Montauk Financial Group over the initial three-year term of the
agreement. In November 2003, we received the final cash advance of $1.25 Million
from Fiserv. We are required to repay any unearned portion of the cash advances
in the event we fail to achieve certain minimum performance criteria, or
terminate the agreement under certain circumstances prior to the expiration
date, as well as penalties for early termination.
Competition
We encounter intense competition in all aspects of our business and we
compete 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, we also compete with numerous regional and local firms.
Our Montauk Financial Group subsidiary 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, we entered the
discount brokerage arena through our 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 our 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, we may be adversely affected to
the extent those services are offered on a large-scale basis.
Our subsidiary Montauk Financial Group competes through its advertising and
recruiting programs for registered representatives interested in joining its
affiliate program. Montauk Financial Group often offers incentives to qualified
registered representatives to join it. 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, Montauk Financial Group 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, principally the NASD, and in
the case of New York Stock Exchange, Inc. member firms, the New York Stock
Exchange. The self-regulatory organizations, among other things, promulgate
regulations and provide oversight in areas of:
o sales practices,
o trade practices among broker-dealers,
o capital requirements,
o record keeping, and
o conduct of employees and affiliates of member organizations.
In addition to promulgating regulations and providing oversight, the SEC
and the self-regulatory organizations 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 SEC and the
self-regulatory organizations, 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.
05
Net Capital Requirements. Every U.S. registered broker-dealer doing
business with the public is subject to the Commission's Uniform Net Capital Rule
(the "Rule"), which specifies minimum net capital requirements. Although we are
not directly subject to the Rule, our subsidiary, Montauk Financial Group, is a
registered broker-dealer and is subject to the Rule. The Rule provides that a
broker-dealer doing business with the public shall not permit its aggregate
indebtedness to exceed 15 times its adjusted net capital (the "basic method")
or, alternatively, that it not permit its adjusted net capital to be less than
2% of its aggregate debit balances (primarily receivables from customers and
broker-dealers) computed in accordance with such Rule (the "alternative
method"). Montauk Financial Group applies the basic method of calculation.
Compliance with applicable net capital rules could limit our operations,
such as underwriting and trading activities, that require the use of significant
amounts of capital, and may also restrict loans, advances, dividends and other
payments by our subsidiaries to us. As of December 31, 2003, Montauk Financial
Group has $757,047 of net capital and $344,479 of excess net capital.
Employees
Currently, we have approximately 439 registered representatives of which
333 are associated with affiliate offices. In addition, we employ approximately
90 support personnel in the areas of operations, compliance, accounting, and
administration. We believe our relationship with our employees is satisfactory.
Fidelity Bond
As required by the NASD and certain other authorities, Montauk Financial
Group 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 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 aggregate protection
provided by a private insurance company for the benefit of all of our clearing
firm's customer. The Securities Investor Protection Corporation is funded
through assessments on registered broker-dealers and charges a flat annual fee
of $150.
Securities Broker/Dealer Professional Liability Insurance
Montauk Financial Group carries a securities Broker/Dealer professional
liability insurance policy underwritten by National Union First Insurance
Company of Pittsburgh, PA, a subsidiary of American International Companies.
This liability 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 transactions, investment management services, the giving of
financial investment advice and the purchase and/or sale of securities. This
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, 2004 to
January 31, 2005, with a $1 Million limit of liability for each covered event
and a $3 Million aggregate liability limit. We are responsible for a $100,000
deductible payment per claim, of which a minimum of $10,000 is offset to the
registered representative involved in the claim. In the event that the cost of
this coverage becomes cost prohibitive or otherwise becomes unavailable, the
lack of coverage may have an adverse impact on our financial condition in the
event of material claims in the future which may not be covered by our existing
policy.
Executive and Organization Liability Insurance Policy
We carry an executive and organization liability insurance policy (also
known as Directors and Officers liability insurance), which covers our 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 our behalf.
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. Our carrier has
issued a renewal quote for the policy period commencing March 30, 2004 with
coverage substantially similar to that in effect during the prior policy period.
During the prior policy, this coverage was underwritten by XL Specialty
Insurance Company of Stamford, Connecticut, and provided for coverage in the
amount of $5 Million with a deductible of $250,000 for all claims.
06
General Business Developments During the
2003 Fiscal Year and Subsequent Events
New Management
Effective January 1, 2004, we restructured our senior management. As of
such date, Mr. Victor K. Kurylak commenced his service as our President and
Chief Operating Officer. Mr. Herbert Kurinsky, who had served as our Chairman,
President and Chief Executive Officer will continue to serve us as Chairman of
the Board of Directors, but relinquished his other offices. Mr. William J.
Kurinsky, who had served as our Vice President, Chief Operating and Chief
Financial Officers and Secretary will now serve as our Vice Chairman and Chief
Executive Officer. Mr. William J. Kurinsky has also retained his offices of
Chief Financial Officer and Secretary.
Closure of Montauk Capital Markets Group
In January 2004, we ceased operations of Montauk Capital Markets Group,
which provided market analysis, equity research and brokerage services to its
institutional clientele. Management determined to cease the operations of this
division in view of new regulations pertaining to the publication of research
reports and pending regulatory action regarding our research.
Debenture Offering
During the quarter ended December 31, 2003 we completed a private offering
of securities pursuant to Section 4(2) of the Securities Act of 1933, as
amended, and Regulation D, promulgated thereunder. In the offering, we sold an
aggregate of $1,895,000 of convertible debentures to certain "accredited
investors" only. The offering consisted of up to $3,000,000 principal amount of
6% convertible debentures. Each debenture is due and payable five years from
issuance, unless previously converted into shares of our common stock. The
proceeds of the financing will be used to satisfy our general working capital
needs.
Each debenture earns interest at the rate of 6% per annum, payable
semi-annually, and is convertible at an initial conversion price of $0.50 per
share, subject to adjustment for stock dividends, combinations, splits,
recapitalizations, and like events. Each holder shall have the right to convert
its debentures, at the option of such holder, at any time, into shares of our
common stock at the then applicable conversion price. In addition, we, at our
option, may demand the holders convert some or all of the debentures into shares
of common stock in the event that the closing bid price of our common stock is
200% of the conversion price for the twenty consecutive trading days prior to
the date of the notice of conversion.
Further, we, at our option, may prepay some or all of the debentures in the
event that the closing bid price of our common stock is 200% of the conversion
price for the twenty consecutive trading days prior to the date of the notice of
prepayment. The prepayment amount shall be 130% of the principal amount of the
debentures from the date of issuance until the first anniversary of the date of
issuance, together with accrued and unpaid interest. Thereafter, the prepayment
amount shall be equal to 120% of the principal amount of the debentures,
together with accrued and unpaid interest through the date of prepayment.
Holders of debentures shall have notice of and the right to include the
shares of common stock issuable upon conversion of the debentures in a
registration statement that we file other than a registration statement on Form
S-4 or S-8, or a successor form. Montauk Financial Group served as the exclusive
agent for the sale of the debentures and received commissions of 10% of the
principal amount of debentures sold in the offering and warrants to purchase
such number of shares of common stock as equals 10% of the aggregate principal
amount of the debentures sold. These warrants are exercisable for a period of
five years at an exercise price of equal to the conversion price of the
debentures.
The debentures have not been registered for offer or sale under the
Securities Act; such securities are being issued on the basis of the statutory
exemption provided by Section 4(2) of the Securities Act, as amended, and/or
Rule 506 of Regulation D, promulgated thereunder relating to transactions by an
issuer not involving any public offering; and the transaction has not been
reviewed by, passed on or submitted to any Federal or state agency or
self-regulatory organization where an exemption is being relied upon. The
securities may not be sold, assigned or transferred unless (i) the sale,
assignment or transfer of such securities is registered under the Securities
Act, or (ii) the securities are sold, assigned or transferred in accordance with
all the requirements and limitations of Rule 144 under the Securities Act.
07
Risk Factors
Our business is inherently risky and we have suffered losses
For the years ended December 31, 2003, 2002 and 2001, we reported revenues
of $58,227,000, $47,967,000 and $51,220,000, respectively. We suffered net
losses of $3,518,000, $2,960,000 and $5,208,000 for the fiscal years ended
December 31, 2003, 2002 and 2001, respectively. The losses in these periods were
primarily due to costs associated with litigation expenses and settlements. We
may incur further losses in the future, and such losses would necessarily affect
the nature, scope and level of our future operations. Our 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 our 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 our business is directly affected by our available
net capital.
Fluctuations in securities volume and prices increase the potential for future
losses
We, 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. We 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 we expand our investment banking activities
and more frequently serve as manager or co-manager of public offerings of
securities, we 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 results 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 us to losses
Our 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 our ability to
resell securities purchased or to repurchase securities sold in principal
transactions. Montauk Financial Group'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 we may not recover the funds loaned to
the customer.
Competition in the brokerage industry may adversely impact our retail business.
We encounter intense competition in all aspects of our business and compete
directly with many other securities firms, a significant number of which offer
their customers a broader range of financial services, have substantially
greater resources and may have greater operating efficiencies. In addition, a
number of firms offer discount brokerage services to individual retail customers
and generally effect transactions at lower commission rates on an "execution
only" basis without offering other services such as investment recommendations
and research. The further expansion of discount brokerage firms could adversely
affect our retail business. Moreover, there is substantial commission
discounting by full-service broker-dealers competing for institutional and
individual brokerage business. The possible increase of this discounting could
adversely affect us. Other financial institutions, notably commercial banks and
savings and loan associations, offer customers some of the 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 which banks
and other institutions ultimately may offer to customers, we may be adversely
affected to the extent those services are offered on a large scale.
08
We are subject to various risks in the securities industry.
As a securities broker-dealer, our subsidiary is subject to uncertainties
that are common in the securities industry. These uncertainties include:
o the volatility of capital markets;
o governmental regulation;
o litigation;
o intense competition;
o substantial fluctuations in the volume and price level of
securities; and
o dependence on third parties.
As a result, revenues and earnings may vary significantly from period to
period. In periods of low volume, profitability is impaired because certain
expenses remain relatively fixed. We are smaller and have less capital than many
competitors in the securities industry. In the event of a market downturn, our
business could be adversely affected in many ways, including those described
herein. Our revenues are likely to decline in such circumstances and, if it is
unable to reduce expenses accordingly, our financial condition and results of
operations would be adversely affected.
We have incurred liability due to securities-related litigation.
Many aspects of our business involve substantial risks of liability,
including exposure to liability under applicable federal and state securities
laws in connection with the activity of our associated persons, as well the
underwriting and distribution of securities. In recent years, there has been an
increasing incidence of litigation involving the securities industry in general,
which seeks both rescissionary and punitive damages. During the year ended
December 31, 2003, we incurred $5,837,000 in litigation costs, reserves and
expenses related to various legal claims and settlements. Management cannot give
assurance that the accrual will be adequate to cover actuaul costs that may be
subsequently incurred. It is not possible to predict the outcome of other
matters pending against us at this time. All such cases are and will continue to
be, vigorously defended. However, litigation is subject to many uncertanties,
and some of these actions and proceedings may result in adverse awards or
judgments. After considering all relevant facts, available insurance coverage
and consultation with litigation counsel, it is possible that our consolidated
financial condition, results of operations, or cash flows could be materially
affected by unfavorable outcomes or settlements of certain pending litigation.
We remain subject to extensive regulation and the failure to comply with these
regulations could subject us to penalties or sanctions.
The securities industry in general and our business in particular is
subject to extensive regulation by the SEC, state securities regulators and
other governmental regulatory authorities. The broker-dealer is also regulated
by industry self-regulatory organizations, including the NASD and the Municipal
Securities Rulemaking Board. Montauk Financial Group is a registered
broker-dealer with the SEC and a member firm of the NASD. Broker-dealers are
subject to regulations which cover all aspects of the securities business,
including:
o sales methods and supervision;
o trading practices among broker-dealers;
o use and safekeeping of customers' funds and securities;
o capital structure of securities firms;
o record keeping; and
o the conduct of directors, officers, agents and employees.
Much of the regulation of broker-dealers has been delegated to
self-regulatory organizations, principally the NASD, which is Montauk Financial
Group's primary regulator. NASD adopts rules, subject to approval by the SEC,
that govern its members and conducts periodic examinations of member firms'
operations.
Compliance with these regulations involves a number of risks, particularly
where the regulations may be subject to varying interpretation. If we are found
to have violated an applicable regulation, an administrative or judicial action
may be initiated against us that may result in penalties which could have a
material adverse effect on our operating results and financial condition,
including but not limited to:
o censure;
o fine;
o civil damage awards, including treble damages for insider
trading violations;
o the issuance of cease-and-desist orders; or
o the deregistration or suspension of our broker-dealer activities
and/or our employees.
09
We depend upon our registered representatives.
Most aspects of our business are dependent on highly skilled and
experienced individuals. We have devoted considerable efforts to recruiting and
compensating those individuals and provide incentives to encourage them to
remain employed by or associated with us. Individuals associated with us may in
the future leave our company at any time to pursue other opportunities.
We depend upon our senior management.
For the foreseeable future, we will be substantially dependent upon the
personal efforts and abilities of our senior management, including our Chairman
and founder, Mr. Herbert Kurinsky, our Chief Executive Officer and Chief
Financial Oficer, Mr. William Kurinsky and our President and Chief Operating
Officer, Mr. Victor K. Kurylak to coordinate, implement and manage our business
plans and programs. The loss or unavailability of the services of any of them
would likely have a material adverse affect on our business, operations and
prospects. We have obtained, for our benefit, a life insurance policy on the
life of Mr. Herbert Kurinsky in the amount of $500,000.
Montauk Financial Group must comply with Net Capital Requirements.
The business of our broker-dealer, like that of other securities firms, is
capital intensive. The SEC and the NASD 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 our ability to significantly expand or, depending upon the magnitude of
the loss or charge, to maintain our present level of business.
We are exposed to risks due to our investment banking activities.
Participation in an underwriting syndicate or a selling group involves both
economic and regulatory risks. An underwriter may incur losses if it is unable
to resell the securities it is committed to purchase, or if it is forced to
liquidate its commitment at less than the purchase price. In addition, under
federal securities laws, other laws and court decisions with respect to
underwriters' liabilities and limitations on the indemnification of underwriters
by issuers, an underwriter is subject to substantial potential liability for
misstatements or omissions of material facts in prospectuses and other
communications with respect to such offerings. Acting as a managing underwriter
increases these risks. Underwriting commitments constitute a charge against net
capital and our ability to make underwriting commitments may be limited by the
requirement that it must at all times be in compliance with the Net Capital
Rule.
We rely on one clearing firm and the termination of the clearing agreement with
this firm could disrupt Montauk Financial Group's business.
Montauk Financial Group uses one clearing broker, Fiserv Securities, Inc.,
to process its securities transactions, maintain customer accounts, control,
receive, custody and deliver securities, on a fee basis. We depend on the
operational capacity and ability of the clearing broker for the orderly
processing of transactions. If the clearing agreement is terminated for any
reason, or if the clearing firm fails to provide its functions for us in the
normal course of business, we would be forced to find an alternative clearing
firm. There is no assurance that we would be able to find an alternative
clearing firm on acceptable terms to us or at all.
We do not pay dividends on our common stock.
We do not pay dividends on the issued and outstanding shares of our common
stock. However, we pay 6% quarterly dividends on the outstanding shares of our
Series A Preferred Stock and pay interest at the rate of 6% on our outstanding
debentures. Applicable laws, rules and regulations under the New Jersey Business
Corporation Act, the Securities Act of 1933, as amended, as well as regulations
of the NASD may affect our ability to declare and pay dividends.
The conversion or exercise of outstanding convertible securities may result in
dilution to our common shareholders.
Dilution of the per share value of our common shares could result from the
conversion of most or all of the currently outstanding debentures and shares of
Series A Preferred Stock. We issued an aggregate of $1,240,000 principal amount
of debentures in a private offering completed March 1, 2003 and subsequently
issued an aggregate of $1,895,000 principal amount of debentures in a private
placement completed in December 2003. The debentures are convertible into a
total of 6,270,000 shares of our common stock at an initial conversion rate of
$0.50. In 1999, we issued an aggregate of 349,511 shares of Series A Preferred
Stock in connection with an exchange offer. Currently, 311,089 Series A
Preferred Shares remain outstanding and convertible into 622,178 shares of
common stock at the rate of $2.50 per share. However, if the last sale price of
the common stock is $3.50 or more a share for 20 consecutive trading days, as
listed on the Over-the-Counter Bulletin Board, the Series A Shares will
automatically be converted into shares of common stock.
10
In addition, as of December 31, 2003, there were outstanding:
o warrants to purchase 313,500 shares of common stock at an
exercise price of $0.50 per share;
o warrants to purchase 775,000 shares of common stock at exercise
prices ranging from $.25 to $1.75, issued in a settlement of
certain claims;
o warrants to purchase 3,072,446 shares of common stock at an
exercise price of $7.00 per share; and
o options to purchase 3,556,498 shares of common stock, at
exercise prices ranging from $0.20 to $2.75 per share.
The conversion or exercise of these convertible securities and the sale of
the underlying common stock, or even the potential of such conversion or
exercise and sale, may have a depressive effect on the market price of our
securities and will cause dilution to our shareholders. Moreover, the terms upon
which we will be able to obtain additional equity capital may be adversely
affected, since the holders of the outstanding convertible securities can be
expected to convert or exercise them at a time when we would, in all likelihood,
be able to obtain any needed capital on terms more favorable to us than the
exercise terms provided by the outstanding options and warrants. Dilution could
create significant downward pressure on the trading price of our common stock if
the conversion or exercise of these securities encouraged short sales. Even the
mere perception of eventual sales of common shares issued on the conversion of
these securities could lead to a decline in the trading price of our common
stock.
We have sold restricted shares which may depress the common stock price.
As of March 30, 2004, of the 10,065,486 issued and outstanding shares of
our common stock, approximately 2,544,241 shares may be deemed restricted shares
and, in the future, may be sold in compliance with Rule 144 under the securities
Act of 1933, as amended. Rule 144 provides that a person holding restricted
securities for a period of one year may sell in brokerage transactions an amount
equal to 1% of our outstanding common stock every three months. A person who not
affiliated with us and who has held restricted securities for over two years is
not subject to the aforesaid volume limitations as long as the other conditions
of the Rule are met. Possible or actual sales of our common stock by certain of
our present shareholders under Rule 144 may, in the future, have a depressive
effect on the price of the common stock in any market which may develop for such
shares. Such sales at that time may have a depressive effect on the price of the
common stock in the open market.
There is a limited public market for our securities
Our 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 NASD.
Although we may apply for inclusion of our common stock in the Nasdaq Smallcap
Market and/or on the American Stock Exchange, we do not currently satisfy the
minimum listing requirements. Accordingly, there can be no assurance that we
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.
Our broker-dealer subsidiary faces limitations on trading and market-making
activities in our securities
Due to regulatory positions and requirements of both the SEC and the NASD
relating to the circumstances and extent to which a registered broker-dealer and
NASD member may engage in market-making transactions in the securities of its
parent company, Montauk Financial Group does not engage in trading or
market-making activities relating to our common stock or warrants where Montauk
Financial Group would speculate in, purchase or sell our securities for its own
account. The purpose and effect of such limitation restricts Montauk Financial
Group from being a factor in the determination of the market or price of our
securities. Montauk Financial Group does, however, execute transactions for its
customers on an "agency basis" where it does not acquire our securities for its
own proprietary 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 NASD, Montauk Financial
Group is permitted to participate as a market-maker, it may do so on the basis
of showing a bid and offer for our securities at specified prices representing
customer interest.
We have limited the liability of our directors.
We have amended our certificate of incorporation to include provisions
eliminating the personal liability of our directors, except for breach of a
director's duty of loyalty to the company or to our 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
11
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.
We believe 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.
Our Certificate of Incorporation and By-Laws contain provisions which may have
an anti-takeover effect.
Our 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, our 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
We maintain our corporate headquarters and executive offices at Parkway 109
Office Center, 328 Newman Springs Road, Red Bank, New Jersey. In March 1997, we
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, we 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. We pay, 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. Management is currently reviewing its
alternatives in light of the impending expiration of the current term of the
Master Lease.
Leased Branch Offices
In June 2001 we 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 we 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. In January 2004 we discontinued the
operations of this division and currently utilize this space as a Montauk
Financial Group-operated branch office.
12
Item 3. Legal Proceedings
Many aspects of our business involve substantial risks of liability. In
recent years, there has been an increasing incidence of litigation and
arbitration involving the securities industry.
On July 17, 2003, we entered into a settlement agreement, along with
Montauk Financial Group, with certain claimants in order to settle pending
arbitration proceedings which were brought against us within the last eighteen
months. The covered proceedings arose out of customer purchases of certain
high-yield corporate bonds which declined in market value and subsequently
defaulted. The settlement agreement covers eleven separate claims that sought an
aggregate of approximately $12.3 million in damages. In exchange for the
consideration we provided, each claimant granted a general release of claims in
favor of our company and all individual respondents, with the exception of the
registered representative who had handled the claimants' accounts. In
consideration for the release granted by the claimants, we agreed to pay to the
claimants an aggregate of $1,000,000 cash and to issue to the claimants warrants
to purchase an aggregate of 750,000 shares of our common stock and 500,000
shares of our common stock. We agreed to file a registration statement with the
Securities and Exchange Commission covering the resale of the shares of common
stock underlying the warrants and fifty percent of the shares of common stock
issued in connection with the settlement agreement.
In addition, the settlement agreement provides that we may be obligated to
make additional payments of up to $600,000, in the event that claimants elect to
exercise the warrants on certain dates. Specifically, upon the election of the
majority of then existing warrant holders to exercise up to a maximum of 250,000
warrants, respectively during the months of June 2004, June 2005 and June 2006,
the claimants, upon exercising their warrants, will be required to sell the
shares in the open market. Thereafter, we would pay to the claimants up to an
aggregate amount of $200,000 less the amount received by the claimants from the
sale of their shares net of commissions. In the event that warrant holders do
not elect to exercise the warrants during a particular period, we will not be
required to make a payment for that period.
We are currently defending nine additional claims relating to the sale of
the high-yield bonds referenced in the preceding paragraphs. The claimants in
these matters seek compensatory damages in excess of $4.3 million, plus punitive
damages and the recovery of various costs. We are vigorously defending theses
actions and believe that there are meritorious defenses in each case. There is
no insurance coverage available for the payment of settlements and/or judgments
that may result from these particular claims.
In 2002, we filed a claim against one of our competitors for raiding,
unfair competition and unfair use of proprietary and confidential information.
In 2003, the matter was resolved between the parties and we received a cash
payment from the respondent firm, with specific restrictions on the
solicitation, and limitation on the hiring of our registered representatives and
employees by the respondent for a specific time period. The agreement also
requires the payment of liquidated damages by each party in the event of a
breach of its terms.
Montauk Financial Group is also a respondent or co-respondent in various
other legal proceedings which are related to its securities business. Montauk
Financial Group is contesting these claims and believes there are meritorious
defenses in each case. However, litigation is subject to many uncertainties, and
some of these actions and proceedings may result in adverse judgments. Further,
the availability of insurance coverage in any particular case is determined on a
case by case basis by the insurance carrier, and is limited to the coverage
limits within the policy for any individual claim and in the aggregate. After
considering all relevant facts, available insurance coverage and consultation
with litigation counsel, management believes that significant judgments or other
unfavorable outcomes from pending litigation could have a material adverse
impact on our consolidated financial condition, results of operations and cash
flows in any particular quarterly or annual period, or in the aggregate could
impair our ability to meet the net capital requirements relating to our
securities business.
As of December 31, 2003, we have accrued for litigation costs that are
probable and can be reasonably estimated based on a review of existing claims,
arbitrations and unpaid settlements. Management cannot give assurance that this
accrual will be adequate to cover actual costs that may be subsequently
incurred. It is not possible to predict the outcome of other matters pending
against Montauk Financial Group. All such cases are, and will continue to be,
vigorously defended.
Item 4. Submission of Matters on a Vote of Security Holders
Not Applicable.
13
PART II
Item 5. Market of and Dividends on our Common Equity and
Related Stockholder Matters
A. Principal Market
Our common stock is traded in the over-the-counter market. Trading in the
our common stock is reported on the NASD Bulletin Board system and in the pink
sheets published by Pink Sheets LLC. We believe that there is an established
public trading market for our common stock based on the volume of trading in our
common stock and the existence of market makers who regularly publish quotations
for our common stock. Our Class A, Class B and Class C Warrants commenced
trading in the over-the-counter market upon their issuance in March 1998. The
Class A Warrants and Class B Warrants expired on February 17, 2003. The Class C
Warrants are exercisable until February 17, 2005.
B. Market Information
Our common stock commenced trading in the over-the-counter market in 1987.
On March 30, 2004, our common stock had a high and low bid price of $.38 and
$.32, respectively.
The following is the range of high and low bid prices for such securities
for the periods indicated below:
Common Stock
Fiscal Year 2004 High Bid Low Bid
1st Quarter $.43 $.30
(through 3/29/04)
Fiscal Year 2003 High Bid Low Bid
1st Quarter $.22 $.20
2nd Quarter $.32 $.17
3rd Quarter $.32 $.20
4th Quarter $.40 $.24
Fiscal Year 2002 High Bid Low Bid
1st Quarter $.55 $.25
2nd Quarter $.53 $.21
3rd Quarter $.51 $.21
4th Quarter $.23 $.18
C. Number of Record Holders
The approximate number of record holders of our common stock as of March
30, 2004 was 470. Such number of record holders was determined from our
stockholder records, and does not include beneficial owners of our common stock
whose shares are held in the names of various security holders, dealers and
clearing agencies. We believe there are in excess of 3,000 beneficial holders of
our common stock.
D. Dividend Policy
We have not paid any dividends upon our common stock since our inception,
and 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. We pay quarterly dividends on outstanding shares of
our Series A Preferred Stock at the rate of 6% per annum, subject to the
limitations under the New Jersey Business Corporation Act. There are currently
outstanding 311,089 shares of Series A Preferred Stock. We have not paid
dividends on our outstanding shares of Series A Preferred Stock since the first
quarter of our 2003 fiscal year. There can be no assurance that we will continue
to pay dividends in the future.
14
E. Sales of Unregistered Securities
Private Placement
In December 2003, we completed a private offering of 6% convertible
debentures. We offered an aggregate of $3,000,000 of the debentures to
accredited investors on a best efforts basis. In the offering, we sold an
aggregate amount of $1,895,000 of debentures. The debentures are initially
convertible into shares of our common stock at the conversion price of $0.50 per
share. Interest on the debentures accrues at the rate of 6% per annum and is
payable in cash on a semi-annual basis on April 1st and October 1st of each year
until maturity or conversion. Each debenture is due and payable five (5) years
from issuance, unless previously converted into shares of common stock. Montauk
Financial Group served as our placement agent for the sale of the debentures. We
paid commissions of ten percent (10%) of the principal amount sold, and issued
warrants to purchase 189,500 shares of common stock, exercisable at $0.50 per
share, which expire five (5) years from the date of issuance, to registered
representatives of Montauk Financial Group who participated in the sale of the
debentures. Additional information regarding this offering is described under
the caption "General Business Developments During the 2003 Fiscal Year -
Debenture Offering" in Item 1 "Business" of this Annual Report on Form 10-K.
Settlement of Certain Claims
On July 17, 2003, we entered into a settlement agreement, along with
Montauk Financial Group, with certain claimants in order to settle pending
arbitration proceedings which were brought against us within the last eighteen
months. The covered proceedings arose out of customer purchases of certain
high-yield corporate bonds which declined in market value and subsequently
defaulted. The settlement agreement covers eleven separate claims and sought an
aggregate of approximately $12.3 million in damages. In exchange for the
consideration we provided, each claimant granted a general release of claims in
favor of our company and all individual respondents, with the exception of the
registered representative who had handled the claimants' accounts. In
consideration for the release granted by the claimants, we agreed to pay to the
claimants an aggregate of $1,000,000 cash and to issue to the claimants warrants
to purchase an aggregate of 750,000 shares of our common stock and 500,000
shares of our common stock. We agreed to file a registration statement with the
Securities and Exchange Commission covering the resale of the shares of common
stock underlying the warrants and fifty percent of the shares of common stock
issued in connection with the settlement agreement.
15
Item 6. Selected Financial Data
The following selected financial data should be read in conjunction with
the Consolidated Financial Statements, including the related notes, and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
Year Ended December 31,
2003 2002 2001 2000 1999
Operations Results:
Revenues:
Commissions $41,950,392 $36,513,802 $37,807,870 $46,529,771 $40,516,625
Principal transactions 9,466,359 6,727,642 8,021,887 7,131,079 14,000,680
Investment banking 2,439,144 1,007,700 1,483,210 2,416,711 439,065
Interest and other income 4,370,787 3,717,600 3,907,448 3,252,325 2,628,246
--------- --------- --------- --------- ---------
Total $58,226,682 $47,966,744 $ 51,220,415 $ 59,329,886 $57,584,616
---------- ---------- ---------- ---------- ----------
revenues
Expenses:
Commissions, employee $46,218,107 39,572,851 42,356,207 46,800,661 42,137,968
compensation and benefits
Clearing and floor $2,934,164 2,666,376 3,247,219 4,003,345 4,109,961
brokerage
Communications and $2,659,105 3,006,017 3,249,389 2,731,681 2,697,433
occupancy
Legal matters and related $5,836,960 1,259,502 2,415,374 1,181,115 1,395,008
costs
Write-down of Note -- -- -- 239,183 100,000
Receivable - Global Financial
Corp.
Loss on Global lease -- -- -- -- 600,416
Settlements
Other operating expenses 3,393,335 4,029,515 5,076,806 4,862,158 3,545,308
Interest 204,054 98,918 174,632 160,230 166,104
------- ------ ------- ------- -------
Total expenses $61,245,725 50,633,179 56,519,627 59,978,373 54,752,198
---------- ---------- ---------- ---------- ----------
Income (loss) before income (3,019,043) (2,666,435) (5,299,212) (648,487) 2,832,418
taxes
Provision for income taxes (benefit) 499,000 294,000 (90,989) 6,721 549,140
------- ------- -------- ----- -------
Income (loss) before $(3,518,043) $(2,960,435) $(5,208,223) $ (655,208) $2,283,278
extraordinary loss
Extraordinary loss - -- -- -- 34,200 --
-- -- -- ------ --
extinguishment of debt, net
of tax
Net income (loss) $(3,518,043) $(2,960,435) $(5,208,223) $(689,408) $2,283,278
============ ============ ============ ========== ==========
Net income (loss) available $(3,542,882) $(3,059,722) $(5,306,976) $(792,136) $2,215,528
============ ============ ============ ========== ==========
to common stockholders
Per share of
Common Stock:
(continued)
16
Year Ended December 31,
2003 2002 2001 2000 1999
Basic: $(.40) $(.36) $(.61) $(.08) $.22
$(.40) $(.36) $(.61) $(.08) $.21
Diluted:
Weighted average common 8,784,103 8,551,932 8,704,355 9,450,055 9,878,129
========= ========= ========= ========= =========
shares outstanding-- Basic
Weighted average common and 8,784,103 8,551,932 8,704,355 9,450,055 11,262,708
========= ========= ========= ========= ==========
common share equivalents
outstanding - Diluted
Financial condition:
Total assets $12,596,776 $11,425,506 $14,227,562 $16,913,063 $17,059,184
Total liabilities $16,684,215 $12,203,196 $11,934,884 $ 9,203,672 $7,429,046
Temporary Equity-Shares $ -- $-- $ 6,500 $ 6,500 $ 36,500
subject to redemption
Stockholders' equity (deficit) $(4,087,439) $(777,690) $2,286,181 $7,702,891 $9,593,638
17
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations
Factors Affecting "Forward Looking Statements"
From time to time, we may publish "forward-looking statements" within the
meaning of Section 27A of the Securities Act of 1933, as amended, and Section
21E of the Securities and Exchange Act of 1934, as amended, or make oral
statements that constitute forward-looking statements. These forward-looking
statements may relate to such matters as anticipated financial performance,
future revenues or earnings, business prospects, projected ventures, new
products, anticipated market performance, and similar matters. The Private
Securities Litigation Reform Act of 1995 provides a safe harbor for
forward-looking statements. These risks and uncertainties, many of which are
beyond our control, include, but are not limited to: (i) transaction volume in
the securities markets, (ii) the volatility of the securities markets, (iii)
fluctuations in interest rates, (iv) changes in regulatory requirements which
could affect the cost of doing business, (v) fluctuations in currency rates,
(vi) general economic and political conditions, both domestic and international,
(vii) changes in the rate of inflation and related impact on securities markets,
(viii) competition from existing financial institutions and other new
participants in competition from existing financial institutions and other new
participants in the securities markets, (ix) legal developments affecting the
litigation experience of the securities industry, and (x) changes in federal and
state tax laws which could affect the popularity of products sold by us. We do
not undertake any obligation to publicly update or revise any forward-looking
statements.
Overview
We are a New Jersey-based financial services holding company whose
principal subsidiary, First Montauk Securities Corp., has operated as a full
service retail and institutional securities brokerage firm since 1987. Since
July 2000, First Montauk Financial Group has operated under the trade name
"Montauk Financial Group" and 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, Montauk Financial Group established Century Discount
Investments, a discount brokerage division. We also sell insurance products
through our subsidiary, Montauk Insurance Services, Inc.
Montauk Financial Group has approximately 439 registered representatives
and services over 60,000 retail and institutional customers. With the exception
of two corporate-leased branch offices, all of our other 113 branch office and
satellite locations in 28 states are owned and operated by affiliates;
independent representatives who maintain all appropriate licenses and are
responsible for all office overhead and expenses. Montauk Financial Group also
employs registered representatives directly at its corporate office and its two
company-leased branch offices.
Montauk Financial Group is registered as a broker-dealer with the
Securities and Exchange Commission, the National Association of Securities
Dealers, the Municipal Securities Rule Making Board, and the Securities Investor
Protection Corporation and is licensed to conduct its brokerage activities in
all 50 states, the District of Columbia, and the Commonwealth of Puerto Rico.
All securities transactions are cleared through Fiserv Securities, Inc. of
Philadelphia, Pennsylvania with various floor brokerage and specialist firms
also providing execution services. These arrangements provide Montauk Financial
Group with back office support, transaction processing services on all
principal, national and international securities exchanges, and access to many
other financial services and products which allows Montauk Financial Group to
offer products and services comparable to larger brokerage firms.
Montauk Financial Group's revenues consist primarily of commissions and fee
income from individual and institutional securities transactions, mutual fund
and annuity sales 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 & Over-The-Counter Stocks 56%
Debt Instruments:
Municipal, Government and Corporate Bonds and
Unit Investment Trusts 8%
Mutual Funds 10%
Options: Equity and Index 4%
Insurance and Annuities 7%
Investment Banking and Corporate Finance 4%
Investment Advisory Fees 3%
Miscellaneous (1) 8%
----
Total 100%
- ---------------------------------------
(1) Miscellaneous includes interest income, amortization of deferred
revenue and recovery of bad debts.
We engage in a highly competitive business. Therefore, our earnings, like
those of others in the industry, reflect the activity in the markets and can and
do fluctuate accordingly.
18
Results of Operations
Three Years Ended December 31, 2003
The results of operations for fiscal 2003 showed an increase in revenues
over fiscal 2002, as investors returned to the equity markets. Total revenues
for 2003 increased $10,260,000, or 21.4%, to $58,227,000, as compared to 2002.
However, the net loss applicable to common stockholders for 2003 was $3,543,000,
approximately 19% greater than the net loss applicable to common stockholders of
$3,060,000 for 2002.
Year Ended December 31,
---------------------------------------------------------------------------------
2003
2002 2001
---------------------------------------------------------------------------------
---------- ---------------------------- ----------------------------
Revenues: (000's) % Change (000's) % Change (000's)
---------- ---------------------------- ----------------------------
Commissions 41,950 15 36,514 (3) 37,808
Principal Transactions 9,466 41 6,728 (16) 8,022
Investment Banking 2,439 142 1,008 (32) 1,483
Interest/Other 4,371 18 3,717 (5) 3,907
----- ----- -----
Total Revenues 58,226 21 47,967 (6) 51,220
====== ====== ======
The primary source of our revenue is commissions generated from securities
transactions, mutual funds, syndicate offerings and insurance products. Total
revenues from commissions increased $5,437,000, or 15%, from fiscal 2002 to
fiscal 2003. The increase resulted from stronger volume of transaction business
executed by our registered representatives on behalf of customers, who were more
active in the purchase and sale of stocks, bonds, options and mutual funds than
in the previous two years.
Revenues from agency transactions increased $5,467,000, or 24%, from
$22,732,000 in 2002, to $28,199,000 in 2003. As a percentage of total revenues,
agency revenues, which consist primarily of equity and options transactions,
increased from 47% in 2002, to 48% in 2003. The 2002 revenues were 4% greater
than the 2001 revenues of $21,918,000 in this category.
Mutual fund revenues decreased slightly from $5,756,000 in 2002, to
$5,717,000 in 2003, a decrease of less than 1%. We anticipate that the level of
mutual fund sales will continue to decline in light of the recent disclosure of
regulatory investigations into the mutual fund industry. In 2002, mutual fund
commissions increased from the 2001 fiscal year by 13% due to the sale of
certain products including principal protection plans, bond funds and 529
College Savings Plans.
Revenues from insurance commissions also decreased in 2003, from $5,101,000
in 2002 to $4,212,000 in 2003, a decrease of $889,000. This decrease is
reflective of a shift in investor focus from insurance-related investments back
toward the equity markets. For 2001 insurance commissions were $8,160,000 due
primarily from the sales of certain variable annuity contracts. The large
commissions associated with these products in 2001 were a one-time occurrence
that was not repeated during 2002 or 2003 primarily due to the fact that the
registered representative responsible for the majority of these commissions is
no longer with us.
Fees generated from managed accounts have continued to increase over the
years through efforts that began in 2001. In 2003, revenues were $1,880,000, up
from $1,343,000 in 2002, an increase of 40%. This increase of 40% is
attributable to the increased interest by investors who prefer to pay a fee
based on a percentage of asset value, rather than commissions paid on
transactions. As this structure has increased in popularity industry-wide, we
have increased our focus on servicing and increasing this business segment. In
2001 fee based revenues were $962,000, 39% below the 2002 revenues.
19
Total revenues from principal transactions, which include
mark-ups/mark-downs on transactions in which we act as principal, proprietary
trading and the sale of fixed income and equity securities, showed increases for
2003. Gross revenue from principal transactions increased $2,739,000, from
$6,728,000 to $9,466,000, an increase of 41% over the 2002 year. Revenues from
proprietary equity trading decreased in 2003 when compared with the previous
year. For 2003, profits from trading were $774,000, compared to $1,075,000 for
the 2002 year. Revenues from all fixed income sources, which include municipal,
government, corporate bonds and unit investment trusts increased to $4,446,000,
from $3,322,000 for the 2003 year.
In 2002, we implemented new policies and procedures governing firm trading
operations, which resulted in fewer inventory accounts, shorter holding periods
of securities positions, and improvements in risk management.
Investment banking revenues for the 2003 fiscal year increased
significantly, to $2,439,000, an increase of $1,431,000 over 2002, as investment
banking and syndicate business increased substantially over prior years. This
category includes new issues of equity and preferred stock offerings in which we
participated as a selling group or syndicate member. After two years of sluggish
activity in this segment, we were able to generate greater volume during the
2003 year as more companies returned to the capital markets.
Interest and other income for 2003 totaled $4,371,000, as compared to
$3,718,000 for 2002, an increase of $653,000. Interest income as a component of
this segment, increased about 5% or $125,000, in 2003, when compared to the 2002
year. The primary reason for the increase in other income is attributable to the
recognition of deferred income, and recovery of bad debt write-offs. For
financial reporting purposes, the cash advances that were received from our
clearing firm, Fiserv Securities, Inc., are deferred and amortized on a
straight-line basis over the remaining contract term. Other income included
amortization of approximately $726,000, $589,000, and $400,000 in fiscal 2003,
fiscal 2002 and fiscal 2001, respectively.
Year Ended December 31,
-------------------------------------------------
2003 2002 2001
-------------------------------------------------
(000's) % Change (000's) % Change (000's)
-------- -------------------- -------------------
Expenses:
Commissions, employee
Compensation & benefits 46,218 17 39,572 (7) 42,356
Clearing and floor brokerage 2,934 10 2,666 (18) 3,247
Communications and occupancy 2,659 (12) 3,006 (7) 3,249
Legal matters and related costs 5,837 363 1,260 (48) 2,415
Other operating expenses 3,393 (16) 4,030 (21) 5,077
Interest 204 106 99 (43) 175
--------- ------- -------
Total expenses 61,245 21 50,633 (6) 56,519
========= ======= =======
Total expenses increased by $10,612,000, or 21%, to $61,245,000 in 2003,
from $50,633,000 in 2002. Compensation and benefits expense for management,
operations and clerical personnel, increased slightly in 2003, from $7,026,000
(15% of revenues) to $7,061,000 (12% of revenues), an increase of $35,000 over
the 2002 year. When compared with the 2001 year, compensation and benefits
20
decreased $1,206,000. Commission expense, the largest expense category, which is
directly related to commission revenues, increased 20%, or $6,611,000, from
$32,546,000 for the 2002 year to $39,157,000 for the 2003 year. Commissions as a
percentage of total revenues remained relatively constant at 67% for all three
years. We employed approximately 90 salaried employees as of December 31, 2003,
97 salaried employees as of December 31, 2002, and 106 salaried employees as of
December 31, 2001. In fiscal 2001, certain cost cutting measures were
implemented in response to the decrease in revenues and trading activity. These
measures included a reduction in executive officers' salaries and personnel
layoffs. Additional layoffs were made in 2002 to further reduce expenses.
Clearing and floor brokerage costs, which are determined by the volume and
type of transactions, increased $268,000, to $2,934,000 in 2003, from $2,666,000
in 2002, which was a decrease of $581,000 from the 2001 expense of $3,247,000.
As a percent of revenues, clearing costs were approximately 5% for 2003 as
compared with 5.6% and 6.3% in years 2002 and 2001, respectively. The percentage
of clearing costs to gross revenues can fluctuate on an interim basis 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 decreased 12%, or $347,000, to
$2,659,000 in 2003 from $3,006,000 in 2002, which was a decrease of $243,000
from the 2001 expense of $3,249,000. As a percentage of revenue, communications
and occupancy decreased to 4.6%, from 6.3% for both the 2002 and 2001 years. The
decrease in communications and occupancy costs was the result of the elimination
of three company-leased branch offices and their related costs and equipment
rental expenses.
Legal matters and related settlement costs increased by $4,615,000, to
$5,875,000 in 2003, from $1,260,000 in 2002. In July 2003, we entered into a
settlement agreement with certain claimants in order to settle pending
arbitration proceedings that were brought against us within the last eighteen
months. The covered proceedings arose out of customer purchases of certain
high-yield corporate bonds that declined in market value and subsequently
defaulted. The settlement agreement covers eleven separate claims that sought an
aggregate of approximately $12.3 million in damages. In exchange for the
consideration we provided, each claimant granted a general release of claims in
our favor and all individual respondents, with the exception of the registered
representative who had handled the claimants' accounts. In consideration for the
release, we paid an aggregate of $1,000,000 cash and issued 500,000 shares of
our common stock and warrants to purchase an additional 750,000 shares of our
common stock to those claimants. We agreed to file a registration statement with
the Securities and Exchange Commission covering the resale of the shares of
common stock underlying the warrants and fifty percent of the shares of common
stock issued in connection with the settlement agreement.
In addition, the settlement agreement provides that we may be obligated to
make additional payments of up to $600,000, in the event that claimants elect to
exercise the warrants on certain dates. Specifically, upon the election of the
majority of then existing warrant holders to exercise up to a maximum of 250,000
warrants, respectively during the months of June 2004, June 2005 and June 2006,
the claimants, upon exercising their warrants, will be required to sell the
shares in the open market. Thereafter, we would pay to the claimants up to an
aggregate amount of $200,000 less the amount received by the claimants from the
sale of their shares, net of commissions. In the event that warrant holders do
not elect to exercise the warrants during a particular period, we will not be
required to make a payment for that period.
We are currently defending nine additional claims relating to the sale of
the high-yield bonds referenced in the preceding paragraphs. The claimants in
these matters seek compensatory damages in excess of $4.3 million, plus punitive
damages and the recovery of various costs. We are vigorously defending theses
actions and believe that there are meritorious defenses in each case. There is
no insurance coverage available for the payment of settlements and/or judgments
that may result from these particular claims.
In 2002, we filed a claim against one of our competitors for raiding,
unfair competition and unfair use of proprietary and confidential information.
In 2003, the matter was resolved between the parties and we received a cash
payment from the respondent firm, with specific restrictions on the
solicitation, and limitation on the hiring of our registered representatives and
employees by the respondent for a specific time period. The agreement also
requires the payment of liquidated damages by each party in the event of a
breach of its terms.
Montauk Financial Group is also a respondent or co-respondent in various
other legal proceedings which are related to its securities business. Montauk
Financial Group is contesting these claims and believes there are meritorious
defenses in each case. However, litigation is subject to many uncertainties, and
some of these actions and proceedings may result in adverse judgments. Further,
the availability of insurance coverage in any particular case is determined on a
case by case basis by the insurance carrier, and is limited to the coverage
limits within the policy for any individual claim and in the aggregate. After
21
considering all relevant facts, available insurance coverage and consultation
with litigation counsel, management believes that significant judgments or other
unfavorable outcomes from pending litigation could have a material adverse
impact on our consolidated financial condition, results of operations and cash
flows in any particular quarterly or annual period, or in the aggregate, and
could impair our ability to meet the statutory net capital requirements relating
to our securities business.
As of December 31, 2003, we have accrued for litigation costs that are
probable and can be reasonably estimated based on a review of existing claims,
arbitrations and unpaid settlements. Management cannot give assurance that this
accrual will be adequate to cover actual costs that may be subsequently
incurred. It is not possible to predict the outcome of other matters pending
against Montauk Financial Group. All such cases are, and will continue to be,
vigorously defended.
Other operating costs decreased $637,000, to $3,393,000 in 2003, from
$4,030,000 in 2002. In 2003, we took less of a write off for customer and broker
bad debts as compared to 2002 and 2001. This expense item was $73,000 in 2003
compared to $1,021,000 and $1,281,000 in 2002 and 2001, respectively. From 2001
to 2002, other operating expenses decreased $1,047,000, from $5,077,000 to
$4,030,000.
Professional liability insurance premiums have substantially increased in
fiscal 2003 due to a hardening in the market for broker-dealer professional
liability and directors and officers insurance coverages. Many insurance
carriers have eliminated these types of coverages, while others have
substantially increased premiums and deductible limits. Our registered
representatives have historically paid the cost of errors and omission
insurance. However, to stay competitive in the marketplace for registered
representatives, we absorbed a large portion of these premiums in 2003. The net
cost to us for this errors and omissions insurance increased by $332,000, from
$7,000 in 2002 to $339,000 in 2003. The amount of this cost will continue to be
dependent on the number of registered representatives associated with us
throughout the year.
Income tax expense (benefit) for the years ended December 31, 2003, 2002
and 2001 was $499,000, $294,000 and $(90,989), respectively. The effective tax
rate on pre-tax loss was 16.5%, 11.0% and (2.8)% during 2003, 2002 and 2001,
respectively. The difference in the rate from fiscal 2002 to fiscal 2003 was due
primarily to a reduction in the 2002 provision to reflect a federal loss
carryback refund claim of approximately $212,000. In addition, during fiscal
2002. During the fourth quarter of 2002 and 2003, we received the final two
payments of $1,250,000 under the financing agreement with our clearing firm. The
payments were taxable in the year of receipt. Previously recorded deferred tax
assets were charged against that income in both years. As of December 31, 2003,
other future tax benefits have been entirely offset by a valuation allowance
because, based on the weight of available evidence, it is more likely than not
that the recorded deferred tax assets will not be realized in future periods.
The difference in the rate from 2002 to 2001 was due primarily to higher federal
loss carryback refund claims in 2001, as well as an increase in the 2001
valuation allowance to offset deductible temporary differences that did not meet
the "more likely than not" realization test.
For 2003, we reported a net loss applicable to common stockholders of
$3,543,000, or $.40 per basic and diluted share, as compared to a net loss
applicable to common stockholders reported in fiscal 2002 of $3,060,000, or $.36
per basic and diluted share. For 2001, we reported a net loss applicable to
common stockholders of $5,307,000, or $.61 per basic and diluted share. The net
loss for 2003 was primarily related to the legal fees and settlement costs
attributable to several arbitrations reserved and paid for in 2003, as described
in more detail above and in Footnote 14 to the financial statements.
Liquidity and Capital Resources
We maintain a highly liquid balance sheet with approximately 70% of assets
consisting of cash and cash equivalents, securities owned, and receivables from
our clearing firm and other broker-dealers. The balances in these accounts can
and do fluctuate significantly from day to day, depending on general economic
and market conditions, volume of activity, and investment opportunities. These
accounts are monitored on a daily basis in order to ensure compliance with
regulatory net capital requirements and to preserve liquidity.
Overall, cash and cash equivalents increased for 2003 by $803,000. Net cash
used in operating activities during 2003 was $625,000, as a result of the net
loss for 2003 of $3,518,000, adjusted by non-cash charges including depreciation
and amortization of $510,000, increases in the amount due from clearing firm of
$628,000 and other assets of $736,000, offset by net increases in commissions,
accounts payable and accrued expenses of $1,616,000.
We received cash advances under the financing agreement with Fiserv of
$1,250,000 in both 2002 and 2001. Under this agreement, we received our fourth
and final advance of $1,250,000 in November 2003.
Investing activities required cash of $139,000 in 2003. Additions to
capital expenditures consumed $166,000, while decreases in other assets provided
$27,000.
22
Financing activities provided cash of $1,567,000 during the 2003 year. We
received gross proceeds of $2,105,000 in 2003 from a private offering of 6%
convertible debentures. This was partially offset by notes and capital lease
repayments of $269,000, dividend payments to preferred shareholders of $25,000
and a decrease in the cash portion of deferred financing costs of $244,000.
In connection with the settlement agreement we entered into in July 2003,
regarding the settlement of eleven pending arbitration proceedings discussed
above, we issued 750,000 five-year warrants in three classes of 250,000 warrants
each. Class A warrants have an exercise price of $.40 per share; Class B and
Class C warrants have exercise prices of $.25 per share. The settlement
agreement provides that we may be obligated to make additional cash payments of
up to $600,000 in the event that claimants elect to exercise the warrants on
certain dates. Specifically, if a majority of then existing Class A warrant
holders elect to exercise the remaining warrants in their particular class
during the month of June 2004 (the "Required Exercise Event"), the claimants,
upon exercising their warrants, will be required to sell the shares in the open
market. If the warrants are exercised and the shares sold, we will pay to the
claimants up to an aggregate amount of $200,000 less the amount received by the
claimants from the sale of their shares, net of commissions. This process will
be repeated for remaining Class B and Class C warrant holders during the months
of June 2005 and June 2006, respectively.
In the alternative, we may elect or be required to redeem the unexercised
warrants for up to $.80 per warrant, or a maximum of $200,000 per class,
depending upon the then prevailing market price of our common stock on or about
the date of the Required Exercise Event of a particular class. We may call a
warrant class for redemption if the average market price of the underlying
common shares during the ten trading days immediately preceding the date upon
which we receive notice that the warrant holders of a particular class have
elected to declare a Required Exercise Event is less than $1.20. We will be
required to redeem the warrants for $.80 per warrant in cash if the average
market price of the underlying common shares during the ten trading days
immediately preceding the date upon which we receive notice that the warrant
holders of a particular class have elected to declare a Required Exercise Event
is less than or equal to the warrant exercise price. In the event that warrant
holders of a particular class elect not to declare a Required Exercise Event,
our guarantee will be canceled with respect to that class.
Consolidated Contractual Obligations and Lease Commitments
The table below provides information about our commitments related to debt
obligations, leases, guarantees and investments as of December 31, 2003. This
table does not include any projected payment amounts related to our potential
exposure to arbitrations and other legal matters.
Expected Maturity Date
As of December 31, 2003
- --------------------------- --------------- ----------------- ---------------- --------------- -------------- ----- ----------------
Category 2004 2005 2006 2007 2008 After Total
2008
- --------------------------- --------------- ----------------- ---------------- --------------- -------------- ----- ----------------
- --------------------------- --------------- ----------------- ---------------- --------------- -------------- ----- ----------------
- --------------------------- --------------- ----------------- ---------------- --------------- -------------- ----- ----------------
- --------------------------- --------------- ----------------- ---------------- --------------- -------------- ----- ----------------
Debt Obligations 0 0 0 $1,030,000 $2,105,000 0 $3,135,000
- --------------------------- --------------- ----------------- ---------------- --------------- -------------- ----- ----------------
- --------------------------- --------------- ----------------- ---------------- --------------- -------------- ----- ----------------
Capital Lease Obligations $114,000 $15,711 0 0 0 0 $130,107
- --------------------------- --------------- ----------------- ---------------- --------------- -------------- ----- ----------------
- --------------------------- --------------- ----------------- ---------------- --------------- -------------- ----- ----------------
Operating Lease $1,103,126 $296,302 $169,500 0 0 0 $1,568,928
Obligations
- --------------------------- --------------- ----------------- ---------------- --------------- -------------- ----- ----------------
- --------------------------- --------------- ----------------- ---------------- --------------- -------------- ----- ----------------
Purchase Obligations
- --------------------------- --------------- ----------------- ---------------- --------------- -------------- ----- ----------------
- --------------------------- --------------- ----------------- ---------------- --------------- -------------- ----- ----------------
Other Long-Term $200,000(1) $200,000(1) $200,000(1) 0 0 0 $600,000(1)
Obligations Reflected on
Balance Sheet under GAAP
- --------------------------- --------------- ----------------- ---------------- --------------- -------------- ----- ----------------
- --------------------------- --------------- ----------------- ---------------- --------------- -------------- ----- ----------------
Total $1,417,126 $512,013 $881,513 $1,030,000 $2,105,000 $5,434,035
- --------------------------- --------------- ----------------- ---------------- --------------- -------------- ----- ----------------
(1) Expected payment obligations embodied in the warrants subject to put
options. For more detailed information please refer to Footnote No. 12 of the
consolidated financial statements.
23
Net Capital
At December 31, 2003, Montauk Financial Group had net capital of $757,047
which was $344,479 in excess of its required net capital of $412,568, and the
ratio of aggregate indebtedness to net capital was 8.17 to 1.
Financing Activities
In 1999, we completed a private offering of Series A Convertible Preferred
Stock in connection with the settlement with holders of leases of Global
Financial Corp. Under the terms of the offering, each Global lease investor who
participated in the offering received one share of Preferred Stock in exchange
for every $5 of lease investment value that the investor was entitled to receive
from Global after certain adjustments. Each leaseholder was required to assign
their interest in all lease payments to which they were entitled. Each share of
the Preferred Stock is convertible into two shares of Common Stock and pays a
quarterly dividend of 6%. Pursuant to the offering, we 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. We have suspended the
quarterly payments of our Series A Preferred Stock dividend in accordance with
applicable state law. (See Footnote 17 to the consolidated financial
statements).
In October 2002, we commenced a private offering of up to $3,000,000 of 6%
convertible debentures to accredited investors. Each debenture is convertible at
an initial conversion price of $0.50 per share, subject to adjustment for stock
dividends, combinations, splits, recapitalizations, and like events. Interest on
the debentures accrues at the rate of 6% per annum and is payable in cash on a
semi-annual basis on April 1st and October 1st of each year until maturity or
conversion. Each debenture is due and payable five (5) years from issuance,
unless previously converted into shares of Common Stock. The offering expired on
March 1, 2003. In the offering, we sold an aggregate amount of $1,240,000 of
debentures, $1,030,000 in 2002 and $210,000 in 2003. The proceeds of the
financing will be used to satisfy general working capital needs. Neither the
debentures nor the shares underlying the debentures have been registered for
offer or sale under the Securities Act; such securities are being issued on the
basis of the statutory exemption provided by Section 4(2) of the Securities Act,
as amended, and/or Rule 506 of Regulation D, promulgated thereunder relating to
transactions by an issuer not involving any public offering.
In September 2003, we commenced an additional private offering of up to
$3,000,000 of 6% convertible debentures to accredited investors. Each debenture
is convertible at an initial conversion price of $0.50 per share, subject to
adjustment for stock dividends, combinations, splits, recapitalizations, and
like events. Interest on the debentures accrues at the rate of 6% per annum and
is payable in cash on a semi-annual basis on April 1st and October 1st of each
year until maturity or conversion. Each debenture is due and payable five (5)
years from issuance, unless previously converted into shares of Common Stock.
The offering was completed on December 31, 2003. In the offering, we sold an
aggregate principal amount of $1,895,000 of debentures. The proceeds of the
financing will be used to satisfy general working capital needs. The debentures
have not been registered for offer or sale under the Securities Act; such
securities are being issued on the basis of the statutory exemption provided by
Section 4(2) of the Securities Act, as amended, and/or Rule 506 of Regulation D,
promulgated thereunder relating to transactions by an issuer not involving any
public offering. For more information, see a discussion of the debentures under
the captions "Item 1. Business -- Debenture Offering" and "Item 5. Sale of
Unregistered Securities."
Off-Balance Sheet Arrangements
We execute securities transactions on behalf of our customers. If either
the customer or a counter-party fail to perform, we, by agreement with our
clearing broker may be required to discharge the obligations of the
non-performing party. In such circumstances, we may sustain a loss if the market
value of the security is different from the contract value of the transaction.
We seek to control off-balance-sheet risk by monitoring the market value of
securities held or given as collateral in compliance with regulatory and
internal guidelines. Pursuant to such guidelines, our clearing firm requires
additional collateral or reduction of positions, when necessary. We also
complete credit evaluations where there is thought to be credit risk.
Critical accounting policies
We prepare our financial statements in accordance with accounting
principles generally accepted in the United States of America. Preparing
financial statements in accordance with generally accepted accounting principles
requires us to make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent assets and liabilities as
of the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. The following paragraphs include a
discussion of some of the significant accounting policies and methods applied to
the preparation of our consolidated financial statements. Review Note 2 to the
financial statements for further discussion of significant accounting policies.
24
Warrants subject to put options
We have issued common stock purchase warrants that embody obligations
requiring us to make cash redemption payments under certain circumstances. FAS
150 requires us to classify these financial instruments as liabilities and to
record them at fair value initially and at the end of subsequent reporting
periods. The valuation of the warrants involves the use of significant judgments
and assumptions. At December 31, 2003, we valued the warrants using the
discounted cash flow method, assuming, based on available evidence, that we will
be required to pay the full redemption liability. Actual results could differ
from these estimates as circumstances change.
Use of Estimates
In presenting the consolidated financial statements, management makes
estimates regarding the valuation of certain securities owned, the carrying
value of investments, the realization of deferred tax assets, the outcome of
litigation, and other matters that affect the reported amounts and disclosure of
contingencies in the financial statements. Estimates, by their nature, are based
on judgment and available information. Therefore, actual results could differ
from those estimates and could have a material impact on the consolidated
financial statements and it is possible that such changes could occur in the
near term.
Revenue recognition
Securities transactions, commission income and related expenses are
recorded on a trade date basis. 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 our financial agreement with our clearing firm are deferred and
amortized over the remaining term of the agreement on a straight-line basis.
Long-lived Assets
We evaluate impairment losses on long-lived assets used in operations,
primarily fixed assets, when events and circumstances indicate that the carrying
value of the assets, might not be recoverable in accordance with FASB Statement
No. 144 "Accounting for the Impairment or Disposal of Long-lived Assets". For
purposes of evaluating the recoverability of long-lived assets, the undiscounted
cash flows estimated to be generated by those assets would be compared to the
carrying amounts of those assets. If and when the carrying values of the assets
exceed their fair values, the related assets will be written down to fair value.
Clearing Agreement
Montauk Financial Group introduces all of its customer transactions, which
are not reflected in the financial statements, to its clearing broker, which
maintains the customers' accounts and clears such transactions. Additionally,
the clearing broker provides the clearing and depository operations for Montauk
Financial Group's proprietary securities transactions. These activities may
expose us to off-balance sheet risk in the event that customers do not fulfill
their obligations with the clearing broker, as Montauk Financial Group has
agreed to indemnify the clearing broker for any resulting losses. We will record
a loss from a client transaction when information becomes available to
management that allows it to estimate its impact on our financial statements.
Income taxes
Due to significant operating losses from 2001-2003 and continuing business
uncertainty, we have established a valuation allowance against all of our
deferred tax benefits as of December 31, 2003. We intend to maintain this
valuation allowance until we determine that it is more likely than not that
deferred tax assets will be realized. Our income tax expense recorded in the
future will be reduced to the extent of offsetting decreases in our valuation
allowance. The realization of our remaining deferred tax assets is primarily
dependent on forecasted future taxable income.
Recent pronouncements of the Financial Accounting Standards Board
In April 2003, the FASB issued FAS No. 149 which amends and clarifies
financial accounting and reporting for derivative instruments, including certain
derivative instruments embedded in other contracts, and for hedging activities
under FAS No. 133. In particular, FAS No. 149 clarifies under what circumstances
a contract with an initial net investment meets the characteristic of a
derivative discussed in FAS No. 133, clarifies when a derivative contains a
financing component, amends the definition of an underlying (as initially
defined in FAS No. 133) to conform it to a language used in FIN No. 45,
Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others, and amends certain other existing
pronouncements. FAS No. 149 is effective for all contracts entered into or
modified after June 30, 2003, subject to certain exceptions. The adoption of
this statement did not have an impact on our financial position, results of
operations, or cash flows.
25
In May 2003, the FASB issued FAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity". FAS No. 150
establishes standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equity. FAS
No. 150 requires that an issuer classify a financial instrument that is within
the scope of FAS No. 150 as a liability. FAS No. 150 is effective for financial
instruments entered into or modified after May 31, 2003, and otherwise is
effective beginning September 1, 2003. We have applied the provisions of FAS No.
150 to certain warrants issued in a legal settlement during 2003.
In November 2002, the FASB issued FASB Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, including Indirect
Guarantees of Indebtedness of Others" ("FIN 45"). This interpretation elaborates
on the disclosures to be made by a guarantor in its interim and annual financial
statements about its obligations under certain guarantees that it has issued. It
also clarifies that a guarantor is required to recognize, at the inception of a
guarantee, a liability for the fair value of the obligation undertaken in
issuing the guarantee. The disclosure requirements of this interpretation are
effective for interim and annual periods after December 15, 2002. The initial
recognition and initial measurement requirements of this interpretation are
effective prospectively for guarantees issued or modified after December 31,
2002. We adopted FIN 45 effective January 1, 2003. The effect of such adoption
was not material to our financial position, results of operations, or cash
flows.
In January 2003, the FASB issued FASB Interpretation No. 46, "Consolidation
of Variable Interest Entities" ("FIN 46"). This interpretation of Accounting
Research Bulletin No. 51, "Consolidated Financial Statements", addresses
consolidation by business enterprises of variable interest entities. Under
current practice, two enterprises generally have been included in consolidated
financial statements because one enterprise controls the other through voting
interests. This interpretation defines the concept of "variable interests" and
requires existing unconsolidated variable interest entities to be consolidated
by their primary beneficiaries if the entities do not effectively disperse the
risks among the parties involved. The provisions of FIN 46, which were adopted
in 2003, did not have a material impact on our consolidated financial position,
results of operations, or cash flows.
In accordance with the provisions of FAS 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity," we
have classified our obligations under the warrants as liabilities in the
Statement of Financial Condition. The fair value of the obligations embodied in
the warrants were initially valued at $441,000 using the discounted cash flow
method, assuming that we will be required to pay the full redemption liability.
We will re-measure the value of the warrant obligations as of the end of each
reporting period using the discounted cash flow method until the obligations are
settled. The recorded value at December 31, 2003 was $479,066. Changes in value
are recognized in earnings as interest expense. We have agreed to register all
shares of common stock underlying the warrants.
Impact of Inflation
We believe 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 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, or
has other adverse effects on the securities markets and the value of securities
held in inventory, it may adversely affect our financial position and results of
operations.
Risk Management
Risk is an inherent part of our business and activities. The extent to
which we properly and effectively identify, assess, monitor and manage the
various types of risk involved in our activities is critical to our soundness
and profitability. We seek to identify, assess, monitor and manage the following
principal risks involved in its business activities: market, credit, operational
and legal. Senior management takes an active role in the risk management process
and requires specific administrative and business functions to assist in the
identification, assessment and control of various risks. Our risk management
policies and procedures are subject to ongoing review and modification.
Market Risk. Certain of our business activities expose us to market risk. This
market risk represents the potential for loss that may result from a change in
value of a financial instrument as a result of fluctuations in interest rates,
equity prices or changes in credit rating of issuers of debt securities. This
risk relates to financial instruments we hold as investment and for trading.
Securities inventories are exposed to risk of loss in the event of unfavorable
price movements. Securities positions are marked to market on a daily basis.
Market-making activities are client-driven, with the objective of meeting
26
clients' needs while earning a positive spread. At December 31, 2003 and
December 31, 2002, equity securities positions owned and sold, not yet purchased
were approximately $169,500 and $184,000, and $69,000 and $-0-, respectively. In
our view, the potential exposure to market risk, trading volatility and the
liquidity of securities held in the firm's inventory accounts could potentially
have a material effect on its financial position.
Credit Risk. Credit risk represents the loss that we would incur if a client,
counterparty or issuer of securities or other instruments that we hold fails to
perform its contractual obligations. Client activities involve the execution,
settlement, and financial of various transactions on behalf of its clients.
Client activities are transacted on either a cash or margin basis. Client
activities may expose us to off-balance sheet credit risk. We may have to
purchase or sell financial instruments at the prevailing market price in the
event of the failure of a client to settle a trade on its original terms or in
the event that cash and securities in the client margin accounts are not
sufficient to fully cover the client losses. We seek to control the risks
associated with client activities by requiring clients to maintain collateral in
compliance with various regulations and company policies.
Operational Risk. Operational risk generally refers to the risk of loss
resulting from our operations, including, but not limited to, improper or
unauthorized execution and processing of transactions, deficiencies in our
operating systems, business disruptions and inadequacies or breaches in our
internal control processes. We operate in diverse markets and rely on the
ability of our employees and systems to process high numbers of transactions
often within short time frames. In the event of a breakdown or improper
operation of systems, human error or improper action by employees, we could
suffer financial loss, regulatory sanctions or damage to our reputation. In
order to mitigate and control operational risk, we have developed and continue
to enhance policies and procedures that are designed to identify and manage
operational risk at appropriate levels. Included in our operational risk
management practice is disaster recovery for our critical systems. We believe
that our disaster recovery program, including off-site back-up technology and
operational facilities, is adequate to handle a reasonable business disruption.
However, there can be no assurances that a disaster directly affecting our
headquarters or operations center would not have a material adverse impact.
Insurance and other safeguards might only partially reimburse us for our losses.
Legal Risk. Legal risk includes the risk of non-compliance with applicable
legal and regulatory requirements. We are subject to extensive regulation in the
different jurisdictions in which we conduct our business. We have various
procedures addressing issues such as regulatory capital requirements, sales and
trading practices, use of and safekeeping of customer funds, credit granting,
collection activities, anti money-laundering and record keeping.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our activities often involve the purchase, sale or short sale of securities
as principal. Such activities subject our capital to significant risks from
markets that may be characterized by relative illiquidity or may be particularly
susceptible to rapid fluctuation in price or liquidity. Such market conditions
could limit our ability to resell securities purchased or to purchase securities
sold short. These activities subject our capital to significant risks, including
market, credit and liquidity risks. Market risk relates to the risk of
fluctuating values based on market prices without action on our part. Our
primary credit risk is settlement risk, which relates to whether counterparty
will fulfill its contractual obligations, such as delivery of securities or
payment of funds. Liquidity risk relates to our inability to liquidate assets or
redirect the deployment of assets contained in illiquid investments. Additional
information pertaining to the foregoing risks is included under the caption
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Risk Management."
27
Item 8. Financial Statements
See Financial Statements attached hereto at pages F-1 to F-24.
Item 9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure
Not Applicable.
Item 9A. Controls and Procedures
Our management, including the President and the Chief Executive Officer and
Chief Financial Officer, carried out an evaluation of our disclosure controls
and procedures (as defined in Rule 15d-15(e) under the Securities Exchange Act
of 1934, as amended) as of the end of the period covered by this report. Based
on that evaluation, our President and our Chief Executive Officer and Chief
Financial Officer concluded that we had effective controls and procedures for
(i) recording, processing, summarizing and reporting information that is
required to be disclosed in its reports under the Securities Exchange Act of
1934, as amended, within the time periods specified in the Securities and
Exchange Commission's rules and forms and (ii) ensuring that information
required to be disclosed in such reports is accumulated and communicated to our
management, including our President and our Chief Executive Officer and Chief
Financial Officer, as appropriate to allow timely decisions regarding
disclosure.
No change in our internal control over financial reporting (as defined in
Rules 13a-15(f) and 15d-15(f) under the Exchange Act) occurred during the fiscal
quarter ended January 31, 2004 that has materially affected, or is reasonably
likely to materially affect, our internal control over financial reporting.
28
PART III
Item 10. Directors and Executive Officers Our directors and executive officers
are as follows:
Name Age Position
- ---- --- --------
Herbert Kurinksy 72 Class I Director and Chairman of the Board of First
Montauk Financial Corp. and Registered Options
Principal of Montauk Financial Group
William J. Kurinsky 43 Class I Director, Vice-Chairman, Chief Executive and
Chief Financial Officer and Secretary of First Montauk
Financial Corp. and of Montauk Financial Group and
Financial/Operations Principal of Montauk Financial
Group
Victor K. Kurylak 46 President and Chief Operating Officer, First Montauk
Financial Corp. and Montauk Financial Group
Robert I. Rabinowitz 46 General Counsel, First Montauk Financial Corp., Chief
Administrative Officer, Vice President and General
Securities Principal of Montauk Financial Group
Norma Doxey 65 Class II Director, First Montauk Financial Corp., and
Vice President of Operations, Montauk Financial Group
Ward R. Jones 72 Class III Director, First Montauk Financial Corp.
Barry D. Shapiro 62 Class II Director, First Montauk Financial Corp.
Our 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 our 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 our company (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 company which
is materially and demonstrably injurious to the company, 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.
David Portman, a former Class III Director, resigned his position effective
December 31, 2002. The Board of Directors has not yet filled the vacancy created
by Mr. Portman's resignation.
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.
29
Herbert Kurinsky, our Chairman, became a Director and the President of
First Montuak Financial Corp. on November 16, 1987. Mr. Kurinsky is a co-founder
of Montauk Financial Gorup. and has been its President, one of its Directors and
its Registered Options Principal since September of 1986. Effective December 15,
2003, Mr. Kurinsky relinquished his duties as our Chief Executive Officer. 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, serves as our Chief Executive Officer, Vice Chairman,
Chief Financial Officer and Secretary. Mr. Kurinsky previously served as our
Vice President, a Director and Chief Operating Officer, in addition to serving
as Chief Financial Officer and Secretary, since November 16, 1987. Mr. Kurinsky
relinquished the office of Chief Operating Officer and became our Chief
Executive Officer and Vice Chairman, effective December 15, 2003. He is a
co-founder of Montauk Financial Group 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.
Victor K. Kurylak became our President and Chief Operating Officer
effective as of January 1, 2004. From November 2001 through December 2003, Mr.
Kurylak was a self-employed business consultant, and was retained by us prior to
his becoming our President and Chief Operating Officer. From November 1995
through December 2000 he was the owner and Executive Vice President for Madison
Consulting Group/Summit Insurance, an independent insurance brokerage firm. From
January 2001 through November 2001 he was also a registered representative with
Terra-Nova Trading Company. From February 1990 through October 1995, Mr. Kurylak
was the Chief Information Officer for Rockefeller Financial Services in New York
City. Mr. Kurylak received his Bachelor of Arts degree in Engineering from
Princeton University in 1979. Mr. Kurylak is registered as a general securities
representative and registered principal and is licensed as a life, health and
property and casualty insurance producer.
Robert I. Rabinowitz, Esq. has been our General Counsel since 1987. He
concurrently served as General Counsel of Montauk Financial Group from 1986
until 1998 when a new general counsel was named. Thereafter, he became the Chief
Administrative Officer of Montauk Financial Group 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.
Norma L. Doxey has been a member of our Board of Directors since December
6, 1988. Ms. Doxey has been a Vice President of Operations and a Registered
Representative with Montauk Financial Group since September 1986. From September
1986, she was operations 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 member of our Board of Directors 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.
Barry D. Shapiro, CPA has been a member of our Board of Directors 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 CPAs 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.
30
Significant Employees
Mark D. Lowe, 45, 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, a Chartered Financial Planner (Chfc) in 2001 and a Chartered Life
Underwriter (CLU) in 2003. Mr. Lowe graduated Ocean County College in Toms
River, NJ. Mr. Lowe is the past President of the Estate and Financial Planning
Council of Central New Jersey.
Mindy A. Horowitz, CPA, 46, has been Vice President of Finance for Montauk
Financial Group 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.
Certain Reports
No person who, during the fiscal year ended December 31, 2003, was a
Director, officer or beneficial owner of more than ten percent of our common
stock (which is the only class of our securities registered under Section 12 of
the Securities Exchange Act of 1934 failed to file on a timely basis, reports
required by Section 16 of the Securities Exchange Act during the most recent
fiscal year or prior years. The foregoing is based solely upon our review of
Forms 3 and 4 during the most recent fiscal year as furnished us under Rule
16a-3(d) under the Securities Exchange Act, and Forms 5 and amendments thereto
furnished to us with respect to its most recent fiscal year, and any
representation received by us from any reporting person that no Form 5 is
required.
Compensation of Directors; Meetings of Directors
We pay our directors who are not also our employees 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 that are also our employees are not entitled to any
additional compensation as such. During fiscal year 2003, the Board of Directors
met on five occasions and voted by unanimous written consent on one occasion. No
member of the Board of Directors attended less than 75% of the aggregate number
of (i) the total number of meetings of the Board of Directors or (ii) the total
number of meetings held by all Committees of the Board of Directors.
Committees of the Board of Directors
The Board of Directors has two committees: Audit and Compensation.
For the fiscal year ended December 31, 2003, the members of the committees,
and a description of the duties of the Committees were as follows:
Audit Committee. Our audit committee acts to:
o review with management our finances, financial condition and interim
financial statements;
o review with our independent auditors the year-end financial statements;
and
o review implementation with the independent auditors and management any
action recommended by the independent auditors and the retention and
termination of our independent auditors.
During the fiscal year ended December 31, 2003, the audit committee met on
one occasion. The audit committee adopted a written charter governing its
actions effective June 23, 2000. During the fiscal year, the members of the
audit committee were Ward R. Jones and Barry Shapiro. Both of the members of our
audit committee were "independent" within the definition of that term as
provided by Rule 4200(a)(14) of the listing standards of the National
Association of Securities Dealers. Members of the Audit Committee do not receive
additional compensation for such service. The Board has determined that Mr.
Barry D. Shapiro qualified as the audit committee financial expert as defined
under applicable Securities and Exchange Commission rules.
Compensation Committee. The compensation committee functions include
administration of our 2002 Incentive Stock Option Plan, 2002 Non-Executive
Director Stock Option Plan and 1996 Senior Management Option Plan and the
negotiation and review of all employment agreements with our executive officers.
The compensation committees' members are Ward R. Jones and Barry Shapiro. During
the fiscal year ended December 31, 2003, the committee met on one occasion.
31
Compensation Committee Interlocks and Insider Participation
There are no compensation committee interlocks between the members of our
compensation committee and any other entity. None of the members of the Board's
compensation committee are executive officers of our company. Mr. Jones is a
registered representative of our broker-dealer subsidiary, First Montauk
Securities Corp., but does not engage in any securities business.
Code of Ethics
On March 29, 2004, our Board of Directors approved the Code of Ethics and
Business Conduct for our company. Our Code of Ethics and Conduct covers all our
employees and Directors, including our Chief Executive Officer and Chief
Financial Officer and our President. A copy of our Code of Ethics and Conduct is
included as an exhibit to this Annual Report.
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 us during the years ended December 31, 2003,
2002 and 2001 to each of our named executive officers.
SUMMARY COMPENSATION TABLE
Annual Compensation Long Term
Compensation
Securities
Underlying
Name & Principal Other Annual Options/ SARs
Position Year Salary Bonus Compensation Granted
- ----------------------- ---- ------ ----- ------------ --------------
Herbert Kurinsky 2003 $231,218 $200,000 $ 2,500 (4) 0 (1)
Chief Executive Officer 2002 $181,218 $ - $ 2,500 (4) 0
and Chairman (7) 2001 $233,140 $ - $ 2,000 (4) 200,000 (1)
William J. Kurinsky 2003 $231,218 $50,000 $ 0 (5) 0 (2)
Chief Operating and 2002 $181,218 $ - $ 2,000 (5) 0
Chief Financial 2001 $233,140 $ - $ 1,000 (5) 200,000 (2)
Officer and Secretary (8)
Robert I. Rabinowitz 2003 $150,000 $10,000 $ 2,500 (6) 0 (3)
General Counsel, FMFC, 2002 $150,000 $ - $ 2,500 (6) 0
Chief Administrative 2001 $146,154 $ - $ 2,000 (6) 43,750(3)
Officer, Montauk
Financial Group (9)
1) In 2003 the Compensation Committee of the Board of Directors did not
authorize any option grants the named officer. In 2001, 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.
2) In 2002 the Compensation Committee did not authorize any option grants
the named officer. In 2001, 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.
3) In 2002 the Compensation Committee did not authorize any option grants
the named officer. In 2001, 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.
4) Includes: (i) for 2003, an automobile allowance of $2,500; (ii) for
2002, an automobile allowance of $2,500; and (i) for 2001, an
automobile allowance of $2,000. Subsequent to the fiscal year ended
December 31, 2003, we granted the named executive officer the right to
receive an aggregate of 375,000 restricted shares of common stock,
which vest in equal amounts of 33.3%, on April 1, 2004, July 1, 2004
and October 1, 2004.
32
5) Includes: (i) for 2003 and 2002 no automobile allowance was paid, (iii)
for 2001, an automobile allowance of $1,000. Subsequent to the fiscal
year ended December 31, 2003, we granted the named executive officer
the right to receive an aggregate of 375,000 restricted shares of
common stock, which vest in equal amounts of 33.3%, on April 1, 2004,
July 1, 2004 and October 1, 2004.
6) Includes (i) for 2003, an automobile allowance of $2,500; (ii) for
2002, an automobile allowance of $2,500; and (iii) for 2001, an
automobile allowance of $2,000.
7) Effective January 1, 2004, Mr. Herbert Kurinsky relinquished the office
of Chief Executive Officer. He is the beneficial owner of 86,518 shares
of the Company's Common Stock as of December 31, 2003, which shares had
a market value of $30,281 as of that date, without giving effect to the
diminution in value attributable to the restriction on said shares. In
January 2004, we issued 375,000 shares of restricted common stock
pursuant to the terms of his employment agreement, as discussed below
in greater detail.
8) Effective January 1, 2004, Mr. William Kurinsky became our Chief
Executive Officer and relinquished the office of Chief Operating
Officer. He is the beneficial owner of 1,405,823 shares of the
Company's Common Stock as of December 31, 2003, which shares had a
market value of $492,038 as of that date, without giving effect to the
diminution in value attributable to the restriction on said shares. In
January 2004, we issued 375,000 shares of restricted common stock
pursuant to the terms of his employment agreement, as discussed below
in greater detail.
9) Mr. Robert I. Rabinowitz is the beneficial owner of 29,500 shares of
the Company's Common Stock as of December 31, 2003, which shares had a
market value of $10,325 as of that date, without giving effect to the
diminution in value attributable to the restriction on said shares.
Compensation Committee Report on Executive Compensation
This report is submitted by the compensation committee of the Board of
Directors. During the fiscal year ended December 31, 2003, the compensation
committee was responsible for reviewing our stock plans and reviewing and
approving compensation matters concerning our executive officers and key
employees.
Overview and Philosophy. We uses our compensation program to achieve the
following objectives:
o To provide compensation that attracts, motivates and retains
the talented, high caliber officers and employees necessary to
achieve our strategic objectives, as determined by the
compensation committee;
o To align the interest of officers with our success;
o To align the interest of officers with stockholders by
including long-term equity incentives; and
o To increase our long-term profitability and, accordingly,
increase stockholder value.
Compensation under the executive compensation program is comprised of cash
compensation in the form of base salary, bonus compensation and long-term
incentive awards, generally in the form of options to purchase common stock. In
addition, the compensation program includes various other benefits, including
medical and insurance plans and the employee stock option incentive plans and
company sponsored 401(k) plans, both of which plans are generally available to
all of our employees.
33
The principal factors which the compensation committee considered with
respect to each officer's compensation package for fiscal year ended December
31, 2003 are summarized below. The compensation committee may, however, in its
discretion, apply different or additional factors in making decisions with
respect to executive compensation in future years.
Base Salary. Compensation levels for each of our officers, including the
Chief Executive Officer, are generally set within the range of salaries that the
compensation committee believes are paid to officers with comparable
qualifications, experience and responsibilities at similar companies. In setting
compensation levels, the compensation committee takes into account such factors
as (i) the Company's past performance and future expectations, (ii) individual
performance and experience and (iii) past salary levels. The compensation
committee does not assign relative weights or ranking to these factors, but
instead makes a determination based upon the consideration of all of these
factors as well as the progress made with respect to the our long-term goals and
strategies. Base salary, while reviewed annually, is only adjusted as deemed
necessary by the compensation committee in determining total compensation for
each officer. Additionally, certain executives, including Herbert Kurinsky, our
Chief Executive Officer during the 2003 fiscal year, and William Kurinsky, the
Chief Operating Officer during the 2003 fiscal year have existing employment
agreements with us which set forth certain levels of base salary and bonus
compensations. Each of Messrs. Kurinsky entered into new employment agreements
with us effective January 1, 2004 and we entered into an employment agreement
with our new President and Chief Operating Officer, Mr. Victor K. Kurylak, also
effective January 1, 2004. Mr. Kurylak's annual compensation during the term of
his employment will be as set forth in his employment agreement. You are
directed to the detailed discussion of these agreements under the heading
"Employment Agreements" appearing elsewhere in this Annual Report on Form 10-K.
Equity Incentives. The compensation committee believes that stock
participation aligns officers' interests with those of the stockholders. In
addition, the compensation committee believes that equity ownership by officers
helps to balance the short term focus of annual incentive compensation with a
longer term view and may help to retain key executive officers. Long term
incentive compensation, generally granted in the form of stock options, allows
the officers to share in any appreciation in the value of our common stock.
In making stock option grants, the compensation committee considers general
corporate performance, individual contributions to our financial, operational
and strategic objectives, level of seniority and experience, existing levels of
stock ownership, previous grants of restricted stock or options, vesting
schedules of outstanding restricted stock or options and the current stock
price. With respect to the compensation determination for the fiscal year ended
December 31, 2003, the compensation committee believes that the current stock
ownership positions of the executive officers was sufficient to achieve the
benefits intended by equity ownership. Accordingly, no additional options were
granted options to our executive officers during the past fiscal year. However
subsequent to the end of the 2003 fiscal year, each of Mr. Herbert Kurinsky, Mr.
William Kurinsky and Mr. Victor K. Kurylak received equity compensation in
connection with the employment agreements each of them entered into with us,
effective as of January 1, 2004. Each of Messrs. Kurinsky received an award of
granted them the right to receive an aggregate of 375,000 restricted shares of
common stock, which vest in equal amounts of 33.3%, on April 1, 2004, July 1,
2004 and October 1, 2004. Mr. Kurylak was granted options to purchase 500,000
shares of common stock and 250,000 restricted shares of common stock, all of
which vest in equal amounts over a three-year period, commencing on the first
anniversary of his employment agreement.
Other Benefits. We also have various broad-based employee benefit plans.
Executive officers participate in these plans on the same terms as eligible,
non-executive employees, subject to any legal limits on the amounts that may be
contributed or paid to executive officers under these plans. We offer a 401(k)
savings plan, which allows employees to invest in a wide array of funds on a
pre-tax basis, as well as insurance and other benefit plans for its employees,
including executive officers.
34
Chief Executive Officer and Chief Operating Officer Compensation. The terms
of the compensation paid to each of our Chief Executive Officer and Chief
Operating Officer for the 2003 fiscal year were determined primarily in
accordance with the employment agreements entered into by such officer in
August, 2003. During the last fiscal year, neither the Chief Executive Officer
nor the Chief Operating Officer received any cash bonuses or compensation
outside of a $2,500 automobile expense allowance for the Chief Executive
Officer. Each of our Chief Executive Officer and Chief Operating Officer
received a base salary of $231,218 during the fiscal year ended December 31,
2003. Each officer received an increase in his base salary in fiscal 2003 as
compared to the fiscal year ended December 31, 2002 pursuant to the terms of
their then-effective employment agreements. Each of our Chief Executive Officer
and Chief Operating Officer was entitled to a base salary of $256,218 for the
2003 fiscal year pursuant to their employment agreements. Each of these officers
agreed to accept a base salary below the amount that they were entitled in order
to assist us in improving our cash flow and financial condition. We paid a bonus
of $200,000 to our former Chief Executive Officer for the 2003 fiscal year in
consideration of his agreement to accept a new employment contract for a new
salary and shorter employment duration as he was entitled under his prior
contract. With respect to our former Chief Operating Officer (and current Chief
Executive Officer), a bonus of $50,000 was paid for the 2003 fiscal year in
recognition of his promotion to Vice Chairman and Chief Executive Officer. As
discussed below, each of these employees entered into new employment agreements
effective January 1, 2004.
New Employment Agreements. In December 2003, the Committee approved new
employment agreements for each of Mr. Herbert Kurinsky, Mr. William Kurinsky and
Mr. Victor K. Kurylak. Each agreement became effective as of January 1, 2004.
Pursuant to his agreement, Mr. Herbert Kurinsky resigned his position as our
Chief Executive Officer and now serves as our Chairman. As set forth in his
employment agreement, Mr. William Kurinsky became our Chief Executive Officer,
remained as our Chief Financial Officer and resigned his position as Chief
Operating Officer and Executive Vice President. Finally, Mr. Kurylak became our
President and Chief Operating Officer. We entered into these new employment
agreements in order to strengthen our management team and to include adequate
provisions for these employees in the event of a change of control. The
Committee determined that these officers were essential to our success, and that
their continued retention, especially in the event of a threat of a change of
control of our company, necessitated that these executives be eligible for added
compensation under certain conditions. The Committee believed that several
factors out of our control made a potential change of control possible. These
factors included the falling stock market generally, and the falling price of
our stock. The new employment agreements also provide for additional financial
and employment security under other conditions, such as termination without
cause. Additional information relating to these new employment agreements is
described under the heading "Employment Agreements" appearing elsewhere in this
Annual Report on Form 10-K.
Tax Deductibility of Executive Compensation. Section 162(m) of the Code
limits the tax deduction to us to $1 million for compensation paid to any of the
executive officers unless certain requirements are met. The compensation
committee has considered these requirements and the regulations. It is the
compensation committee's present intention that, so long as it is consistent
with its overall compensation objectives, substantially all executive
compensation be deductible for United States federal income tax purposes. The
compensation committee believes that any compensation deductions attributable to
options granted under the employee stock option plan currently qualify for an
exception to the disallowance under Section 162(m). Future option grants to
executive officers under each of our employee stock option plans will be granted
by the compensation committee.
By the Compensation Committee of
the Board of Directors of First Montauk
Financial Corp.
Ward R. Jones, Jr.
Barry Shapiro
35
OPTION/SAR GRANTS IN LAST FISCAL YEAR
There were no stock option grants to any executive officers granted during
the year ended December 31, 2003. In connection with his employment agreement,
effective January 1, 2004, Mr. Victor K. Kurylak was granted options to purchase
500,000 shares of common stock and 250,000 restricted shares of common stock,
all of which vest in equal amounts over a three-year period. In addition, Mr.
Robert Rabinowitz, our General Counsel, was granted an aggregate of 100,000
options during the current fiscal year.
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, 2003 December 31, 2003 (1)
---- -------- -------- ----------------- ---------------------
Exercisable/Unexercisable Exercisable/Unexercisable
Herbert Kurinsky -- $0 325,000/0 $0/$0
William J. Kurinsky -- $0 325,000/0 $0/$0
Robert I. Rabinowitz -- $0 103,750/0 $0/$0
- ----------------------
(1) Based upon the closing bid price of our common stock on December 31, 2003
($.35 per share), less the exercise price for the aggregate number of shares
subject to the options.
Employment Agreements
In December 2003, we entered into new three-year employment contracts with
Herbert Kurinsky, William J. Kurinsky and Victor K. Kurylak, as described below.
Our agreements with each of the aforementioned officers became effective January
1, 2004.
Pursuant to his employment agreement, Mr. Herbert Kurinsky resigned as
Chief Executive Officer and remained as our Chairman. This agreement, which will
expire on December 31, 2006, provides for a base salary of $200,000 for each
year of the agreement. The agreement automatically renews for an additional
one-year term, unless we elect not to renew it. Mr. Kurinsky will also be
entitled to receive a portion of a bonus pool consisting of 15% of our pre-tax
profits, to be determined by our compensation committee. The bonus pool would
require a minimum of $500,000 pretax profit per year in order to become
effective. He is also entitled to receive commissions at the same rate as paid
to our other non-affiliate registered representatives. Mr. Kurinsky is also
entitled to purchase from Montauk Financial Group, up to 20% of all underwriters
and/or placement agent warrants or options that are granted to Montauk Financial
Group upon the same price, terms and conditions afforded to Montauk Financial
Group as the underwriter or placement agent. Mr. Kurinsky also receives health
insurance benefits and life insurance as generally made available to our regular
full-time employees, and reimbursement for expenses incurred on our behalf and
the use of an automobile, or in the alternative, an automobile allowance. The
contracts also provide for a severance of one years salary in the event Mr.
Kurinsky's employment is terminated without cause or the contract is not renewed
and a severance benefit equal to three times the five year average compensation
paid to him in the event Mr. Kurinsky is terminated or his duties significantly
change after a change in our management as defined in the agreement. As
additional compensation under the agreement, we granted Mr. Kurinsky the right
to receive an aggregate of 375,000 restricted shares of common stock, which vest
in equal amounts of 33.3%, on April 1, 2004, July 1, 2004 and October 1, 2004.
Pursuant to his employment agreement, Mr. William J. Kurinsky was appointed
as our Chief Executive Officer, remained as our Chief Financial Officer and a
director and relinquished his positions as Executive Vice President and Chief
Operating Officer. This agreement, which will expire on December 31, 2008,
provides for a base salary of $300,000 for each year of the agreement. The
agreement automatically renews for an additional one-year term, unless we elect
not to renew it. Mr. Kurinsky will also be entitled to receive a portion of a
bonus pool consisting of 15% of our pre-tax profits, to be determined by our
36
compensation committee. The bonus pool would require a minimum of $500,000
pretax profit per year in order to become effective. He is also entitled to
receive commissions at the same rate as paid to our other non-affiliate
registered representatives. Mr. Kurinsky is also entitled to purchase from
Montauk Financial Group, up to 20% of all underwriters and/or placement agent
warrants or options that are granted to Montauk Financial Group upon the same
price, terms and conditions afforded to Montauk Financial Group as the
underwriter or placement agent. Mr. Kurinsky also receives health insurance
benefits and life insurance as generally made available to our regular full-time
employees, and reimbursement for expenses incurred on our behalf and the use of
an automobile, or in the alternative, an automobile allowance. The contracts
also provide for a severance of one years salary in the event Mr. Kurinsky's
employment is terminated without cause or the contract is not renewed and a
severance benefit equal to three times the five year average compensation paid
to him in the event Mr. Kurinsky is terminated or his duties significantly
change after a change in our management as defined in the agreement. As
additional compensation under the agreement, we granted Mr. Kurinsky the right
to receive an aggregate of 375,000 restricted shares of common stock, which vest
in equal amounts of 33.3%, on April 1, 2004, July 1, 2004 and October 1, 2004.
Pursuant to his employment agreement, Mr. Victor K. Kurylak was hired as
our President and Chief Operating Officer. This agreement, which will expire on
December 31, 2006, provides for a base salary of $250,000 for each year of the
agreement. The agreement automatically renews for an additional one-year term,
unless we elect otherwise. Mr. Kurylak will also be entitled to receive a
portion of a bonus pool consisting of 15% of our pre-tax profits, to be
determined by our compensation committee. The bonus pool would require a minimum
of $500,000 pretax profit per year in order to become effective. He is also
entitled to receive commissions at the same rate as paid to our other
non-affiliate registered representatives. Mr. Kurylak is also entitled to
purchase from Montauk Financial Group, up to 20% of all underwriters and/or
placement agent warrants or options that are granted to Montauk Financial Group
upon the same price, terms and conditions afforded to Montauk Financial Group as
the underwriter or placement agent. Mr. Kurylak also receives health insurance
benefits and life insurance as generally made available to our regular full-time
employees, and reimbursement for expenses incurred on our behalf and the use of
an automobile, or in the alternative, an automobile allowance. The contracts
also provide that Mr. Kurylak will be nominated to serve on our Board of
Directors after his first full year of service pursuant to the agreement. As
additional compensation under the agreement, we granted Mr. Kurylak options to
purchase 500,000 shares of common stock and 250,000 restricted shares of common
stock, all of which vest in equal amounts over a three-year period commencing on
the first anniversary of his employment agreement.
Incentive Stock Option Plan
In June 2002, we adopted the 2002 Incentive Stock Option Plan, which
provides for the grant of options to purchase up to 5,000,000 shares of our
common stock by our employees, registered representatives and consultants. Under
the terms of the Incentive Plan, options granted thereunder may be designated as
options which qualify for incentive stock option treatment under Section 422A of
the Code, or options which do not so qualify.
The Plan is administered by our Board of Directors which has the discretion
to determine the eligible employees to whom, and the times and the price at
which, options will be granted; whether such options shall be Incentive Stock
Options or Non-Incentive Stock Options; 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 Incentive Plan and to establish and amend
rules and regulations relating thereto.
Under the Incentive Plan, the exercise price of an option designated as an
Incentive Stock Option 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 Incentive Stock Option is granted to a ten percent stockholder
such exercise price shall be at least 110% of such fair market value. Exercise
prices of Non-Incentive Stock 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 Incentive Stock Options which become
exercisable in any calendar year may not exceed $100,000.
37
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 Incentive Plan will expire in 2012.
Since the adoption of the 2002 Incentive Plan, we have issued 1,003,000
options to registered representatives and employees. There remain 1,195,998
options outstanding from our 1992 Incentive Stock Option Plan, resulting in a
total of 2,198,998 options outstanding.
Director Plan
In June 2002, we adopted the Non-Executive Director Stock Option Plan (the
"Director Plan"). 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. A Non-Executive Director who has not served as a
director for an entire year prior to September 1st of each year shall receive a
pro rata number of options determined as follows:
Date of Membership Options Granted
- ------------------ ---------------
September 1 through November 30 20,000
December 1 through February 28 15,000
March 1 through May 30 10,000
June 1 through August 31 5,000
Options are granted under the Director Plan until 2012 to non-executive
directors who are not our full time employees.
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 Director 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 our common stock 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 two persons who are our officers (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 80,000 options have been granted to our Non-Executive members
of the Board of Directors under the 2002. An additional 60,000 options remain
outstanding from grants made pursuant to the 1992 Non-Executive Director Stock
Option Plan, which terminated in June 2002, and which was replaced by the 2002
Non-Executive Director Stock Option Plan.
Senior Management Plan
In 1996, we 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 Management Plan or grants of restricted stock or incentive stock rights. The
Board of Directors or a committee of the board may grant awards under the
Management Plan to executive management employees, if one is appointed for this
purpose. The Management Plan provides for four types of awards: stock options,
incentive stock rights, stock appreciation rights, and restricted stock purchase
agreements. The stock options granted under the Management Plan can be either
incentive stock options or non-incentive stock options, similar to the options
granted under the Incentive Plan, except that the exercise price of
non-Incentive Stock Option 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 us. 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 stock appreciation rights, which become
exercisable upon a "change of control" of our company. A change of control
includes the purchase by any person of 25% or more of the voting power of our
outstanding securities, or a change in the majority of the Board of Directors.
38
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 our company. Awards under
the Management Plan may be made until 2006.
In June 2000, at our 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. Options to purchase
1,317,500 shares of the our common stock are currently outstanding under the
Senior Management Plan. In January 2004, we granted an aggregate of 1,000,000
restricted shares of common stock to Mr. Herbert Kurinsky, Mr. William J.
Kurinsky and Mr. Victor K. Kurylak, pursuant to their employment agreements.
Shareholder Return Performance Presentation
Set forth herein is a line graph comparing the total returns (assuming
reinvestment of dividends) of our common stock, the Standard and Poor Industrial
Average, and an industry composite consisting of a group of three peer issuers
we have selected in good faith. Our common stock is listed for trading in the
over the counter market and is traded under the symbol "FMFK".
Comparison of 5 Year Cumulative Total Return
Assumes Initial Investment of $100
1998 1999 2000 2001 2002 2003
First Montauk Financial Corp. Return % $-49.50 -10.61 -44.75 -38.03 -54.54 75.00
Cum $ $ 50.50 $45.14 $24.94 $15.46 $7.03 $24.35
S & P 500 Return % 28.58 21.05 -9.10 -11.88 -22.10 28.69
Cum $ $128.58 $155.64 $141.47 $124.66 $97.11 $97.19
Peer Group Only Return % $-39.06 186.80 -59.19 15.01 -49.14 158.29
Cum $ $ 60.94 $174.78 $71.32 $82.03 $41.72 $176.81
Peer Group + FMFK Return % $-43.10 119.35 -57.28 6.67 -49.60 151.97
Cum $ $56.90 $124.81 $53.32 $56.87 $28.66 $126.92
Listed below is the value of a $100 investment at each of our last five fiscal
year ends:
Cumulative Total Shareholder Return
------------------------ ---------------------- ----------------------- ----------------------
First Montauk
Date Financial Corp. S&P 500 Index Peer Group Index
------------------------ ---------------------- ----------------------- ----------------------
------------------------ ---------------------- ----------------------- ----------------------
------------------------ ---------------------- ----------------------- ----------------------
------------------------ ---------------------- ----------------------- ----------------------
12/31/99 $100 $100 $100
------------------------ ---------------------- ----------------------- ----------------------
------------------------ ---------------------- ----------------------- ----------------------
12/31/00 $49.39 $110.02 $117.03
------------------------ ---------------------- ----------------------- ----------------------
------------------------ ---------------------- ----------------------- ----------------------
12/31/01 $30.61 $96.95 $134.60
------------------------ ---------------------- ----------------------- ----------------------
------------------------ ---------------------- ----------------------- ----------------------
12/31/02 $13.91 $75.52 $68.45
------------------------ ---------------------- ----------------------- ----------------------
------------------------ ---------------------- ----------------------- ----------------------
12/31/03 $24.35 $97.19 $176.81
------------------------ ---------------------- ----------------------- ----------------------
- -------------------------
NOTES Industry composite includes Paulson Capital Corp., Olympic Cascade
Financial Corp. and Kirlin Holding Corp. The industry composite has been
determined in good faith by management to represent entities that compete with
us in certain of its significant business segments.
39
Item 12. Security Ownership of Certain
Beneficial Owners and Management
The following table sets forth, as of March 30, 2004, the number and
percentage of outstanding shares of our common stock beneficially owned by each
person known by us to own beneficially more than 5% of our outstanding shares of
common stock and common stock warrants, by each of our directors and officers
and by all of our directors and officers as a group.
Directors, Officers Amount and Percentage
and 5% Shareholders (1) Of Beneficial Ownership (1)
----------------------- ---------------------------
Number of Shares Percent
Herbert Kurinsky
Parkway 109 Office Center
328 Newman Springs Road
Red Bank, NJ 07701 786,518(2) 7.57%
William J. Kurinsky
Parkway 109 Office Center
328 Newman Springs Road 2,105,823(3) 20.27%
Red Bank, NJ 07701
Victor K. Kurylak
Parkway 109 Office Center
328 Newman Springs Road 750,000(4) 7.10%
Red Bank, NJ 07701
Robert I. Rabinowitz, Esq.
Parkway 109 Office Center
328 Newman Springs Road 233,250(5) 2.27%
Red Bank, NJ 07701
Ward R. Jones
300 West Jersey Road
Lehigh Acres, FL 33936 110,000 1.08%
Norma Doxey
Parkway 109 Office Center
328 Newman Springs Road 54,900(7) *
Red Bank, NJ 07701
Barry Shapiro, CPA
Parkway 109 Office Center
328 Newman Springs Road 40,000(8) *
Red Bank, NJ 07701
Kirlin Holdings Corp.
6901 Jericho Turnpike
Syosset, NY 11792 852,500(9) 8.47%
All Directors, Officers and 5%
Shareholders as a group (8 persons 4,932,991 46.68%
in number) (2, 3, 4, 5, 6, 7, 8, 9)
- ------------------------------------------
* Indicates less than 1%
(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 325,000 shares of common stock. Amounts and percentages
indicated for Mr. Kurinsky include an aggregate of 375,000 shares of
restricted common stock, which shares vest in equal amounts of 33.3%, on
April 1, 2004, July 1, 2004 and October 1, 2004.
(3) Includes vested and presently exercisable options of Mr. William J.
Kurinsky to purchase 325,000 shares of common stock. Amounts and
percentages indicated for Mr. Kurinsky include an aggregate of 375,000
shares of restricted common stock, which shares vest in equal amounts of
33.3%, on April 1, 2004, July 1, 2004 and October 1, 2004.
(4) Amounts and percentages indicated for Mr. Kurylak include an aggregate of
250,000 shares of restricted common stock and options to purchase 500,000
shares of common stock, all of which securities vest in equal amounts over
a three-year period commencing on the first anniversary of his employment
agreement.
40
(5) Includes vested and presently exercisable options of Mr. Robert Rabinowitz
to purchase 203,750 shares of common stock. Mr. Rabinowitz's children own
2,000 shares of common stock. Mr. Rabinowitz also owns 5,833 Class C
Warrants.
(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 42,500 shares of common stock.
(8) Includes vested and presently exercisable options of Mr. Barry Shapiro to
purchase 40,000 shares of common stock.
(9) As reported under Schedule 13G filing made by Kirlin Holding Corp. dated
July 15, 2002.
NOTE: Class C Warrants are exercisable at $7.00 per share for a period of seven
(7) years from February 17, 1998.
Equity Compensation Plan Information
The following table provides information about our common stock that may be
issued upon the exercise of options and rights under all of our existing equity
compensation plans as of December 31, 2003, including the 2002 Incentive Stock
Option Plan, the 2002 Non-Executive Director Stock Option Plan, the 1992
Incentive Stock Option Plan, as amended, the 1992 Non-Employee Director Stock
Option Plan, as amended and the 1996 Senior Management Stock Option Plan, as
amended. Information concerning each of the aforementioned plans is set forth
below following the caption "Shareholder Approved Option Plans." Each of the
1992 Incentive Stock Option Plan and 1992 Non-Executive Director Stock Option
Plan have expired and no additional options may be granted under such plans.
Unexpired options granted pursuant to such plans prior to their expiration,
however, remain exercisable (when vested) until the expiration of the individual
option grant.
============================== =========================== =========================== ==============================
Number of Securities
Remaining Available for
Number of Securities to Future Issuance Under Equity
be Issued upon Exercise Compensation Plans Excluding
of Outstanding Options Weighted Average Exercise Securities Reflected in
and Rights Price of Outstanding Column (a)
(a) Options (b) (c)
Plan Category
============================== =========================== =========================== ==============================
- ------------------------------ --------------------------- --------------------------- ------------------------------
Equity Compensation Plans 3,556,4981 $1.19 7,164,5002,3
Approved by Stockholders
- ------------------------------ --------------------------- --------------------------- ------------------------------
Equity Compensation Plans N/A N/A N/A
Not Approved by Stockholders
- ------------------------------ --------------------------- --------------------------- ------------------------------
Total 3,556,4981 $1.19 7,164,5002,3
- ------------------------------ --------------------------- --------------------------- ------------------------------
1. Includes 1,003,000 options issued pursuant to the our 2002 Incentive
Stock Option Plan, 1,195,998 options issued pursuant to our 1992
Incentive Stock Option Plan, as amended, 80,000 options issued pursuant
to our 2002 Director Stock Option Plan, 60,000 options issued pursuant
to our 1992 Director Stock Option Plan, as amended, and 1,217,500
options and shares issued pursuant to our 1996 Senior Management Stock
Option Plan, as amended.
2. Includes 3,997,000 options available for issuance under our 2002
Incentive Stock Option Plan and an aggregate of 2,687,500 shares
reserved for issuance as options, incentive stock rights or pursuant to
restricted stock purchase agreements under our 1996 Senior Management
Stock Option Plan, as amended.
3. Includes 480,000 options assumed available for issuance under our 2002
Directors Stock Option Plan. We expect to have three outside directors,
each of whom will receive 20,000 options over the ten years of the
plan.
41
Item 13. Certain Relationships and Related Transactions
For information concerning the terms of the employment agreements entered
into between us and Messrs. Herbert Kurinsky and William J. Kurinsky and Mr.
Victor K. Kurylak, see "Executive Compensation".
Item 14. Principal Accountant Fees and Service.
Our Audit Committee has selected Schneider & Associates, LLP, Certified
Public Accountants, as its independent accountants for the current fiscal year.
The audit services provided by Schneider & Associates, LLP consist of
examination of financial statements, services relative to filings with the
Securities and Exchange Commission, and consultation in regard to various
accounting matters. The following table presents the total fees paid for
professional audit and non-audit services rendered by our independent auditors
for the audit of our annual financial statements for the years ended December
31, 2003 and December 31, 2002 and fees billed for other services rendered by
our independent auditors during those periods.
- ---------------------------------------- ------------------------------------- -------------------------------------
Fiscal Year Ended December 31, 2003 Fiscal Year Ended
December 31, 2002
- ---------------------------------------- ------------------------------------- -------------------------------------
Audit Fees (1) $149,000 $129,674
- ---------------------------------------- ------------------------------------- -------------------------------------
Audit-Related Fees (2) $5,025 $0
- ---------------------------------------- ------------------------------------- -------------------------------------
Tax Fees (3) $29,300 $22,001
- ---------------------------------------- ------------------------------------- -------------------------------------
All Other Fees (4) $12,000 $4,500
- ---------------------------------------- ------------------------------------- -------------------------------------
Total $195,325 $156,175
- ---------------------------------------- ------------------------------------- -------------------------------------
- -------------------------
(1) Audit services consist of audit work performed in the preparation of
financial statements for the fiscal year and for the review of financial
statements included in Quarterly Reports on Form 10-Q during the fiscal
year, as well as work that generally only the independent auditor can
reasonably be expected to provide, including consents for registration
statement flings and responding to SEC comment letters on annual and
quarterly filings.
(2) Audit-related services consist of assurance and related services that are
traditionally performed by the independent auditor, including due diligence
related to mergers and acquisitions, agreed upon procedures report and
accounting and regulatory consultations.
(3) Tax services consist of all services performed by the independent auditor's
tax personnel, except those services specifically related to the audit of
the financial statements, and includes fees in the areas of tax compliance,
tax planning, and tax advice.
(4) Other services consist of those service not captured in the other
categories.
42
Our Audit Committee has determined that the services provided by our
independent auditors and the fees paid to them for such services has not
compromised the independence of our independent auditors.
Consistent with SEC policies regarding auditor independence, the Audit
Committee has responsibility for appointing, setting compensation and overseeing
the work of the independent auditor. In recognition of this responsibility, the
Audit Committee has established a policy to pre-approve all audit and
permissible non-audit services provided by the independent auditor. Prior to
engagement of the independent auditor for the next year's audit, management will
submit a detailed description of the audit and permissible non-audit services
expected to be rendered during that year for each of four categories of services
described below to the Audit Committee for approval. In addition, management
will also provide to the Audit Committee for its approval a fee proposal for the
services proposed to be rendered by the independent auditor. Prior to the
engagement of the independent auditor, the Audit Committee will approve both the
description of audit and permissible non-audit services proposed to be rendered
by the independent auditor and the budget for all such services. The fees are
budgeted and the Audit Committee requires the independent auditor and management
to report actual fees versus the budget periodically throughout the year by
category of service.
During the year, circumstances may arise when it may become necessary to
engage the independent auditor for additional services not contemplated in the
original pre-approval. In those instances, the Audit Committee requires separate
pre-approval before engaging the independent auditor. To ensure prompt handling
of unexpected matters, the Audit Committee may delegate pre-approval authority
to one or more of its members. The member to whom such authority is delegated
must report, for informational purposes only, any pre-approval decisions to the
Audit Committee at its next scheduled meeting. The four categories of services
provided by the independent auditor are as defined in the footnotes to the fee
table set forth above.
PART IV
Item 15. Exhibits, Financial Statement Schedules
and Reports on Form 8-K
(a) 1. Financial Statements
See the Consolidated Financial Statements and Notes thereto, together with
the reports thereon of Schneider & Associates, LLP dated March 18, 2004
beginning on page F-1 of this report.
2. All schedules are omitted because they are not required or
applicable, or the required information is shown in the consolidated financial
statements or notes.
3. 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, the following
reports were filed on Form 8-K:
-------------------------- ----------- ------------------------------------------------------------------------
Date of Report Item(s) Description
-------------------------- ----------- ------------------------------------------------------------------------
November 17, 2003 7, 12 Announcement of quarterly financial information and including related
press release.
-------------------------- ----------- ------------------------------------------------------------------------
December 15, 2003 5, 7 Announcement of hiring
of new President and Chief Operating
Officer and restructuring of
management and including related
press release.
-------------------------- ----------- ------------------------------------------------------------------------
43
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/ William J. Kurinsky
--------------------------------
Dated: March 30, 2004 William J. Kurinsky,
Chief Executive Officer
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 March 30, 2004
- --------------------------------------------
Herbert Kurinsky,
Chairman
/s/ William J. Kurinsky March 30, 2004
- --------------------------------------------
William J. Kurinsky,
Chief Executive Officer, Chief Financial
Officer, Secretary and Director
/s/ Victor K. Kurylak March 30, 2004
- --------------------------------------------
Victor K. Kurylak,
President and Chief Operating Officer
/s/ Norma Doxey March 30, 2004
- --------------------------------------------
Norma Doxey, Director
/s/ Ward R. Jones, Jr. March 30, 2004
- --------------------------------------------
Ward R. Jones, Jr., Director
/s/ Barry Shapiro March 30, 2004
- --------------------------------------------
Barry Shapiro, Director
44
EXHIBIT INDEX
The exhibits designated with an asterisk (*) are filed herewith. All other
exhibits have been previously filed with the Commission and, pursuant to 17
C.F.R. ss.230.411, are incorporated by reference to the document referenced in
brackets following the descriptions of such exhibits.
- -------------------- ----------------------------------------------------------------------------------------
Exhibit No. Description
- -------------------- ----------------------------------------------------------------------------------------
- -------------------- ----------------------------------------------------------------------------------------
3.1 Amended and Restated Certificate of Incorporation adopted at 1989 Special Meeting in
lieu of Annual Meeting of Shareholders (Previously filed with the Commission as an
exhibit to our Registration Statement on Form S-l, File No. 33-24696).
3.2 Amended and Restated By-Laws (Previously filed with the Commission as an exhibit to
our Registration Statement on Form S-l, File No. 33-24696).
3.3 Certificate of Designations of Series A Preferred Stock. (Previously filed with the
Commission as an exhibit to our Annual Report on Form 10-K for the fiscal year ended
December 31, 2002).
4.1 Form of Common Stock. (Previously filed with the Commission as an exhibit to our
Registration Statement on Form S-l, File No. 33-24696).
4.2 Form of Debenture Sold in Private Placement. (Previously filed with the Commission as
Exhibit 4.1 to Report on Form 8-K dated March 27, 2003).
4.3 Form of Placement Agent Warrant (Previously filed with the Commission as Exhibit 4.2
to Report on Form 8-K dated March 27, 2003).
4.4 Form of Debenture Sold in Private Placement. (Previously filed with the Commission as
Exhibit 4.1 to Report on Form 8-K dated January 5, 2004).
4.5 Form of Placement Agent Warrant (Previously filed with the Commission as Exhibit 4.2
to Report on Form 8-K dated January 5, 2004).
10.1 Office Lease Agreement between First Montauk Securities
Corp. and River Office Equities dated March 5, 1997
(Previously filed with the Commission as an exhibit to our
Annual Report on Form 10-KSB for the fiscal year ended
December 31, 1997).
10.2 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 with
the Commission as Exhibit 28.8 to Form 10-K for the fiscal year ended December 31,
1998).
10.3 Employment Agreement between First Montauk Securities Corp. and Mark Lowe dated
October 15, 1998 (Previously filed with the Commission as an exhibit to our Annual
Report on Form 10-K for the fiscal year ended December 31, 1998).
10.4 Employment Agreement between First Montauk Securities Corp. and Seth Rosen dated
January 25, 1999 (Previously filed with the Commission as an exhibit to our Annual
Report Form 10-K for the fiscal year ended December 31, 1998).
10.5 Clearing Agreement dated May 8, 2000 between Fiserv Securities, Inc. and First Montauk
Securities Corp. (Previously filed with the Commission as an exhibit to our Annual
Report on Form 10-K for the fiscal year ended December 31, 2000).
10.6 Financial Agreement dated May 8, 2000 between Fiserv Securities, Inc. and First
Montauk Securities Corp. (Previously filed with the Commission as an exhibit to our
Annual Report on Form 10-K for the fiscal year ended December 31, 2000).
10.7 Amended and Restated Financial Agreement dated February 1, 2001 between Fiserv
Securities, Inc., First Montauk Financial Corp. and First Montauk Securities Corp.
(Previously filed with the Commission as an exhibit to our Annual Report on Form 10-K
for the fiscal year ended December 31, 2000).
10.8 Security Agreement dated February 1, 2001 between Fiserv Securities, Inc. and First
Montauk Financial Corp. (Previously filed with the Commission as an exhibit to our
Annual Report on Form 10-K for the fiscal year ended December 31, 2000).
10.9 Sublease Agreement between Eloquent, Inc. and First Montauk Financial Corp. dated May
31, 2001 (Previously filed with the Commission as an exhibit to our Annual Report on
Form 10-K for the fiscal year ended December 31, 2001).
10.10 Sublease Agreement between Aim net Solutions, Inc. and First Montauk Financial Corp.
dated January 15, 2002 (Previously filed with the Commission as an exhibit to our
Annual Report on Form 10-K for the fiscal year ended December 31, 2001).
45
10.11 Employment Agreement dated August 21, 2002 between Herbert Kurinsky and First Montauk
Financial Corp. (Previously filed with the Commission as an exhibit to our Quarterly
Report on Form 10-Q for the Quarter ended September 20, 2002).
10.12 Employment Agreement dated August 21, 2002 between William J. Kurinsky and First
Montauk Financial Corp. (Previously filed with the Commission as an exhibit to our
Quarterly Report on Form 10-Q for the quarter ended September 30, 2002).
10.13* Employment Agreement dated as of January 1, 2004 between Herbert Kurinsky and First
Montauk Financial Corp.
10.14* Employment Agreement dated as of January 1, 2004 between William J. Kurinsky and First
Montauk Financial Corp.
10.15* Employment Agreement dated as of January 1, 2004 between Victor K. Kurylak and First
Montauk Financial Corp.
10.16 1992 Incentive Stock Option Plan (Previously filed with the Commission as an exhibit
to our Registration Statement on Form S-l, File No. 33-24696).
10.17 1992 Non-Executive Director Stock Option Plan (Previously filed with the Commission as
an exhibit to our Registration Statement on Form S-l, File No. 33-24696).
10.18 Amended and Restated 1992 Incentive Stock Option Plan. (Previously filed with the
Commission as an exhibit to our Proxy Statement dated May 30, 1996).
10.19 Non-Executive Director Stock Option Plan - Amended and Restated June 28, 1996
(Previously filed with the Commission as an exhibit to our Proxy Statement dated May
30, 1996).
10.20 1996 Senior Management Incentive Stock Option Plan (Previously filed with the
Commission as an exhibit to our Proxy Statement dated May 30, 1996).
10.21 Second Amended and Restated 1992 Incentive Stock Option
Plan (Previously filed with the Commission as an exhibit
to our Proxy Statement dated May 23, 2000).
10.22 1996 Senior Management Incentive Plan Amended as of June
23, 2000 (Previously filed with the Commission as an
exhibit to our Proxy Statement dated May 23, 2000).
10.23 2002 Incentive Stock Option Plan. (Previously filed with the Commission as an Exhibit
A to our Proxy Statement dated May 20, 2002).
10.24 2002 Non-Executive Director Stock Option Plan. (Previously filed with the Commission
as Exhibit B to our Proxy Statement dated May 20, 2002).
14* Code of Ethics
21* Subsidiary companies
31.1* Certification of Chief Executive Officer and Chief Financial Officer
31.2* Certification of President
32.1 * Certification of William J. Kurinsky pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2 * Certification of Victor K. Kurylak pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
- --------------------- ----------------------------------------------------------------------------------------
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,
2003 and 2002, and the related consolidated statements of operations, changes in
stockholders' equity (deficit), and cash flows for each of the three years in
the period ended December 31, 2003. 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 consolidated 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, 2003 and 2002, and
the results of their operations and their cash flows for each of the three years
in the period ended December 31, 2003 in conformity with accounting principles
generally accepted in the United States of America.
/s/ Schneider & Associates LLP
Jericho, New York
March 18, 2004
F-2
FIRST MONTAUK FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
December 31,
2003 2002
---- ----
ASSETS
Cash and cash equivalents $ 3,441,743 $ 2,638,819
Due from clearing firm 5,219,267 4,591,701
Securities owned, at market value 169,534 183,944
Employee and broker receivables 1,052,317 1,070,087
Loans receivable - officers -- 178,936
Property and equipment - net 1,052,564 1,396,892
Income tax refund receivable -- 212,300
Deferred income taxes - net -- 460,000
Other assets 1,661,351 692,827
---------- ------------
Total assets $12,596,776 $11,425,506
========== ==========
LIABILITIES AND STOCKHOLDERS' DEFICIT
LIABILITIES
Deferred income $ 5,980,124 $ 5,456,323
6% convertible debentures 3,135,000 1,030,000
Warrants subject to put options 479,066 --
Securities sold, not yet purchased, at market value 69,330 --
Commissions payable 4,077,803 2,681,128
Accounts payable 980,483 577,225
Accrued expenses 1,803,973 1,987,871
Capital leases payable 122,733 343,682
Notes payable -- 48,057
Other liabilities 35,703 78,910
------- -------------
Total liabilities 16,684,215 12,203,196
---------- ----------
Commitments and contingencies (See Notes)
STOCKHOLDERS' DEFICIT
Preferred Stock, 4,375,000 shares authorized, $.10 par
value, no shares issued and outstanding -- --
Series A Convertible Preferred Stock, 625,000 shares authorized,
$.10 par value, 311,089 and 330,250 shares issued and
outstanding, respectively; liquidation preference: $1,555,445 31,109 33,025
Common Stock, no par value, 30,000,000 shares authorized,
9,065,486 and 8,527,164 shares issued and outstanding,
respectively 3,578,136 3,416,220
Additional paid-in capital 4,097,309 3,918,930
Accumulated deficit (11,678,659) (8,135,777)
Less: Deferred compensation (115,334) (10,088)
--------- -----------
Total stockholders' deficit (4,087,439) (777,690)
----------- -----------
Total liabilities and stockholders' deficit $12,596,776 $11,425,506
========== ==========
See notes to consolidated financial statements.
F-3
FIRST MONTAUK FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Years ended December 31,
2003 2002 2001
---- ---- ----
Revenues:
Commissions $41,950,392 $36,513,802 $37,807,870
Principal transactions 9,466,359 6,727,642 8,021,887
Investment banking 2,439,144 1,007,700 1,483,210
Interest and other income 4,370,787 3,717,600 3,907,448
----------- ----------- -----------
Total revenues 58,226,682 47,966,744 51,220,415
---------- ---------- ----------
Expenses:
Commissions, employee compensation and benefits 46,218,107 39,572,851 42,356,207
Clearing and floor brokerage 2,934,164 2,666,376 3,247,219
Communications and occupancy 2,659,105 3,006,017 3,249,389
Legal matters and related costs 5,836,960 1,259,502 2,415,374
Other operating expenses 3,393,335 4,029,515 5,076,806
Interest 204,054 98,918 174,632
-------- ------------ ------------
Total expenses 61,245,725 50,633,179 56,519,627
---------- ---------- ----------
Loss before income taxes (3,019,043) (2,666,435) (5,299,212)
Provision for income taxes (benefit) 499,000 294,000 (90,989)
-------- ----------- ------------
Net loss $(3,518,043) $(2,960,435) $(5,208,223)
========== ========== ==========
Net loss applicable to common stockholders $(3,542,882) $(3,059,722) $(5,306,976)
========== ========== ==========
Per share of common stock:
Basic and diluted $(.40) $(.36) $(.61)
==== ==== ====
Weighted average common shares
outstanding - basic and diluted 8,784,103 8,551,932 8,704,355
========= ========= =========
See notes to consolidated financial statements.
F-4
FIRST MONTAUK FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE PERIOD FROM JANUARY 1, 2001 TO DECEMBER 31, 2003
Series A Convertible Additional
Preferred Stock Common Stock Paid-in
Shares Amount Shares Amount Capital
Balances at January 1, 2001 349,511 $34,951 9,309,309 $4,063,397 $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 (18,321) (1,832) 36,642 1,832 --
Payment of dividends -- -- -- -- --
Net loss for the year -- -- -- -- --
------------ ------------ ----------- ----------- -----------
Balances at December 31, 2001 331,190 33,119 8,622,284 3,434,642 3,950,542
Transfer of common shares from
temporary equity to permanent
capital -- -- 3,000 6,500 --
Reversal of deferred
compensation -- -- -- -- (42,994)
Amortization of deferred
compensation -- -- -- -- --
Repurchase of common stock -- -- -- -- --
Cancellation of treasury shares -- -- (100,000) (25,016) --
Issuance of common stock
purchase warrants for services -- -- -- -- 11,382
Conversion of preferred stock
into common stock (940) (94) 1,880 94 --
Payment of dividends -- -- -- -- --
Net loss for the year -- -- -- -- --
------------ ---------- ----------- ----------- -----------
Balances at December 31, 2002 330,250 33,025 8,527,164 3,416,220 3,918,930
Increase in deferred compensation -- -- -- -- 142,402
Amortization of deferred
compensation -- -- -- -- --
Common stock issued in
connection with legal
settlements -- -- 500,000 160,000 --
Conversion of preferred stock
into common stock (19,161) (1,916) 38,322 1,916 --
Payment of dividends -- -- -- -- --
Issuance of common stock
purchase warrants for services -- -- -- -- 35,977
Net loss for the year -- -- -- -- --
------------ ----------- ----------- ---------- ------------
Balances at December 31, 2003 311,089 $31,109 9,065,486 $3,578,136 $4,097,309
======= ====== ========= ========== =========
See notes to consolidated financial statements.
F-5
FIRST MONTAUK FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE PERIOD FROM JANUARY 1, 2001 TO DECEMBER 31, 2003
Retained
Earnings Stockholders'
(Accumulated Deferred Treasury StockEquity
Deficit) Compensation Shares Amount (Deficit)
------- ------------ ------ ------ ---------
Balances at January 1, 2001 $ 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
Transfer of common shares from
temporary equity to permanent
capital -- -- -- -- 6,500
Reversal of deferred
compensation -- 42,994 -- -- --
Amortization of deferred
compensation -- 2,985 -- -- 2,985
Repurchase of common stock -- -- (100,000) (25,016) (25,016)
Cancellation of treasury shares -- -- 100,000 25,016 --
Issuance of common stock
purchase warrants for services -- -- -- -- 11,382
Conversion of preferred stock
into common stock -- -- -- -- --
Payment of dividends (99,287) -- -- -- (99,287)
Net loss for the year (2,960,435) -- -- -- (2,960,435)
---------- ------------- ----------- ----------- ----------
Balances at December 31, 2002 (8,135,777) (10,088) -- -- (777,690)
Increase in deferred compensation -- (142,402) -- -- --
Amortization of deferred
compensation -- 37,156 -- -- 37,156
Common stock issued in
connection with legal
settlements -- -- -- -- 160,000
Conversion of preferred stock
into common stock -- -- -- -- --
Payment of dividends (24,839) -- -- -- (24,839)
Issuance of common stock
purchase warrants for services 35,977
Net loss for the year (3,518,043) -- -- -- (3,518,043)
----------- -------------- ------------ --------- ----------
Balances at December 31, 2003 $(11,678,659) $(115,334) -- $ -- $(4,087,439)
=========== ======== === === ==========
See notes to consolidated financial statements.
F-6
FIRST MONTAUK FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31,
2003 2002 2001
---- ---- ----
Cash flows from operating activities:
Net loss $(3,518,043) $(2,960,435) $(5,208,223)
---------- ---------- ----------
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization 509,968 526,816 563,685
Amortization of deferred compensation 37,156 2,985 33,830
Amortization of deferred financing costs 20,776 -- --
Amortization of bond discount -- 3,852 18,033
Reserves -- -- 500,000
Shares issued in legal settlement 160,000 -- --
Loss on disposal of property and equipment -- 5,964 --
Loss on investment -- 23,147 --
Increase (decrease) in cash attributable to
changes in assets and liabilities:
Due from clearing firm (627,566) (445,291) (1,740,744)
Securities owned 14,410 992,011 2,776,207
Employee and broker receivables 17,770 1,035,533 (495,954)
Loans receivable - officers 178,936 24,028 (27,896)
Income tax refund receivable 212,300 857,142 (1,069,442)
Deferred income taxes - net 460,000 470,000 791,262
Other assets (736,366) 482,103 (132,241)
Deferred income 523,801 672,990 850,000
Warrants subject to put options 479,066 -- --
Securities sold, not yet purchased 69,330 (245,078) (141,381)
Commissions payable 1,396,675 (966,042) 2,009,437
Accounts payable 403,258 86,383 39,868
Accrued expenses (183,898) 552,986 594,307
Income taxes payable -- -- (868,675)
Other liabilities (43,207) (466,094) 99,444
---------- ----------- -----------
Total adjustments 2,892,409 3,613,435 3,799,740
---------- ---------- ----------
Net cash provided by (used in) operating activities (625,634) 653,000 (1,408,483)
--------- --------- ----------
Cash flows from investing activities:
Collection of notes receivable -- -- 18,000
Collection of leases receivable -- -- 168,170
Additions to property and equipment (165,640) (266,854) (308,061)
Other assets 26,873 31,821 (196,049)
--------- -------- ------------
Net cash used in investing activities (138,767) (235,033) (317,940)
----------- --------- ------------
(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,
2003 2002 2001
---- ---- ----
Cash flows from financing activities:
Payments of notes payable (48,057) (233,171) (299,836)
Proceeds from capital lease financing -- -- 606,195
Repurchase of common stock -- (25,016) (143,564)
Payments of capital leases payable (220,949) (198,528) (259,075)
Payment of preferred stock dividends (24,839) (99,287) (98,753)
Proceeds from issuance of 6% convertible debentures 2,105,000 1,030,000 --
Other assets (243,830) (32,700) --
--------- ---------- ------------
Net cash provided by (used in) financing activities 1,567,325 441,298 (195,033)
---------- --------- -----------
Net increase (decrease) in cash and cash equivalents 802,924 859,265 (1,921,456)
Cash and cash equivalents at beginning of year 2,638,819 1,779,554 3,701,010
---------- ---------- ----------
Cash and cash equivalents at end of year $ 3,441,743 $ 2,638,819 $ 1,779,554
========== ========== ==========
Supplemental disclosures of cash flow information:
Cash paid (received) during the period for:
Interest $ 134,055 $ 95,522 $ 174,632
Income taxes $ (187,707) $ (1,113,636) $ 894,852
Noncash financing and investing transactions:
Property and equipment financed under capital leases $ -- $ -- $ 662,290
Equipment acquired through vendor financing $ -- $ 31,017 $ --
Warrants charged to deferred financing costs in
connection with debenture offerings $ 35,987 $ 11,382 $ --
See notes to consolidated financial statements.
F-8
FIRST MONTAUK FINANCIAL CORP. AND SUBSIDIARIES
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), operates a securities broker-dealer registered
with the Securities and Exchange Commission (SEC). Through
FMSC, the Company executes principal and agency transactions
primarily for retail customers, performs investment banking
services, and trades securities on a proprietary basis.
Montauk Insurance Services, Inc. (MISI) sells a range of
insurance products. The Company operates in one business
segment. Customers are located primarily throughout the United
States.
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. FMSC
is a member of the National Association of Securities Dealers,
Inc. (NASD).
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The consolidated financial statements include the accounts of
the Company and its subsidiaries, all of which are
wholly-owned. All intercompany accounts and transactions have
been eliminated in consolidation.
Revenue Recognition
Securities transactions, commission income and related
expenses are recorded on a trade date basis. Sales concessions
from participation in syndicated offerings are recorded on
settlement date.
Securities owned and securities sold, not yet purchased are
stated at quoted market value with unrealized gains and losses
included in earnings. Securities not readily marketable are
carried at estimated fair value as determined by management.
Advances received under the Company's financial agreement with
its clearing firm are deferred and amortized to income over
the remaining term of the agreement on a straight-line basis
(see Note 8).
Advertising
Advertising costs are expensed as incurred and totaled
approximately $71,000, $115,000 and $67,000 in 2003, 2002 and
2001, respectively.
Property and Equipment
Furniture, equipment and leasehold improvements are stated at
cost. Depreciation of furniture and equipment are computed
over the estimated useful lives of the assets, ranging from
three to ten years. Capitalized lease equipment is amortized
over the lease term. Leasehold improvements are amortized over
the shorter of either the asset's useful life or the related
lease term. Depreciation is computed on the straight-line
method for financial reporting purposes and on an accelerated
basis for income tax purposes.
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, 2003 and 2002.
F-9
Loss per Share
Basic loss per share is computed by dividing net loss
attributable to common stockholders by the weighted-average
number of common shares outstanding for the period. In
determining basic loss per share for the periods presented,
dividends paid on Series A Convertible Preferred Stock are
added to the net loss. Diluted loss per share reflects the
potential dilution from the exercise or conversion of other
securities into common stock, but only if dilutive. Diluted
loss per share for 2003, 2002 and 2001 is the same as basic
loss per share, since the effects of the calculation for these
years were anti-dilutive. The following securities, presented
on a common share equivalent basis, have been excluded from
the per share computations:
Year ended December 31,
2003 2002 2001
---- ---- ----
Stock options 3,556,498 4,072,498 5,243,998
Warrants 4,160,946 9,345,338 9,242,338
Convertible debt 6,270,000 2,084,028 345,263
Convertible preferred stock 622,178 660,500 662,380
In January 2004, the Company issued a total of 1,000,000
restricted common shares and 500,000 stock options to various
executive officers pursuant to new employment agreements (see
Note 23).
Use of Estimates
The consolidated financial statements are prepared in
conformity with accounting principles generally accepted in
the United States of America which require management to make
estimates and assumptions that affect the amounts reported in
the financial statements and accompanying notes. Management
periodically evaluates estimates used in the preparation of
financial statements for continued reasonableness. Appropriate
adjustments, if necessary, to the estimates used are made
prospectively based upon such periodic evaluation. Actual
results could differ from those estimates.
Long-lived Assets
The Company evaluates impairment losses on long-lived assets
used in operations, primarily property and equipment, when
events and circumstances indicate that the carrying value of
the assets might not be recoverable in accordance with FAS No.
144 "Accounting for the Impairment or Disposal of Long-lived
Assets". For purposes of evaluating the recoverability of
long-lived assets, the undiscounted cash flows estimated to be
generated by those assets would be compared to the carrying
amounts of those assets. If and when the carrying values of
the assets exceed their fair values, the related assets will
be written down to fair value.
Income Taxes
The Company uses the liability method to determine its income
tax expense as required under Statement of Financial
Accounting Standards No. 109 (FAS 109). Under FAS 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.
Reclassification
Syndicate revenues totaling $641,858 in 2002 have been
reclassified from Principal transactions to Investment banking
in the Statement of Operations to conform with the
presentations in 2001 and 2003.
F-10
Stock-based Compensation
The Company periodically grants stock options to employees in
accordance with the provisions of its stock option plans, with
the exercise price of the stock options being set at the
closing market price of the common stock on the date of grant.
The Company accounts for stock-based compensation plans under
Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees", and accordingly accounts for
employee stock-based compensation utilizing the intrinsic
value method. FAS No. 123, "Accounting for Stock-Based
Compensation", establishes a fair value based method of
accounting for stock-based compensation plans. The Company has
adopted the disclosure only alternative under FAS No. 123,
which requires disclosure of the pro forma effects on earnings
and earnings per share as if FAS No. 123 had been adopted as
well as certain other information.
Stock options granted to non-employees are recorded at their
fair value, as determined in accordance with FAS No. 123 and
Emerging Issues Task Force Consensus No. 96-18, and recognized
over the related service period. Deferred charges for options
granted to non-employees are periodically re-measured until
the options vest.
In December 2002, the FASB issued Statement of Financial
Accounting Standards No. 148, "Accounting for Stock-Based
Compensation -- Transition and Disclosure" ("FAS 148"), which
(i) amends FAS Statement No. 123, "Accounting for Stock-Based
Compensation," to provide alterative methods of transition for
an entity that voluntarily changes to the fair value based
method of accounting for stock-based employee compensation
(ii) amends the disclosure provisions of FAS 123 to require
prominent disclosure about the effects on reported net income
of an entity's accounting policy decisions with respect to
stock-based employee compensation and (iii) amends APB opinion
No. 28, "Interim Financial Reporting," to require disclosure
about those effects
in interim financial information. The additional disclosures
required by FAS 148 are as follows:
Years ended December 31,
2003 2002 2001
---- ---- ----
Net loss applicable to common
stockholders, as reported $(3,542,882) $(3,059,722) $(5,306,976)
Add: Stock based employee
compensation expense included
in reported net loss, net of tax -- -- --
Deduct: Total stock based
employee compensation expense
determined under the fair value
based method for all awards, net
of tax (105,862) (178,642) (468,019)
--------- --------- ---------
Pro forma net loss $(3,648,744) $(3,238,364) $(5,774,995)
========== ========== ==========
Loss per share:
Basic and diluted - as reported $(.40) $(0.36) $(0.61)
Basic and diluted - pro forma $(.42) $(0.38) $(0.66)
Pro forma net loss and loss per share information, as required
by FAS 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 2003, 2002 and
2001:
2003 2002 2001
---- ---- ----
Risk free interest rates 3.14% 1.97% 4.46%
Expected option lives 4 years 2.4 years 2.4 years
Expected volatilities 105.11% 87.64% 83%
Expected dividend yields 0% 0% 0%
F-11
Recent Pronouncements of the Financial Accounting Standards
Board
In April 2003, the FASB issued FAS No. 149 which amends and
clarifies financial accounting and reporting for derivative
instruments, including certain derivative instruments embedded
in other contracts, and for hedging activities under FAS No.
133. In particular, FAS No. 149 clarifies under what
circumstances a contract with an initial net investment meets
the characteristic of a derivative discussed in FAS No. 133,
clarifies when a derivative contains a financing component,
amends the definition of an underlying (as initially defined
in FAS No. 133) to conform it to a language used in FIN No.
45, Guarantor's Accounting and Disclosure Requirements for
Guarantees, Including Indirect Guarantees of Indebtedness of
Others, and amends certain other existing pronouncements. FAS
No. 149 is effective for all contracts entered into or
modified after June 30, 2003, subject to certain exceptions.
The adoption of this statement did not have an impact on the
Company's financial position, results of operations, or cash
flows.
In May 2003, the FASB issued FAS No. 150, "Accounting for
Certain Financial Instruments with Characteristics of both
Liabilities and Equity". FAS No. 150 establishes standards
for how an issuer classifies and measures certain
financial instruments with characteristics of both
liabilities and equity. FAS No. 150 requires that an issuer
classify a financial instrument that is within the scope of
FAS No. 150 as a liability. FAS No. 150 is effective
for financial instruments entered into or modified after
May 31, 2003, and otherwise is effective beginning
September 1, 2003. The Company has applied the provisions
of FAS No. 150 to certain warrants issued in a legal
settlement during 2003.
In November 2002, the FASB issued FASB Interpretation No. 45,
"Guarantor's Accounting and Disclosure Requirements for
Guarantees, including Indirect Guarantees of Indebtedness of
Others" ("FIN 45"). This interpretation elaborates on the
disclosures to be made by a guarantor in its interim and
annual financial statements about its obligations under
certain guarantees that it has issued. It also clarifies that
a guarantor is required to recognize, at the inception of a
guarantee, a liability for the fair value of the obligation
undertaken in issuing the guarantee. The disclosure
requirements of this interpretation are effective for interim
and annual periods after December 15, 2002. The initial
recognition and initial measurement requirements of this
interpretation are effective prospectively for guarantees
issued or modified after December 31, 2002. The Company
adopted FIN 45 effective January 1, 2003. The effect of such
adoption was not material to the Company's financial position,
results of operations, or cash flows.
In January 2003, the FASB issued FASB Interpretation No. 46,
"Consolidation of Variable Interest Entities" ("FIN 46"). This
interpretation of Accounting Research Bulletin No. 51,
"Consolidated Financial Statements", addresses consolidation
by business enterprises of variable interest entities. Under
current practice, two enterprises generally have been included
in consolidated financial statements because one enterprise
controls the other through voting interests. This
interpretation defines the concept of "variable interests" and
requires existing unconsolidated variable interest entities to
be consolidated by their primary beneficiaries if the entities
do not effectively disperse the risks among the parties
involved. The provisions of FIN 46, which were adopted in
2003, did not have a material impact on the Company's
consolidated financial position, results of operations, or
cash flows.
F-12
NOTE 3 - SECURITIES OWNED and SOLD, NOT YET PURCHASED
December 31,
2003 2002
---- ----
Sold Sold
not yet not yet
Owned Purchased Owned Purchased
Corporate stocks $ 80,710 $69,330 $111,216 $ --
U. S. government agency and
municipal obligations 73,875 -- 10,537 --
Corporate bonds 10,016 -- -- --
Certificates of deposit -- -- 42,000 --
Mutual funds -- -- 14,820 --
Other 4,933 -- 5,371 --
------ ---- ------ --
$169,534 $69,330 $183,944 $ --
======= ====== ======= ===
Securities owned and securities sold, not yet purchased
consist of trading securities at quoted market values. The
Company owns investment securities, consisting of shares of
common stock and common stock purchase warrants, that cannot
be publicly offered or sold unless registration has been
affected under the Securities Act of 1933. At December 31,
2003 and 2002, these nonmarketable securities were deemed by
management to have nominal value, and are included in Other
securities above.
NOTE 4 - EMPLOYEE AND BROKER RECEIVABLES
December 31,
2003 2002
---- ----
Commission advances $ 285,866 $ 265,678
Forgivable loans 43,395 167,221
Other loans 723,056 637,188
-------- --------
$1,052,317 $1,070,087
========= =========
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 five years. The loans are being amortized to expense
for financial reporting purposes over the term of the loan.
Loan amortization charged to compensation was $230,578,
$235,528 and $483,651 in 2003, 2002, and 2001, respectively.
Other loans to employees and registered representatives are
payable in installments generally over periods of one to five
years with interest rates ranging from 0% to 8% per annum.
NOTE 5 - PROPERTY AND EQUIPMENT
December 31, Estimated
2003 2002 Useful Life
---- ---- -----------
Computer and office equipment $ 2,960,830 $ 2,852,536 3 to 7 years
Furniture and fixtures 1,299,343 1,243,861 7 to 10 years
Leasehold improvements 804,654 802,790 Term of lease
-------- --------
5,064,827 4,899,187
Less: Accumulated depreciation
and amortization (4,012,263) (3,502,295)
---------- ----------
$ 1,052,564 $ 1,396,892
========== ==========
Depreciation expense was $509,968, $526,816 and $563,685 in
2003, 2002 and 2001, respectively.
F-13
NOTE 6 - LOANS RECEIVABLE - OFFICERS
December 31,
2003 2002
---- ----
Chief Executive Officer (CEO) $ -- $133,368
Chief Operating Officer (COO) -- 45,568
----- -------
$ -- $178,936
===== =======
In April 2003, the CEO and COO began repaying their loan
balances in bi-weekly installments of $2,576 and $1,630,
respectively, with interest at 3% per annum. In December 2003,
in connection with the execution of new employment agreements
(See Note 23), the board of directors approved bonuses of
$200,000 and $50,000 for the CEO and COO, respectively. Both
officers applied the after-tax proceeds towards repayment of
their loans.
NOTE 7 - OTHER ASSETS
December 31,
2003 2002
---- ----
Commissions and concessions receivable $ 306,442 $ 51,915
Deferred financing costs-net 303,113 44,082
Insurance claim receivable 245,000 ---
Security deposits 285,129 338,126
Prepaid expenses and other 521,667 258,704
-------- -------
$1,661,351 $692,827
========= =======
NOTE 8 - DEFERRED INCOME
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, FMSC
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 on all
shares.
The Company received additional cash advances of $1,250,000
each in November 2001, 2002 and 2003, respectively. All
advances have been recorded as deferred income and are being
amortized to earnings over the term of the agreement.
Amortization of approximately $726,000, $577,000 and $400,000
in 2003, 2002 and 2001, respectively, is included in Other
Income. Advances are subject to income taxes in the year of
receipt.
F-14
NOTE 9 - ACCRUED EXPENSES
December 31,
2003 2002
---- ----
Accrued litigation costs $1,364,169 $1,154,000
Accrued commission refund -- 175,000
Accrued payroll 123,886 144,000
Accrued professional fees 97,254 140,673
Other accrued expenses 218,664 374,198
---------- ----------
$1,803,973 $1,987,871
========= =========
NOTE 10 - NOTES PAYABLE
December 31,
2003 2002
---- ----
Convertible promissory notes, net of discount $ -- $48,057
==== ======
Notes payable consisted of thirty-six monthly non-interest
bearing installments of $16,404 through September 2002, plus
balloon payments of $112,000,. The balloon payments included
interest of $12,000 calculated on the basis of 8% of the
balloon amount beginning in month nineteen of the note term.
The Company recorded a loan discount on the notes of $64,609,
which was amortized over the note terms using the interest
method. The notes were convertible into 345,263 common shares
of the Company's common stock based on a conversion price of
$2.00 per share. In September 2002, the parties agreed to
refinance the balloon payments. The amended terms provided for
six monthly installments of $16,404 and a final payment in
March 2003 of $15,889, including interest at the rate of 8%
per annum. The Company's CEO personally guaranteed repayment
of the refinanced amounts.
NOTE 11 - 6% CONVERTIBLE DEBENTURES
In 2002 and 2003, the Company raised gross proceeds of
$1,030,000 and $2,105,000, respectively, in private placements
of 6% convertible debentures to accredited investors. The
offerings were made in reliance upon the exemption under
Sections 4(2) of the Securities Act of 1933 and the provisions
of Regulation D. The debentures are convertible into shares of
common stock at $.50 per share, subject to adjustment for
stock dividends and stock splits, and mature five years from
the date of issuance unless previously converted. Interest is
payable in cash on a semi-annual basis until maturity or
conversion.
In the event that the closing bid price of the Company's
common stock is 200% of the conversion price for the twenty
(20) consecutive trading days prior to the date of notice of
conversion or prepayment, the Company may, at its option and
only if the underlying shares have been registered, upon
thirty (30) days written notice to the holders, demand the
conversion of some or all of the debentures, or prepay some or
all of the debentures at the following repayment prices: 130%
of the principal amount if prepaid from the date of issuance
until the first anniversary of the date of issuance; 120% of
the principal amount if prepaid anytime thereafter. The
debentures contain certain covenants which, among other
things, prevent the sale of all or substantially all of the
Company's assets without provision for the payment of the
debentures from such sales proceeds, and making loans to any
executive officers or 5% stockholders. The debentures provide
for piggy-back registration rights relating to the underlying
shares.
FMSC was the Placement Agent for the offerings. Offering costs
of approximately $324,000, consisting of the value of warrants
issued to selling brokers, commissions and other cash
expenses, have been capitalized and are being amortized on a
straight-line basis over the respective terms of the
debentures.
Assuming no prior conversion, the debentures will mature in
2007 and 2008, as follows: 2007 - $1,030,000; 2008 -
$2,105,000.
F-15
NOTE 12 - WARRANTS SUBJECT TO PUT OPTIONS
In July 2003, the Company issued 750,000 five-year warrants to
various plaintiffs as part of a legal settlement (See Note
14). The warrants have been issued in three classes of 250,000
warrants each. Class A warrants have an exercise price of $.40
per share; Class B and Class C warrants have exercise prices
of $.25 per share. The settlement agreement provides that the
Company may be obligated to make additional cash payments of
up to $600,000 in the event that claimants elect to exercise
the warrants on certain dates. Specifically, if a majority of
then existing Class A warrant holders elect to exercise the
remaining warrants in their particular class during the month
of June 2004 (the "Required Exercise Event"), the claimants,
upon exercising their warrants, will be required to sell the
shares in the open market. If the warrants are exercised and
the shares sold, the Company will pay to the claimants up to
an aggregate amount of $200,000 less the amount received by
the claimants from the sale of their shares, net of
commissions. This process will be repeated for remaining Class
B and Class C warrant holders during the months of June 2005
and June 2006, respectively.
In the alternative, the Company may elect or be required to
redeem the unexercised warrants for up to $.80 per warrant,
or a maximum of $200,000 per class, depending upon the then
prevailing market price of the Company's common stock on or
about the date of the Required Exercise Event of a particular
class. The Company may call a warrant class for redemption if
the average market price of the underlying common shares
during the ten trading days immediately preceding the date
upon which the Company receives notice that the warrant
holders of a particular class have elected to declare a
Required Exercise Event is less than $1.20. The Company will
be required to redeem the warrants for $.80 per warrant in
cash if the average market price of the underlying common
shares during the ten trading days immediately preceding the
date upon which the Company receives notice that the warrant
holders of a particular class have elected to declare a
Required Exercise Event is less than or equal to the warrant
exercise price. In the event that warrant holders of a
particular class elect not to declare a Required Exercise
Event, the Company's guarantee will be canceled with respect
to that class.
In accordance with the provisions of FAS 150, "Accounting for
Certain Financial Instruments with Characteristics of both
Liabilities and Equity," the Company has classified its
obligations under the warrants as liabilities in the Statement
of Financial Condition. The fair value of the obligations
embodied in the warrants were initially valued at $441,000
using the discounted cash flow method, assuming, based on
available evidence, that the Company will be required to pay
the full redemption liability. The Company will re-measure
the value of the warrant obligations as of the end of each
reporting period using the discounted cash flow method until
the obligations are settled. The recorded value at
December 31, 2003 was $479,066. Changes in value are
recognized in earnings as interest expense. The Company has
agreed to register all shares of common stock underlying the
warrants.
NOTE 13 - INCOME TAXES
The provision for income taxes (benefit) consists of the
following:
Year ended December 31,
2003 2002 2001
---- ---- ----
Currently payable (refundable):
Federal $ -- $(212,300) $(893,978)
State 39,000 36,300 11,727
------- ------- -------
39,000 (176,000) (882,251)
------- -------- --------
Deferred:
Federal 425,000 425,000 483,978
State 35,000 45,000 307,284
------- --------- --------
460,000 470,000 791,262
------- -------- --------
Provision for income taxes (benefit) $499,000 $ 294,000 $ (90,989)
======= ======== =========
F-16
Following is a reconciliation of the income tax provision
(benefit) with income taxes based on the federal statutory
rate:
Year ended December 31,
2003 2002 2001
---- ---- ----
Expected federal tax benefit at
statutory rate $(1,043,000) $ (926,397) $(1,802,142)
State taxes, net of federal tax effect (145,000) (144,958) (230,898)
Non-deductible expenses 29,000 35,680 65,400
Increase in valuation allowance 1,658,000 1,329,675 1,876,651
---------- --------- ---------
Provision for income taxes (benefit) $ 499,000 $ 294,000 $ (90,989)
======== ========== ===========
The tax effects of the temporary differences that give rise to
significant portions of the deferred tax assets and
liabilities as of December 31, 2003 and 2002 are:
Year ended December 31,
2003 2002
---- ----
Deferred tax assets:
Deferred income $ 2,392,000 $ 2,177,729
Reserves and allowances 1,356,000 1,366,266
Tax loss carryforwards 1,028,000 258,125
Stock-based compensation 447,000 261,286
Other 70,000 31,725
----------- ----------
Subtotal 5,293,000 4,095,131
Valuation allowance (5,293,000) (3,635,131)
---------- ----------
Net deferred tax assets $ -- $ 460,000
========== ===========
The Company has determined that, based upon available
information, the probability of utilizing its deferred tax
assets does not meet the "more likely than not" test under
SFAS 109. As such, a valuation allowance has been provided
against all deferred tax assets as of December 31, 2003.
The Company and its subsidiaries file a consolidated federal
tax return and separate state returns. At December 31, 2003,
the Company has approximately $2.4 million and $5.0 million of
federal and state operating loss carryforwards, respectively,
available to offset future taxable income. These losses expire
at various dates through 2023.
During 2002 and 2003, the Company recovered approximately
$904,000 and $212,000, respectively, of federal income taxes
through loss carryback refund claims.
The Internal Revenue Service is conducting an examination of
the Company's income tax return for the year ended December
31, 2000. Management does not expect the outcome to have a
material impact on the Company's financial condition, results
of operations or cash flows.
NOTE 14 - COMMITMENTS AND CONTINGENT LIABILITIES
Operating Leases
The Company leases office facilities and equipment under
operating leases expiring at various dates through 2006. The
lease for the Company's headquarters has a six-year renewal
option through 2011. Certain leases require the Company to pay
increases in real estate taxes, operating costs and repairs
over certain base year amounts. Operating lease expense for
the years ended December 31, 2003, 2002 and 2001 were
approximately $1,192,000, $1,393,000 and $1,254,000,
respectively.
F-17
Future minimum rental commitments under all non-cancelable
leases are as follows:
Year ending December 31,
2004 $1,103,126
2005 296,302
2006 169,500
----------
$1,568,928
=========
Capital Lease Obligations
The Company leases certain equipment under non-cancelable
lease agreements, which meet the criteria for capitalization.
The cost, accumulated depreciation and net book value of
equipment under the capital leases as of December 31, 2003
were $689,086, $431,906, and $257,180.
Future minimum lease payments under capital lease obligations
at December 31, 2003 are as follows:
Year ending December 31,
2004 $114,396
2005 15,711
-------
Total minimum payments 130,107
Less amount representing interest (7,375)
--------
Total principal $122,732
=======
Employment agreements
In August 2002, the Company's board of directors approved new
employment agreements with similar terms for its CEO and its
COO. The agreements expire in December 2005 and provide for a
base annual salary of $256,218, increasing by 10% per annum on
January 1st of each contract year. Each employee will also be
entitled participate in a bonus pool, as defined. The
agreements also include severance provisions and termination
payments arising from a change in control, as defined. These
agreements were superceded by new employment contracts in
January 2004 (see Note 23).
During 2002 and 2003, respectively, each officer waived his
rights to approximately $126,000 and $75,000 of base salary.
Mutual fund breakpoints
The NASD has directed member firms to assess mutual fund
transactions executed during the five-year period from 1999 to
2003 for the purpose of determining potential breakpoint
commission refunds to customers. Based on its internal review
as well as information provided by the NASD, the Company has
established a reserve account of $10,000 for customer claims.
Management believes, but cannot give assurance, that this
amount will be sufficient to cover eventual payouts.
Legal matters
On July 17, 2003, the Company and FMSC entered into an
agreement with certain claimants in order to settle pending
arbitration proceedings. The litigation arose out of customer
purchases of certain high-yield corporate bonds that declined
in market value or defaulted. The settlement agreement covers
eleven separate claims which sought an aggregate of
approximately $12.3 million in damages. In exchange for the
consideration provided by the Company, each claimant granted a
general release of claims in favor of the Company and all
individual respondents, with the exception of the former
registered representative who had handled the claimants'
accounts. The Company paid an aggregate of $1,000,000 cash,
and issued to the claimants 500,000 shares of the Company's
common stock valued at $160,000 based on the stock's quoted
market price. The Company also issued to the claimants
five-year warrants to purchase an aggregate of 750,000 common
shares (see Note 12).
F-18
The Company is currently defending nine additional claims
relating to the sale of the high-yield bonds. The claimants
seek compensatory damages in excess of $4.3 million plus
punitive damages and the recovery of various costs. The
Company is vigorously defending these actions and believes
that there are meritorious defenses in each case. There is no
insurance coverage available for the payment of settlements
and/or judgments that may result from these particular claims.
In 2002, the Company filed a claim against one of its
competitors for raiding, unfair competition and unfair use of
proprietary and confidential information. In 2003, the matter
was resolved between the parties with the Company receiving a
cash payment from the respondent firm, with specific
restrictions on the solicitation, and limitation on the hiring
of Company registered representatives and employees for a
specific time period. The agreement also requires the payment
of liquidated damages by each party in the event of a breach
of its terms.
During 2001, the Company established a $500,000 reserve
against payments previously made to a vendor for the
development of applications software, and in 2002 instituted a
lawsuit against the vendor. In July 2002, the Company settled
the lawsuit upon receipt of a $230,000 cash payment and
terminated the software project.
The Company is a respondent or co-respondent in various other
legal proceedings which are related to its securities
business. Management is contesting these claims and believes
that there are meritorious defenses in each case. However,
litigation is subject to many uncertainties, and some of these
actions and proceedings may result in adverse judgments.
Further, the availability of insurance coverage is determined
on a case-by-case basis by the insurance carrier, and is
limited to the coverage limits within the policy for any
individual claim and in the aggregate. After considering all
relevant facts, available insurance coverage and consultation
with litigation counsel, management believes that significant
judgments or other unfavorable outcomes from pending
litigation could have a material adverse impact on the
Company's consolidated financial condition, results of
operations, and cash flows in any particular quarterly or
annual period, or in the aggregate, and could impair the
Company's ability to meet the statutory net capital
requirements of its securities business.
As of December 31, 2003, the Company has accrued litigation
costs that are probable and can be reasonably estimated based
on a review of existing claims, arbitrations and unpaid
settlements. Management cannot give assurance that this amount
will be adequate to cover actual costs that may be
subsequently incurred. Further, it is not possible to predict
the outcome of other matters pending against the Company. All
such cases will continue to be vigorously defended.
NOTE 15 - FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK and
CONCENTRATION 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.
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 ($69,330 and $-0- at December 31, 2003 and 2002,
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. Cash balances held at
commercial banks may periodically exceed federal insurance
limits.
F-19
NOTE 16 - PENSION PLAN
The Company sponsors a defined contribution (401(k)) pension
plan covering substantially all employees who meet minimum age
and service requirements. The Company may elect to contribute
up to 100% of each participant's annual contribution to the
plan. There were no employer contributions in 2003, 2002 or
2001.
NOTE 17 - STOCKHOLDERS' EQUITY (DEFICIT)
Preferred Stock
In 1999, the Company's board of directors designated a Series
A Convertible Preferred Stock with the following features:
Shares authorized: 625,000
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: Convertible at the option of the holder
anytime into two shares of Common Stock at $2.50 per share;
automatic conversion 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.
The Company issued 349,511 Series A shares in a private
exchange offering in 1999. As of December 31, 2003, a total of
38,422 preferred shares have been converted into 76,844 shares
of common stock.
During the quarter ended June 30, 2003, the Company suspended
the payment of cash dividends on its Series A Preferred stock.
New Jersey Business Corporation Act prohibits the payment of
any distribution by a corporation to, or for the benefit of
its shareholders, if the corporation's total assets would be
less than its total liabilities. Unpaid preferred dividends
will continue to accumulate at 6% per annum. Arrearages must
be fully paid before any distribution can be declared or paid
on the Company's common stock. Cumulative dividends in arrears
at December 31, 2003 were approximately $75,000.
The Company is presently authorized to issue 4,375,000
additional shares of Preferred Stock, none of which has been
issued at December 31, 2003. The rights and preferences, if
any, to be given to these preferred shares will be designated
by the board of directors at the time of issuance.
Common Stock
In connection with a legal settlement in 2003, the Company
issued 500,000 shares of common stock to various litigants.
The shares were valued at $160,000 based on the quoted market
price of the shares on the issuance date. The Company has
provided demand registration rights with respect to 250,000
shares and piggy-back registration rights with respect to the
remaining 250,000 shares.
During 2001 and 2002, respectively, the Company repurchased
236,737 shares for $143,564, and 100,000 shares for $25,016
under a stock repurchase program authorized by the board of
directors.
During 2002, the holder of 3,000 shares of common stock
subject to redemption agreed to sell the shares and provided a
general release to the Company. The shares were reclassified
from temporary equity to permanent capital at that time.
Warrants
During 2002 and 2003, the Company issued 103,000 and 210,500
common stock purchase warrants, respectively, to FMSC
registered representatives as compensation in connection with
the sale of convertible debentures. The Company valued the
warrants at $11,382 and $35,977, respectively using the
Black-Scholes option pricing method. The warrants are
exercisable at $.50 per share for five years from the date of
issuance.
F-20
The Company presently has outstanding 3,072,446 Class C
Redeemable Common Stock Purchase Warrants issued in February
1998 in connection with a Rights Offering. The Warrants are
exercisable at a price of $7.00 per share and expire in
February 2005. Class A and Class B Warrants issued in the
Rights Offering expired in February 2003.
During 1999, the Company issued 25,000 common stock purchase
warrants in connection with a legal 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 - STOCK OPTION PLANS
2002 Stock Incentive Plan
In June 2002, the Company adopted and its stockholders
approved the 2002 Incentive Stock Option Plan (the "2002
Plan"), replacing the 1992 Incentive Stock Option Plan (the
"1992 Plan"), which expired in September 2002. The 1992 Plan
provided for the granting of options to employees, consultants
and registered representatives of the Company, but only
options issued to employees qualify for incentive stock option
treatment ("ISOs"). Option exercise periods were fixed by the
Board of Directors on the grant date but no exercise period
could be less than one year nor more than ten years from the
date of grant. As of December 31, 2003, a total of 1,195,998
options issued under this plan remain outstanding.
The Company has reserved up to 5,000,000 shares of common
stock for issuance under the 2002 Plan. The 2002 Plan provides
for the grant of options, including ISOs to employees; NQSOs
to employees, consultants and independent registered
representatives; and stock appreciation rights or any
combination thereof (collectively, "Awards"). The Board of
Directors determines the terms and provisions of each award
granted under the 2002 Plan, including the exercise price,
term and vesting schedule. In the case of ISOs, the per share
exercise price must be equal to at least 100% of the fair
market value of a share of common stock on the date of grant,
and no individual will be granted ISOs corresponding to shares
with an aggregate fair value in excess of $100,000 in any
calendar year. The 2002 Plan will terminate in 2012. As of
December 31, 2003, options to purchase a total of 1,003,000
shares were outstanding and 3,997,000 shares remained
available for future issuance under the 2002 Plan.
2002 Non-Executive Director Stock Option Plan
In June 2002, the Company adopted and its stockholders
approved the 2002 Non-Executive Director Stock Option Plan
(the "2002 Director Plan"), replacing the Non-Executive
Director Stock Option Plan, which expired in September 2002.
Under the 2002 Director Plan, each non-executive director will
automatically be granted an option to purchase 20,000 shares,
pro rata, on September 1st of each year or partial year of
service. The Plan will be administered by the Board of
Directors or a committee of the Board, which shall at all
times consist of not less than two officer/directors of the
Company who are ineligible to participate in the 2002 Director
Plan. The 2002 Director Plan does not contain a reserve for a
specific number of shares available for grant. Each option
issued under the 2002 Director Plan will be immediately vested
NQSOs, and will have a five-year term and an exercise price
equal to the 100% of the fair market value of the shares
subject to such option on the date of grant. The 2002 Director
Plan will terminate in 2012. As of December 31, 2003, 60,000
options were outstanding under the Non-Executive Director
Stock Plan and 80,000 options were outstanding under the 2002
Director Plan.
1996 Management Incentive Plan
In June 2000, the Company's stockholders approved an amendment
to the 1996 Management Incentive Plan (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
F-21
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. As of December 31, 2003, options to purchase
1,217,500 shares were outstanding and 2,687,500 shares
remained available for future issuance under the plan.
A summary of the activity in the Company's stock option plans
for the three-year period ended December 31, 2003 is presented
below:
Weighted
Average
Exercise
Shares Prices
====== ======
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
Granted 573,000 .55
Canceled (1,744,500) 1.84
----------
Options outstanding, December 31, 2002 4,072,498 1.52
Granted 873,000 .54
Canceled (1,389,000) 1.75
----------
Options outstanding, December 31, 2003 3,556,498 $1.19
==========
Shares of common stock available for future grant under
Company plans totaled 6,684,500 as of December 31, 2003. This
number does not include options that are expected to be issued
during the remaining term of the 2002 Director's Plan, but for
which no specific reserve has been established.
The Company has elected to use the intrinsic value-based
method of APB Opinion No. 25 to account for all of its
employee stock-based compensation plans. Accordingly, no
compensation cost has been recognized in the accompanying
financial statements for stock options issued to employees
because the exercise price of each option equals or exceeds
the fair value of the underlying common stock as of the grant
date for each stock option. Accordingly, compensation is
recognized in the consolidated financial statements only for
the fair value of options issued to consultants and
independent registered representatives. Such compensation is
amortized to expense over the related options' vesting
periods. Compensation expense recognized in 2003, 2002 and
2001 totaled $37,156, $2,985 and $33,830, respectively. The
weighted-average grant date fair value of options granted
during 2003, 2002 and 2001 was $.22, $.08, and $.21,
respectively.
Additional information as of December 31, 2003 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 Prices Exercisable Prices
--------------- ----------- ---- ------ ----------- ------
$0.20 - $0.30 125,000 4.22 $.25 70,000 $.26
$0.30 - $0.49 95,000 3.50 .41 65,400 .41
$0.50 - $0.75 1,413,000 3.93 .58 859,623 .63
$ .83 - $1.09 333,000 2.79 .90 255,100 .87
$1.44 - $2.16 1,485,498 1.42 1.87 1,183,498 1.87
$2.38 - $2.75 105,000 2.20 2.53 52,200 2.56
- ----------------------------------------------------------------------------------------------------------------------------------
$0.20 - $2.75 3,556,498 2.72 $1.19 2,485,821 $1.27
- ----------------------------------------------------------------------------------------------------------------------------------
F-22
NOTE 19 - FAIR VALUE OF FINANCIAL INSTRUMENTS
Financial instruments reported in the Company's consolidated
statement of financial condition consist of cash, securities
owned and sold, not yet purchased, loans receivable, warrants
subject to put options, 6% convertible debentures, accounts
payable and accrued expenses, and capital leases payable, the
carrying value of which approximated fair value at December
31, 2003 and 2002. The fair value of the financial instruments
disclosed are not necessarily representative of the amount
that could be realized or settled nor does the fair value
amount consider the tax consequences of realization or
settlement.
NOTE 20 - 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,
2003, FMSC had net capital of $757,047, which was $344,479 in
excess of its required net capital of $412,568. FMSC's ratio
of aggregate indebtedness to net capital was 8.17 to 1.
NOTE 21 - VALUATION ACCOUNT
Additions
Balance at Charged to charged Balance
beginning costs and to other at end
of period expenses accounts Deductions of period
--------- -------- -------- ---------- ---------
Valuation allowance for
Deferred tax assets:
Year ended December 31, 2003 $3,635,131 $1,657,869 $-- $-- $5,293,000
Year ended December 31, 2002 2,305,456 1,329,675 -- -- 3,635,131
Year ended December 31, 2001 428,805 1,876,651 -- -- 2,305,456
NOTE 22 - UNAUDITED QUARTERLY RESULTS OF OPERATIONS
March 31, June 30, September 30, December 31,
2003 2003 2003 2003
---- ---- ---- ----
Revenues $10,956,167 $15,902,470 $15,171,548 $16,196,497
Expenses 11,427,511 17,241,938 15,460,089 17,615,187
Net loss (471,344) (1,339,468) (288,541) (1,418,690)
Net loss applicable
to common
stockholders (496,183) (1,339,468) (288,541) (1,418,690)
Loss per common share:
Net loss applicable
to common
stockholders - basic
and diluted (.06) (.16) (.03) (.16)
Revenues $12,748,468 $12,876,729 $10,738,742 $11,602,805
Expenses 13,044,130 13,849,861 11,243,268 12,789,920
Net loss (295,662) (973,132) (504,526) (1,187,115)
Net loss applicable
to common
stockholders (320,502) (997,971) (529,365) (1,211,884)
Loss per common share:
Net loss applicable to
common stockholders -
basic and diluted (.04) (.12) (.06) (.14)
Net loss per share is computed independently for each of the
quarters presented. Therefore, the sum of the quarterly net
loss per share figures in 2003 does not necessarily equal the
total computed for the entire year.
F-23
NOTE 23 - SUBSEQUENT EVENTS
Employment Agreements
Effective in January 2004, the board named William Kurinsky
Chief Executive Officer, replacing Herb Kurinsky, who has
retained the office of Chairman. The board also named Victor
Kurylak President. In connection with these management
changes, FMFC entered into new employment agreements with the
three executive officers. The agreements provide for annual
base salaries of $200,000, $300,000 and $250,000, for the
Chairman, CEO and President, respectively, customary fringe
benefits, severance, and participation in an executive bonus
pool and a corporate finance bonus pool. The executive bonus
pool will be equal to 15% of net pre-tax profit, as defined,
provided that net pre-tax profit for any bonus year exceeds
$500,000. The corporate finance bonus pool will provide for
grants of up to 20% of warrants and other securities issued to
the Company for investment banking services. In the event of a
change of control, as defined, the Chairman and CEO will each
be entitled to receive a single cash payment equal to three
times the amount of the five-year average of their gross
incomes, as well as the automatic vesting of any unvested
Company securities granted to them. The agreements have terms
of two, five, and three years, respectively, for the Chairman,
CEO and President, with a one-year extension provision. The
agreements also provide for the following restricted stock and
option grants:
Chairman: 375,000 restricted shares of common stock vesting
one-third in three, six and nine months, respectively,
from the grant date.
CEO: 375,000 restricted shares of common stock vesting
one-third in three, six and nine months, respectively, from
the grant date.
President: 250,000 restricted shares of common stock vesting
one-third on each of the next three grant date anniversaries;
250,000 stock options exercisable at $.50 per share and
250,000 stock options exercisable at $.75 per share, vesting
one-third on each of the next three grant date anniversaries.
Exhibit 10.13
EMPLOYMENT AGREEMENT
AGREEMENT made as of the 1st day of January, 2004 by and between Herbert
Kurinsky, residing at 16 Barberry Drive, Ocean, New Jersey 07712 (hereinafter
referred to as the "Employee") and First Montauk Financial Corp., a New Jersey
corporation with principal offices Parkway 109, Red Bank, New Jersey 07701
(hereinafter referred to as the "Company").
W I T N E S S E T H :
WHEREAS, the Company, through its wholly owned subsidiary First Montauk
Securities Corp, is engaged in the investment banking and general securities
business as a registered broker-dealer; and
WHEREAS, the Company desires to continue the employment of the Employee for
the purpose of securing for the Company the experience, ability and services of
the Employee; and
WHEREAS, the Employee desires to continue to be employed by the Company,
pursuant to the terms and conditions herein set forth, superseding all prior
oral and written employment agreements, and term sheets and letters between the
Company, its subsidiaries and/or predecessors and Employee;
NOW, THEREFORE, it is mutually agreed by and between the parties hereto as
follows:
ARTICLE I
DEFINITIONS
1.1 Accrued Compensation. "Accrued Compensation" shall mean an amount which
shall include all amounts earned or accrued through the "Termination Date" (as
defined below) but not paid as of the Termination Date, including (i) Base
Salary, (ii) reimbursement for business expenses incurred by the Employee on
behalf of the Company, pursuant to the Company's expense reimbursement policy in
effect at such time, (iii) car allowance, (iv) vacation pay, (v) Gross Up
Payments, and (vi) bonuses and incentive compensation (other than the "Pro Rata
Bonus" (as defined below)).
1.2 BASE AMOUNT. "Base Amount" shall mean the greater of the Employee's
annual base compensation (a) at the rate in effect on the Termination Date or
(b) at the highest rate in effect at any time during the ninety (90) day period
prior to the Termination Date or a Change in Control, and shall include all
amounts of his base compensation that are reported as income; provided however,
Base Amount shall not include the Bonus Amount or any other payment contingent
on performance.
1.3 BONUS AMOUNT. "Bonus Amount" shall mean the greater of the most recent
annual bonus paid or payable to the Employee, or, if greater, the annual bonus
paid or payable for the full fiscal year ended prior to the fiscal year during
which a Termination Date or a Change in Control occurred.
1.4 CAUSE. "Cause"shall mean if the Employee has been convicted of a felony
or the termination is evidenced by a resolution adopted in good faith by
two-thirds of the Board that the Employee (a) intentionally and continually
failed substantially to perform his reasonably assigned duties with the Company
(other than a failure resulting from the Employee's incapacity due to physical
or mental illness or from the assignment of duties that would constitute "Good
Reason"), which failure continued for a period of at least thirty (30) days
after a written notice of demand for substantial performance has been delivered
to the Employee, specifying the manner in which the Employee has failed
substantially to perform, or (b) intentionally and continually failed
substantially to follow or perform the lawful directives of the Board of
Directors (other than a failure resulting from the Employee's incapacity due to
physical or mental illness or from the establishment of directives that would
constitute "Good Reason"), which failure continued for a period of at least
thirty (30) days after written notice of demand for compliance or substantial
performance has been delivered to the Employee, specifying the manner in which
the Employee has failed substantially to perform or comply. No act, nor failure
to act, on the Employee's part, shall be considered "intentional," unless the
Employee has acted, or failed to act, with a lack of good faith or with a lack
of reasonable belief that the Employee's action or failure to act was in the
best interest of the Company.
1.5 CHANGE IN CONTROL. For purposes of this Agreement, a "Change in
Control" shall mean any of the following events:
(a) (i) An acquisition (other than directly from the Company) of any voting
securities of the Company (the "Voting Securities") by any "Person" (as the term
person is used for purposes of Section 13(d) or 14(d) of the Securities Exchange
Act of 1934, as amended (the "1934 Act")) immediately after which such Person
has "Beneficial Ownership" (within the meaning of Rule 13d-3 promulgated under
the 1934 Act) of twenty percent (20%) or more of the combined voting power of
the Company's then outstanding Voting Securities; provided, however, that in
determining whether a Change in Control has occurred, Voting Securities which
are acquired in a "Non-Control Acquisition" (as defined below) shall not
constitute an acquisition which would cause a Change in Control. A "Non-Control
Acquisition" shall mean an acquisition by (1) an employee benefit plan (or a
trust forming a part thereof) maintained by (x) the Company or (y) any
corporation or other Person of which a majority of its voting power or its
equity securities or equity interest is owned directly or indirectly by the
Company (a "Subsidiary"), or (2) the Company or any Subsidiary.
(ii)Notwithstanding the foregoing, a Change in Control shall not be deemed
to occur solely because a Person (the "Subject Person") gained Beneficial
Ownership of more than the permitted amount of the outstanding Voting Securities
as a result of the acquisition of Voting Securities by the Company which, by
reducing the number of Voting Securities outstanding, increases the proportional
number of shares Beneficially Owned by the Subject Person, provided that if a
Change in Control would occur (but for the operation of this sentence) as a
result of the acquisition of Voting Securities by the Company, and after such
share acquisition by the Company, the Subject Person becomes the Beneficial
Owner of any additional Voting Securities which increases the percentage of the
then outstanding Voting Securities Beneficially Owned by the Subject Person,
then a Change in Control shall occur.
(b) The individuals who, as of the date this Agreement is approved by the
Board, are members of the Board (the "Incumbent Board"), cease for any reason to
constitute at least two-thirds of the Board; provided, however, that if the
election, or nomination for election by the Company's stockholders, of any new
director was approved by a vote of at least two-thirds of the Incumbent Board,
such new director shall, for purposes of this Agreement, be considered and
defined as a member of the Incumbent Board; and provided, further, that no
individual shall be considered a member of the Incumbent Board if such
individual initially assumed office as a result of either an actual or
threatened "Election Contest" (as described in Rule 14a-11 promulgated under the
1934 Act) or other actual or threatened solicitation of proxies or consents by
or on behalf of a Person other than the Board (a "Proxy Contest"), including by
reason of any agreement intended to avoid or settle any Election Contest or
Proxy Contest; or
(c) Approval by stockholders of the Company of:
(1) A merger, consolidation or reorganization involving the Company, unless
(i) the stockholders of the Company, immediately before such merger,
consolidation or reorganization, own, directly or indirectly immediately
following such merger, consolidation or reorganization, at least eighty-five
percent (85%) of the combined voting power of the outstanding voting securities
of the corporation resulting from such merger or consolidation or reorganization
(the "Surviving Corporation") in substantially the same proportion as their
ownership of the Voting Securities immediately before such merger, consolidation
or reorganization,
(ii) the individuals who were members of the Incumbent Board immediately
prior to the execution of the agreement providing for such merger, consolidation
or reorganization constitute at least two-thirds of the members of the board of
directors of the Surviving Corporation, and
(iii) no Person (other than the Company, any Subsidiary, any employee
benefit plan (or any trust forming a part thereof) maintained by the Company,
the Surviving Corporation or any Subsidiary) has Beneficial Ownership of twenty
percent (20%) or more of the combined voting power of the Surviving
Corporation's then outstanding voting securities, a transaction described in
clauses (i) through (iii) shall herein be referred to as a "Non-Control
Transaction"; or
(2) An agreement for the sale or other disposition of all or substantially
all of the assets of the Company, or of a significant subsidiary, to any Person,
other than a transfer to a Subsidiary, in one transaction or a series of related
transactions. For purposes of this subparagraph 1.5 (c) (2), "significant
subsidiary " shall mean any subsidiary or business division of the Company which
accounts for more than 40% of the Company's income, revenue or gross profits.
(3) The stockholders of the Company approve any plan or proposal for the
liquidation or dissolution of the Company.
(d) Notwithstanding anything contained in this Agreement to the contrary,
if the Employee's employment is terminated prior to a Change in Control and the
Employee reasonably demonstrates that such termination (i) was at the request of
a third party who has indicated an intention or taken steps reasonably
calculated to effect a Change in Control (a "Third Party") or (ii) otherwise
occurred in connection with, or in anticipation of, a Change in Control, then
for all purposes of this Agreement, the date of a Change in Control with respect
to the Employee shall mean the date immediately prior to the date of such
termination of the Employee's employment.
1.6 COMPANY. For purposes of this Agreement, "Company" shall mean First
Montauk Financial Corp, its subsidiaries, and shall include its "Successors and
Assigns" (as defined below).
1.7 CONTINUATION BENEFITS. "Continuation Benefits" shall be the
continuation for a period of eighteen (18) months from the Termination Date (the
"Continuation Period") at the Company's expense on behalf of the Employee and
his dependents and beneficiaries, of the life insurance, disability, medical,
dental and hospitalization benefits provided (x) to the Employee at any time
during the ninety (90) day period prior to the Change in Control or at any time
thereafter or (y) to other similarly situated executives who continue in the
employ of the Company during the Continuation Period. The coverage and benefits
(including deductibles and costs) provided during the Continuation Period shall
be no less favorable to the Employee, and his dependents and beneficiaries, than
the most favorable of such coverages and benefits during any of the periods
referred to in clauses (x) and (y) above. The Company's obligation hereunder
with respect to the foregoing benefits shall be limited to the extent that if
the Employee obtains any such benefits pursuant to a subsequent employer's
benefit plans, the Company may reduce the coverage of any benefits it is
required to provide the Employee hereunder as long as the aggregate coverages
and benefits of the combined benefit plans is no less favorable to the Employee
than the coverages and benefits required to be provided hereunder. In the event
any amounts attributable to these Continuation Benefits are includible in the
gross income of the Employee for federal income tax purposes, the Company shall,
in addition to the benefits set forth above, pay the Employee a Gross Up Payment
on the amount so includible in Employee's gross income. Notwithstanding the
foregoing, in lieu of providing the foregoing benefits, the Company may pay the
Employee an amount equal to the cost to the Employee of obtaining comparable
Continuation Benefits plus a Gross Up Payment with respect to such amount. This
definition of Continuation Benefits shall not be interpreted so as to limit any
benefits to which the Employee, his dependents or beneficiaries may be entitled
under any of the Company's employee benefit plans, programs or practices
following the Employee's termination of employment, including, without
limitation, retiree medical and life insurance benefits.
1.8 DISABILITY. A physical or mental infirmity which impairs the Employee's
ability to substantially perform his duties with the Company for a period of one
hundred eighty (180) consecutive days, and the Employee has not returned to his
full time employment prior to the Termination Date as stated in the "Notice of
Termination" (as defined below).
1.9 GOOD REASON. (a) "Good Reason" shall mean:
(i) the occurrence of a Change in Control;
(ii) a change in the Employee's status, title, position or responsibilities
(including reporting responsibilities) which, in the Employee's reasonable
judgment, represents an adverse change from his status, title, position or
responsibilities; the assignment to the Employee of any duties or
responsibilities which, in the Employee's reasonable judgment, are inconsistent
with his status, title, position or responsibilities; or any removal of the
Employee from or failure to reappoint or reelect him to any of such offices or
positions, except in connection with the termination of his employment for
Disability, Cause, as a result of his death or by the Employee other than for
Good Reason; (iii) a reduction in the Employees base salary or any failure to
pay the Employee any compensation or benefits to which he or she is entitled
within five (5) days of the date due; (iv) the Company's requiring the Employee
to be based at any place outside a 30-mile radius from Red Bank, New Jersey,
except for reasonably required travel on the Company's business which is not
materially greater than such travel generally required for such Employee; (v)
the failure by the Company to continue in effect (without reduction in benefit
level, and/or reward opportunities) any material compensation or employee
benefit plan in which the Employee was participating, unless such plan is
replaced with a plan that provides at least substantially equivalent
compensation or benefits to the Employee;
(vi) the insolvency or the filing (by any party, including the Company) of
a petition for bankruptcy of the Company, which petition is not dismissed within
sixty (60) days; (vii) any material breach by the Company of any provision of
this Agreement which is not cured within thirty (30) days after notice to the
Company by the Employee specifying the breach; (viii) any purported termination
of the Employee's employment for Cause by the Company which is inconsistent with
the terms of Section 1.4 and the other applicable provisions of this Agreement;
or (ix) the failure of the Company to obtain an agreement, satisfactory to the
Employee, from any Successors and Assigns to assume and agree to perform this
Agreement, as contemplated in Section 15.3 hereof; or
(b) The Employee's right to terminate his employment pursuant to this
Section 1.9 shall not be affected by his incapacity due to physical or mental
illness.
1.10 GROSS UP PAYMENT. With respect to any amount includible in the
Employee's gross income for federal income tax purposes (the "Taxable Benefit"),
an amount in cash equal to (i) the product of the Highest Marginal Income Tax
Rate and the Taxable Benefit, (ii) divided by one minus the Highest Marginal
Income Tax Rate. The Highest Marginal Income Tax Rate shall mean the sum of the
highest marginal combined local, state and federal personal income tax rates
(including tax rates associated with any state unemployment compensation tax,
any tax imposed under the Federal Insurance Contributions Act, any excise tax or
surtax, and any other tax on income based on the Company's employment of the
Employee), as in effect for the calendar year in which the Taxable Benefit is
includible in the gross income of the Employee for federal income tax purposes.
The Gross Up Payment shall be paid within ten (10) days of the payment or
realization for federal income tax purposes of the Taxable Benefit.
1.11 NOTICE OF TERMINATION. "Notice of Termination" shall mean a written
notice from the Company of termination of the Employee's employment which
indicates the specific termination provision in this Agreement relied upon, if
any, and which sets forth in reasonable detail the facts and circumstances
claimed to provide a basis for termination of the Employee's employment under
the provision so indicated.
1.12 OUTPLACEMENT SERVICES. "Outplacement Services" shall mean all
reasonable costs and expenses associated with the engagement of an executive
outplacement firm to provide executive outplacement services to the Employee.
1.13 PRO RATA BONUS. "Pro Rata Bonus" shall mean an amount equal to the
greater of (i) the Bonus Amount or (ii) an amount equal to the bonus objective
or target established by the Board for the Employee for the fiscal year in which
the termination occurs multiplied by a fraction the numerator of which is the
number of days in the fiscal year through the Termination Date and the
denominator of which is 365.
1.14 SEVERANCE PAYMENT. Severance Payment shall mean a lump sum cash
payment equal to twelve (12) months Base Amount.
1.15 SUCCESSORS AND ASSIGNS. "Successors and Assigns" shall mean a
corporation or other entity acquiring all or substantially all the assets and
business of the Company (including this Agreement) whether by operation of law
or otherwise.
1.16 TERMINATION DATE. "Termination Date" shall mean in the case of the
Employee's death, his date of death; in the case of Good Reason, the last day of
his employment; and in all other cases, the date specified in the Notice of
Termination; provided, however, that if the Employee's employment is terminated
by the Company for Cause or due to Disability, the date specified in the Notice
of Termination shall be at least 30 days from the date the Notice of Termination
is given to the Employee, and provided further that in the case of Disability,
the Employee shall not have returned to the full-time performance of his duties
during such period of at least 30 days.
ARTICLE II
EMPLOYMENT
2.1 Subject to and upon the terms and conditions of this Agreement, the
Company hereby employs and agrees to continue the employment of the Employee,
and the Employee hereby accepts such continued employment in his capacity as
Chairman of the Board. In this capacity, Employee will report to the Board of
Directors.
ARTICLE III
DUTIES
3.1 The Employee shall, during the term of his employment with the Company,
and subject to the direction and control of the Company's Board of Directors,
perform such duties and functions as he may be called upon to perform by the
Company's Board of Directors during the term of this Agreement, consistent with
his position as Chairman of the Board.
3.2 The Employee agrees to use his best efforts in the promotion and
advancement of the Company and its welfare and business. Employee agrees to
devote his primary professional time to the business of the Company as Employee
deems reasonably necessary; provided, however, that the Company acknowledges
that Employee shall be entitled to pursue unrelated personal business ventures
that do not materially conflict with the performance of Employee's duties to the
Company. 3. 3 Employee shall be based in the Red Bank New Jersey area, and shall
undertake such occasional travel, within or without the United States as is or
may be reasonably necessary in the interests of the Company.
ARTICLE IV
COMPENSATION
4.1 During the term of this Agreement, Employee shall be compensated
initially at the rate of $200,000 per annum, subject to such increases, if any,
as determined by the Board of Directors, or if the Board so designates, the
Compensation Committee, in its discretion, at the commencement of each of the
Company's fiscal years during the term of this Agreement (the "Base Salary").
The Base Salary shall be paid to the Employee in accordance with the Company's
regular executive payroll periods.
4.2 Employee shall be entitled to receive a bonus (the "Bonus") during each
year of this Agreement, determined as follows: The amount to be paid as a Bonus
shall be determined as of each December 31 by the Compensation Committee of the
Board of Directors based upon the prior fiscal year end and shall consist of a
portion of an "Executive Bonus Pool." The Executive Bonus Pool shall be equal to
fifteen (15%) percent of the net pre-tax profit of the Company as determined by
the Company's independent auditors, no later than 90 days following the end of
the Company's fiscal year, excluding any expense deduction attributed to such
Executive Bonus Pool (the "Net Pre-Tax Profit"); provided that, in the event the
Net Pre-Tax Profit of the Company for any fiscal year is less than $500,000, no
Executive Bonus Pool shall be established or Bonus paid by the Company to the
Employee pursuant to this subparagraph 4.2. Such determination, for purposes of
this Section 4.2 only, shall be made in accordance with generally accepted
accounting principles, as modified by these resolutions.
4.3 Employee shall also be entitled to receive brokerage commissions on in
accordance with the commission schedule in effect for other non-affiliate
brokers employed by the Company.
4.4 Employee shall be eligible to purchase from the Company, at Employees
sole discretion, a portion of the securities contributed to the "Corporate
Finance Bonus Pool" upon the same price, terms and conditions afforded to First
Montauk Securities Corp. The Corporate Finance Bonus Pool shall consist of up to
20% of all underwriter's warrants, placement agent warrants and/or other
securities granted to First Montauk Securities Corp., in connection with its
service as an underwriter, placement agent or investment banker. The amount
Employee shall be entitled to purchase shall be determined by the Compensation
Committee of the Board of Directors on a transaction by transaction basis.
4.5 The Company shall deduct from Employee's compensation all federal,
state and local taxes which it may now or may hereafter be required to deduct.
4.6 Employee may receive such other additional compensation as may be
determined from time to time by the Board of Directors including bonuses and
other long term compensation plans. Nothing herein shall be deemed or construed
to require the Board to award any bonus or additional compensation.
ARTICLE V
BENEFITS
5.1 During the term hereof, the Company shall provide Employee with the
following benefits (the "Benefits"): (i) group health care and insurance
benefits as generally made available to the Company's senior management; (ii)
such other insurance benefits obtained by the Company and made generally
available to the Company's senior management; (iii) the Company shall provide
the Employee with an automobile suitable for his position, equipped with a
mobile telephone, or at Employee's option, an appropriate automobile allowance,
and reimburse reasonable automobile expenses including repairs, maintenance,
gasoline charges, mobile phone, etc. via receipted expense reports; and (iv)
reimbursement, upon presentation of appropriate vouchers, for all reasonable
business expenses incurred by Employee on behalf of the Company upon
presentation of suitable documentation.
5.2 In the event the Company wishes to obtain Key Man life insurance on the
life of Employee, Employee agrees to cooperate with the Company in completing
any applications necessary to obtain such insurance and promptly submit to such
physical examinations and furnish such information as any proposed insurance
carrier may request.
5.3 For the term of this Agreement, Employee shall be entitled to paid
vacation at the rate of four (4) weeks per annum.
ARTICLE VI
NON-DISCLOSURE
6.1 The Employee shall not, at any time during or after the termination of
his employment hereunder, except when acting on behalf of and with the
authorization of the Company, make use of or disclose to any person,
corporation, or other entity, for any purpose whatsoever, any trade secret or
other confidential information concerning the Company's business, finances,
marketing, brokerage accounts, corporate finance transactions and clients,
products and services, accounting, insurance business and personnel of the
Company and its subsidiaries, including information relating to any customer of
the Company, or any other nonpublic business information of the Company and/or
its subsidiaries learned as a consequence of Employee's employment with the
Company (collectively referred to as the "Proprietary Information"). For the
purposes of this Agreement, trade secrets and confidential information shall
mean information disclosed to the Employee or known by him as a consequence of
his employment by the Company, whether or not pursuant to this Agreement, and
not generally known in the industry. The Employee acknowledges that trade
secrets and other items of confidential information, as they may exist from time
to time, are valuable and unique assets of the Company, and that disclosure of
any such information would cause substantial injury to the Company. Trade
secrets and confidential information shall cease to be trade secrets or
confidential information, as applicable, at such time as such information
becomes public other than through disclosure, directly or indirectly, by
Employee in violation of this Agreement.
6.2 If Employee is requested or required (by oral questions,
interrogatories, requests for information or document subpoenas, civil
investigative demands, or similar process) to disclose any Proprietary
Information, Employee shall, unless prohibited by law, promptly notify the
Company of such request(s) so that the Company may seek an appropriate
protective order.
ARTICLE VII
RESTRICTIVE COVENANT
7.1 In the event of the voluntary termination of employment with the
Company prior to the expiration of the term hereof, or Employee's discharge in
accordance with Article IX, or the expiration of the term hereof without
renewal, Employee agrees that he will not, during the term hereof and for a
period of one (1) year following termination of employment for any reason,
directly or indirectly, solicit brokers, or employees of the Company, or any
sister or subsidiary of the Company for employment with any other entity, or
(ii) solicit or accept (a) any corporate finance client relating to a
transaction, pending or proposed, involving a public offering, private
placement, or merger and acquisition advisory services, (b) research project
which was under consideration or pending at the time of Employee's termination,
or (c) any brokerage client of the Company.
7.2 If any court shall hold that the duration of non-competition or any
other restriction contained in this Article VII is unenforceable, it is our
intention that same shall not thereby be terminated but shall be deemed amended
to delete therefrom such provision or portion adjudicated to be invalid or
unenforceable or, in the alternative, such judicially substituted term may be
substituted therefor.
ARTICLE VIII
TERM
8.1 This Agreement shall be for a term (the "Initial Term") commencing on
January 1, 2004 (the "Commencement Date") and terminating on December 31, 2006
(the "Expiration Date"), and renewable as provided for herein, for one
additional period of one year.
8.2 The Company agrees to notify Employee in writing of its intent to
negotiate an extension of this Agreement six months prior to the expiration of
the original term hereof. If the Company fails to so notify Employee, or after
having timely notified Employee of its intention to extend, fails to reach
agreement with Employee on the terms of such extension, this agreement shall be
renewable, at the option of the Employee, for an additional period of one year
from the expiration of the original term, except that the Employee's base salary
shall be increased 10% above the prior year, and Employee shall be entitled to
stock options equivalent to one-third of the options granted during the initial
term of this agreement on comparable terms and conditions. If the Company elects
not to seek to negotiate an extension and has so timely notified Employee, then
the Company shall pay Employee, upon the expiration of the original term of this
Agreement, the Severance Payment.
ARTICLE IX
TERMINATION
9.1 The Company may terminate this Agreement by giving a Notice of
Termination to the Employee in accordance with this Agreement:
a. For Disability;
b. For Cause.
c. Without Cause.
9.2 Employee may terminate this Agreement by giving a Notice of Termination
to the Company in accordance with this Agreement, at any time, with or without
good reason.
9.3 If the Employee's employment with the Company shall be terminated, the
Company shall pay and/or provide to the Employee the following compensation and
benefits in lieu of any other compensation or benefits arising under this
Agreement or otherwise:
a. if the Employee was terminated by the Company for
Cause, or the Employee terminates without Good
Reason, the Accrued Compensation;
b. if the Employee was terminated by the Company for
Disability, the Accrued Compensation, a Pro Rata
Bonus, the Severance Payment and the Continuation
Benefits, less all disability insurance payments
which Employee may receive from insurance policies
provided by the Company; or
c. if termination was due to the Employee's death, the
Accrued Compensation; and Employee's pro rata bonus
for the fiscal year in which the date of death
occurred; or
d. if termination was by the Employee other than for
Good Reason, the Company shall pay to the Employee
the Accrued Compensation.
e. If the Employee's employment with the Company shall
be terminated for any reason other than as specified
in Section 9.3 (a-d), in lieu of any further
compensation for periods subsequent to the
Termination Date, the Company shall pay and/or
provide to the Employee each and all of the following
compensation and benefits:
(i) all Accrued Compensation;
(ii) a Pro-Rata Bonus;
(iii) the Employee's Base Amount, for the period from the Termination Date
to the expiration of the term of the Employment Agreement, including any renewal
period which is automatic on the Termination Date;
(iv) a bonus payment equal to one-twelfth (1/12) of the Bonus Amount times
the number of months remaining from the Termination Date to the expiration of
the term of the Employment Agreement, including any renewal period which is
automatic on the Termination Date;
(v) The Severance Payment;
(vi) The Continuation Benefits;
(vii) Any Gross Up Payments to which the Employee would have been entitled
from the Termination Date to the expiration of the term of the Employment
Agreement, including any renewal period which is automatic on the Termination
Date; and
(viii) The Outplacement Services.
9.4 In the event the Employee's employment is terminated for any reason
other than as specified in Section 9.3 (a-d), the conditions to the vesting of
any outstanding incentive awards (including restricted stock, stock options and
granted performance shares or units) granted to the Employee under any of the
Company's plans, or under any other incentive plan or arrangement, shall be
deemed void and all such incentive awards shall be immediately and fully vested
and exercisable.
9.5 The amounts payable under this Section 9, shall be paid as follows:
(a) Accrued Compensation shall be paid within five (5) business days after
the Employee's Termination Date (or earlier, if required by applicable law).
(b) The Pro-Rata Bonus shall be paid within thirty (30) days after the
Employee's Termination Date (or earlier, if required by applicable law).
(c) If the Continuation Benefits are paid in cash, the payments shall be
made within thirty (30) days after the Employee's Termination Date (or earlier,
if required by applicable law).
(d) The Severance Payment shall be paid within thirty (30) days after the
Employee's Termination Date (or earlier, if required by applicable law).
(e) The amounts provided for in Sections 9.3(e)(iii) and (iv), shall be
paid within thirty (30) days after the Employee's Termination Date (or earlier,
if required by applicable law).
9.6 The Employee shall not be required to mitigate the amount of any
payment provided for in this Agreement by seeking other employment or otherwise
and no such payment shall be offset or reduced by the amount of any compensation
or benefits provided to the Employee in any subsequent employment except as
provided in Section 1.7.
9.7 Employee's employment and the Employment Agreement may be terminated by
the Company or by the Employee, in accordance with this Agreement, by service of
a Notice of Termination. For purposes of this Agreement, no such purported
termination shall be effective without service of a Notice of Termination.
ARTICLE X
TERMINATION OF PRIOR AGREEMENTS
10.1 This Agreement sets forth the entire agreement between the parties and
supersedes all prior agreements, letters and understandings between the parties,
whether oral or written prior to the effective date of this Agreement.
ARTICLE XI
RESTRICTED STOCK GRANTS
11.1 As an inducement to Employee to enter into this Agreement, the Company
hereby grants to Employee 375,000 restricted shares of the Company's Common
Stock, $.001 par value.
11.2 Subject to the terms and conditions of the Company's 1996 Senior
Management Incentive Plan (the "Plan"), the Employee is hereby granted 375,000
restricted shares of the Company's Common Stock, $.001 par value (the "Shares")
.. One-third of such Shares shall vest one year after the date of this Agreement,
one-third of such Shares shall vest two years after the date of this Agreement,
and one- third of such Shares shall vest three years after the date of this
Agreement. If Employee renders continuous service to the Company from the date
hereof to a vesting date, on each such vesting date the Company shall deliver to
Employee such number of shares of Common Stock as shall vest on such date.
Notwithstanding the foregoing, in the event Employee's employment is terminated
due to Death or Disability, all Restricted Share Awards shall immediately vest
and all such Shares shall delivered to the Employee, or Employee's estate.
ARTICLE XII
EXTRAORDINARY TRANSACTIONS
12.1 In the event of a Change of Control as described in Sections 1.5(a)
and (b), the Company shall provide notice to the Employee within ten (10) days
of the date the Company has notice of such Change of Control transaction. If the
Employee provides notice in writing to the Company, within ninety (90) days
after the Company's notice, that the Employee intends to terminate his
Employment Agreement for Good Reason effective thirty (30) days after the date
of such notice, in addition to the benefits provided elsewhere in this
Agreement, the Company shall pay and/or provide to the Employee, the following
compensation and benefits:
(a) The Company shall pay the Employee as additional severance, in a single
payment, an amount in cash equal to three times the amount of the five year
average of the gross income of the Employee, as reported by the Company for
federal income tax purposes or, at the option of the Employee, credit such
amount against the exercise price of Employee's employee stock options; and
(b) The conditions to the vesting of any outstanding incentive awards
(including restricted stock, stock options and granted performance shares or
units) granted to the Employee under any of the Company's plans, or under any
other incentive plan or arrangement, shall be deemed void and all such incentive
awards shall be immediately and fully vested and exercisable.
12.2 Notwithstanding the provisions of Article IX to the contrary, in the
event the Employee's employment is terminated for any reason within twenty-four
(24) months of a Change of Control, the amounts provided for in Article IX,
including the Continuation Benefits, if the Continuation Benefits are paid in
cash, and the amounts payable under Section 12.1 shall be paid in a single lump
sum cash payment within five (5) business days after the Employee's Termination
Date (or earlier, if required by applicable law).
12.3 In the event of a Change of Control as described in Section 1.5(c),
the Company shall provide thirty (30) days prior written notice to the Employee
of the anticipated closing date of such Change of Control transaction. If the
Employee provides notice in writing to the Company, at least five (5) days prior
to the closing date specified in the Company's notice, that the Employee intends
to terminate his Employment Agreement for Good Reason effective on the closing
date, there shall be paid to the Employee in a single lump sum, cash payment
simultaneously with the closing of such Change of Control transaction, the
amounts provided for in this Article XII, including the Continuation Benefits,
if the Continuation Benefits are paid in cash. Upon the closing of such Change
of Control Transaction and the payment of the amounts due Employee under this
Agreement, Employee's employment, and the Employment Agreement shall be deemed
terminated for Good Reason.
ARTICLE XIII
EXCISE TAX GROSS UP PAYMENT
13.1 The Company and the Employee acknowledge that the payments and
benefits provided under this Agreement, and benefits provided to, or for the
benefit of, the Employee under other Company plans and agreements (such payments
or benefits are collectively referred to as the "Payments") are subject to the
excise tax (the "Excise Tax") imposed under Section 4999 of the Internal Revenue
Code of 1986, as amended (the "Code"). In addition to the Payments, the Company
shall pay to the Employee within five (5) business days of Payment subject to
the Excise Tax, a gross up payment (the "Gross Up Payment") equal to the amount
which, after the deduction of any applicable Federal, State and Local income
taxes attributable to the Gross Up Payment, is equal to the Excise Tax including
the Excise Tax attributable to the Gross Up Payment.
13.2 The Company shall pay to the applicable government taxing authorities,
as Excise Tax withholding, the amount of the Excise Tax that the Company has
actually withheld from the Payment or Payments.
13.3 If it is established pursuant to a determination of a court, or an
Internal Revenue Service (the "IRS") decision, action or proceeding, that there
has been an underpayment of the Excise Tax (an "Underpayment"), the Company
shall pay to the Employee within thirty (30) days of such determination or
resolution, the amount which, after the deduction of any applicable federal,
state and local income taxes, including the Excise Tax, is equal to the
Underpayment, plus applicable interest and penalties until the date of payment.
13.4 The Company hereby agrees to indemnify, defend, and hold harmless the
Employee for any and all claims arising from or related to non-payment of Excise
Tax, including the amount of such tax and any and all costs, interest, expenses,
penalties associated with the non-payment of such tax to the fullest extent
permitted by law.
ARTICLE XIX
ARBITRATION AND INDEMNIFICATION; FEES AND EXPENSES
14.1 Any dispute arising out of the interpretation, application, and/or
performance of this Agreement with the sole exception of any claim, breach, or
violation arising under Articles VI or VII hereof shall be settled through final
and binding arbitration before a panel of arbitrators in accordance with the
rules of the National Association of Securities Dealers (the "NASD"). Any
judgment upon any arbitration award may be entered in any court, federal or
state, having competent jurisdiction of the parties before a single arbitrator
in the State of New Jersey in accordance with the Rules of the American
Arbitration Association. The arbitrators shall be selected by the NASD. Any
judgment upon any arbitration award may be entered in any court, federal or
state, having competent jurisdiction of the parties.
14.2 The Company hereby agrees to indemnify, defend, and hold harmless the
Employee for any and all claims arising from or related to his employment by the
Company at any time asserted, at any place asserted, to the fullest extent
permitted by law, except for claims based on Employee's fraud, deceit or
wilfulness. The Company shall maintain such insurance as is necessary and
reasonable to protect the Employee from any and all claims arising from or in
connection with his employment by the Company during the term of Employee's
employment with the Company and for a period of six (6) years after the date of
termination of employment for any reason. The provisions of this Section 12.2
are in addition to and not in lieu of any indemnification, defense or other
benefit to which Employee may be entitled by statute, regulation, common law or
otherwise.
14.3 The Company shall pay all reasonable legal fees and related expenses
(including the costs of arbitrators, experts, evidence and counsel) incurred by,
the Employee as they become due as a result of (a) the Employee's termination of
employment (including all such fees and expenses, if any, incurred in contesting
or disputing any such termination of employment) in violation of this Agreement,
or (b) the Employee seeking to obtain or enforce any right or benefit provided
by this Agreement.
ARTICLE XV
SUCCESSORS: BINDING AGREEMENT
15.1 This Agreement shall be binding upon and shall inure to the benefit of
the Company, and its Successors and Assigns, and the Company shall require any
Successors and Assigns to expressly assume and agree to perform this Agreement
in the same manner and to the same extent that the Company would be required to
perform it if no such succession or assignment had taken place.
15.2 Neither this Agreement nor any right or interest hereunder shall be
assignable or transferable by the Employee, his beneficiaries or legal
representatives, except by will or by the laws of descent and distribution. This
Agreement shall inure to the benefit of and be enforceable by the Employee's
personal representative.
15.3 In the event that a Division (or part thereof) is sold, divested, or
otherwise disposed of by the Company subsequent to or in connection with a
Change in Control and the Employee accepts employment by the purchaser or
acquiror thereof, the Company shall require such purchaser or acquiror to
assume, and agree to perform, the Company's obligations under this Agreement, in
the same manner, and to the same extent, that the Company would be required to
perform if no such acquisition or purchase had taken place.
ARTICLE XVI
OTHER CONTRACTUAL RIGHTS; NON-EXCLUSIVITY; SETTLEMENT OF CLAIMS
16.1 The provisions of this Agreement, and any payment provided for
hereunder, shall not reduce any amounts otherwise payable, or in any way
diminish the Employee's existing rights, or rights which would accrue solely as
a result of the passage of time, under any Benefit Plan, Incentive Plan or
Securities Plan, employment agreement or other contract, plan or arrangement.
16.2 Nothing in this Agreement shall prevent or limit the Employee's
continuing or future participation in any benefit, bonus, incentive or other
plan or program provided by the Company (except for any severance or termination
policies, plans, programs or practices) and for which the Employee may qualify,
nor shall anything herein limit or reduce such rights as the Employee may have
under any other agreements with the Company (except for any severance or
termination agreement). Amounts which are vested benefits or which the Employee
is otherwise entitled to receive under any plan or program of the Company shall
be payable in accordance with such plan or program, except as explicitly
modified by this Agreement.
16.3 The Company's obligation to make the payments provided for in this
Agreement and otherwise to perform its obligations hereunder shall not be
affected by any circumstances, including, without limitation, any set-off,
counterclaim, recoupment, defense or other right which the Company may have
against the Employee or others.
ARTICLE XVII
SEVERABILITY
17.1 If any provision of this Agreement shall be held invalid and
unenforceable, the remainder of this Agreement shall remain in full force and
effect. If any provision is held invalid or unenforceable with respect to
particular circumstances, it shall remain in full force and effect in all other
circumstances.
ARTICLE XVIII
NOTICE
18.1 For the purposes of this Agreement, notices and all other
communications provided for in the Agreement shall be in writing and shall be
deemed to have been duly given when personally delivered or sent by certified
mail, return receipt requested, postage prepaid, addressed to the respective
addresses as set forth below or to any such other address as the party to
receive the notice shall advise by due notice given in accordance with this
paragraph . All notices and communications shall be deemed to have been received
on the date of delivery thereof or on the third business day after the mailing
thereof, except that notice of change of address shall be effective only upon
receipt.
18.2 The current addresses of the parties are as follows:
IF TO THE COMPANY: First Montauk Financial Corp.
Parkway 109 Office Center
328 Newman Springs Road
Red Bank, New Jersey 07701
Att. Chief Counsel
With a copy to: Victor J. DiGioia, Esq.
Goldstein & DiGioia, LLP
45 Broadway
New York, NY 10006
IF TO THE EMPLOYEE: Herbert Kurinsky
16 Barberry Drive,
Ocean, New Jersey 07712
ARTICLE XIX
WAIVER
19.1 The waiver by either party of any breach or violation of any provision
of this Agreement shall not operate or be construed as a waiver of any
subsequent breach of construction and validity.
ARTICLE XX
GOVERNING LAW
20.1 This Agreement has been negotiated and executed in the State of New
Jersey which shall govern its construction and validity.
ARTICLE XXI
JURISDICTION
21.1 Any or all actions or proceedings which may be brought by the Company
or Employee under this Agreement shall be brought in courts having a situs
within the State of New Jersey, and Employee and the Company each hereby consent
to the jurisdiction of any local, state, or federal court located within the
State of New Jersey.
ARTICLE XXII
ENTIRE AGREEMENT
22.1 This Agreement contains the entire agreement between the parties
hereto. No change, addition, or amendment shall be made hereto, except by
written agreement signed by the parties hereto.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement and
affixed their hands and seals the day and year first above written.
FIRST MONTAUK FINANCIAL CORP..
By:_________________________________
------------------------------------
Herbert Kurinsky
Employee
Exhibit 10.14
EMPLOYMENT AGREEMENT
AGREEMENT made as of the 1st day of January, 2004 by and between William J.
Kurinsky, residing at 4 Cotswold Circle, Ocean, New Jersey 07712 (hereinafter
referred to as the "Employee") and First Montauk Financial Corp., a New Jersey
corporation with principal offices Parkway 109, Red Bank, New Jersey 07701
(hereinafter referred to as the "Company").
W I T N E S S E T H :
WHEREAS, the Company, through its wholly owned subsidiary First Montauk
Securities Corp, is engaged in the investment banking and general securities
business as a registered broker-dealer; and
WHEREAS, the Company desires to continue the employment of the Employee for
the purpose of securing for the Company the experience, ability and services of
the Employee; and
WHEREAS, the Employee desires to continue to be employed by the Company,
pursuant to the terms and conditions herein set forth, superseding all prior
oral and written employment agreements, and term sheets and letters between the
Company, its subsidiaries and/or predecessors and Employee;
NOW, THEREFORE, it is mutually agreed by and between the parties hereto as
follows:
ARTICLE I
DEFINITIONS
1.1 Accrued Compensation. "Accrued Compensation" shall mean an amount which
shall include all amounts earned or accrued through the "Termination Date" (as
defined below) but not paid as of the Termination Date, including (i) Base
Salary, (ii) reimbursement for business expenses incurred by the Employee on
behalf of the Company, pursuant to the Company's expense reimbursement policy in
effect at such time, (iii) car allowance, (iv) vacation pay, (v) Gross Up
Payments, and (vi) bonuses and incentive compensation (other than the "Pro Rata
Bonus" (as defined below)).
1.2 BASE AMOUNT. "Base Amount" shall mean the greater of the Employee's
annual base compensation (a) at the rate in effect on the Termination Date or
(b) at the highest rate in effect at any time during the ninety (90) day period
prior to the Termination Date or a Change in Control, and shall include all
amounts of his base compensation that are reported as income; provided however,
Base Amount shall not include the Bonus Amount or any other payment contingent
on performance.
1.3 BONUS AMOUNT. "Bonus Amount" shall mean the greater of the most recent
annual bonus paid or payable to the Employee, or, if greater, the annual bonus
paid or payable for the full fiscal year ended prior to the fiscal year during
which a Termination Date or a Change in Control occurred.
1.4 CAUSE. "Cause"shall mean if the Employee has been convicted of a felony
or the termination is evidenced by a resolution adopted in good faith by
two-thirds of the Board that the Employee (a) intentionally and continually
failed substantially to perform his reasonably assigned duties with the Company
(other than a failure resulting from the Employee's incapacity due to physical
or mental illness or from the assignment of duties that would constitute "Good
Reason"), which failure continued for a period of at least thirty (30) days
after a written notice of demand for substantial performance has been delivered
to the Employee, specifying the manner in which the Employee has failed
substantially to perform, or (b) intentionally and continually failed
substantially to follow or perform the lawful directives of the Board of
Directors (other than a failure resulting from the Employee's incapacity due to
physical or mental illness or from the establishment of directives that would
constitute "Good Reason"), which failure continued for a period of at least
thirty (30) days after written notice of demand for compliance or substantial
performance has been delivered to the Employee, specifying the manner in which
the Employee has failed substantially to perform or comply. No act, nor failure
to act, on the Employee's part, shall be considered "intentional," unless the
Employee has acted, or failed to act, with a lack of good faith or with a lack
of reasonable belief that the Employee's action or failure to act was in the
best interest of the Company.
1.5 CHANGE IN CONTROL. For purposes of this Agreement, a "Change in
Control" shall mean any of the following events:
(a) (i) An acquisition (other than directly from the Company) of any voting
securities of the Company (the "Voting Securities") by any "Person" (as the term
person is used for purposes of Section 13(d) or 14(d) of the Securities Exchange
Act of 1934, as amended (the "1934 Act")) immediately after which such Person
has "Beneficial Ownership" (within the meaning of Rule 13d-3 promulgated under
the 1934 Act) of twenty percent (20%) or more of the combined voting power of
the Company's then outstanding Voting Securities; provided, however, that in
determining whether a Change in Control has occurred, Voting Securities which
are acquired in a "Non-Control Acquisition" (as defined below) shall not
constitute an acquisition which would cause a Change in Control. A "Non-Control
Acquisition" shall mean an acquisition by (1) an employee benefit plan (or a
trust forming a part thereof) maintained by (x) the Company or (y) any
corporation or other Person of which a majority of its voting power or its
equity securities or equity interest is owned directly or indirectly by the
Company (a "Subsidiary"), or (2) the Company or any Subsidiary.
(ii)Notwithstanding the foregoing, a Change in Control shall not be deemed
to occur solely because a Person (the "Subject Person") gained Beneficial
Ownership of more than the permitted amount of the outstanding Voting Securities
as a result of the acquisition of Voting Securities by the Company which, by
reducing the number of Voting Securities outstanding, increases the proportional
number of shares Beneficially Owned by the Subject Person, provided that if a
Change in Control would occur (but for the operation of this sentence) as a
result of the acquisition of Voting Securities by the Company, and after such
share acquisition by the Company, the Subject Person becomes the Beneficial
Owner of any additional Voting Securities which increases the percentage of the
then outstanding Voting Securities Beneficially Owned by the Subject Person,
then a Change in Control shall occur.
(b) The individuals who, as of the date this Agreement is approved by the
Board, are members of the Board (the "Incumbent Board"), cease for any reason to
constitute at least two-thirds of the Board; provided, however, that if the
election, or nomination for election by the Company's stockholders, of any new
director was approved by a vote of at least two-thirds of the Incumbent Board,
such new director shall, for purposes of this Agreement, be considered and
defined as a member of the Incumbent Board; and provided, further, that no
individual shall be considered a member of the Incumbent Board if such
individual initially assumed office as a result of either an actual or
threatened "Election Contest" (as described in Rule 14a-11 promulgated under the
1934 Act) or other actual or threatened solicitation of proxies or consents by
or on behalf of a Person other than the Board (a "Proxy Contest"), including by
reason of any agreement intended to avoid or settle any Election Contest or
Proxy Contest; or
(c) Approval by stockholders of the Company of:
(1) A merger, consolidation or reorganization involving the Company, unless
(i) the stockholders of the Company, immediately before such merger,
consolidation or reorganization, own, directly or indirectly immediately
following such merger, consolidation or reorganization, at least eighty-five
percent (85%) of the combined voting power of the outstanding voting securities
of the corporation resulting from such merger or consolidation or reorganization
(the "Surviving Corporation") in substantially the same proportion as their
ownership of the Voting Securities immediately before such merger, consolidation
or reorganization,
(ii) the individuals who were members of the Incumbent Board immediately
prior to the execution of the agreement providing for such merger, consolidation
or reorganization constitute at least two-thirds of the members of the board of
directors of the Surviving Corporation, and
(iii) no Person (other than the Company, any Subsidiary, any employee
benefit plan (or any trust forming a part thereof) maintained by the Company,
the Surviving Corporation or any Subsidiary) has Beneficial Ownership of twenty
percent (20%) or more of the combined voting power of the Surviving
Corporation's then outstanding voting securities, a transaction described in
clauses (i) through (iii) shall herein be referred to as a "Non-Control
Transaction"; or
(2) An agreement for the sale or other disposition of all or substantially
all of the assets of the Company, or of a significant subsidiary, to any Person,
other than a transfer to a Subsidiary, in one transaction or a series of related
transactions. For purposes of this subparagraph 1.5 (c) (2), "significant
subsidiary " shall mean any subsidiary or business division of the Company which
accounts for more than 40% of the Company's income, revenue or gross profits.
(3) The stockholders of the Company approve any plan or proposal for the
liquidation or dissolution of the Company.
(d) Notwithstanding anything contained in this Agreement to the contrary,
if the Employee's employment is terminated prior to a Change in Control and the
Employee reasonably demonstrates that such termination (i) was at the request of
a third party who has indicated an intention or taken steps reasonably
calculated to effect a Change in Control (a "Third Party") or (ii) otherwise
occurred in connection with, or in anticipation of, a Change in Control, then
for all purposes of this Agreement, the date of a Change in Control with respect
to the Employee shall mean the date immediately prior to the date of such
termination of the Employee's employment.
1.6 COMPANY. For purposes of this Agreement, "Company" shall mean First
Montauk Financial Corp, its subsidiaries, and shall include its "Successors and
Assigns" (as defined below).
1.7 CONTINUATION BENEFITS. "Continuation Benefits" shall be the
continuation for a period of eighteen (18) months from the Termination Date (the
"Continuation Period") at the Company's expense on behalf of the Employee and
his dependents and beneficiaries, of the life insurance, disability, medical,
dental and hospitalization benefits provided (x) to the Employee at any time
during the ninety (90) day period prior to the Change in Control or at any time
thereafter or (y) to other similarly situated executives who continue in the
employ of the Company during the Continuation Period. The coverage and benefits
(including deductibles and costs) provided during the Continuation Period shall
be no less favorable to the Employee, and his dependents and beneficiaries, than
the most favorable of such coverages and benefits during any of the periods
referred to in clauses (x) and (y) above. The Company's obligation hereunder
with respect to the foregoing benefits shall be limited to the extent that if
the Employee obtains any such benefits pursuant to a subsequent employer's
benefit plans, the Company may reduce the coverage of any benefits it is
required to provide the Employee hereunder as long as the aggregate coverages
and benefits of the combined benefit plans is no less favorable to the Employee
than the coverages and benefits required to be provided hereunder. In the event
any amounts attributable to these Continuation Benefits are includible in the
gross income of the Employee for federal income tax purposes, the Company shall,
in addition to the benefits set forth above, pay the Employee a Gross Up Payment
on the amount so includible in Employee's gross income. Notwithstanding the
foregoing, in lieu of providing the foregoing benefits, the Company may pay the
Employee an amount equal to the cost to the Employee of obtaining comparable
Continuation Benefits plus a Gross Up Payment with respect to such amount. This
definition of Continuation Benefits shall not be interpreted so as to limit any
benefits to which the Employee, his dependents or beneficiaries may be entitled
under any of the Company's employee benefit plans, programs or practices
following the Employee's termination of employment, including, without
limitation, retiree medical and life insurance benefits.
1.8 DISABILITY. A physical or mental infirmity which impairs the Employee's
ability to substantially perform his duties with the Company for a period of one
hundred eighty (180) consecutive days, and the Employee has not returned to his
full time employment prior to the Termination Date as stated in the "Notice of
Termination" (as defined below).
1.9 GOOD REASON. (a) "Good Reason" shall mean:
(i) the occurrence of a Change in Control;
(ii) a change in the Employee's status, title, position or responsibilities
(including reporting responsibilities) which, in the Employee's reasonable
judgment, represents an adverse change from his status, title, position or
responsibilities; the assignment to the Employee of any duties or
responsibilities which, in the Employee's reasonable judgment, are inconsistent
with his status, title, position or responsibilities; or any removal of the
Employee from or failure to reappoint or reelect him to any of such offices or
positions, except in connection with the termination of his employment for
Disability, Cause, as a result of his death or by the Employee other than for
Good Reason;
(iii) a reduction in the Employees base salary or any failure to pay the
Employee any compensation or benefits to which he or she is entitled within five
(5) days of the date due;
(iv) the Company's requiring the Employee to be based at any place outside
a 30-mile radius from Red Bank, New Jersey, except for reasonably required
travel on the Company's business which is not materially greater than such
travel generally required for such Employee;
(v) the failure by the Company to continue in effect (without reduction in
benefit level, and/or reward opportunities) any material compensation or
employee benefit plan in which the Employee was participating, unless such plan
is replaced with a plan that provides at least substantially equivalent
compensation or benefits to the Employee;
(vi) the insolvency or the filing (by any party, including the Company) of
a petition for bankruptcy of the Company, which petition is not dismissed within
sixty (60) days;
(vii) any material breach by the Company of any provision of this Agreement
which is not cured within thirty (30) days after notice to the Company by the
Employee specifying the breach;
(viii) any purported termination of the Employee's employment for Cause by
the Company which is inconsistent with the terms of Section 1.4 and the other
applicable provisions of this Agreement; or
(ix) the failure of the Company to obtain an agreement, satisfactory to the
Employee, from any Successors and Assigns to assume and agree to perform this
Agreement, as contemplated in Section 15.3 hereof; or
(b) The Employee's right to terminate his employment pursuant to this
Section 1.9 shall not be affected by his incapacity due to physical or mental
illness.
1.10 GROSS UP PAYMENT. With respect to any amount includible in the
Employee's gross income for federal income tax purposes (the "Taxable Benefit"),
an amount in cash equal to (i) the product of the Highest Marginal Income Tax
Rate and the Taxable Benefit, (ii) divided by one minus the Highest Marginal
Income Tax Rate. The Highest Marginal Income Tax Rate shall mean the sum of the
highest marginal combined local, state and federal personal income tax rates
(including tax rates associated with any state unemployment compensation tax,
any tax imposed under the Federal Insurance Contributions Act, any excise tax or
surtax, and any other tax on income based on the Company's employment of the
Employee), as in effect for the calendar year in which the Taxable Benefit is
includible in the gross income of the Employee for federal income tax purposes.
The Gross Up Payment shall be paid within ten (10) days of the payment or
realization for federal income tax purposes of the Taxable Benefit.
1.11 NOTICE OF TERMINATION. "Notice of Termination" shall mean a written
notice from the Company of termination of the Employee's employment which
indicates the specific termination provision in this Agreement relied upon, if
any, and which sets forth in reasonable detail the facts and circumstances
claimed to provide a basis for termination of the Employee's employment under
the provision so indicated.
1.12 OUTPLACEMENT SERVICES. "Outplacement Services" shall mean all
reasonable costs and expenses associated with the engagement of an executive
outplacement firm to provide executive outplacement services to the Employee.
1.13 PRO RATA BONUS. "Pro Rata Bonus" shall mean an amount equal to the
greater of (i) the Bonus Amount or (ii) an amount equal to the bonus objective
or target established by the Board for the Employee for the fiscal year in which
the termination occurs multiplied by a fraction the numerator of which is the
number of days in the fiscal year through the Termination Date and the
denominator of which is 365.
1.14 SEVERANCE PAYMENT. Severance Payment shall mean a lump sum cash
payment equal to twelve (12) months Base Amount.
1.15 SUCCESSORS AND ASSIGNS. "Successors and Assigns" shall mean a
corporation or other entity acquiring all or substantially all the assets and
business of the Company (including this Agreement) whether by operation of law
or otherwise.
1.16 TERMINATION DATE. "Termination Date" shall mean in the case of the
Employee's death, his date of death; in the case of Good Reason, the last day of
his employment; and in all other cases, the date specified in the Notice of
Termination; provided, however, that if the Employee's employment is terminated
by the Company for Cause or due to Disability, the date specified in the Notice
of Termination shall be at least 30 days from the date the Notice of Termination
is given to the Employee, and provided further that in the case of Disability,
the Employee shall not have returned to the full-time performance of his duties
during such period of at least 30 days.
ARTICLE II
EMPLOYMENT
2.1 Subject to and upon the terms and conditions of this Agreement, the
Company hereby employs and agrees to continue the employment of the Employee,
and the Employee hereby accepts such continued employment in his capacity as
Vice-Chairman of the Board and Chief Executive Officer. In this capacity,
Employee will report to the Chairman of the Board and the Board of Directors.
ARTICLE III
DUTIES
3.1 The Employee shall, during the term of his employment with the Company,
and subject to the direction and control of the Company's Board of Directors,
perform such duties and functions as he may be called upon to perform by the
Chairman and the Company's Board of Directors during the term of this Agreement,
consistent with his position as Vice-Chairman of the Board and Chief Executive
Officer.
3.2 The Employee agrees to use his best efforts in the promotion and
advancement of the Company and its welfare and business. Employee agrees to
devote his primary professional time to the business of the Company as Employee
deems reasonably necessary; provided, however, that the Company acknowledges
that Employee shall be entitled to pursue unrelated personal business ventures
that do not materially conflict with the performance of Employee's duties to the
Company.
3. 3 Employee shall be based in the Red Bank New Jersey area, and shall
undertake such occasional travel, within or without the United States as is or
may be reasonably necessary in the interests of the Company.
ARTICLE IV
COMPENSATION
4.1 During the term of this Agreement, Employee shall be compensated
initially at the rate of $300,000 per annum, subject to such increases, if any,
as determined by the Board of Directors, or if the Board so designates, the
Compensation Committee, in its discretion, at the commencement of each of the
Company's fiscal years during the term of this Agreement (the "Base Salary").
The Base Salary shall be paid to the Employee in accordance with the Company's
regular executive payroll periods.
4.2 Employee shall be entitled to receive a bonus (the "Bonus") during each
year of this Agreement, determined as follows: The amount to be paid as a Bonus
shall be determined as of each December 31 by the Compensation Committee of the
Board of Directors based upon the prior fiscal year end and shall consist of a
portion of an "Executive Bonus Pool." The Executive Bonus Pool shall be equal to
fifteen (15%) percent of the net pre-tax profit of the Company as determined by
the Company's independent auditors, no later than 90 days following the end of
the Company's fiscal year, excluding any expense deduction attributed to such
Executive Bonus Pool (the "Net Pre-Tax Profit"); provided that, in the event the
Net Pre-Tax Profit of the Company for any fiscal year is less than $500,000, no
Executive Bonus Pool shall be established or Bonus paid by the Company to the
Employee pursuant to this subparagraph 4.2. Such determination, for purposes of
this Section 4.2 only, shall be made in accordance with generally accepted
accounting principles, as modified by these resolutions.
4.3 Employee shall also be entitled to receive brokerage commissions on in
accordance with the commission schedule in effect for other non-affiliate
brokers employed by the Company.
4.4 Employee shall be eligible to purchase from the Company, at Employees
sole discretion, a portion of the securities contributed to the "Corporate
Finance Bonus Pool" upon the same price, terms and conditions afforded to First
Montauk Securities Corp. The Corporate Finance Bonus Pool shall consist of up to
20% of all underwriter's warrants, placement agent warrants and/or other
securities granted to First Montauk Securities Corp., in connection with its
service as an underwriter, placement agent or investment banker. The amount
Employee shall be entitled to purchase shall be determined by the Compensation
Committee of the Board of Directors on a transaction by transaction basis.
4.5 The Company shall deduct from Employee's compensation all federal,
state and local taxes which it may now or may hereafter be required to deduct.
4.6 Employee may receive such other additional compensation as may be
determined from time to time by the Board of Directors including bonuses and
other long term compensation plans. Nothing herein shall be deemed or construed
to require the Board to award any bonus or additional compensation.
ARTICLE V
BENEFITS
5.1 During the term hereof, the Company shall provide Employee with the
following benefits (the "Benefits"): (i) group health care and insurance
benefits as generally made available to the Company's senior management; (ii)
such other insurance benefits obtained by the Company and made generally
available to the Company's senior management; (iii) the Company shall provide
the Employee with an automobile suitable for his position, equipped with a
mobile telephone, or at Employee's option, an appropriate automobile allowance,
and reimburse reasonable automobile expenses including repairs, maintenance,
gasoline charges, mobile phone, etc. via receipted expense reports; and (iv)
reimbursement, upon presentation of appropriate vouchers, for all reasonable
business expenses incurred by Employee on behalf of the Company upon
presentation of suitable documentation.
5.2 In the event the Company wishes to obtain Key Man life insurance on the
life of Employee, Employee agrees to cooperate with the Company in completing
any applications necessary to obtain such insurance and promptly submit to such
physical examinations and furnish such information as any proposed insurance
carrier may request.
5.3 For the term of this Agreement, Employee shall be entitled to paid
vacation at the rate of four (4) weeks per annum.
ARTICLE VI
NON-DISCLOSURE
6.1 The Employee shall not, at any time during or after the termination of
his employment hereunder, except when acting on behalf of and with the
authorization of the Company, make use of or disclose to any person,
corporation, or other entity, for any purpose whatsoever, any trade secret or
other confidential information concerning the Company's business, finances,
marketing, brokerage accounts, corporate finance transactions and clients,
products and services, accounting, insurance business and personnel of the
Company and its subsidiaries, including information relating to any customer of
the Company, or any other nonpublic business information of the Company and/or
its subsidiaries learned as a consequence of Employee's employment with the
Company (collectively referred to as the "Proprietary Information"). For the
purposes of this Agreement, trade secrets and confidential information shall
mean information disclosed to the Employee or known by him as a consequence of
his employment by the Company, whether or not pursuant to this Agreement, and
not generally known in the industry. The Employee acknowledges that trade
secrets and other items of confidential information, as they may exist from time
to time, are valuable and unique assets of the Company, and that disclosure of
any such information would cause substantial injury to the Company. Trade
secrets and confidential information shall cease to be trade secrets or
confidential information, as applicable, at such time as such information
becomes public other than through disclosure, directly or indirectly, by
Employee in violation of this Agreement.
6.2 If Employee is requested or required (by oral questions,
interrogatories, requests for information or document subpoenas, civil
investigative demands, or similar process) to disclose any Proprietary
Information, Employee shall, unless prohibited by law, promptly notify the
Company of such request(s) so that the Company may seek an appropriate
protective order.
ARTICLE VII
RESTRICTIVE COVENANT
7.1 In the event of the voluntary termination of employment with the
Company prior to the expiration of the term hereof, or Employee's discharge in
accordance with Article IX, or the expiration of the term hereof without
renewal, Employee agrees that he will not, during the term hereof and for a
period of one (1) year following termination of employment for any reason,
directly or indirectly, solicit brokers, or employees of the Company, or any
sister or subsidiary of the Company for employment with any other entity, or
(ii) solicit or accept (a) any corporate finance client relating to a
transaction, pending or proposed, involving a public offering, private
placement, or merger and acquisition advisory services, (b) research project
which was under consideration or pending at the time of Employee's termination,
or (c) any brokerage client of the Company.
7.2 If any court shall hold that the duration of non-competition or any
other restriction contained in this Article VII is unenforceable, it is our
intention that same shall not thereby be terminated but shall be deemed amended
to delete therefrom such provision or portion adjudicated to be invalid or
unenforceable or, in the alternative, such judicially substituted term may be
substituted therefor.
ARTICLE VIII
TERM
8.1 This Agreement shall be for a term (the "Initial Term") commencing on
January 1, 2004 (the "Commencement Date") and terminating on December 31, 2008
(the "Expiration Date"), and renewable as provided for herein, for one
additional period of one year.
8.2 The Company agrees to notify Employee in writing of its intent to
negotiate an extension of this Agreement six months prior to the expiration of
the original term hereof. If the Company fails to so notify Employee, or after
having timely notified Employee of its intention to extend, fails to reach
agreement with Employee on the terms of such extension, this agreement shall be
renewable, at the option of the Employee, for an additional period of one year
from the expiration of the original term, except that the Employee's base salary
shall be increased 10% above the prior year, and Employee shall be entitled to
stock options equivalent to one-third of the options granted during the initial
term of this agreement on comparable terms and conditions. If the Company elects
not to seek to negotiate an extension and has so timely notified Employee, then
the Company shall pay Employee, upon the expiration of the original term of this
Agreement, the Severance Payment.
ARTICLE IX
TERMINATION
9.1 The Company may terminate this Agreement by giving a Notice of
Termination to the Employee in accordance with this Agreement:
a. For Disability;
b. For Cause.
c. Without Cause.
9.2 Employee may terminate this Agreement by giving a Notice of Termination
to the Company in accordance with this Agreement, at any time, with or without
good reason.
9.3 If the Employee's employment with the Company shall be terminated,
the Company shall pay and/or provide to the Employee the following compensation
and benefits in lieu of any other compensation or benefits arising under this
Agreement or otherwise:
a. if the Employee was terminated by the Company for Cause, or the Employee
terminates without Good Reason, the Accrued Compensation;
b. if the Employee was terminated by the Company for Disability, the
Accrued Compensation, a Pro Rata Bonus, the Severance Payment and the
Continuation Benefits, less all disability insurance payments which Employee may
receive from insurance policies provided by the Company; or
c. if termination was due to the Employee's death, the Accrued
Compensation; and Employee's pro rata bonus for the fiscal year in which the
date of death occurred; or
d. if termination was by the Employee other than for Good Reason, the
Company shall pay to the Employee the Accrued Compensation.
e. If the Employee's employment with the Company shall be terminated for
any reason other than as specified in Section 9.3 (a-d), in lieu of any further
compensation for periods subsequent to the Termination Date, the Company shall
pay and/or provide to the Employee each and all of the following compensation
and benefits:
(i) all Accrued Compensation;
(ii) a Pro-Rata Bonus;
(iii) the Employee's Base Amount, for the period from the Termination Date
to the expiration of the term of the Employment Agreement, including any renewal
period which is automatic on the Termination Date;
(iv) a bonus payment equal to one-twelfth (1/12) of the Bonus Amount times
the number of months remaining from the Termination Date to the expiration of
the term of the Employment Agreement, including any renewal period which is
automatic on the Termination Date;
(v) The Severance Payment;
(vi) The Continuation Benefits;
(vii) Any Gross Up Payments to which the Employee would have been entitled
from the Termination Date to the expiration of the term of the Employment
Agreement, including any renewal period which is automatic on the Termination
Date; and
(viii) The Outplacement Services.
9.4 In the event the Employee's employment is terminated for any reason
other than as specified in Section 9.3 (a-d), the conditions to the vesting of
any outstanding incentive awards (including restricted stock, stock options and
granted performance shares or units) granted to the Employee under any of the
Company's plans, or under any other incentive plan or arrangement, shall be
deemed void and all such incentive awards shall be immediately and fully vested
and exercisable.
9.5 The amounts payable under this Section 9, shall be paid as follows:
(a) Accrued Compensation shall be paid within five (5) business days after
the Employee's Termination Date (or earlier, if required by applicable law).
(b) The Pro-Rata Bonus shall be paid within thirty (30) days after the
Employee's Termination Date (or earlier, if required by applicable law).
(c) If the Continuation Benefits are paid in cash, the payments shall be
made within thirty (30) days after the Employee's Termination Date (or earlier,
if required by applicable law).
(d) The Severance Payment shall be paid within thirty (30) days after the
Employee's Termination Date (or earlier, if required by applicable law).
(e) The amounts provided for in Sections 9.3(e)(iii) and (iv), shall be
paid within thirty (30) days after the Employee's Termination Date (or earlier,
if required by applicable law).
9.6 The Employee shall not be required to mitigate the amount of any
payment provided for in this Agreement by seeking other employment or otherwise
and no such payment shall be offset or reduced by the amount of any compensation
or benefits provided to the Employee in any subsequent employment except as
provided in Section 1.7.
9.7 Employee's employment and the Employment Agreement may be terminated by
the Company or by the Employee, in accordance with this Agreement, by service of
a Notice of Termination. For purposes of this Agreement, no such purported
termination shall be effective without service of a Notice of Termination.
ARTICLE X
TERMINATION OF PRIOR AGREEMENTS
10.1 This Agreement sets forth the entire agreement between the parties and
supersedes all prior agreements, letters and understandings between the parties,
whether oral or written prior to the effective date of this Agreement.
ARTICLE XVIII
INCENTIVE STOCK UNITS
11.1 As an inducement to Employee to enter into this Agreement, the Company
hereby grants to Employee 375,000 restricted shares of the Company's Common
Stock, $.001 par value subject to the provisions of Section 11.2.
11.2 Subject to the terms and conditions of the Company's 1996 Senior
Management Incentive Plan (the "Plan"), and the terms and conditions set forth
in the Incentive Stock Rights Agreement, which are incorporated herein by
reference, the Employee is hereby granted 375,000 restricted shares of the
Company's Common Stock, $.001 par value (the "Shares"). One-third of such Shares
shall vest one year after the date of this Agreement, one-third of such Shares
shall vest two years after the date of this Agreement, and one- third of such
Shares shall vest three years after the date of this Agreement. If Employee
renders continuous service to the Company from the date hereof to a vesting
date, on each such vesting date the Company shall deliver to Employee such
number of shares of Common Stock as shall vest on such date. Notwithstanding the
foregoing, in the event Employee's employment is terminated due to Death or
Disability, all Restricted Share Awards shall immediately vest and all such
Shares shall delivered to the Employee, or Employee's estate.
ARTICLE XII
EXTRAORDINARY TRANSACTIONS
12.1 In the event of a Change of Control as described in Sections 1.5(a)
and (b), the Company shall provide notice to the Employee within ten (10) days
of the date the Company has notice of such Change of Control transaction. If the
Employee provides notice in writing to the Company, within ninety (90) days
after the Company's notice, that the Employee intends to terminate his
Employment Agreement for Good Reason effective thirty (30) days after the date
of such notice, in addition to the benefits provided elsewhere in this
Agreement, the Company shall pay and/or provide to the Employee, the following
compensation and benefits:
(a) The Company shall pay the Employee as additional severance, in a single
payment, an amount in cash equal to three times the amount of the five year
average of the gross income of the Employee, as reported by the Company for
federal income tax purposes or, at the option of the Employee, credit such
amount against the exercise price of Employee's employee stock options; and
(b) The conditions to the vesting of any outstanding incentive awards
(including restricted stock, stock options and granted performance shares or
units) granted to the Employee under any of the Company's plans, or under any
other incentive plan or arrangement, shall be deemed void and all such incentive
awards shall be immediately and fully vested and exercisable.
12.2 Notwithstanding the provisions of Article IX to the contrary, in the
event the Employee's employment is terminated for any reason within twenty-four
(24) months of a Change of Control, the amounts provided for in Article IX,
including the Continuation Benefits, if the Continuation Benefits are paid in
cash, and the amounts payable under Section 12.1 shall be paid in a single lump
sum cash payment within five (5) business days after the Employee's Termination
Date (or earlier, if required by applicable law).
12.3 In the event of a Change of Control as described in Section 1.5(c)),
the Company shall provide thirty (30) days prior written notice to the Employee
of the anticipated closing date of such Change of Control transaction. If the
Employee provides notice in writing to the Company, at least five (5) days prior
to the closing date specified in the Company's notice, that the Employee intends
to terminate his Employment Agreement for Good Reason effective on the closing
date, there shall be paid to the Employee in a single lump sum, cash payment
simultaneously with the closing of such Change of Control transaction, the
amounts provided for in this Article XII, including the Continuation Benefits,
if the Continuation Benefits are paid in cash. Upon the closing of such Change
of Control Transaction and the payment of the amounts due Employee under this
Agreement, Employee's employment, and the Employment Agreement shall be deemed
terminated for Good Reason.
ARTICLE XIII
EXCISE TAX GROSS UP PAYMENT
13.1 The Company and the Employee acknowledge that the payments and
benefits provided under this Agreement, and benefits provided to, or for the
benefit of, the Employee under other Company plans and agreements (such payments
or benefits are collectively referred to as the "Payments") are subject to the
excise tax (the "Excise Tax") imposed under Section 4999 of the Internal Revenue
Code of 1986, as amended (the "Code"). In addition to the Payments, the Company
shall pay to the Employee within five (5) business days of Payment subject to
the Excise Tax, a gross up payment (the "Gross Up Payment") equal to the amount
which, after the deduction of any applicable Federal, State and Local income
taxes attributable to the Gross Up Payment, is equal to the Excise Tax including
the Excise Tax attributable to the Gross Up Payment.
13.2 The Company shall pay to the applicable government taxing authorities,
as Excise Tax withholding, the amount of the Excise Tax that the Company has
actually withheld from the Payment or Payments.
13.3 If it is established pursuant to a determination of a court, or an
Internal Revenue Service (the "IRS") decision, action or proceeding, that there
has been an underpayment of the Excise Tax (an "Underpayment"), the Company
shall pay to the Employee within thirty (30) days of such determination or
resolution, the amount which, after the deduction of any applicable federal,
state and local income taxes, including the Excise Tax, is equal to the
Underpayment, plus applicable interest and penalties until the date of payment.
13.4 The Company hereby agrees to indemnify, defend, and hold harmless the
Employee for any and all claims arising from or related to non-payment of Excise
Tax, including the amount of such tax and any and all costs, interest, expenses,
penalties associated with the non-payment of such tax to the fullest extent
permitted by law.
ARTICLE XIX
ARBITRATION AND INDEMNIFICATION; FEES AND EXPENSES
14.1 Any dispute arising out of the interpretation, application, and/or
performance of this Agreement with the sole exception of any claim, breach, or
violation arising under Articles VI or VII hereof shall be settled through final
and binding arbitration before a panel of arbitrators in accordance with the
rules of the National Association of Securities Dealers (the "NASD"). Any
judgment upon any arbitration award may be entered in any court, federal or
state, having competent jurisdiction of the parties before a single arbitrator
in the State of New Jersey in accordance with the Rules of the American
Arbitration Association. The arbitrators shall be selected by the NASD. Any
judgment upon any arbitration award may be entered in any court, federal or
state, having competent jurisdiction of the parties.
14.2 The Company hereby agrees to indemnify, defend, and hold harmless the
Employee for any and all claims arising from or related to his employment by the
Company at any time asserted, at any place asserted, to the fullest extent
permitted by law, except for claims based on Employee's fraud, deceit or
wilfulness. The Company shall maintain such insurance as is necessary and
reasonable to protect the Employee from any and all claims arising from or in
connection with his employment by the Company during the term of Employee's
employment with the Company and for a period of six (6) years after the date of
termination of employment for any reason. The provisions of this Section 12.2
are in addition to and not in lieu of any indemnification, defense or other
benefit to which Employee may be entitled by statute, regulation, common law or
otherwise.
14.3 The Company shall pay all reasonable legal fees and related expenses
(including the costs of arbitrators, experts, evidence and counsel) incurred by,
the Employee as they become due as a result of (a) the Employee's termination of
employment (including all such fees and expenses, if any, incurred in contesting
or disputing any such termination of employment) in violation of this Agreement,
or (b) the Employee seeking to obtain or enforce any right or benefit provided
by this Agreement.
ARTICLE XV
SUCCESSORS: BINDING AGREEMENT
15.1 This Agreement shall be binding upon and shall inure to the benefit of
the Company, and its Successors and Assigns, and the Company shall require any
Successors and Assigns to expressly assume and agree to perform this Agreement
in the same manner and to the same extent that the Company would be required to
perform it if no such succession or assignment had taken place.
15.2 Neither this Agreement nor any right or interest hereunder shall be
assignable or transferable by the Employee, his beneficiaries or legal
representatives, except by will or by the laws of descent and distribution. This
Agreement shall inure to the benefit of and be enforceable by the Employee's
personal representative.
15.3 In the event that a Division (or part thereof) is sold, divested, or
otherwise disposed of by the Company subsequent to or in connection with a
Change in Control and the Employee accepts employment by the purchaser or
acquiror thereof, the Company shall require such purchaser or acquiror to
assume, and agree to perform, the Company's obligations under this Agreement, in
the same manner, and to the same extent, that the Company would be required to
perform if no such acquisition or purchase had taken place.
ARTICLE XVI
OTHER CONTRACTUAL RIGHTS; NON-EXCLUSIVITY; SETTLEMENT OF CLAIMS
16.1 The provisions of this Agreement, and any payment provided for
hereunder, shall not reduce any amounts otherwise payable, or in any way
diminish the Employee's existing rights, or rights which would accrue solely as
a result of the passage of time, under any Benefit Plan, Incentive Plan or
Securities Plan, employment agreement or other contract, plan or arrangement.
16.2 Nothing in this Agreement shall prevent or limit the Employee's
continuing or future participation in any benefit, bonus, incentive or other
plan or program provided by the Company (except for any severance or termination
policies, plans, programs or practices) and for which the Employee may qualify,
nor shall anything herein limit or reduce such rights as the Employee may have
under any other agreements with the Company (except for any severance or
termination agreement). Amounts which are vested benefits or which the Employee
is otherwise entitled to receive under any plan or program of the Company shall
be payable in accordance with such plan or program, except as explicitly
modified by this Agreement.
16.3 The Company's obligation to make the payments provided for in this
Agreement and otherwise to perform its obligations hereunder shall not be
affected by any circumstances, including, without limitation, any set-off,
counterclaim, recoupment, defense or other right which the Company may have
against the Employee or others.
ARTICLE XVII
SEVERABILITY
17.1 If any provision of this Agreement shall be held invalid and
unenforceable, the remainder of this Agreement shall remain in full force and
effect. If any provision is held invalid or unenforceable with respect to
particular circumstances, it shall remain in full force and effect in all other
circumstances.
ARTICLE XVIII
NOTICE
18.1 For the purposes of this Agreement, notices and all other
communications provided for in the Agreement shall be in writing and shall be
deemed to have been duly given when personally delivered or sent by certified
mail, return receipt requested, postage prepaid, addressed to the respective
addresses as set forth below or to any such other address as the party to
receive the notice shall advise by due notice given in accordance with this
paragraph . All notices and communications shall be deemed to have been received
on the date of delivery thereof or on the third business day after the mailing
thereof, except that notice of change of address shall be effective only upon
receipt.
18.2 The current addresses of the parties are as follows:
IF TO THE COMPANY: First Montauk Financial Corp.
Parkway 109 Office Center
328 Newman Springs Road
Red Bank, New Jersey 07701
Att. Chief Counsel
With a copy to: Victor J. DiGioia, Esq.
Goldstein & DiGioia, LLP
45 Broadway
New York, NY 10006
IF TO THE EMPLOYEE: William J. Kurinsky
4 Cotswold Circle
Ocean, New Jersey 07712
ARTICLE XIX
WAIVER
19.1 The waiver by either party of any breach or violation of any provision
of this Agreement shall not operate or be construed as a waiver of any
subsequent breach of construction and validity.
ARTICLE XX
GOVERNING LAW
20.1 This Agreement has been negotiated and executed in the State of New
Jersey which shall govern its construction and validity.
ARTICLE XXI
JURISDICTION
21.1 Any or all actions or proceedings which may be brought by the Company
or Employee under this Agreement shall be brought in courts having a situs
within the State of New Jersey, and Employee and the Company each hereby consent
to the jurisdiction of any local, state, or federal court located within the
State of New Jersey.
ARTICLE XXII
ENTIRE AGREEMENT
22.1 This Agreement contains the entire agreement between the parties
hereto. No change, addition, or amendment shall be made hereto, except by
written agreement signed by the parties hereto.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement and
affixed their hands and seals the day and year first above written.
FIRST MONTAUK FINANCIAL CORP.
By:___________________________________
--------------------------------------
William J. Kurinsky
Employee
Exhibit 10.15
EMPLOYMENT AGREEMENT
AGREEMENT made as of the 1st day of January, 2004 by and between Victor
Kurylak, residing at 26 Meadow Lane, Lebanon, New Jersey 08833 (hereinafter
referred to as the "Employee") and First Montauk Financial Corp., a New Jersey
corporation with principal offices Parkway 109, Red Bank, New Jersey 07701
(hereinafter referred to as the "Company").
W I T N E S S E T H :
WHEREAS, the Company, through its wholly owned subsidiary First Montauk
Securities Corp, is engaged in the investment banking and general securities
business as a registered broker-dealer; and
WHEREAS, the Company desires to employ the Employee for the purpose of
securing for the Company the experience, ability and services of the Employee;
and
WHEREAS, the Employee desires to be employed by the Company, pursuant to
the terms and conditions herein set forth, superseding all prior oral and
written employment agreements, and term sheets and letters between the Company,
its subsidiaries and/or predecessors and Employee;
NOW, THEREFORE, it is mutually agreed by and between the parties hereto
as follows:
ARTICLE I
DEFINITIONS
1.1 Accrued Compensation. Accrued Compensation shall mean an amount which
shall include all amounts earned or accrued through the "Termination Date" (as
defined below) but not paid as of the Termination Date, including (i) Base
Salary, (ii) reimbursement for business expenses incurred by the Employee on
behalf of the Company, pursuant to the Company's expense reimbursement policy in
effect at such time, (iii) vacation pay, and (iv) bonuses and incentive
compensation earned and awarded prior to the Termination Date.
1.2 Cause. Cause shall mean: (i) willful disobedience by the Employee of a
material and lawful instruction of the Board of Directors of the Company; (ii)
formal charge, indictment or conviction of the Employee of any misdemeanor
involving fraud or embezzlement or similar crime, or any felony; (iii) breach by
the Employee of any material provision of this Agreement; (iv) conduct amounting
to fraud, dishonesty, gross negligence, willful misconduct or recurring
insubordination; (v) excessive absences from work, other than for illness or
Disability; or (vi) unsatisfactory performance of duties; provided that the
Company shall not have the right to terminate the employment of Employee
pursuant to the foregoing clauses (i), (iii), (iv), (v) and (vi) above unless
written notice specifying such breach shall have been given to the Employee and,
in the case of breach which is capable of being cured, the Employee shall have
failed to cure such breach within thirty (30) days after his receipt of such
notice.
1.3 Change in Control. For purposes of this Agreement, a "Change in
Control" shall mean any of the following events:
(a) (i) An acquisition (other than directly from the Company) of any voting
securities of the Company (the "Voting Securities") by any "Person" (as the term
person is used for purposes of Section 13(d) or 14(d) of the Securities Exchange
Act of 1934, as amended (the "1934 Act")) immediately after which such Person
has "Beneficial Ownership" (within the meaning of Rule 13d-3 promulgated under
the 1934 Act) of twenty percent (20%) or more of the combined voting power of
the Company's then outstanding Voting Securities; provided, however, that in
determining whether a Change in Control has occurred, Voting Securities which
are acquired in a "Non-Control Acquisition" (as defined below) shall not
constitute an acquisition which would cause a Change in Control. A "Non-Control
Acquisition" shall mean an acquisition by (1) an employee benefit plan (or a
trust forming a part thereof) maintained by (x) the Company or (y) any
corporation or other Person of which a majority of its voting power or its
equity securities or equity interest is owned directly or indirectly by the
Company (a "Subsidiary"), or (2) the Company or any Subsidiary.
(ii)Notwithstanding the foregoing, a Change in Control shall not be deemed
to occur solely because a Person (the "Subject Person") gained Beneficial
Ownership of more than the permitted amount of the outstanding Voting Securities
as a result of the acquisition of Voting Securities by the Company which, by
reducing the number of Voting Securities outstanding, increases the proportional
number of shares Beneficially Owned by the Subject Person, provided that if a
Change in Control would occur (but for the operation of this sentence) as a
result of the acquisition of Voting Securities by the Company, and after such
share acquisition by the Company, the Subject Person becomes the Beneficial
Owner of any additional Voting Securities which increases the percentage of the
then outstanding Voting Securities Beneficially Owned by the Subject Person,
then a Change in Control shall occur.
(b) The individuals who, as of the date this Agreement is approved by the
Board, are members of the Board (the "Incumbent Board"), cease for any reason to
constitute at least two-thirds of the Board; provided, however, that if the
election, or nomination for election by the Company's stockholders, of any new
director was approved by a vote of at least two-thirds of the Incumbent Board,
such new director shall, for purposes of this Agreement, be considered and
defined as a member of the Incumbent Board; and provided, further, that no
individual shall be considered a member of the Incumbent Board if such
individual initially assumed office as a result of either an actual or
threatened "Election Contest" (as described in Rule 14a-11 promulgated under the
1934 Act) or other actual or threatened solicitation of proxies or consents by
or on behalf of a Person other than the Board (a "Proxy Contest"), including by
reason of any agreement intended to avoid or settle any Election Contest or
Proxy Contest; or
(c) Approval by stockholders of the Company of:
(1) A merger, consolidation or reorganization involving the Company, unless
(i) the stockholders of the Company, immediately before such merger,
consolidation or reorganization, own, directly or indirectly immediately
following such merger, consolidation or reorganization, at least eighty-five
percent (85%) of the combined voting power of the outstanding voting securities
of the corporation resulting from such merger or consolidation or reorganization
(the "Surviving Corporation") in substantially the same proportion as their
ownership of the Voting Securities immediately before such merger, consolidation
or reorganization,
(ii) the individuals who were members of the Incumbent Board immediately
prior to the execution of the agreement providing for such merger, consolidation
or reorganization constitute at least two-thirds of the members of the board of
directors of the Surviving Corporation, and
(iii) no Person (other than the Company, any Subsidiary, any employee
benefit plan (or any trust forming a part thereof) maintained by the Company,
the Surviving Corporation or any Subsidiary) has Beneficial Ownership of twenty
percent (20%) or more of the combined voting power of the Surviving
Corporation's then outstanding voting securities,
a transaction described in clauses (i) through (iii) shall herein be
referred to as a "Non-Control Transaction"; or
(2) An agreement for the sale or other disposition of all or substantially
all of the assets of the Company, or of a significant subsidiary, to any Person,
other than a transfer to a Subsidiary, in one transaction or a series of related
transactions. For purposes of this subparagraph 1.3 (c) (2), "significant
subsidiary " shall mean any subsidiary or business division of the Company which
accounts for more than 40% of the Company's income, revenue or gross profits.
(3) The stockholders of the Company approve any plan or proposal for the
liquidation or dissolution of the Company.
(d) Notwithstanding anything contained in this Agreement to the contrary,
if the Employee's employment is terminated prior to a Change in Control and the
Employee reasonably demonstrates that such termination (i) was at the request of
a third party who has indicated an intention or taken steps reasonably
calculated to effect a Change in Control (a "Third Party") or (ii) otherwise
occurred in connection with, or in anticipation of, a Change in Control, then
for all purposes of this Agreement, the date of a Change in Control with respect
to the Employee shall mean the date immediately prior to the date of such
termination of the Employee's employment.
1.4 Continuation Benefits. Continuation Benefits shall be the continuation
of the Benefits, as defined in Section 5.1, for the period from the Termination
Date to the earlier of three months from the Termination Date or the Expiration
Date (the "Continuation Period") at the Company's expense on behalf of the
Employee and his dependents. The Company's obligation hereunder with respect to
the foregoing benefits shall be limited to the extent that if the Employee
obtains any such benefits pursuant to a subsequent employer's benefit plans, the
Company may reduce the coverage of any benefits it is required to provide the
Employee hereunder as long as the aggregate coverages and benefits of the
combined benefit plans is no less favorable to the Employee than the coverages
and benefits required to be provided hereunder. This definition of Continuation
Benefits shall not be interpreted so as to limit any benefits to which the
Employee, his dependents or beneficiaries may be entitled under any of the
Company's employee benefit plans, programs or practices following the Employee's
termination of employment, including, without limitation, retiree medical and
life insurance benefits.
1.5 Disability. Disability shall mean a physical or mental infirmity which
impairs the Employee's ability to substantially perform his duties with the
Company for a period of ninety (90) consecutive days.
1.6 Notice of Termination. Notice of Termination shall mean a written
notice from the Company, or the Employee, of termination of the Employee's
employment which indicates the provision in this Agreement relied upon, if any.
A Notice of Termination served by the Company shall specify the effective date
of termination.
1.7 Termination Date. Termination Date shall mean (i) in the case of the
Employee's death, his date of death; and (ii) in all other cases, the date
specified in the Notice of Termination.
ARTICLE II
EMPLOYMENT
2.1 Subject to and upon the terms and conditions of this Agreement, the
Company hereby employs and agrees to continue the employment of the Employee,
and the Employee hereby accepts such continued employment in his capacity as
President and Chief Operating Officer. In this capacity, Employee will report to
the Chief Executive Officer and Chairman of the Board and the Board of
Directors.
ARTICLE III
DUTIES
3.1 The Employee shall, during the term of his employment with the Company,
and subject to the direction and control of the Chairman of the Board of
Directors and Chief Executive Officer, perform such duties and functions as he
may be called upon to perform by the Chairman of the Board of Directors and
Chief Executive Officer during the term of this Agreement, consistent with his
position as President and Chief Operating Officer.
3.2 The Employee agrees to use his best efforts in the promotion and
advancement of the Company and its welfare and business. Employee agrees to
devote his primary professional time to the business of the Company as Employee
deems reasonably necessary; provided, however, that the Company acknowledges
that Employee shall be entitled to pursue unrelated personal business ventures
that do not materially conflict with the performance of Employee's duties to the
Company. 3. 3 Employee shall be based in the Red Bank New Jersey area, and shall
undertake such occasional travel, within or without the United States as is or
may be reasonably necessary in the interests of the Company.
ARTICLE IV
COMPENSATION
4.1 During the term of this Agreement, Employee shall be compensated
initially at the rate of $250,000 per annum, and increasing 10% per annum on the
1st day of each January during the period this Agreement provided that the
Company shall have achieved net profits of at least $500,000 during the previous
fiscal year (the "Base Salary"). The Base Salary shall be paid to the Employee
in accordance with the Company's regular executive payroll periods.
4.2 Employee shall be entitled to receive a bonus (the "Bonus") during each
year of this Agreement, determined as follows: The amount to be paid as a Bonus
shall be determined as of each December 31 by the Compensation Committee of the
Board of Directors based upon the prior fiscal year end and shall consist of a
portion of an "Executive Bonus Pool." The Executive Bonus Pool shall be equal to
fifteen (15%) percent of the net pre-tax profit of the Company as determined by
the Company's independent auditors, no later than 90 days following the end of
the Company's fiscal year, excluding any expense deduction attributed to such
Executive Bonus Pool (the "Net Pre-Tax Profit"); provided that, in the event the
Net Pre-Tax Profit of the Company for any fiscal year is less than $500,000, no
Executive Bonus Pool shall be established or Bonus paid by the Company to the
Employee pursuant to this subparagraph 4.2. Such determination, for purposes of
this Section 4.2 only, shall be made in accordance with generally accepted
accounting principles, as modified by these resolutions.
4.3 Employee shall also be entitled to receive brokerage commissions on in
accordance with the commission schedule in effect for other non-affiliate
brokers employed by the Company.
4.4 Employee shall be eligible to purchase from the Company, at Employees
sole discretion, a portion of the securities contributed to the "Corporate
Finance Bonus Pool" upon the same price, terms and conditions afforded to First
Montauk Securities Corp. The Corporate Finance Bonus Pool shall consist of up to
20% of all underwriter's warrants, placement agent warrants and/or other
securities granted to First Montauk Securities Corp., in connection with its
service as an underwriter, placement agent or investment banker. The amount
Employee shall be entitled to purchase shall be determined by the Compensation
Committee of the Board of Directors on a transaction by transaction basis.
4.5 The Company shall deduct from Employee's compensation all federal,
state and local taxes which it may now or may hereafter be required to deduct.
4.6 Employee may receive such other additional compensation as may be
determined from time to time by the Board of Directors including bonuses and
other long term compensation plans. Nothing herein shall be deemed or construed
to require the Board to award any bonus or additional compensation.
ARTICLE V
BENEFITS
5.1 During the term hereof, the Company shall provide Employee with the
following benefits (the "Benefits"): (i) group health care and insurance
benefits as generally made available to the Company's senior management; (ii)
such other insurance benefits obtained by the Company and made generally
available to the Company's senior management; (iii) the Company shall provide
the Employee with an automobile suitable for his position, equipped with a
mobile telephone, or at Employee's option, an appropriate automobile allowance,
and reimburse reasonable automobile expenses including repairs, maintenance,
gasoline charges, mobile phone, etc. via receipted expense reports; and (iv)
reimbursement, upon presentation of appropriate vouchers, for all reasonable
business expenses incurred by Employee on behalf of the Company upon
presentation of suitable documentation.
5.2 In the event the Company wishes to obtain Key Man life insurance on the
life of Employee, Employee agrees to cooperate with the Company in completing
any applications necessary to obtain such insurance and promptly submit to such
physical examinations and furnish such information as any proposed insurance
carrier may request.
5.3 For the term of this Agreement, Employee shall be entitled to paid
vacation at the rate of four (4) weeks per annum.
ARTICLE VI
NON-DISCLOSURE
6.1 The Employee shall not, at any time during or after the termination of
his employment hereunder, except when acting on behalf of and with the
authorization of the Company, make use of or disclose to any person,
corporation, or other entity, for any purpose whatsoever, any trade secret or
other confidential information concerning the Company's business, finances,
marketing, brokerage accounts, corporate finance transactions and clients,
products and services, accounting, insurance business and personnel of the
Company and its subsidiaries, including information relating to any customer of
the Company, or any other nonpublic business information of the Company and/or
its subsidiaries learned as a consequence of Employee's employment with the
Company (collectively referred to as the "Proprietary Information"). For the
purposes of this Agreement, trade secrets and confidential information shall
mean information disclosed to the Employee or known by him as a consequence of
his employment by the Company, whether or not pursuant to this Agreement, and
not generally known in the industry. The Employee acknowledges that trade
secrets and other items of confidential information, as they may exist from time
to time, are valuable and unique assets of the Company, and that disclosure of
any such information would cause substantial injury to the Company. Trade
secrets and confidential information shall cease to be trade secrets or
confidential information, as applicable, at such time as such information
becomes public other than through disclosure, directly or indirectly, by
Employee in violation of this Agreement. Notwithstanding the foregoing,
information concerning a customer introduced to the Company by Employee, and
known to Employee other than as a consequence of his employment by the Company,
shall not be deemed Propriety Information within the contemplation of this
Section 6.1.
6.2 If Employee is requested or required (by oral questions,
interrogatories, requests for information or document subpoenas, civil
investigative demands, or similar process) to disclose any Proprietary
Information, Employee shall, unless prohibited by law, promptly notify the
Company of such request(s) so that the Company may seek an appropriate
protective order.
ARTICLE VII
RESTRICTIVE COVENANT
7.1 In the event of the voluntary termination of employment with the
Company prior to the expiration of the term hereof, or Employee's discharge in
accordance with Article IX, or the expiration of the term hereof without
renewal, Employee agrees that he will not, during the term hereof and for a
period of one (1) year following termination of employment for any reason,
directly or indirectly, solicit brokers, or employees of the Company, or any
sister or subsidiary of the Company for employment with any other entity, or
(ii) solicit or accept (a) any corporate finance client relating to a
transaction, pending or proposed, involving a public offering, private
placement, or merger and acquisition advisory services, (b) research project
which was under consideration or pending at the time of Employee's termination,
or (c) any brokerage client of the Company, other than brokerage clients
introduced to the Company by Employee, and known to Employee other than as a
consequence of his employment by the Company.
7.2 If any court shall hold that the duration of non-competition or any
other restriction contained in this Article VII is unenforceable, it is our
intention that same shall not thereby be terminated but shall be deemed amended
to delete therefrom such provision or portion adjudicated to be invalid or
unenforceable or, in the alternative, such judicially substituted term may be
substituted therefor.
ARTICLE VIII
TERM
8.1 This Agreement shall be for a term (the "Initial Term") commencing on
January 1, 2004 (the "Commencement Date") and terminating on December 31, 2005
(the "Expiration Date"), and renewable as provided for herein, for one
additional period of one year.
ARTICLE IX
TERMINATION
9.1 The Company may terminate this Agreement by giving a Notice of
Termination to the Employee in accordance with this Agreement:
a. For Disability;
b. For Cause.
c. Without Cause.
9.2 Employee may terminate this Agreement by giving a Notice of Termination
to the Company in accordance with this Agreement, at any time, with or without
good reason.
9.3 If the Employee's employment with the Company shall be terminated, the
Company shall pay and/or provide to the Employee the following compensation and
benefits in lieu of any other compensation or benefits arising under this
Agreement or otherwise:
a. if the Employee was terminated by the Company for Cause, or the Employee
terminates, the Accrued Compensation.
b. if the Employee was terminated by the Company for Disability, the
Accrued Compensation, the Continuation Benefits from the Termination Date
through the period ending three (3) months thereafter, and Base Salary, from the
Termination Date through the period ending three (3) months thereafter; or
c. if termination was due to the Employee's death, the Accrued
Compensation; and Employee's pro rata bonus for the fiscal year in which the
date of death occurred; or
d. if the Employee was terminated by the Company without cause, (i) the
Accrued Compensation; (ii) the Employee's Base Salary to the end of the fiscal
year in which such termination occurs, provided, however; that such period of
payment shall not be less than three (3) months if such termination occurs in
fiscal 2004; (iii) the Continuation Benefits; and (iv) the Pro Rata Bonus; and
further, all conditions to the vesting of outstanding Incentive Stock Awards and
Employee Stock Options granted to the Employee under Articles XI and XII shall
be deemed void and all such awards shall be immediately and fully vested and
exercisable.
9.4 The amounts payable under this Section 9, shall be paid as follows:
a. Accrued Compensation shall be paid within five (5) business days after
the Employee's Termination Date (or earlier, if required by applicable law).
b. If the Continuation Benefits are paid in cash, the payments shall be
made on the first day of each month during the Continuation Period (or earlier,
if required by applicable law).
c. The Base Salary through the Expiration Date, shall be paid in accordance
with the Company's regular pay periods (or earlier, if required by applicable
law).
9.5 Notwithstanding the foregoing, in the event Employee is a member of the
Board of Directors on the Termination Date, the payment of any and all
compensation due hereunder, except Accrued Compensation, and Employee's right to
exercise any Employee Stock Option after the Termination Date, is expressly
conditioned on Employee's resignation from the Board of Directors within five
(5) business days of the Termination Date.
9.6 The Employee shall not be required to mitigate the amount of any
payment provided for in this Agreement by seeking other employment or otherwise
and no such payment shall be offset or reduced by the amount of any compensation
or benefits provided to the Employee in any subsequent employment except as
provided in Sections 1.4.
ARTICLE X
TERMINATION OF PRIOR AGREEMENTS
10.1 This Agreement sets forth the entire agreement between the parties and
supersedes all prior agreements, letters and understandings between the parties,
whether oral or written prior to the effective date of this Agreement.
ARTICLE XVIII
RESTRICTED STOCK GRANTS
11.1 As an inducement to Employee to enter into this Agreement, the Company
hereby grants to Employee 250,000 restricted shares of the Company's Common
Stock, $.001 par value subject to the provisions of Section 11.2.
11.2 Subject to the terms and conditions of the Company's 1996 Senior
Management Incentive Plan (the "Plan"), the Employee is hereby granted 250,000
restricted shares of the Company's Common Stock, $.001 par value (the "Shares").
One-third of such Shares shall vest one year after the date of this Agreement,
one-third of such Shares shall vest two years after the date of this Agreement,
and one- third of such Shares shall vest three years after the date of this
Agreement. If Employee renders continuous service to the Company from the date
hereof to a vesting date, on each such vesting date the Company shall deliver to
Employee such number of shares of Common Stock as shall vest on such date.
11.3 In the event of a Change of Control, as defined in Section 1.3, the
conditions to the vesting of any outstanding Restricted Stock Awards granted to
the Employee under this Article XI shall be deemed void and all such Shares
shall be immediately and fully vested and delivered to the Employee.
ARTICLE XII
STOCK OPTIONS
12.1 As an inducement to Employee to enter into this Agreement the Company
hereby grants to Employee options to purchase shares of the Company's Common
Stock, $.001 par value, as follows:
Subject to the terms and conditions of the Company's 2000 Employees' Stock
Option Plan (the "Plan"), and the terms and conditions set forth in the Stock
Option Certificate which are incorporated herein by reference, the Employee is
hereby granted options to purchase 500,000 shares of the Company's Common Stock,
of which 250,000 options shall be exercisable at $.50 per share and 250,000
options shall be exercisable at $.75 per share. One-third of such options shall
vest on the first anniversary of this Agreement, one-third of such options shall
vest on the second anniversary of this Agreement, and one-third of such options
shall vest on the third anniversary of this Agreement. The options shall contain
such other terms and conditions as set forth in the stock option agreement. The
foregoing options shall be qualified as incentive stock options to the maximum
as allowed by law. The Options provided for herein are not transferable by
Employee and shall be exercised only by Employee, or by his legal representative
or executor, as provided in the Plan.
12.2 In the event of a Change of Control, as defined in Section 1.3, the
conditions to the vesting of any outstanding Employee's Stock Options granted to
the Employee under this Article XII shall be deemed void and all such options
shall be immediately and fully vested and exercisable.
ARTICLE XIII
ARBITRATION AND INDEMNIFICATION; FEES AND EXPENSES
13.1 Any dispute arising out of the interpretation, application, and/or
performance of this Agreement with the sole exception of any claim, breach, or
violation arising under Articles VI or VII hereof shall be settled through final
and binding arbitration before a panel of arbitrators in accordance with the
rules of the National Association of Securities Dealers (the "NASD"). Any
judgment upon any arbitration award may be entered in any court, federal or
state, having competent jurisdiction of the parties before a single arbitrator
in the State of New Jersey in accordance with the Rules of the American
Arbitration Association. The arbitrators shall be selected by the NASD. Any
judgment upon any arbitration award may be entered in any court, federal or
state, having competent jurisdiction of the parties.
13.2 The Company hereby agrees to indemnify, defend, and hold harmless the
Employee for any and all claims arising from or related to his employment by the
Company at any time asserted, at any place asserted, to the fullest extent
permitted by law, except for claims based on Employee's fraud, deceit or
wilfulness. The Company shall maintain such insurance as is necessary and
reasonable to protect the Employee from any and all claims arising from or in
connection with his employment by the Company during the term of Employee's
employment with the Company and for a period of six (6) years after the date of
termination of employment for any reason. The provisions of this Section 12.2
are in addition to and not in lieu of any indemnification, defense or other
benefit to which Employee may be entitled by statute, regulation, common law or
otherwise.
13.3 The Company shall pay all reasonable legal fees and related expenses
(including the costs of arbitrators, experts, evidence and counsel) incurred by,
the Employee as they become due as a result of (a) the Employee's termination of
employment (including all such fees and expenses, if any, incurred in contesting
or disputing any such termination of employment) in violation of this Agreement,
or (b) the Employee seeking to obtain or enforce any right or benefit provided
by this Agreement.
ARTICLE XIV
SEVERABILITY
14.1 If any provision of this Agreement shall be held invalid and
unenforceable, the remainder of this Agreement shall remain in full force and
effect. If any provision is held invalid or unenforceable with respect to
particular circumstances, it shall remain in full force and effect in all other
circumstances.
ARTICLE XV
NOTICE
15.1 For the purposes of this Agreement, notices and all other
communications provided for in the Agreement shall be in writing and shall be
deemed to have been duly given when personally delivered or sent by certified
mail, return receipt requested, postage prepaid, addressed to the respective
addresses as set forth below or to any such other address as the party to
receive the notice shall advise by due notice given in accordance with this
paragraph . All notices and communications shall be deemed to have been received
on the date of delivery thereof or on the third business day after the mailing
thereof, except that notice of change of address shall be effective only upon
receipt.
15.2 The current addresses of the parties are as follows:
IF TO THE COMPANY: First Montauk Financial Corp.
Parkway 109 Office Center
328 Newman Springs Road
Red Bank, New Jersey 07701
Att. Chief Counsel
With a copy to: Victor J. DiGioia, Esq.
Goldstein & DiGioia, LLP
45 Broadway
New York, NY 10006
IF TO THE EMPLOYEE: Victor Kurylak
26 Meadow Lane
Lebanon, New Jersey 08833
ARTICLE XVI
WAIVER
16.1 The waiver by either party of any breach or violation of any provision
of this Agreement shall not operate or be construed as a waiver of any
subsequent breach of construction and validity.
ARTICLE XVII
GOVERNING LAW
17.1 This Agreement has been negotiated and executed in the State of New
Jersey which shall govern its construction and validity.
ARTICLE XVIII
JURISDICTION
18.1 Any or all actions or proceedings which may be brought by the Company
or Employee under this Agreement shall be brought in courts having a situs
within the State of New Jersey, and Employee and the Company each hereby consent
to the jurisdiction of any local, state, or federal court located within the
State of New Jersey.
ARTICLE XIX
ENTIRE AGREEMENT
19.1 This Agreement contains the entire agreement between the parties
hereto. No change, addition, or amendment shall be made hereto, except by
written agreement signed by the parties hereto.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement and
affixed their hands and seals the day and year first above written.
FIRST MONTAUK FINANCIAL CORP.
By:________________________________
-----------------------------------
Victor Kurylak
Employee
Exhibit 14
CODE OF ETHICS AND CONDUCT
FOR
FIRST MONTAUK FINANCIAL CORP.
Adopted by the Board of Directors of First Montauk Financial Corp., a New
Jersey corporation ("First Montauk"), on March 29, 2004.
First Montauk Financial Corp. and its subsidiaries are committed to
fostering an environment throughout our organization that supports and
reinforces our commitment to the highest ethical standards. Each of us has a
singular duty to First Montauk to engage in business conduct consistent with the
highest legal, moral and ethical standards. To that end, we have adopted this
Code of Ethics. This Code of Ethics applies to our Board of Directors, executive
officers and employees alike. Any waiver of the Code for directors or executive
officers must be approved by the Audit Committee of First Montauk's Board of
Directors and will be promptly disclosed to our shareholders.
We make business decisions every day at all levels of our organization. We
are accountable for making good decisions and for the outcomes those decisions
produce. This Code of Ethics establishes guidelines and standards for how we
conduct business and make business decisions. We apply these guidelines and
standards in both letter and spirit. Where the letter of the Code is not
specific, the spirit of the Code will prevail. Experience and good business
judgment must be applied when following the Code. By the same token, the Code is
not a substitute for legal advice and cannot cover all possible situations. If
you have any questions concerning the Code of Ethics or its application in a
particular instance, you should consult with a member of senior management or
our outside legal counsel.
The Code's guidelines and standards are intended to provide a foundation
that will help us:
o maintain a strong ethical climate;
o provide clear channels of communication for employees and
clients; and
o promote ethical decision making at all levels within the
organization.
Each First Montauk employee must abide by our Code of Ethics. Adherence to
the Code of Ethics is a condition of employment. Violators are subject to
disciplinary action, up to and including dismissal from the Company for cause
and criminal prosecution.
1. Introduction to and Administration of the First Montauk Code of Ethics and
Conduct
1.1 Introduction. First Montauk has adopted this Code of Ethics and Conduct
(the "Code") to advise all First Montauk Employees of the ethical and legal
standards that we expect you to observe when dealing with First Montauk, your
First Montauk colleagues, our customers and our vendors. When you encounter
ethical or legal issues where you are not certain about the correct course of
action, you should apply the principles described in this Code as guideposts in
deciding how to proceed. We have adopted this Code to give you guidance for
resolving these questions. When you are in doubt about the correct or best
course of action, you should always consider consulting your manager or our
General Counsel director for guidance. First Montauk expects all First Montauk
Employees to adhere to this Code and to comply with all legal requirements.
Accordingly, we have established a procedure for reporting suspected violations
of the Code. Any violations of the Code may result in disciplinary action,
including termination of employment. These matters are described in more detail
below. Throughout this Code, we use the terms "First Montauk Employees", "you"
and "your" to refer to all First Montauk employees, directors and independent
contractors, and the terms "First Montauk", the "company", "we" and "our" to
refer to First Montauk and its subsidiaries.
1.2 Administration
1.2.1 Ongoing Review of Compliance. We require all First Montauk Employees
to comply with this Code. Upon your receipt of this Code, and also from time to
time as we deem to be necessary, we may require you to sign an acknowledgment
that you have read and understood this Code and agree to comply with its
provisions. We reserve the right to monitor the ongoing compliance by any or all
First Montauk Employees with this Code and to investigate any suspected
violations. If substantiated, these violations could result in disciplinary
action, including immediate termination of employment.
1.2.2 Reporting of Suspected Violations. All First Montauk Employees are to
report information about suspected violations of this Code by any other First
Montauk Employee, regardless of the identity or position of the person who is
the subject of such report, to the attention of our General Counsel or the Audit
Committee of the Board of Directors. If you suspect improper accounting or
auditing matters, you should bring such information to the attention of our
General Counsel or a member of our Audit Committee. To contact our Audit
Committee or to submit a report to them, please contact Audit Committee
Chairman. With respect to any suspected violation, you may make an anonymous
report through the Assistant to the President.
First Montauk will treat all information in a confidential manner and will
not take any acts of retribution or retaliation against any First Montauk
Employee for making a report. As the failure to report wrongful conduct may be
interpreted as condoning such actions, the failure to report knowledge of
wrongdoing may result in disciplinary action against any First Montauk Employee
who fails to report.
1.2.3 Non-Retaliation. Retaliation in any form against an First Montauk
Employee who reports a violation of this Code (even if the report is mistaken
but was submitted in good faith) or who assists in the investigation of a
reported violation is a serious violation of this Code. Acts of retaliation
should be reported immediately and may result in severe disciplinary action.
1.2.4 Investigation of Suspected Violations. Suspected violations will be
investigated under the supervision of our General Counsel or Audit Committee as
deemed appropriate. All First Montauk Employee's are expected to cooperate in
the investigation of reported violations. In order to protect the privacy of
persons involved in investigations, persons investigating a suspected violation
will use their best efforts to keep confidential, the identity of anyone
reporting a suspected violation or participating in an investigation, unless
disclosure is required by law or is otherwise in the company's best interests.
Persons involved in an investigation are obliged to act in the best interests of
First Montauk as a company and not on behalf of any First Montauk Employee,
including executive officers. Our Board of Directors has ultimate responsibility
for final interpretation of this Code and for determining whether any violations
of this Code have occurred.
1.2.5 Disciplinary Action. If we determine, in our good faith discretion,
that any First Montauk Employee has violated any provision of this Code, such
First Montauk Employee may be subject to disciplinary action, including
termination of employment, without prior warning.
1.2.6 Amendments to this Code; Disclaimers. This Code may be revised,
changed or amended at any time by our Board of Directors. Following any material
revisions or updates, an amended version of this Code will be distributed to
you, and will immediately supercede the prior version of this Code. We may ask
you to sign an acknowledgment confirming that you have read and understood the
revised version of the Code, and that you agree to comply with its provisions.
This Code reflects general principles to assist First Montauk Employees in
making ethical decisions and cannot, and is not intended to, address every
specific situation in which we may find it appropriate to take disciplinary
action. This Code is not intended to create any contract (express or implied)
with you, including without limitation any employment contract, and is not a
promise that your employment will be not terminated except for cause.
1.2.7 Special Provisions Applicable to First Montauk Employees with
Financial Reporting Obligations. Given the important position of trust and
authority that they occupy, our Chief Executive Officer, Chief Financial
Officer, Chief Operating Officer, the heads of our subsidiaries and operating
divisions and First Montauk Employees involved in the Company's financial
reporting function (collectively, the "Financial Reporting Personnel") should
use the utmost of discretion and caution in interpreting and applying this Code.
In the event that any Financial Reporting Personnel wishes to engage in a
proposed action that is not consistent with the Code, such person must obtain a
waiver of the relevant Code provisions in advance from our Audit Committee. U.S.
federal law requires First Montauk to make public disclosure of our Financial
Reporting Personnel's compliance with the Code. Therefore, we will publicly
report on a Current Report on Form 8-K any waivers of any provision of the Code
granted by our Board of Directors to any Financial Reporting Personnel.
Similarly, violations of the Code by our Financial Reporting Personnel may also
be immediately reported on Form 8-K. Additional provisions of this Code
pertaining solely to Financial Reporting Personnel are set forth in Section 5.
2. Conflicts of Interest
2.1 Generally . All First Montauk Employees have a duty of loyalty to act
in the best interests of the company. The business decisions and actions of
First Montauk Employees must never be influenced by personal considerations or
personal relationships. First Montauk Employees should avoid any relationship or
activity that might impair, or appear to impair, their ability to make objective
and fair business decisions. Generally, a conflict of interest arises whenever
your personal interests diverge from your responsibilities to First Montauk or
from First Montauk's best interests. First Montauk persons must not take for
themselves personally opportunities they discover through the use of First
Montauk property, information or position in violation of First Montauk
policies. In addition, First Montauk property, information or position must not
be used for personal gain. No First Montauk person may compete with First
Montauk. Examples of when a conflict of interest may occur include situations
where a family member or close personal friend is involved in business
relationships with you, either inside or outside the company. Other examples of
potential conflicts of interest include, but are not limited to:
o employment by an actual or potential competitor, customer, vendor or
regulator while you are employed by First Montauk;
o acceptance of gifts, payments, products or anything of value from anyone
seeking to do business with First Montauk;
o placement of First Montauk business with an entity in which you or a
family member has a financial interest;
o Appropriating or diverting to yourself or others any business
opportunity or idea in which First Montauk might have an interest; and
o a significant ownership interest in a First Montauk competitor.
In such situations, or where even the appearance of a conflict of interest
may exist, seek guidance from your manager or our General Counsel.
2.2 Use of Company Assets. You are responsible for the proper use of First
Montauk's assets and property, as well as its proprietary information. Our
offices, equipment, supplies and other resources may not be used for activities
which are not related to your employment with First Montauk, except for any
activities that have been approved in writing in advance by us, or for personal
usage that is minor in amount and reasonable. If you are found to be engaging
in, or attempting, theft of any First Montauk property, including without
limitation, documents, equipment, intellectual property, personal property of
other employees, you may be subject to immediate termination of your employment
and we reserve the right to refer the matter for criminal proceedings. We expect
you to report any theft or attempted theft to your manager or our General
Counsel.
Proprietary marks, slogans, logos or other devices used to identify First
Montauk and its proprietary products and technologies are important and valuable
assets which require discretion in their use. You may not negotiate or enter
into any agreement concerning First Montauk's trademarks, service marks or logos
without first consulting an authorized officer of the Company. We also respect
the intellectual property rights of others, and any proposed name of a new
product or offering intended to be sold or provided to customers should be
submitted to the appropriate authorized officer for clearance prior to its
adoption and use. Similarly, using the trademark or service mark of another
company for marketing purposes (even one with whom First Montauk has a business
relationship), requires clearance or approval. You must avoid the unauthorized
use of copyrighted or patented materials of others and should ask an authorized
officer if you have any questions regarding the permissibility of photocopying,
excerpting, electronically copying or otherwise using copyrighted or patented
materials. In addition, First Montauk does not permit the use of software or
other devices whose primary purpose is the circumvention or violation of
another's intellectual property rights. Please contact the General Counsel with
questions about the proposed use of another party's intellectual property and
for appropriate contracts. All copies of work that is authorized to be made
available for ultimate distribution to the public should bear the prescribed
form of copyright notice.
Proprietary information includes business, marketing and service plans,
unpublished financial data and reports, databases, customer information and
salary and bonus information as well as intellectual property such as trade
secrets, patents, trademarks and copyrights. Unauthorized use or distribution of
this material is a violation of First Montauk policy. It may also be illegal and
result in civil and criminal penalties. Intellectual property refers to a
company's intangible assets, such as the company's business methods, inventions,
trademarks and publications. All inventions and copyrightable material conceived
by an employee within the scope of his or her employment are the exclusive
property of First Montauk and as a condition of continued employment the
employee must do whatever is necessary to transfer to First Montauk the
technical ownership of such inventions or materials. All employees are required
as a condition of their employment to disclose to First Montauk all inventions
and copyrightable materials that are conceived, developed or otherwise pursued
by them during their employment. It is the responsibility of every employee to
protect First Montauk's intellectual property by following the company's
policies and procedures relating to its intellectual property.
2.3 Gifts, Gratuities and Entertainment. You may not offer money, gifts or
other items or products of value to customers or potential customers for the
purpose of securing a contract or obtaining favorable treatment.
Business-connected favors or gifts may not be extended to customers or vendors
(current or prospective), unless they (a) are consistent with customary business
practices; (b) do not have substantial monetary value and would not be viewed as
improper by others; and (c) do not violate applicable laws or regulations.
Business entertainment in the form of meals and beverages or other entertainment
may be offered only if these activities and related expenses are modest and
infrequent.
You should decline any gift, favor, entertainment or anything else of value
from current or prospective customers, vendors or contractors or their
representatives except for (a) gifts that do not have substantial monetary value
given at holidays or other special occasions and (b) reasonable entertainment at
lunch, dinner or business meetings where the return of the expenditure on a
reciprocal basis is likely to occur and would be properly chargeable as a
business expense. Other routine entertainment that is business-related such as
sports outings or cultural events is acceptable under this policy only if
reasonable, customary and not excessive. If you question the propriety of any
gift, consult with your manager or our General Counsel.
2.4 Outside Business Activities; Ownership of Securities. All First Montauk
employees must report all outside business activities, including ownership of
privately held stock and limited partnership interests, to their managers and to
the Office of General Counsel so a review for potential conflicts of interest
can be conducted. Outside business activities and interests include serving as a
partner or a stockholder in another business, as an officer in a family-owned
corporation or as an outside director of another company. The appropriateness of
a First Montauk employee engaging in these and other types of outside business
activities, interests or investment opportunities depends on many factors,
including the nature and extent of the outside interest, the potential for
conflicts of interest, and the relationship between First Montauk and the
outside entities and the duties involved. A First Montauk employee must receive
prior written approval for any outside business activity and private investment.
You have an obligation to keep First Montauk apprised of these activities and
provide updated information about the outside interests. This information will
be reviewed and monitored by the employee's business manager and by First
Montauk compliance personnel. Service by any First Montauk employee as a
director, officer or employee of any other corporation or business must be
authorized in writing by the Office of General Counsel. Unless approved in
writing, no First Montauk employee may serve as a director of a publicly traded
company.
Directors of First Montauk should inform the Corporate Secretary prior to
accepting appointments to the boards of directors or advisory boards of any
public or privately held company. The disclosure requirements and other possible
conflict-of-interest issues involved must be analyzed and discussed.
3. Laws and Regulations
3.1 Generally. All First Montauk Employees are to comply with all
applicable local, state and federal laws and regulations, both domestic and
international, and refrain from illegal, dishonest or unethical conduct.
Although laws and regulations may sometimes be difficult to interpret, we expect
you to make a good-faith effort to follow both the letter and the spirit of the
law. You must consult your manager or our Human Resources director if you are
uncertain as to whether a specific act or omission is legal. In addition, all
First Montauk Employees are to comply with all applicable First Montauk policies
and procedures. This includes, but is not limited to, our policies on equal
opportunity, harassment, drug-free workplace, computer usage and information
technology, data protection, expense reimbursement and travel, as well as our
internal financial controls and procedures. We may modify or update these
policies and procedures in the future, and adopt new company policies and
procedures from time to time. You must ensure that you remain aware of all such
changes to these policies. You are also expected to observe the terms of any
Non-Disclosure, Non-Solicitation or Non-Compete Agreement, Employment Agreement
or other similar agreement that applies to you. If you previously signed one of
these agreements with First Montauk, it remains in full force and effect.
3.2 Bribes. Bribery is illegal and subject to criminal penalties. You may
not give any bribes, kickbacks or other similar considerations to any person or
organization to attract business. All decisions regarding the purchasing of
materials, supplies, products and services must be made on the basis of
competitive price, quality and performance, and in a way that preserves First
Montauk's integrity. Fees, commissions or other amounts paid to outside
consultants, agents or other third parties must be fully disclosed to our
General Counsel and must be legal, proper and reasonable.
3.3 International Operations. You are expected to comply with the legal
requirements and ethical standards of each country in which you conduct First
Montauk business, as well as with all U.S. laws applicable in other countries.
The U.S. Foreign Corrupt Practices Act (FCPA) applies to business transactions
both inside the United States and in other countries. Its requirements relate to
accurate and complete financial recording, transactions with foreign government
officials and restrictions on the use of funds for unlawful or improper
purposes. The FCPA makes illegal any corrupt offer, payment, promise to pay, or
authorization to pay any money, gift, or anything of value to any foreign
official, or any foreign political party, candidate or official, for the purpose
of:
o Influencing any act, or failure to act, in the official capacity of that
foreign official or party; or
o Inducing the foreign official or party to use influence to
affect a decision of a foreign government or agency, in order
to obtain or retain business for anyone, or direct business to
anyone.
Because violation of the FCPA can bring severe penalties, including
criminal fines for the company and individuals and jail terms, it is essential
that you become familiar with the FCPA's requirements if you are living or
working in a foreign country. Other statutes that may affect our international
operations include, but are not limited to, the Anti-Bribery and Fair
Competition Act and the Export Administration Act. All supervisory personnel are
expected to monitor continued compliance with these laws to ensure our
compliance. If you have any questions regarding these legal requirements, please
contact your manager or our General Counsel.
3.4 Political Activity. You should not make political contributions in a
way that might appear to be an endorsement or contribution by First Montauk. We
will not reimburse you for political contributions under any circumstances.
3.5 Antitrust Considerations. Antitrust laws prohibit agreements or actions
that restrain trade or reduce competition. Violation of antitrust laws can
result in severe civil and criminal penalties, including imprisonment for
individuals, and First Montauk can be subjected to substantial fines and
monetary awards. First Montauk as a company avoids conduct that may even appear
to be questionable under antitrust laws and expects all First Montauk Employees
to carry out company business consistent with this policy. In all contacts with
our competitors, you are expected to avoid discussing prices, costs,
competition, market share, marketing plans or studies, and any other proprietary
or confidential information. Examples of agreements or arrangements with
competitors which should therefore be avoided include: (a) Agreements that
affect the price or other terms or conditions of sale; (b) Agreements regarding
the customer to whom First Montauk will, or will not, sell its products; (c)
Agreements to refuse to buy from particular vendors; and (d) Agreements that
limit the types of products which First Montauk will provide. Furthermore, First
Montauk cannot coerce customers into complying with restrictive arrangements.
Therefore, you should not negotiate agreements with customers without the
approval of an authorized company officer which (a) require or prohibit
customers from purchasing all of their requirements from First Montauk or other
companies or (b) require customers to buy one First Montauk product as a
condition of obtaining another. In all cases where there is question or doubt
about a particular activity or practice, First Montauk Employees should promptly
contact our General Counsel.
3.6 Fair Business Practices; Relationships With Competitors. Every First
Montauk person must deal fairly with First Montauk's clients, vendors,
competitors and fellow employees. No First Montauk person may take unfair
advantage of anyone through unethical or illegal measures, such as manipulation,
concealment, abuse of privileged information, misrepresentation of material
facts or any other unfair dealing practices. It is improper, and may be illegal,
to hire competitors' employees for the purpose of obtaining trade secrets or
other proprietary information. It is also against First Montauk policy to seek
increased sales by disparaging the products and services of other companies. Our
goal is to increase business by offering superior products and services.
Accordingly, all First Montauk advertising must be truthful, not deceptive and
in full compliance with applicable laws, regulations and company policies. All
advertising and marketing materials must be approved pursuant to the procedures
established in each of the business units across the company.
All First Montauk persons must guard against unfair competitive practices
and exercise extreme caution to avoid conduct that might violate antitrust laws
or other rules prohibiting anti-competitive activities. Violations may carry
criminal penalties. If a competitor or third party proposes to discuss unfair
collusion, price-fixing or other anti-competitive activities, your
responsibility is to object, terminate the conversation or leave the meeting and
report the incident promptly to the Office of General Counsel. Employees must
avoid any discussion with competitors of proprietary or confidential
information, business plans or topics such as pricing or sales policies -- the
discussion of which could be viewed as an attempt to make joint rather than
independent business decisions.
3.7 Securities Laws and Insider Trading. First Montauk is a publicly-traded
company - meaning that our securities are sold in the public marketplace. We
files reports with the Securities and Exchange Commission. As an employee of
First Montauk you are subject to First Montauk's policy against insider trading.
Simply stated, material, non-public information is not to be used for personal
gain, and you should not trade in First Montauk stock when you possess such
information. If you have any question regarding whether it is appropriate to
engage in any transaction, contact the General Counsel.
The U.S. securities laws forbid an investor from purchasing or selling
securities based upon "inside" information not available to the other party. The
consequences of insider trading violations can be severe. First Montauk
Employees who trade on inside information, or who communicate (or "tip") this
information to others so that they may trade, may face substantial civil
penalties, criminal fines and imprisonment. Additionally, First Montauk may also
face severe legal consequences, including, among other things, substantial
criminal penalties.
First Montauk Employees who have material, nonpublic (i.e., "inside")
information about the company should not buy or sell First Montauk securities
until a reasonable time after the inside information has been publicly
disclosed. You also should not disclose inside information to others outside
First Montauk until a reasonable time after the information has been publicly
disclosed. In addition, it is never appropriate for you to advise others to buy
or sell First Montauk securities. We further believe that it is highly
inappropriate for any First Montauk person to "sell short" First Montauk stock
or engage in other transactions where the person will earn a profit based on a
decline in First Montauk's stock price. These rules also apply to the use of
material, nonpublic information about other companies (including, for example,
our customers, competitors and potential business partners). In addition to you,
these rules apply to your spouse, children, parents and siblings, as well as any
other family members living with you in your household.
3.8 Government Contracting. First Montauk frequently does business with
federal, state or local government agencies in the United States and in other
countries. All First Montauk Employees engaged in business with these government
entities must comply with specific rules and regulations concerning relations
with these entities. Important considerations for doing business with government
entities include:
o Not offering or accepting kickbacks, bribes, gifts, or
anything else of value with the intent of obtaining favorable
treatment from the recipient (note that a gift that is
customary in the private sector may be impermissible to a
government entity); and
o Not improperly soliciting or obtaining confidential
information, such as sealed competitors' bids, from government
officials prior to the award of a contract.
3.9 Retention of Documents. Certain documents and records must be retained
for specific periods of time to comply with legal and regulatory requirements or
contractual obligations. You are to comply with all document retention
requirements applicable to your work. If you are uncertain whether the documents
or records you are handling are subject to these requirements, please consult
with your manager or our General Counsel. If at any time you become aware that
any document or record may be required to be disclosed in connection with a
lawsuit or government investigation, you must preserve all possibly relevant
documents. This means that you must immediately cease disposing of or altering
all potentially relevant documents, even if that activity is ordinary or
routine. If you are uncertain whether documents or records under your control
should be preserved because they might relate to a lawsuit or investigation, you
should contact your manager or our General Counsel.
3.10 Money Laundering; Antiterrorism Laws. First Montauk complies fully
with federal, state and international laws prohibiting money laundering and with
the safeguards against terrorist activity contained in the USA Patriot Act.
Under no circumstances should any First Montauk employee participate in any
money laundering activity. In addition to severe criminal penalties, money
laundering by First Montauk employees and violations of the USA Patriot Act will
result in disciplinary action, including termination. Any suspicious deposits or
any other client activity that raises questions about the source of the client's
funds should be reported immediately to your manager and the Office of General
Counsel.
3.11 Cooperation With Investigations and Law Enforcement. It is First
Montauk policy to cooperate with government investigators and law enforcement
officials. Every First Montauk person must also cooperate with investigations by
non-governmental regulators with oversight of our business, such as securities
exchanges, as well as with internal First Montauk investigations. All inquiries
or requests or demands for information from external investigators must be
immediately referred to the Office of General Counsel. The Office of General
Counsel must coordinate all responses to external investigators' questions.
Failure to cooperate with legitimate investigations will result in disciplinary
action, including termination.
3.12 Privacy. First Montauk persons must comply with all applicable privacy
laws in their handling of client matters and client and company records. You
should refer any questions about the applicability of privacy laws to the Office
of General Counsel.
4. Confidentiality
4.1 First Montauk Confidential Information. You will often have access to
information that is confidential and proprietary to First Montauk, has not been
made public and constitutes trade secrets or proprietary information. Protection
of this information is critical to our success. Your obligations with respect to
our confidential trade secrets and proprietary information are:
o Not to disclose the information outside of First Montauk;
o Not to use the information for any purpose except to benefit First
Montauk's business; and
o Not to disclose the information within First Montauk, except to other
First Montauk Employees who need to know, or use, the information and
are aware that it constitutes a trade secret or proprietary information.
These obligations continue even after you leave First Montauk. If you have
previously signed a Non-Disclosure Agreement, Employment Agreement or other
similar agreement that governs your obligations with respect to our information,
you must also follow such agreements. Any documents, papers or records that
contain trade secrets or proprietary information are our property, and must
remain at the company. Our confidential trade secrets and proprietary
information may include, information regarding our operations, business plans,
customers, strategies, trade secrets, finances, assets, technology, data or
other information that reveals the processes, methodologies, technology or "know
how" by which our existing or future products, services or methods of operation
are developed or conducted.
4.2 Confidential Information of Third Parties. In the normal course of
business, you will acquire information about others, including customers,
vendors and competitors. We properly gather this kind of information for such
purposes as evaluating customers' business needs, determining requirements and
evaluating vendors. We also collect information on competitors from a variety of
legitimate sources to evaluate the relative merits of our products and marketing
methods. You may not use information obtained from our customers or vendors in
any way that harms them or violates contractual obligations to them. When
working with sensitive information about customers or vendors, you should use
that information only for the purposes for which it was disclosed to you and
make it available only to other First Montauk Employees with a legitimate "need
to know".
4.3 Inadvertent Disclosure. In order to avoid the inadvertent disclosure of
any confidential information, you should never discuss with any unauthorized
person (whether or not an First Montauk Employee) any information that First
Montauk considers confidential or which we have not made public. You should also
not discuss this information with family members or with friends, as they may
unintentionally pass the information on to someone else.
4.4 Contacts with Reporters, Analysts and Other Media. Because of the
importance of the legal requirements regarding disclosure of certain information
to our investors, we must ensure the accuracy of any information regarding our
business, financial condition or operating results that is released to the
public. As a result, you should not discuss internal First Montauk matters with
anyone outside of First Montauk, except as clearly required in the performance
of your job duties. This prohibition applies particularly to inquiries about
First Montauk made by the news media, securities analysts and investors. All
responses to these inquiries must be made only by the following authorized
persons: our Chief Executive Officer, Chief Financial Officer or any individuals
specifically designated by them. Only these individuals are authorized to
discuss information about First Montauk with the news media, securities analysts
and investors. If you receive inquiries from these sources, you should
immediately refer them to one of these authorized spokespersons.
4.5 Client Information Privacy. First Montauk protects the confidentiality
and security of client information. First Montauk's Privacy Policy for client
information provides that:
o First Montauk does not sell or rent clients' personal information.
o Employees may not discuss the business affairs of any client with any
other person, except on a strict need-to-know basis.
o First Montauk does not release client information to third parties,
except upon a client's authorization or when permitted or required by
law.
o Third-party service providers and vendors with access to client
information are required to keep client information confidential and
use it only to provide services to or for First Montauk.
5. Duties of Financial Reporting Personnel; Accounting and Financial
Records and Disclosure
5.1 General. First Montauk has a responsibility to maintain complete,
accurate and reliable records of our business and must comply with various
disclosure requirements imposed by the United States Securities and Exchange
Commission and by any exchange on which its securities are listed for trading.
First Montauk's executive officers, the heads of First Montauk's subsidiaries
and operating divisions and members of First Montauk's finance department have a
special role in the preparation of these reports. To satisfy these requirements,
First Montauk has implemented procedures to ensure that only proper transactions
are entered into by the Company, that such transactions have proper management
approval, that such transactions are properly accounted for in the books and
records of the Company and that the reports and financial statements of the
Company fairly and accurately reflect such transactions. All First Montauk
Financial Reporting Personnel are to familiarize themselves with these policies,
accounting controls, procedures and records and comply with these requirements.
Ultimately, First Montauk's Financial Reporting Personnel bear significant
responsibility for the accuracy and timeliness of disclosures in reports and
documents First Montauk files with or submits to the Securities and Exchange
Commission and in other public communications.
Due to these considerations, First Montauk's Financial Reporting Personnel
bear a special responsibility for promoting integrity throughout the
organization, with responsibilities to stakeholders both inside and outside of
First Montauk. These particular persons have a special role both to adhere to
these principles themselves and also to ensure that a culture exists throughout
the company as a whole that ensures the fair and timely reporting of First
Montauk's financial results and condition. Each First Montauk Financial
Reporting Personnel agrees to:
o Provide information that is accurate, complete, objective, relevant,
timely and understandable to ensure full, fair, accurate, timely, and
understandable disclosure in reports and documents that First Montauk
files with, or submits to, government agencies and in other public
communications.
o Comply with rules and regulations of federal, state and local
governments, and other appropriate private and public regulatory
agencies.
o Act in good faith, responsibly, with due care, competence and
diligence, without misrepresenting material facts or allowing one's
independent judgment to be subordinated.
o Respect the confidentiality of information acquired in the course of
work except when authorized or otherwise legally obligated to disclose.
o Promptly report to the Audit Committee any conduct that the individual
believes to be a violation of law or business ethics or of any
provision of this Code, including any transaction or relationship that
reasonably could be expected to give rise to such a conflict.
5.2 Disclosures to Investors; Financial Reporting Considerations. First
Montauk is required under U.S. federal securities laws to provide the public
with periodic disclosure regarding our business and financial condition (such as
quarterly and annual reports and materials for our annual stockholders'
meeting). We provide additional disclosures to the public through quarterly
earnings releases and other press releases. All First Montauk Employees who
participate in the preparation or dissemination of this information, or who
provide information that they know may be used in the preparation of these
disclosures, have a legal and ethical duty to ensure that the content of the
disclosures is accurate, complete and timely. We have created disclosure
controls and procedures which are designed to ensure that all public disclosures
are accurate, complete and timely.
To administer these controls and procedures, First Montauk has established
a Disclosure Committee that reports to the Chief Executive Officer and Chief
Financial Officer. The Disclosure Committee is (or certain of its members are),
among other things, charged with reviewing First Montauk's periodic reports and
press releases. It is the responsibility of the Committee to ensure that it has
reviewed and disseminated all material information about the Company that, by
law, should be disseminated. You may be asked to serve on this Committee or to
assist the Disclosure Committee in reviewing certain materials in connection
with it's responsibilities. If you do so, you must accomplish this faithfully
and in accordance with all the Committee's policies. You should report to the
Disclosure Committee all information that it needs to fulfill its duties. All
employees responsible for the preparation of First Montauk's public disclosures,
or who provide information as part of that process, have a responsibility to
ensure that such disclosures and information are complete, accurate and in
compliance with First Montauk's disclosure controls and procedures.
5.3 Accounting and Financial Records. First Montauk is required under U.S.
federal securities laws and generally accepted accounting principles to keep
books, records and accounts that accurately reflect all transactions and to
provide an adequate system of internal accounting and controls. We expect you to
ensure that those portions of our books, records and accounts for which you have
responsibility are valid, complete, accurate and supported by appropriate
documentation in verifiable form.
You should not:
o Improperly accelerate or defer expenses or revenues to achieve financial
results or goals;
o Maintain any undisclosed or unrecorded funds or "off the book" assets;
o Establish or maintain improper, misleading, incomplete or fraudulent
accounting documentation or financial reporting;
o Record revenue for any project that has not fully complied with First
Montauk's revenue recognition guidelines;
o Make any payment for purposes other than those described in the
documents supporting the payment;
o Submit or approve any expense report where you know or suspect that any
portion of the underlying expenses were not incurred or are not
accurate; or
o Sign any documents believed to be inaccurate or untruthful.
All First Montauk Employees who exercise supervisory duties over First
Montauk's assets or records are expected to establish and implement appropriate
internal controls over all areas of their responsibility. This will help ensure
(a) the safeguarding of First Montauk's assets; (b), that business transactions
are properly authorized and carried out, and (c) the accuracy of our financial
records and reports. We have adopted various types of internal controls and
procedures as required to meet internal needs and applicable laws and
regulations. You are to adhere to these controls and procedures to assure the
complete and accurate recording of all transactions. Any accounting entries or
adjustments that materially depart from generally accepted accounting principles
must be approved by our Audit Committee and reported to our independent
auditors. You must not interfere with or seek to improperly influence (directly
or indirectly) the review or auditing of our financial records by our Audit
Committee or independent auditors.
All business transactions require authorization at an appropriate
management level. Any employee who is responsible for the acquisition or
disposition of assets for the company, or who is authorized to incur liabilities
on the company's behalf, must act prudently in exercising this authority and
must be careful not to exceed his or her authority. Equally important, every
employee must help ensure that all business transactions are executed as
authorized. Transactions must be properly reflected on the company's books and
records.
If you become aware of any questionable transaction or accounting practice
concerning First Montauk or our assets, we expect you to report the matter
immediately to our Chief Financial Officer or to a member of our Audit
Committee. In addition, we expect you to report all material off-balance-sheet
transactions, arrangements and obligations, contingent or otherwise, and other
First Montauk relationships with unconsolidated entities or other persons that
may have material current or future effects on our financial condition or
results of operations to our Chief Financial Officer or to a member of our Audit
Committee.
5.5 Confidentiality Considerations; Securities Law Compliance. All
Financial Reporting Personnel will have special access to First Montauk's
confidential financial information. This may include non-public reports and
analyses, pro-forma financial statements and other draft or preliminary
financial information. First Montauk's Financial Reporting Personnel should (i)
never disclose this information to individuals outside the Company and (ii)
caution individuals within the Company to whom you provide such information to
carefully maintain its confidentiality and prevent its disclosure. First
Montauk's Financial Reporting Personnel must also apply the utmost consideration
to transactions involving First Montauk securities in light of their possession
to confidential financial information. Financial Reporting Personnel are
therefore expected to notify our Chief Financial Officer prior to engaging in
any transactions involving First Montauk securities in order to ensure
compliance with all securities laws and regulations. Similarly, First Montauk
imposes periodic blackout periods during which Financial Reporting Personnel may
not engage in transactions involving First Montauk securities. All Financial
Reporting Personnel should notify our Chief Financial Officer before purchasing
or selling any First Montauk securities in order to obtain clearance from the
Chief Financial Officer that the proposed transaction complies with all
securities laws and regulations and First Montauk policies.
6. Our Responsibilities to Each Other
6.1 Dignity and Respect. One of First Montauk's goals is to attract and
retain outstanding employees who will consistently contribute to the ongoing
success of our organization. Each First Montauk employee brings a unique
background and set of skills to his or her position. It is this background and
skill set that helped you attain your position at First Montauk. First Montauk
values the perspective, initiative and creativity of each of its employees. As a
First Montauk employee, First Montauk will treat you with dignity and respect.
Similarly, First Montauk expects that employees will treat each other with
dignity and respect.
6.2 Discrimination. Discriminating against any employee or person with whom
First Montauk does business on the basis of factors such as age, race, color,
religion, gender, national origin, disability, or other legally protected status
is a violation of our Code and is not permitted.
6.3 Workplace Harassment and Violence. Workplace harassment and violence
are unacceptable and will not be tolerated. Conduct that creates an unwelcome or
uncomfortable situation or hostile work environment, including but not limited
to unwelcome advances or requests for sexual favors, inappropriate comments,
jokes, intimidation, bullying, or physical contact may be forms of workplace
harassment. All First Montauk employees should avoid any conduct that might be
interpreted by their fellow employees as harassment or a threat of violence.
6.4 Safety and Health. First Montauk is committed to providing its
employees with a safe workplace. Each of us is responsible for observing all
safety and health rules that apply to our jobs. We are all responsible for
taking precautions to protect ourselves from accident, injury or any unsafe
condition. Additionally, employees must promptly report unsafe or unhealthy
conditions to their supervisors so that First Montauk can take immediate steps
to correct those conditions.
6.5 Alcohol/Substance Abuse. First Montauk is a drug free workplace. We are
committed to maintaining a work environment free from all forms of alcohol and
drug abuse. The safety of all employees is compromised if even one employee
reports to work while impaired from the use of alcohol or drugs. The use,
possession, or distribution of unauthorized drugs or alcohol while on First
Montauk's premises or on company time is not permitted. Additionally, an
employee who engages in this conduct may be subject to criminal prosecution. All
employees are encouraged to seek treatment for alcohol or drug abuse problems.
Exhibit 21
LIST OF SUBSIDIARY COMPANIES
First Montauk Securities Corp.
Red Bank, NJ
Montauk Insurance Services, Inc.
Red Bank, NJ
Montauk Advisors, Inc.
Red Bank, NJ
Exhibit 31.1
CERTIFICATIONS
I, William J. Kurinsky, Chief Executive Officer and Chief Financial Officer
of First Montauk Financial Corp. certify that:
1. I have reviewed this annual report on Form 10-K of First Montauk Financial
Corp.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as
of, and for, the periods presented in this report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
a) designed such disclosure controls and procedures, or caused
such disclosure controls and procedures to be designed under
our supervision, to ensure that material information relating
to the registrant, including its consolidated subsidiaries, is
made known to us by others within those entities, particularly
during the period in which this report is being prepared;
b) [reserved]
c) Evaluated the effectiveness of the registrant's disclosure
controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls
and procedures, as of the end of the period covered by this
report based on such evaluation; and
d) Disclosed in this report any change in the registrant's
internal control over financial reporting that occurred during
the registrant's most recent fiscal quarter (the registrant's
fourth fiscal quarter in the case of an annual report) that
has materially affected, or is reasonably likely to materially
affect, the registrant's internal control over financial
reporting; and
5. The registrant's other certifying officer(s) and I have disclosed, based on
our most recent evaluation of internal control over financial reporting, to the
registrant's auditors and the audit committee of the registrant's board of
directors (or persons performing the equivalent functions):
a) all significant deficiencies and material weaknesses in the
design or operation of internal control over financial
reporting which are reasonably likely to adversely affect the
registrant's ability to record, process, summarize and report
financial information; and
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal control over financial reporting.
Date: March 30, 2004
/s/ William J. Kurinsky
- -----------------------
William J. Kurinsky,
Chief Executive Officer and
Chief Financial Officer
First Montauk Financial Corp.
Exhibit 31.2
CERTIFICATIONS
I, Victor K. Kurylak, President of First Montauk Financial Corp. certify
that:
1. I have reviewed this annual report on Form 10-K of First Montauk Financial
Corp.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as
of, and for, the periods presented in this report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
a) designed such disclosure controls and procedures, or caused
such disclosure controls and procedures to be designed under
our supervision, to ensure that material information relating
to the registrant, including its consolidated subsidiaries, is
made known to us by others within those entities, particularly
during the period in which this report is being prepared;
b) [reserved]
c) Evaluated the effectiveness of the registrant's disclosure
controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls
and procedures, as of the end of the period covered by this
report based on such evaluation; and
d) Disclosed in this report any change in the registrant's
internal control over financial reporting that occurred during
the registrant's most recent fiscal quarter (the registrant's
fourth fiscal quarter in the case of an annual report) that
has materially affected, or is reasonably likely to materially
affect, the registrant's internal control over financial
reporting; and
5. The registrant's other certifying officer(s) and I have disclosed, based on
our most recent evaluation of internal control over financial reporting, to the
registrant's auditors and the audit committee of the registrant's board of
directors (or persons performing the equivalent functions):
a) all significant deficiencies and material weaknesses in the
design or operation of internal control over financial
reporting which are reasonably likely to adversely affect the
registrant's ability to record, process, summarize and report
financial information; and
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal control over financial reporting.
Date: March 30, 2004
/s/ Victor K. Kurylak
- ----------------------
Victor K. Kurylak
President, First Montauk Financial Corp.
Exhibit 32.1
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED
PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of FIRST MONTAUK FINANCIAL CORP. (the
"Company") on Form 10-K for the period ending December 31, 2003 as filed with
the Securities and Exchange Commission on the date hereof (the "Report"), I,
William J. Kurinsky, Chief Executive Officer and Chief Financial Officer of the
Company, certify, pursuant to 18 U.S.C. section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of Section
13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in
all material respects, the financial condition and result of
operations of the Company.
/s/ William J. Kurinsky
- --------------------------------------------
William J. Kurinsky
Chief Executive Officer and Chief Financial Officer
March 30, 2004
Exhibit 32.2
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED
PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of FIRST MONTAUK FINANCIAL CORP. (the
"Company") on Form 10-K for the period ending December 31, 2003 as filed with
the Securities and Exchange Commission on the date hereof (the "Report"), I,
Victor Kurylak, President of the Company, certify, pursuant to 18 U.S.C. section
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002,
that:
(1) The Report fully complies with the requirements of Section
13(a) or 15(d) of the Securities Exchange Act of 1934;
and
(2) The information contained in the Report fairly presents, in
all material respects, the financial condition and result of
operations of the Company.
/s/ Victor K. Kurylak
- --------------------------------------------
Victor K. Kurylak,
President
March 30, 2004