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DETAILED RESPONSE TO LEVIN & WEISER SHAREHOLDER LETTER
Many of our shareholders recently received a letter from a law firm
representing two former registered representatives of Montauk Financial who are
seeking to discredit the management and Board of Directors of the firm and seize
control. For the record, we would like to provide you with our response to these
often false and misleading accusations.
Some context and background information is crucial in understanding the
reasons for this negative letter and its proponents. In 2002 and 2003, we raised
$3.1 million through the issuance of convertible debentures to accredited
investors which were sold through First Montauk Securities Corp. our
broker/dealer subsidiary. Of the many registered representatives who
participated in these offerings, about half of the total raised was sold by two
registered representatives, Shlomo Eplboim and Michael Poutre of Eplboim Poutre
& Co. ("Eplboim Poutre") who are no longer with First Montauk. Levin & Weiser,
the Colorado law firm that sent the shareholders letter represents Eplboim
Poutre. These two former registered representatives have approached management
on behalf of a group of their clients in an attempt to buy the firm and take
control. We believe that the actions of Eplboim Poutre and possibly some of
their clients are inconsistent with their legal obligations under the securities
laws, and, as previously stated, we have notified the appropriate regulatory
authorities and requested their intervention. In addition, Mr. Eplboim and Mr.
Poutre each has outstanding loans to Montauk Financial Group that together total
over $100,000 which we are pursuing in the appropriate legal forum.
Levin & Weiser first communicated with our debenture holders in February
2005 under the guise of representing "a group of investors with holdings in
First Montauk Financial Corp.". When directly confronted by our management, this
law firm finally admitted that they did not represent any shareholders of First
Montauk Financial, but rather the two former registered representatives who were
asked to leave the firm in August 2004 and subsequently were permitted to resign
from their next broker/dealer, J.P. Turner & Company because of their failure to
follow internal corporate procedures. They are now affiliated with their third
brokerage firm in less than one year. We ask that when evaluating the
credibility of the information in the letter, you consider the source and the
ulterior motives of the individuals behind the communication.
Furthermore, you may be aware that a corporate entity named BMAC Corp. has
filed a Form13d with the SEC. A Form 13d is filed by persons who have become the
owners of 5% or more of a public company's shares. In its filing, BMAC stated,
among other things, that it intended to seek management changes at First
Montauk. It is our position that BMAC did not properly disclose the other
members of its group, as required by law, and the transactions by which they
have accumulated stock. Further, we have been provided with written
documentation that Eplboim Poutre represents BMAC Corp as financial advisor.
Use Of The Offering Proceeds And Management Of Corporate Funds
The proceeds of the two debenture offerings were used for general working
capital of the company, as stated in each offering memorandum. The letter
attempts to directly tie the proceeds of the offering to changes in executive
compensation when, in fact there is no correlation. The changes in executive
compensation were related to the appointment of Mr. Kurylak as the new president
and chief operating officer, and new roles for Herbert Kurinsky and William
Kurinsky. In fact our company has been profitable since the conclusion of the
last offering, the funds that were raised in the offerings have served to
substantially increase our capital base and are available to be used for the
growth and development of the company. The writer's attempt to link these events
is self serving and inaccurate.
Executive Compensation Was Fair And Reasonable
Conspicuously absent from the discussion of executive compensation, was any
mention of the salary that both Herbert Kurinsky and William J. Kurinsky
voluntarily relinquished and to which they were entitled under their employment
agreements during 2001, 2002 and 2003. That amount totaled over $415,000. They
voluntarily reduced their contracted compensation in recognition of the
difficulties facing the company during this period.
The amount of executive compensation increased for 2004 because it included
the salary for Victor K. Kurylak who joined the firm as President and COO in
January 1, 2004. Although the letter implies that $750,000 was paid to Messrs.
Herbert and William Kurinsky, the amount noted in the letter included
compensation for Mr. Kurylak as the new president and chief operating officer.
Here again these parties are attempting to mislead you into thinking that the
$750,000 salary was paid solely to Herbert Kurinsky and William Kurinsky when in
fact that is not the case.
The bonus awarded to Herbert Kurinsky by the board's independent
compensation committee was based upon his relinquishing his role of President
and CEO, receiving a reduction in his contracted salary and a shorter term of
employment. In exchange for these concessions, the board awarded Herbert
Kurinsky a bonus that was to be used exclusively for the repayment of loans and
payment of taxes owed on the bonus. The loan was repaid simultaneously with the
grant of the bonus, providing little cash benefit to Herbert Kurinsky and a
manageable cash cost to the company. Contrary to the assertions in the letter,
no debt was forgiven and all outstanding loans were repaid as of December 31,
2003.
The bonus awarded to William Kurinsky, by the board's independent
compensation committee, was based upon his promotion to the position of CEO. His
bonus amount was also used to pay off a loan and payment of the taxes owed on
the bonus. The loan was repaid simultaneously with the grant of the bonus,
providing little cash benefit to William Kurinsky and a manageable cash cost to
the company. Contrary to the assertions in the letter, no debt was forgiven and
all outstanding loans were repaid as of December 31, 2003.
The paragraph also contains a statement that "expenses for commissions and
employee compensation accounted for $46.2 million, which is equal to roughly 79%
of First Montauk's gross revenues for 2003" and that this is an "unacceptable
figure in the financial services industry". To make such a statement without
providing statistical data is both misleading and negligent. The language in the
letter appears to reflect a total lack of understanding of our business. What
the letter fails to explain is that the compensation includes commission expense
for all registered representatives. The independent firm model, such as Montauk,
inherently has a much higher payout structure (in which Eplboim Poutre
participated) than traditional wire house firms, and as such, will have a much
higher percentage of revenues attributable to commissions paid to reps. We
believe that this fundamental lack of understanding of our business reflected in
the letter, or at best, the utter lack of respect for the truth, should give you
great pause in trusting these individuals with your company. Again, we believe
that their sole purpose is to create anxiety in the marketplace and cause
shareholders to sell their stock to them so they can take over the company.
Merger With Olympic Cascade
The group who has sent the letter is apparently seeking to block the merger
with Olympic Cascade, not because the transaction is bad for the company or its
shareholders, but because it interferes with the groups stated objective of
taking control of the company. National Securities, Olympics broker-dealer
subsidiary, like First Montauk and all brokerage firms, is subject to regulatory
sanctions when it runs afoul of the regulations. The delisting of Olympic's
stock from the American Stock Exchange had nothing to do with any broker-dealer
net capital issues. Rather, Olympic was not in compliance with the AMEX listing
standards for minimum shareholder equity. The delisting of Olympic's stock from
the American Stock Exchange and other events related to Olympic and disparaged
in the group's letter were events which were considered during our merger
negotiations, and does not impact the value of the merger to our shareholders.
In fact we believe that the combined entity will increase shareholder value and
provide additional products and services to our reps. Furthermore, there is a
substantial amount of additional information regarding the proposed merger which
will be provided to all shareholders in a proxy statement. The transaction can
only proceed with the affirmative approval of a majority of our shareholders and
regulatory approval. We will be filing a complete proxy statement detailing the
material terms of the transaction, as well as the Board's reasons for the
transaction in the near future. WE ARE NOT SEEKING ANY PROXY FROM YOU AT THIS
TIME.
Preferred Stock Dividends
The company has a Series A Preferred Stock which provides for the payment
of 6% cash dividend as and when declared by the board of directors. From 1999
until June 2003, the company declared and paid each and every quarterly
dividend. For the period from July 2003 to the present, the company has had the
cash available to make the dividend payments, but is legally prohibited from
doing so because of restrictions under New Jersey corporate law, as it relates
to stockholders equity. In our view it is completely false to suggest that
executive compensation had any bearing or relationship to the non-payment of
dividends. Additionally, upon the consummation of the merger with Olympic
Cascade, the combined company's balance sheet will contain positive
stockholders' equity, which will then permit the company to declare and pay all
accrued and unpaid Series A Preferred dividends. This was specifically
stipulated in the recently signed merger agreement. Contrary to the assertions
in the letter, the company did not have a choice to pay the Series A preferred
dividends or use the money for some other purposes. The Company was and still is
legally prohibited under New Jersey law from paying these dividends. The Company
has always paid and continues to pay interest on time on our outstanding
debentures. Now that the balance sheet reflects positive shareholder equity, the
company intends to declare and pay all outstanding Series A preferred dividends,
including those that were missed due to the legal prohibition.
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Management Changes
The management changes that are described in the letter were put into place
in early 2005 in order to better prepare our firm for the challenges that lay
ahead. In addition, the proposed merger had always contemplated certain changes
in senior management to ensure a successful integration of members of both
companies' management teams into the combined entity. A merger of firms in our
industry can only be successful if the management team reflects the business
interests of the financial professionals that are the firm's revenue generators.
The recent management changes at First Montauk reflect that commitment, even to
the financial detriment of certain individuals. Mr. William Kurinsky agreed to
terminate his employment after many years of good service to the company, giving
up substantial economic benefit to which he would have been entitled under his
employment contract. He did so, opting to take certain compensation in stock,
rather than in cash, in order to not burden the company with a substantial cash
payment, and align himself with the interests of all of the shareholders. Mr.
Kurisnky's actions reflected a concern for shareholders, unlike the
self-interest of the dissident group.
The Board Of Directors
Here again the letter misstates several important facts. The current
composition of the board of directors of First Montauk Financial Corp. is
Herbert Kurinsky, William J. Kurinsky, Norma Doxey, Ward Jones, and Barry
Shapiro. Both Messers. Jones and Shapiro are "independent" directors, not
otherwise connected to the company, and make up the compensation committee that
must approve all executive compensation.
In conclusion, we ask that you consider the source and motives of the
individuals seeking to discredit our board and management team at a time when we
have returned the company to profitability and increased share price. We
recognize our obligation to you, the shareholder, and pledge to continue on the
course of profitability and increased shareholder value. If you wish to obtain
more current information about the company, we recommend that you review our
publicly filed reports, which can be found on our web site,
www.montaukfinancial.com or the web site of the SEC at www.sec.gov. You may also
call us at any time at 800-876-3672 if you have any questions and concerns. We
appreciate your continued support.
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