UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
|X| SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD
ENDED JUNE 30, 2008
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD
FROM TO
Commission File Number: 0-6729
FIRST MONTAUK FINANCIAL CORP.
- --------------------------------------------------------------------------------
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
New Jersey 22-1737915
---------------------- ----------------------------------
(State of Incorporation) (I.R.S. Employer Identification No.)
Parkway 109 Office Center, 328 Newman Springs Road, Red Bank, New Jersey 07701
- --------------------------------------------------------------------------------
(Address of principal executive offices)(Zip Code)
(732) 842-4700
- --------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
- --------------------------------------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant is a large accelerated
filer, an accelerated filer, a non-accelerated filer, or a smaller reporting
company. See the definitions of "large accelerated filer", "accelerated filer"
and "smaller reporting company" in Rule 12b-2 of the Exchange Act.
Check one:
Large accelerated filer | | Accelerated filer |_|
Non-accelerated filer | | Smaller Reporting Company |X|
(Do not check if a smaller reporting company)
Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act). |_| YES |X| NO
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS
Indicate by check mark whether the registrant has filed all documents
and reports required to be filed by Sections 12, 13 or 15(d)of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.
|_| Yes |_| No
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date: 13,257,248 shares of Common
Stock were outstanding at August 15, 2008.
FIRST MONTAUK FINANCIAL CORP.
FORM 10-Q
June 30, 2008
INDEX
Page
PART I. FINANCIAL INFORMATION:
Item 1. Financial Statements
Condensed Consolidated Statements of Financial Condition as of
June 30, 2008 (unaudited) and December 31, 2007 .................................. F-1
Condensed Consolidated Statements of Operations for the Six Months and
Three Months Ended June 30, 2008 (unaudited) and 2007 (unaudited)................. F-2
Condensed Consolidated Statements of Cash Flows for the Six Months Ended
June 30, 2008 (unaudited) and 2007 (unaudited) .................................... F-3
Notes to Condensed Consolidated Financial Statements (unaudited) .................. 4-15
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations ...................................... 16-25
Item 3. Quantitative and Qualitative Disclosures About Market Risk ................. 26-28
Item 4T. Controls and Procedures ..................................................... 28
PART II. OTHER INFORMATION:
Item 1. Legal Proceedings .......................................................... 29
Item 1A. Risk Factors ................................................................ 29
Item 2. Unregistered Sales of Equity Securities .................................... 29
Item 3. Defaults Upon Senior Securities ............................................ 29
Item 4. Submission of Matters to a Vote of Security Holders ........................ 29
Item 5. Other Information .......................................................... 29
Item 6. Exhibits ................................................................... 30
Signatures .......................................................................... 30
FIRST MONTAUK FINANCIAL CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
June 30, December 31,
2008 2007
(unaudited)
----------- -----------
ASSETS
Cash and cash equivalents $ 455,610 $ 868,836
Due from clearing firm 2,007,000 2,347,946
Securities owned, at market value 341,223 159,773
Prepaid expenses 726,730 250,948
Employee and broker receivables - net of reserve for bad debt
of $714,644 and $758,515 respectively 184,499 288,049
Property and equipment - net 142,014 175,463
Other assets 419,209 1,159,893
----------- -----------
Total assets $ 4,276,285 $ 5,250,908
=========== ===========
LIABILITIES
10% convertible note $ 1,000,000 $ 1,000,000
Securities sold, not yet purchased, at market value 20,023 201
Commissions payable 1,209,458 1,739,713
Accounts payable 689,758 256,549
Accrued expenses 544,535 556,527
Income taxes payable 4,313 11,358
Other liabilities 111,447 51,528
----------- ------------
Total liabilities 3,579,534 3,615,876
----------- ------------
Commitments and contingencies
STOCKHOLDERS' EQUITY
Preferred stock, 3,929,898 shares authorized, $.10 par value,
no shares issued and outstanding - -
Series A convertible preferred stock, 625,000 shares authorized, $.10 par value
22,282 shares issued and outstanding; liquidation preference: $111,410 2,228 2,228
Series C Participating Cumulative Preferred Stock, 200,000 shares authorized,
$.10 par value, no shares issued and outstanding - -
Common stock, no par value, 60,000,000 shares authorized,
13,257,248 shares issued and outstanding at June 30, 2008 and December 31, 2007 9,625,872 9,621,030
Additional paid-in capital 4,035,064 4,035,064
Accumulated deficit (12,966,413) (12,023,290)
------------ ------------
Total stockholders' equity 696,751 1,635,032
------------ ------------
Total liabilities and stockholders' equity $ 4,276,285 $ 5,250,908
============= =============
See notes to condensed consolidated financial statements.
F-1
FIRST MONTAUK FINANCIAL CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Six Months Ended June 30, Three Months Ended June 30,
2008 2007 2008 2007
---- ---- ---- ----
Revenues:
Commissions $ 11,862,632 $ 17,233,155 $ 5,776,628 $ 8,406,159
Principal transactions 980,315 954,976 525,243 360,560
Investment banking 487,886 2,479,420 51,266 468,932
Interest and other income 952,914 1,522,131 412,592 709,414
----------- ----------- ----------- -----------
Total revenues 14,283,747 22,189,682 6,765,729 9,945,065
----------- ----------- ----------- -----------
Expenses:
Commissions, employee compensation and benefits 11,801,304 19,226,882 5,556,956 8,478,812
Clearing and floor brokerage 665,790 799,553 342,733 391,993
Communications and occupancy 867,226 834,544 414,219 410,778
Legal matters and related costs 383,719 984,251 212,094 553,707
Other operating expenses 1,439,510 1,423,214 486,602 685,692
Interest 60,768 12,843 31,082 8,761
----------- ----------- ---------- -----------
Total expenses 15,218,317 23,281,287 7,043,686 10,529,743
----------- ----------- ---------- -----------
Loss before provision for income taxes (934,570) (1,091,605) (277,957) (584,678)
Provision for income taxes 5,211 15,599 4,475 4,978
----------- ----------- ----------- -----------
Net loss (939,781) (1,107,204) (282,432) (589,656)
Preferred stock dividends (3,342) (85,803) (1,671) (42,900)
----------- ----------- ----------- -----------
Net loss applicable to common stockholders $ (943,123) $ (1,193,007) $(284,103) $(632,556)
=========== =========== =========== ===========
Loss per share:
Basic $ (0.07) $ (0.07) $ (0.02) $ (0.04)
Diluted $ (0.07) $ (0.07) $ (0.02) $ (0.04)
Weighted average number of shares of stock outstanding:
Basic 13,248,477 18,063,724 13,248,477 17,648,721
Diluted 13,248,477 18,063,724 13,248,477 17,648,721
See notes to condensed consolidated financial statements.
F-2
FIRST MONTAUK FINANCIAL CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Six Months Ended June 30,
2008 2007
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (939,781) $ (1,107,204)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation of property and equipment 36,244 71,947
Amortization of stock compensation and deferred costs 19,842 36,670
Increase (decrease) in cash attributable to changes in assets
and liabilities:
Due from clearing firm 340,946 1,243,302
Securities owned (181,450) (86,329)
Prepaid expenses (475,782) (437,085)
Employee and broker receivables 103,550 30,216
Other assets 725,684 (826,177)
Securities sold, not yet purchased 19,822 (484)
Commissions payable (530,255) (161,073)
Accounts payable 433,209 1,061,891
Accrued expenses (11,992) (435,488)
Income taxes payable (7,045) 7,833
Other liabilities 59,919 (14,579)
---------- -----------
NET CASH USED IN OPERATING ACTIVITIES (407,089) (616,560)
---------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment (2,795) (11,913)
---------- -----------
NET CASH USED IN INVESTING ACTIVITIES (2,795) (11,913)
---------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payment of capital lease - (820)
Payment of preferred stock dividends (3,342) (85,803)
---------- -----------
NET CASH USED IN FINANCING ACTIVITIES (3,342) (86,623)
---------- -----------
Net decrease in cash and cash equivalents (413,226) (715,096)
Cash and cash equivalents at beginning of period 868,836 1,145,751
---------- -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 455,610 $ 430,655
========== ===========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 60,768 $ 12,843
========== ===========
Income taxes $ 11,296 $ 8,361
========== ===========
See notes to condensed consolidated financial statements.
F-3
FIRST MONTAUK FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 1- GOING CONCERN AND LIQUIDITY CONSIDERATIONS
The accompanying condensed consolidated financial statements
have been prepared assuming that the Company will continue as
a going concern, which contemplates, among other things, the
realization of assets and satisfaction of liabilities in the
normal course of business. As of June 30, 2008, the Company
had an accumulated deficit, and working capital of $1,077,000,
which does not include the repayment of the $1,000,000
"AEFC-IC Note" (as defined in Note 8 - "Convertible Note
Purchase Agreement" in the Notes to Condensed Consolidated
Financial Statements). For the six months ended June 30, 2008,
the Company incurred a net loss of $939,781. Approximately
$338,000 of the loss is attributable to a fraudulent activity
loss due to a breach in our clearing firm's Internet security
that occurred in the first quarter of 2008 (as described more
fully in Note 11-"Fradulent Activity Loss" in the Notes to
Financial Statements). The Company has filed a claim on its
fidelity bond and business insurance carrier, in an attempt to
recoup the loss sustained and other expenses related to this
matter.
To date, the Company has been able to finance its operations
through cash generated from operations and proceeds from
the issuance of the AEFC-IC Note. On July 9, 2008, the
Company entered into a definitive asset purchase agreement
("Purchase Agreement") with First Allied Securities, Inc., a
related company of AEFC-FMFK Investment Corp.
("AEFC-IC") (See Note 9 - Material Definitive Purchase
Agreement). If the terms of the Purchase Agreement are not
approved by the Company's shareholders or is not consummated
for other reasons, the Company will be required to raise
additional financing and/or renegotiate the repayment terms of
the AEFC-IC Note in order to fund operational expenditures
and/or repay the AEFC-IC Note. There is no assurance that the
Company will be successful in consummating the Purchase
Agreement or in obtaining alternative funding or debt
renegotiation on terms satisfactory to the Company. If the
Company cannot raise additional financing and/or renegotiate
the repayment terms of the AEFC-IC Note, the Company may not
be able to continue as a going concern.
NOTE 2 - BASIS OF PRESENTATION
The interim financial information as of June 30, 2008 and for
the six-month and three-month periods ended June 30, 2008 and
June 30, 2007 has been prepared without audit, in accordance
with accounting principles generally accepted in the United
States of America and pursuant to the interim financial
statements rules and regulations of the Securities and
Exchange Commission (the "SEC"). Certain information and
footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting
principles in the United States of America have been condensed
or omitted pursuant to such rules and regulations, although
management believes that the disclosures made are adequate to
provide for fair presentation. These condensed consolidated
financial statements should be read in conjunction with
management's discussion and analysis of financial condition
and results of operations ("MDA") included elsewhere in this
report on Form 10-Q and the Company's Annual Report on Form
10-K/A for the fiscal year ended December 31, 2007, previously
filed with the SEC on August 8, 2008.
In the opinion of management, all adjustments (which include
normal recurring adjustments) necessary for a fair
presentation of the financial position have been made. The
results of operations for the six months and three months
ended June 30, 2008 are not necessarily indicative of the
operating results for the full fiscal year or any future
periods.
4
NOTE 3 - RECENT ACCOUNTING PRONOUNCEMENTS
In September 2006, the FASB issued SFAS No. 157, Fair Value
Measurements, which defines fair value, establishes a
framework for measuring fair value in generally accepted
accounting principles, and expands disclosures about fair
value measurements. This statement does not require any new
fair value measurements, but provides guidance on how to
measure fair value by providing a fair value hierarchy used to
classify the source of the information. SFAS No. 157 is
effective for fiscal years beginning after November 15, 2007,
and all interim periods within those fiscal years. In February
2008, the FASB released FASB Staff Position (FSP FAS 157-2 -
Effective Date of FASB Statement No. 157) which delays the
effective date of SFAS No. 157 for all nonfinancial assets and
nonfinancial liabilities, except those that are recognized or
disclosed at fair value in the financial statements on a
recurring basis (at least annually), to fiscal years beginning
after November 15, 2008 and interim periods within those
fiscal years. The implementation of SFAS No. 157 for financial
assets and liabilities, effective January 1, 2008, did not
have an impact on the Company's financial position and results
of operations. The Company is currently evaluating the impact
of adoption of this statement on its non-financial assets and
liabilities in the first quarter of fiscal 2009.
In December 2007, the Financial Accounting Standards Board
("FASB") issued Statement of Financial Accounting Standards
("SFAS") No. 141 (revised 2007), Business Combinations, which
replaces SFAS No 141. The statement retains the purchase
method of accounting for acquisitions, but requires a number
of changes, including changes in the way assets and
liabilities are recognized in the purchase accounting. It also
changes the recognition of assets acquired and liabilities
assumed arising from contingencies, requires the
capitalization of in-process research and development at fair
value, and requires the expensing of acquisition-related costs
as incurred. SFAS No. 141R is effective for business
combinations for which the acquisition date is on or after the
beginning of the first annual reporting period beginning on or
after December 15, 2008.
In December 2007, the FASB issued SFAS No. 160.
"Noncontrolling Interests in Consolidated Financial
Statements-and Amendment of ARB No. 51." SFAS 160 establishes
accounting and reporting standards pertaining to ownership
interests in subsidiaries held by parties other than the
parent, the amount of net income attributable to the parent
and to the noncontrolling interest, changes in a parent's
ownership interest, and the valuation of any retained
noncontrolling equity investment when a subsidiary is
deconsolidated. This statement also establishes disclosure
requirements that clearly identify and distinguish between the
interests of the parent and the interests of the
noncontrolling owners. SFAS 160 is effective for fiscal years
beginning on or after December 15, 2008. The adoption of SFAS
160 is not currently expected to have a material effect on the
Company's consolidated financial position, results of
operations, or cash flows.
In March 2008, the Financial Accounting Standards Board (FASB)
issued FASB Statement No. 161, Disclosures about Derivative
Instruments and Hedging Activities. The new standard is
intended to improve financial reporting about derivative
instruments and hedging activities by requiring enhanced
disclosures to enable investors to better understand their
effects on an entity's financial position, financial
performance, and cash flows. It is effective for financial
statements issued for fiscal years and interim periods
beginning after November 15, 2008, with early application
encouraged. The Company is currently evaluating the impact of
adopting SFAS. No. 161 on its consolidated financial
statements.
5
NOTE 4 - STOCK-BASED COMPENSATION
The Company periodically issues common stock to employees,
non-employee consultants and non-employee independent
registered representatives in accordance with the provisions
of the shareholder approved equity compensation plans.
The Company's results for the six and three month periods
ended June 30, 2008 includes share-based compensation expense
for employee options totaling approximately $1,680 compared to
approximately $5,400 and $1,000 for the six and three month
periods ended June 30, 2007. Such amounts have been included
in the condensed consolidated statements of operations within
commissions, employee compensation and benefits. No income tax
benefit has been recognized in the income statement for
share-based compensation arrangements as the Company has
provided for a 100% valuation allowance on net deferred tax
assets.
Employee stock option compensation expense in 2008 and 2007 is
the estimated fair value of options granted amortized on a
straight-line basis over the requisite service period for the
entire portion of the award. The Company has not adjusted the
expense by estimated forfeitures, as required by FAS 123(R)
for employee options, since the forfeiture rate based upon
historical data was determined to be immaterial.
Accounting for Non-employee Awards:
The Company previously accounted for options granted to its
non-employee consultants and non-employee registered
representatives using the fair value cost in accordance with
FAS 123 and EITF No. 96-18. The adoption of FAS 123(R) and SAB
107, as of January 1, 2006, had no material impact on the
accounting for non-employee awards. The Company continues to
consider the additional guidance set forth in EITF Issue No.
96-18 ("EITF 96-18"), "Accounting for Equity Instruments That
Are Issued to Other Than Employees".
Stock compensation expense related to non-employee options was
approximately $0 and $3,160 for the six and three month
periods ended June 30, 2008 compared to approximately $31,000
and ($2,000) for the six and three month periods ended June
30, 2007. These amounts are included in the condensed
consolidated statements of operations within commissions,
employee compensation and benefits.
The fair value of options at the date of grant was estimated
using the Black-Scholes option pricing model. During 2008, the
Company took into consideration guidance under FAS 123(R) and
SEC Staff Accounting Bulletin No. 107 ("SAB 107") when
reviewing and updating assumptions. The expected volatility is
based upon historical volatility of our stock and other
contributing factors. The expected term is based upon
observation of actual time elapsed between date of grant and
exercise of options for all employees. Previously such
assumptions were determined based on historical data.
6
The assumptions made in calculating the fair values of all
options are as follows:
--------------------- --------------------------------- -----------------------------------
Six Months Ended Three Months Ended
--------------------- --------------------------------- -----------------------------------
--------------------- ----------------- --------------- ------------------ ----------------
June 30, 2008 June 30, 2007 June 30, 2008 June 30, 2007
--------------------- ----------------- --------------- ------------------ ----------------
--------------------- ----------------- --------------- ------------------ ----------------
Expected volatility 67% 69% 67% 69%
--------------------- ----------------- --------------- ------------------ ----------------
--------------------- ----------------- --------------- ------------------ ----------------
Expected dividend
yield 0% 0% 0% 0%
--------------------- ----------------- --------------- ------------------ ----------------
--------------------- ----------------- --------------- ------------------ ----------------
Risk-free interest
rate 3.34%-4.54% 3.71%-5.05% 3.34%-4.54% 3.71%-5.05%
--------------------- ----------------- --------------- ------------------ ----------------
--------------------- ----------------- --------------- ------------------ ----------------
Expected term (in
years) 1-5 years 1-5 years 1-5 years 1-5 years
--------------------- ----------------- --------------- ------------------ ----------------
The following table represents all of our stock options
granted, exercised and forfeited/expired during the first six
months of 2008.
----------------------------- -------------- ------------------ --------------------- ------------------
Weighted Average Weighted Average
Number Exercise Price Remaining Aggregate
Stock Options of Shares per Share Contractual Term Intrinsic Value
----------------------------- -------------- ------------------ --------------------- ------------------
----------------------------- -------------- ------------------ --------------------- ------------------
Outstanding at
January 1, 2008 1,871,200 $0.73 2.2 0
----------------------------- -------------- ------------------ --------------------- ------------------
----------------------------- -------------- ------------------ --------------------- ------------------
Granted 6,000 $0.50
----------------------------- -------------- ------------------ --------------------- ------------------
----------------------------- -------------- ------------------ --------------------- ------------------
Exercised - -
----------------------------- -------------- ------------------ --------------------- ------------------
----------------------------- -------------- ------------------ --------------------- ------------------
Forfeited/expired (215,400) $0.85
----------------------------- -------------- ------------------ --------------------- ------------------
----------------------------- -------------- ------------------ --------------------- ------------------
Outstanding at 1,661,800 $0.72 1.8 0
June 30, 2008
----------------------------- -------------- ------------------ --------------------- ------------------
----------------------------- -------------- ------------------ --------------------- ------------------
Exercisable at
June 30, 2008 1,403,280 $0.71 1.5 0
----------------------------- -------------- ------------------ --------------------- ------------------
The weighted average estimated per share fair value of all
share options granted during the six months ended June 30,
2008 and 2007 was $0.04 and $0.21, respectively. There were no
stock options exercised during the six months of 2008 and
2007.
7
NOTE 5 - PREPAID EXPENSES
Prepaid expenses at June 30, 2008 include a payment for errors
and omissions insurance coverage. The unamortized amount at
June 30, 2008 is approximately $435,000, which will be
expensed over the next seven months.
NOTE 6 - OTHER ASSETS
Other assets at June 30, 2008 is primarily comprised of
commissions' receivable due from vendors for insurance, mutual
funds and fees totaling approximately $352,000 and deposits of
$50,000.
NOTE 7 - ACCOUNTS PAYABLE
Accounts payable at June 30, 2008 includes an insurance
premium financing agreement with a current balance of
$301,000, payable in four remaining monthly installments of
approximately $75,000 each, including interest at the rate of
4.22% per annum and legal and accounting fees of $43,000,
market data services of $96,000 and telephone and
communication fees of $38,000.
NOTE 8 - CONVERTIBLE NOTE PURCHASE AGREEMENT
On December 7, 2007 the Company entered into a note purchase
agreement (the "Note Purchase Agreement") with AEFC-FMFK
Investment Corp. ("AEFC-IC"), a related company of First
Allied Securities, Inc., an Advanced Equities Financial Corp.
company (See Note 9 - Material Definitive Purchase Agreement),
pursuant to which AEFC-IC was issued a 10% Convertible
Secured Note due on December 31, 2008 for an aggregate
principal amount up to $2,000,000 (the "AEFC-IC Note"). The
AEFC-IC Note accrues interest on the unpaid principal
amount at the rate of 10% per annum, which will be paid
monthly in arrears on or before the 10th day of
the month following the interest accrual. The principal of the
AEFC-IC Note and all accrued and unpaid interest thereon will
be payable in full on December 31, 2008. The AEFC-IC Note is
convertible into shares of common stock at $0.35 per share, as
adjusted, beginning July 1, 2008 if the AEFC-IC Note is not
prepaid prior to such date. The AEFC-IC Note is prepayable at
any time prior to July 1, 2008 subject to an escalating
prepayment penalty based on the date of prepayment which is
payable by us in cash and the issuance of a warrant to
purchase shares of common stock at an exercise price of $0.35
per share, as adjusted. In the event the Company (i) does not
draw the full $2,000,000 principal amount available under the
AEFC-IC Note and (ii) the AEFC-IC Note has not been prepaid by
July 1, 2008, the Company will issue AEFC-IC a warrant to
purchase shares of common stock at an exercise price of $0.35
per share, as adjusted, for each one dollar of principal
amount available but not drawn upon under the AEFC-IC Note.
The parties also executed a registration rights agreement. At
June 30, 2008, the Company had $1,000,000 of outstanding
borrowings under the Note Purchase Agreement.
In connection with, and concurrent with, the execution of the
Note Purchase Agreement, the AEFC-IC Note and the related
documents, the Company entered into the First Amendment, dated
as of December 7, 2007 ("First Amendment to the Rights
Agreement"), of the Rights Agreement, dated August 1, 2007,
between us and Continental Stock Transfer & Trust Company, as
Rights Agent ("Rights Agreement") as more fully described
above. The First Amendment to the Rights Agreement provides
that AEFC-IC will not be deemed to be an "Acquiring Person"
under the Rights Agreement by reason of (i) the execution of
the AEFC-IC Note Purchase Agreement; (ii) the issuance of the
AEFC-IC Note; (iii) the issuance of shares of common stock
upon the conversion of the AEFC-IC Note into shares of our
common stock; (iv) the issuance of any warrants to AEFC-IC
pursuant to the Note Purchase Agreement or any shares of
common stock upon exercise of such warrants; (v) the purchase
by AEFC-IC of all or any of the 3,300,308 shares of common
stock owned by Mr. Okun or any affiliates of Mr. Okun
(collectively, the "Okun Parties"); (vi) the approval,
execution or delivery of any agreement with respect to the
purchase by AEFC-IC of all or any of the 3,300,308 shares of
common stock owned by the Okun Parties; (vii) the public or
other announcement of the Note Purchase Agreement or any of
the transactions contemplated thereby, or the purchase by
AEFC-IC of all or any of the 3,300,308 shares of common stock
owned by the Okun Parties; or (viii) the consummation of the
Note Purchase Agreement and any other transactions
contemplated by the Note Purchase Agreement or any agreement
to purchase all or any of the 3,300,308 shares of common stock
owned by the Okun Parties.
8
The foregoing description of the First Amendment to the Rights
Agreement is qualified in its entirety by reference to the
full text of the First Amendment to the Rights Agreement which
is filed on Exhibit 10.2 to the Company's Report on Form 8-K
filed on December 13, 2007.
NOTE 9- MATERIAL DEFINITIVE PURCHASE AGREEMENT
On July 9, 2008, the Company and its wholly owned
broker-dealer subsidiary, First Montauk Securities Corp.
("FMSC" and together with the Company, "Company") signed a
definitive asset purchase agreement (the "Purchase Agreement")
with First Allied Securities, Inc., an Advanced Equities
Financial Corp. company ("Buyer"), providing for the sale of
certain assets of FMSC to Buyer.
Under the Purchase Agreement, FMSC's independent registered
representatives will be given the opportunity to join Buyer,
and Buyer will acquire the right to service the customer
accounts of those registered representatives that join Buyer.
The aggregate purchase price for the purchased assets
("Purchase Price") is equal to 30% of the aggregate commission
and fee income for the trailing twelve (12) month period ended
on June 30, 2008 (the "Production") which was generated by the
Closing Date Representatives and credited to the Closing Date
Representatives for the purpose of computing their commission
payout. The term "Closing Date Representative" means any and
all registered representatives currently affiliated with FMSC,
and (i) any registered representative who is accepted by Buyer
to join Buyer and who becomes licensed with (or otherwise
engaged by) Buyer prior to or upon the closing of the
transactions contemplated by the Purchase Agreement and have
not voluntarily resigned or terminated their relationship with
Buyer prior to the Second Payment Date (as defined below) of
the Purchase Price, or (ii) any registered representative who
becomes licensed and affiliated with buyer or any affiliate of
Buyer after the date of execution of the Purchase Agreement
and prior to the closing date and has not been terminated for
cause or voluntarily resigned or terminated his or her
relationship with Buyer prior to the second payment date of
the Purchase Price; provided that Buyer did not take or fail
to take any action (including reducing his or her commission
payout rate) which directly caused or resulted in the
resignation or termination of the Closing Date Representative
with Buyer.
The Purchase Price will be payable in several parts as
follows: (1) Within two business days of execution of the
Purchase Agreement, Buyer will pay $250,000 to the Company;
(2) On the closing date, Buyer will pay an amount equal to the
outstanding balance, including principal and interest through
the closing date, due under the "AEFC-IC Note", by cancelling
the Note and applying the sums due thereunder towards the
Purchase Price; (3) On the 30th day following the closing
date, Buyer will pay an amount equal to the lesser of
$2,000,000 or the balance of the Purchase Price; and (4) On
the 90th day (but in no event earlier than January 15, 2009)
after the closing date, Buyer will pay the balance of the
Purchase Price, if any. The total value of the transaction is
dependent on the amount of commissions and fee income to be
acquired by Buyer.
The Purchase Agreement also contains a provision whereby the
Buyer agrees to waive any rights it has to require the Company
to issue the Contingent Warrant as described in the
Convertible Note Purchase Agreement as described in Note 8
above. As a condition of this waiver by the Buyer, the Company
agreed to waive its right to draw down on the balance of the
AEFC-IC Note.
9
The Purchase Agreement is subject to usual and customary
conditions for transactions of this nature, including, among
other things, the approval and adoption of the Purchase
Agreement and the transactions contemplated by it by the
shareholders of the Company, the regulatory consent of the
Financial Industry Regulatory Authority, the acceptance and
transfer of customer accounts accepted by Buyer to Buyer's
clearing firm, and that the estimated aggregate Production of
the Closing Date Representatives is greater than $12,250,000.
The Purchase Agreement also contains customary
representations, warranties, covenants and indemnities for
breach.
The parties expect that the Company will file a proxy
statement for shareholders with the SEC in the third quarter
of 2008 and the transaction, subject to the conditions set
forth in the Purchase Agreement, is expected to close by the
end of 2008, however, as a result of the foregoing
uncertainties, there can be no assurances that the transaction
will be completed. If the closing is not consummated by
December 31, 2008, the parties have the option to terminate
the Purchase Agreement and not consummate the transaction.
The Purchase Agreement provides that in the event the Company
is not in breach of any representation or warranty and has
performed or observed in all material respects the covenants
and agreements to be performed or observed by it and the
Company terminates the Purchase Agreement because Buyer is in
breach of the Purchase Agreement and which breach has not been
cured within 20 days after giving of written notice, then
$500,000 of the AEFC-IC Note and interest thereon will be
forgiven and the maturity date of the AEFC-IC Note with
respect to the remaining outstanding principal amount of the
AEFC-IC Note will be extended from December 31, 2008 to
December 31, 2009.
In the event that Buyer is not in breach of any representation
or warranty and has performed or observed in all material
respects the covenants and agreements to be performed or
observed by it and Buyer terminates the Purchase Agreement
because the Company is in breach of the Purchase Agreement
which breach has not been cured within 20 days after the
giving of written notice, or because at any time prior to
approval by the shareholders of the Company, the Board of
Directors of the Company acts or fails to act in a manner
consistent with completing the transaction with the Buyer,
then the Company will pay Buyer a termination fee equal to
$250,000 plus the amount of certain expenses incurred by Buyer
related to a transition meeting up to a maximum of $100,000.
In the event that either party terminates under certain other
circumstances, the Company agrees that the AEFC-IC Note shall
become due and payable on the later of 30 days thereafter or
December 31, 2008. In the event of such termination by either
party other than due to a breach by Buyer, the Company shall
refund the Prepayment Amount to Buyer.
The foregoing description of the Purchase Agreement is
qualified in its entirety by reference to the full text of the
Purchase Agreement, which is filed as Exhibit 10.1 to the
Company's Report on Form 8-K filed on July 14, 2008.
10
NOTE 10 - COMMITMENTS AND CONTINGENCIES
Operating Leases:
The Company leases office facilities and equipment under
operating leases expiring at various dates through 2012.
Certain leases require the Company to pay increases in real
estate taxes, operating costs and repairs over certain base
year amounts.
Future minimum rental commitments under all non-cancelable
leases with terms greater than one year are as follows:
Year ending December 31,
2008 $ 483,941
2009 775,868
2010 112,796
2011 35,091
2012 7,983
------------
$ 1,415,679
============
Master Services Agreement:
Effective November 2006, the Company entered into a master
services agreement with an outside vendor for development of
certain software, data integration and business processing
improvement consulting services. Under the terms of the
agreement, the Company made payments totaling $400,000 to the
vendor for software development, none of which has been
amortized or expensed and has been included as security
deposits in other assets on the Consolidated Statements of
Financial Condition. On April 28, 2008, the Company signed a
new agreement amending the master services agreement with an
outside vendor in exchange for a reimbursement of a portion of
the system development costs paid by the Company. As part of
this new Agreement, the vendor will provide a one-time
electronic data feed and commission collection services to the
Company through February 2010, which will be amortized over a
twenty-three (23) month period, beginning April 2008. The
balance of the amount related to the collection of commissions
is reflected in prepaid expenses.
Legal Matters:
FMSC, the Company's wholly owned subsidiary, is a respondent
or co-respondent in various legal proceedings, including
customer arbitrations and regulatory investigations.
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 an adverse judgment. 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.
As of June 30, 2008, 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 us. All such
cases will continue to be vigorously defended.
11
Civil Lawsuit
The Company and certain of its principals are defendants in a
lawsuit filed in the United States District Court for the
Eastern District of North Carolina. The complaint, brought by
two former clients of FMSC, alleges fraud, negligent
misrepresentation, breaches of duty of care and violations of
the North Carolina Securities Act in connection with the
Plaintiff's participation in a 1031 tax-free exchange
investment. The Company intends to vigorously defend this case
and believes it has meritorious defenses to this claim.
Vendor Settlement
In July 2008 the Company was sued in Georgia State Court by
Cypress Communications, Inc. for alleged breach of contract in
connection with the Company's purchase of a telephone system.
Prior to the suit being filed, the parties had been in
negotiations to settle the dispute. The Company accrued
$65,000 related to this claim in the quarter ended June 30,
2008 and paid it in July 2008. The claim was dismissed with
prejudice on July 30, 2008.
SEC Order
The SEC issued a Cease-And-Desist Order ("Order") on April 24,
2008, which determined that the Company failed reasonably to
supervise the trading and research activities of a former
institutional analyst and that the Company failed to adopt
reasonable policies and procedures so as to prevent and detect
certain conduct, which led to the former institutional
trader's violations of federal securities laws. The order
involves conduct that occurred during the time period from
March through December 2003. The Order imposed a censure and
fine of $100,000 against the Company, and a six-month
supervisory suspension and fine of $50,000 against the
Company's former president and CEO. The Company's monetary
fine had been accrued for in 2007 and paid in April 2008.
NOTE 11 - FRAUDULENT ACTIVITY LOSS
On January 24, 2008, a series of fraudulent purchase order
transactions were executed over the order entry system of
National Financial Services ("NFS"), the Company's clearing
broker, through an Internet protocol ("IP") address over the
Internet, which reflected the user identification and password
information of one of FMSC's registered representatives. These
transactions were purchased without authorization in several
customer accounts of the registered representative.
After these transactions were executed, NFS contacted the
appropriate regulatory authorities to report the fraudulent
activities, which the regulatory authorities determined to let
stand. Thereafter, FMSC took market action to liquidate the
securities fraudulently purchased in order to mitigate the
loss to the Company. These transactions resulted in a net loss
to the Company of approximately $338,000 in the quarter ended
March 31, 2008, which is reflected in other expenses in the
Condensed Consolidated Statements of Operation. The Company
has filed a claim on its fidelity bond and business insurance
carrier, in an attempt to recoup the loss sustained and other
expenses related to this matter.
12
NOTE 12 - LOSS PER SHARE
Basic loss per share for the six and three months ended June
30, 2008 and 2007 is based on the weighted average number of
shares of common stock outstanding.
The following table sets forth the weighted average number of
shares of common stock and dilutive securities outstanding
used in the computation of basic and diluted loss per share:
Six months ended June 30, Three months ended June 30,
2008 2007 2008 2007
(unaudited) (unaudited) (unaudited) (unaudited)
Numerator - basic and
diluted:
Net loss $(939,781) $(1,107,204) $ (282,432) $ (589,656)
Deduct: dividends paid
during the year (3,342) (85,803) (1,671) (42,900)
------------------- ------------------- ----------------- -----------------
Numerator for basic and
diluted loss per share $(943,123) $(1,193,007) $(284,103) $(632,556)
=================== =================== ================= =================
Denominator:
Denominator for basic and
diluted loss per share 13,248,477 18,063,724 13,248,477 17,648,721
============================================================================
The following securities have been excluded from the dilutive
per share computation, as they are antidilutive:
---------------------- ------------------------------------ ---------------------------------------
Six months ended June 30, Three months ended June 30,
---------------------- ------------------------------------ ---------------------------------------
---------------------- ----------------- ------------------ ------------------ --------------------
2008 2007 2008 2007
---------------------- ----------------- ------------------ ------------------ --------------------
---------------------- ----------------- ------------------ ------------------ --------------------
---------------------- ----------------- ------------------ ------------------ --------------------
---------------------- ----------------- ------------------ ------------------ --------------------
Stock options 1,661,800 1,967,400 1,771,200 1,730,400
---------------------- ----------------- ------------------ ------------------ --------------------
---------------------- ----------------- ------------------ ------------------ --------------------
Warrants 283,518 407,518 283,518 407,518
---------------------- ----------------- ------------------ ------------------ --------------------
---------------------- ----------------- ------------------ ------------------ --------------------
Convertible 2,857,143 50,000 2,857,143 50,000
debentures
---------------------- ----------------- ------------------ ------------------ --------------------
---------------------- ----------------- ------------------ ------------------ --------------------
Convertible
preferred stock 44,564 44,564 44,564 44,564
---------------------- ----------------- ------------------ ------------------ --------------------
13
As required by FAS 128, "Earnings per Share", cumulative
preferred stock dividends for the six and three months ended
June 30, 2008 and 2007 were deducted from net loss to arrive
at the numerator for basic and diluted loss per share.
NOTE 13 - NET CAPITAL REQUIREMENTS
FMSC is subject to the SEC Uniform Net Capital Rule (Rule
15c3-1), which requires FMSC to maintain minimum net capital,
as defined. At June 30, 2008, FMSC had net capital of
$848,267, which was $598,267 in excess of its required net
capital of $250,000. FMSC's ratio of aggregate indebtedness to
net capital was 2.45 to 1.
NOTE 14 - FAIR VALUE MEASUREMENTS
The Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 157, "Fair Value Measurements" ("SFAS
157") as of January 1, 2008. SFAS 157 defines fair value as
the price that would be received to sell an asset or paid to
transfer a liability in an orderly transaction between market
participants at the measurement date, not adjusted for
transaction costs. SFAS 157 also establishes a fair value
hierarchy that prioritizes the inputs to valuation techniques
used to measure fair value into three broad levels giving the
highest priority to quoted prices in active markets for
identical assets or liabilities (Level 1) and the lowest
priority to unobservable inputs (Level 3) as described below:
Level 1 Inputs -- Unadjusted quoted prices in active markets
for identical assets or liabilities that
is accessible by the Company;
Level 2 Inputs -- Quoted prices in markets that are not active
or financial instruments for which all
significant inputs are observable, either
directly or indirectly;
Level 3 Inputs -- Unobservable inputs for the asset or
liability including significant assumptions
of the Company and other market participants.
The Company determines fair values for the following assets
and liabilities:
Long-term investments, at fair value. The Company's long-term
investments, at fair value, consist of marketable equity
securities and investment securities, marked to market. The
Company's marketable equity securities are classified within
Level 1 of the fair value hierarchy, as they are valued using
quoted market prices from an exchange. Investment securities,
marked to market consists of warrants and equity securities
received in connection with certain capital raising
transactions. Warrants are generally exercisable at the
respective offering price of the transaction. Such investments
are classified within Level 3 of the fair value hierarchy as
the value is determined by management based on valuation
models and enterprise value, taking into consideration the
financial performance of the companies relative to
projections, trends within sectors, underlying business models
and expected exit timing and strategy.
14
Trading securities and trading account securities sold but
not yet purchased, at fair value. The Company's trading
securities and trading account securities sold but not yet
purchased, at fair value, are securities owned or sold by the
Company's broker-dealer subsidiaries and consist of marketable
and non-public equity and debt securities. The Company
classifies marketable equity and debt securities within
Level 1 of the fair value hierarchy because quoted market
prices are used to value the securities. Non-public equity
and debt securities are classified within Level 3 of the fair
value hierarchy if enterprise values are used to value the
securities. In determining the enterprise value, the Company
analyzes various financial, performance and market factors to
estimate the value, including where applicable market trading
activity, which may be reported by The PORTAL MarketSM,
a subsidiary of The NASDAQ Stock Market, Inc.
The following tables present our assets and liabilities that
are measured at fair value on a recurring basis and are
categorized using the fair value hierarchy. The fair value
hierarchy has three levels based on the reliability of the
inputs used to determine fair value.
Fair Value Measurements at Reporting Date
-----------------------------------------------------------
Quoted Prices in Significant
Active Markets for Significant Unobservable
Description June 30, 2008 Identical Assets Other Inputs
----------------------- --------------------- ------------------------- -------------- ------------------
Assets:
Securities Owned $341,223 $341,223
--------------------- ------------------------- -------------- ------------------
Total Assets $341,223 $341,223 $-- $--
===================== ========================= ============== ==================
Liabilities: $ -- $ -- $-- $--
--------------------- ------------------------- -------------- ------------------
Total Liabilities $ -- $ -- $-- $--
===================== ========================= ============== ==================
15
Item 2. 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 (the
"Exchange Act"), 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 (the "1995
Reform Act) provides a "safe harbor" for forward-looking statements. In order to
comply with the terms of the safe harbor, we caution readers that a variety of
factors could cause our actual results to differ materially from the anticipated
results or other expectations expressed in our forward-looking statements. The
Company desires to avail itself of these "safe harbor" provisions of the 1995
Reform Act and is therefore including this special note to enable the Company to
do so. Forward-looking statements are identified by words such as "believes,"
"anticipates," "expect," "intend," "plan," "will," "may" and other similar
expressions. In addition, any statements that refer to expectations, projections
or other characterizations of future events or circumstances are forward-looking
statements. Forward-looking statements in this Quarterly Report involve known
and unknown risks, uncertainties and other factors which could cause the
Company's actual results, performance (financial or operating) or achievements
to differ from future results, performance (financial or operating) or
achievements express or implied by such forward-looking statements.
These risks and uncertainties, many of which are beyond our control,
include, but are not limited to: (i) transaction volume in the securities
markets, (ii) the volatility of the securities markets, (iii) fluctuations in
interest rates, (iv) changes in regulatory requirements which could affect the
cost of doing business, (v) fluctuations in currency rates, (vi) general
economic conditions, both domestic and international, (vii) changes in the rate
of inflation and related impact on securities markets, (viii) competition from
existing financial institutions and other new participants in the securities
markets, (ix) legal developments affecting the litigation experience of the
securities industry, (x) the timely completion of the acquisition of the Company
by a private investor, and (xi) changes in federal and state tax laws which
could affect the popularity of products sold by us. We do not undertake any
obligation to publicly update or revise any forward-looking statements. The
reader is referred to our previous filings with the SEC, including our Form
10-K/A for the year ended December 31, 2007.
Overview
We are a New Jersey-based financial services holding company whose
wholly owned subsidiary, First Montauk Securities Corp., ("FMSC") has operated
as a full service retail and institutional securities brokerage firm since 1987.
Since July 2000, FMSC 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. We also
sell insurance products through our subsidiary, Montauk Insurance Services, Inc.
Montauk Financial Group has approximately 170 registered
representatives and services approximately 45,000 retail and institutional
customers, which comprise approximately $3 billion in customer assets. All of
our 82 branch office and satellite locations in 23 states are owned and operated
by affiliates; who are 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 headquarters.
16
Montauk Financial Group is registered as a broker-dealer with the SEC,
Financial Industry Regulatory Authority ("FINRA"), the Municipal Securities Rule
Making Board, the National Futures Association, 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,
and registered as an International broker-dealer to conduct business with
institutional clients in the province of Ontario, Canada. Securities
transactions are cleared through National Financial Services LLC ("NFS") of
Boston, MA, and Penson Financial Services Inc of Dallas, TX, with various floor
brokerage and specialist firms also providing execution services. These
arrangements provide Montauk Financial Group with back office support and
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.
On July 9, 2008, we signed a definitive asset purchase agreement
with First Allied Securities, Inc., an Advanced Equities Financial Corp.
company ("Buyer"), providing for the sale of certain assets of FMSC to Buyer.
Under the Purchase Agreement, our independent registered
representatives will be given the opportunity to join Buyer, and Buyer will
acquire the right to service the customer accounts of those registered
representatives that join Buyer. The aggregate purchase price for the purchased
assets is equal to 30% of the aggregate commission and fee income for the
trailing twelve (12) month period ended on June 30, 2008, which was generated by
the Closing Date Representatives and credited to the Closing Date
Representatives for the purpose of computing their commission payout.
The Purchase Agreement is subject to usual and customary conditions for
transactions of this nature, including, among other things, the approval and
adoption of the Purchase Agreement and the transactions contemplated by it by
our shareholders, the regulatory consent of the Financial Industry Regulatory
Authority, the acceptance and transfer of customer accounts accepted by Buyer to
Buyer's clearing firm, and that the estimated aggregate Production of the
Closing Date Representatives is greater than $12,250,000. The Purchase Agreement
also contains customary representations, warranties, covenants and indemnities
for breach.
We anticipate filing a proxy statement for shareholders with the SEC in
the third quarter of 2008 and the transaction, subject to the conditions set
forth in the Purchase Agreement, is anticipated to close by the end of 2008,
however, as a result of the foregoing uncertainties, there can be no assurances
that the transaction will be completed.
The accompanying condensed consolidated financial statements have been
prepared assuming that the Company will continue as a going concern, which
contemplates, among other things, the realization of assets and satisfaction of
liabilities in the normal course of business. As of June 30, 2008, the Company
had an accumulated deficit, and working capital of $1,077,000, which does not
include the repayment of the $1,000,000 "AEFC-IC Note" (as defined in Note 8 -
"Convertible Note Purchase Agreement" in the Notes to Condensed Consolidated
Financial Statements). For the six months ended June 30, 2008, the Company
incurred a net loss of $939,781. Approximately $338,000 of the loss is
attributable to a fraudulent activity loss due to a breach in our clearing
firm's Internet security that occurred in the first quarter of 2008 (as
described more fully in Note 11-"Fradulent Activity Loss" in the Notes to
Financial Statements). The Company has filed a claim on its fidelity bond and
business insurance carrier, in an attempt to recoup the loss sustained and other
expenses related to this matter.
17
To date, the Company has been able to finance its operations
through cash generated from operations and proceeds from the issuance of the
AEFC-IC Note. On July 9, 2008, the Company entered into a definitive asset
purchase agreement ("Purchase Agreement") with First Allied Securities, Inc., a
related company of AEFC-FMFK Investment Corp. ("AEFC-IC") (See Note 9 -
Material Definitive Purchase Agreement). If the terms of the Purchase Agreement
are not approved by the Company's shareholders or is not consummated
for other reasons, the Company will be required to raise additional financing
and/or renegotiate the repayment terms of the AEFC-IC Note in order to fund
operational expenditures and/or repay the AEFC-IC Note. There is no assurance
that the Company will be successful in consummating the Purchase Agreement or
in obtaining alternative funding or debt renegotiation on terms satisfactory to
the Company. If the Company cannot raise additional financing and/or renegotiate
the repayment terms of the AEFC-IC Note, the Company may not be able to continue
as a going concern.
RESULTS OF OPERATIONS
Three Months Ended June 30, 2008 Compared to Three Months Ended June 30, 2007
Revenues by Source
The following provides a breakdown of total revenues by source for the
three-month periods ended June 30, 2008 and 2007 (in thousands of dollars).
Three Months Ended
---------------------------------------------------------------
June 30, 2008 June 30, 2007
------------------------------ ------------------------------
Commissions % of Total % of Total
Amount Revenues Amount Revenues
Equities $2,499 37% $ 3,384 34%
Mutual Funds 1,047 15% 1,593 16%
Insurance 800 12% 1,229 12%
Alternative Products
411 6% 1,070 11%
Asset
Management
Fees 945 14% 1,026 10%
Fixed Income 75 1% 104 1%
------------ --------------- -------------- ---------------
Total 5,777 85% 8,406 84%
Principal Transactions
525 8% 361 4%
Investment Banking
51 1% 469 5%
Interest and Other
Interest
372 5% 588 6%
Other 41 1% 121 1%
------------ --------------- -------------- ---------------
Total 413 6% 709 7%
------------ --------------- -------------- ---------------
Total revenues $6,766 100% $ 9,945 100%
============ =============== ============== ===============
18
Overview
Total revenues decreased $3.18 million, or 32%, for the three months
ended June 30, 2008 (the "2008 quarter"), to $6.77 million from $9.95 million
for the three months ended June 20, 2007 (the "2007 quarter"). The decrease in
revenues is partially attributable to a decline in the number of producing
registered representatives quarter over quarter, which resulted in decreases in
almost every category of revenue.
Expenses decreased in the 2008 quarter by $3.5 million, or 33%,
compared to the 2007 quarter. Commissions, employee compensation and benefits
decreased by $2.9 million, from $8.5 million in the 2007 quarter to $5.6 million
in the 2008 quarter. Of the $2.9 million decrease, $2.3 million was attributable
to the reduction in commission expense, which is directly related to the
decrease in revenues for the 2008 quarter.
The net loss attributable to common stockholders for the 2008 quarter
was $284,000, or ($0.02) per basic and diluted shares compared to a net loss
attributable to common stockholders for the 2007 quarter of $633,000, or ($0.04)
per basic and diluted shares.
Commission Revenue
Commissions are comprised of revenues from transactions related to
equities, fixed income, mutual funds, insurance, alternative products and asset
management fees. Commission revenue for the 2008 quarter was $5.8 million
compared to $8.4 million for the 2007 quarter, a decrease of approximately $2.6
million. There were decreases in every category of commissions. Decreases in
commissions from equity transactions of $885,000, alternative products of
$659,000 and mutual funds of $546,000 accounted for the majority of the
reduction in commission revenues when compared to the 2007 quarter. This
decrease highlights the result of the reduction in producing registered
representatives' from the 2007 quarter to the 2008 quarter.
Principal Transactions
Principal transactions, which include mark-ups/mark-downs on customer
transactions in which we act as principal, proprietary trading, and the sale of
fixed income securities, increased $164,000, from $361,000 for the 2007 quarter
to $525,000 for the 2008 quarter. The increase is primarily due to unrealized
gains in restricted stock that the Company received during 2008 as a result of
investment banking deals.
Investment Banking
Investment banking revenues for the 2008 quarter decreased $418,000
from $469,000 in the 2007 quarter, to $51,000 in the 2008 quarter, a decrease of
approximately 89%. The decrease in investment banking revenues is attributable
to the Company having completed a smaller number of investment banking
transactions in the second quarter of 2008 when compared to the same quarter in
2007. This category includes new issues of equity and preferred stock offerings
of securities in which we participate as a selling group or syndicate member. In
addition, the Company receives fees for providing financial advice to various
companies pertaining to their business affairs.
Interest and Other Income
Interest and other income for the 2008 quarter decreased by
approximately $296,000 when compared to the 2007 quarter. Of the total decrease,
214,000 was from the reduction in interest income, directly related to margin
debit rebates.
19
Commissions, Employee Compensation and Benefits
Commission expense, consistently the largest expense category and
directly related to commission revenue, decreased 34%, or $2.36 million, from
$6.98 million for the 2007 quarter to $4.62 million for the 2008 quarter.
Compensation and benefits expense for management, operations and clerical
personnel, which include salaries, severance payments, payroll taxes, health
insurance premiums, and bonus accruals, decreased for the 2008 quarter, to
$941,000 from $1.5 million, a decrease of approximately $561,000, or 37%, over
the 2007 quarter. Salaries for the 2008 quarter were down $382,000 due to
reductions in personnel quarter over quarter. In addition, insurance costs,
severance payments and bonus accruals for the 2008 quarter were reduced by
$57,000, $33,000 and $56,000, respectively, when compared with the 2007 quarter.
Clearing and Floor Brokerage
Clearing and floor brokerage costs which are greatly affected by volume
and type of transactions, decreased $49,000 in the 2008 quarter when compared to
the 2007 quarter. Clearing costs, as a percentage of gross revenues, fluctuate
depending upon the product mix.
Communications and Occupancy
Communications and occupancy costs increased slightly during the 2008
quarter, to $414,000, from $411,000 in the 2007 quarter.
Legal Matters and Related Costs
Legal matters and related settlement costs decreased $342,000, from
$554,000 during the 2007 quarter, to $212,000 for the 2008 quarter, most of
which was related to legal fees. During the 2007 quarter, we expensed $240,000
related to various lawsuits involving a proposed merger that was terminated in
December 2006. There were no legal fees related to this matter during the 2008
quarter.
Other Operating Expenses
Other operating expenses decreased approximately $199,000, from
$686,000 during the 2007 quarter to $487,000 for the 2008 quarter. Reductions in
this category include consulting fees of $39,000, branch office audits of
$39,000, website design of $14,000 and training related to the Company's
"Harvard Institute" of $43,000.
20
Six Months Ended June 30, 2008 Compared to Six Months Ended June 30, 2007
Revenues by Source
The following provides a breakdown of total revenues by source for the six-month
periods ended June 30, 2008 and 2007 (in thousands of dollars).
Six Months Ended
-----------------------------------------------------------------
June 30, 2008 June 30, 2007
------------------------------ ------------------------------
% of
Total % of Total
Commissions Amount Revenues Amount Revenues
----------- ------ --------- ------ --------
Equities $5,001 35% $ 6,816 31%
Mutual Funds 2,129 15% 3,292 15%
Insurance 1,684 12% 2,314 10%
Alternative Products 886 6% 2,614 12%
Asset Management Fees 2,003 14% 2,070 9%
Fixed Income 160 1% 127 1%
-------------- --------------- -------------- ---------------
Total 11,863 83% 17,233 78%
Principal Transactions 980 7% 955 4%
Investment Banking 488 3% 2,480 11%
Interest and Other
Interest 784 6% 1,168 5%
Other 169 1% 354 2%
-------------- --------------- -------------- ---------------
Total 953 7% 1,522 7%
-------------- --------------- -------------- ---------------
Total revenues $14,284 100% $ 22,190 100%
============== =============== ============== ===============
Overview
Overall, revenues decreased $7.9 million for the six months ended June
30, 2008 (the "2008 period"), to $14.3 million, compared to $22.2 million, for
the six months ended June 30, 2007 (the "2007 period"). Commission revenues
decreased by $5.4 million while revenues from investment banking decreased by
$2.0 million. The decrease in commission revenues is primarily attributable to a
decline in the number of producing registered representatives period over
period, which resulted in decreases in almost every category of revenue.
Investment banking revenues decreased due to the Company having completed a
smaller number of investment banking transactions during the first six months of
2008 compared to the same period in 2007.
21
Expenses in the 2008 period decreased by approximately $8.06 million,
or 35%, compared to the 2007 period. Commissions, employee compensation and
benefits accounted for the largest decrease of $7.4 million, from $19.2 million
in the 2007 period compared to $11.8 million in the 2008 period.
The net loss applicable to common stockholders for the 2008 period was
$943,000, or ($0.07) per basic and diluted shares compared to a net loss
applicable to common stockholders for the 2007 period of $1,193,000, or ($0.07)
per basic and diluted shares.
Commission Revenue
Commissions are comprised of revenues from transactions related to
equities, fixed income, mutual funds, insurance, alternative products and asset
management fees. Commission revenue for the 2008 period decreased $5.3 million
to $11.9, from $17.2 million in the 2007 period. There were decreases in every
category of commission revenue. The largest decreases were in equity
transactions of $1.82 million, alternative products of $1.73 million each and
mutual funds of $1.16 million.
Principal Transactions
Principal transactions, which include mark-ups/mark-downs on customer
transactions in which we act as principal, proprietary trading, and the sale of
fixed income securities, increased $25,000 during the 2008 period when compared
to the 2007 period.
Investment Banking
Investment banking revenues for the 2008 quarter decreased $1.99
million from $2.48 million in the 2007 period, to $488,000 in the 2008 period, a
decrease of approximately 80%. The decrease in investment banking revenues is
attributable to the Company having completed a smaller number of investment
banking transactions during the 2008 period when compared to the 2007 period.
This category includes new issues of equity and preferred stock offerings of
securities in which we participate as a selling group or syndicate member. In
addition, the Company receives fees for providing financial advice to various
companies pertaining to their business affairs.
Interest and Other Income
Interest and other income for the 2008 period decreased by
approximately $569,000 when compared to the 2007 period. Of the total decrease,
$412,000 was from the reduction in interest income, directly related to margin
debit rebates. In addition, marketing fees decreased by $172,000, which is
directly related to the reduction in alternative product transactions during the
2008 period.
Commissions, Employee Compensation and Benefits
Commission expense, consistently the largest expense category and
directly related to commission revenue, decreased 38%, or $6.0 million, from
$15.8 million for the 2007 period, to $9.8 million for the 2008 period.
Compensation and benefits expense for management, operations and clerical
personnel, which include salaries, severance payments, payroll taxes, health
insurance premiums, and bonus accruals, decreased for the 2008 period, to $2.01
million from $3.42 million, a decrease of approximately $1.4 million, or 41%,
over the 2007 period. Salaries for the 2008 period were down $793,000 due to
reductions in personnel period over period. In addition, insurance costs,
severance payments and bonus accruals for the 2008 period were reduced by
$77,000, $206,000 and $197,000, respectively, when compared with the 2007
period.
Clearing and Floor Brokerage
Clearing and floor brokerage costs which are greatly affected by volume
and type of transactions, decreased $134,000 during the 2008 period when
compared to the 2007 period. Clearing costs, as a percentage of gross revenues,
fluctuate depending upon the product mix.
Communications and Occupancy
Communications and occupancy costs increased $32,000 during the 2008
period, to $867,000, from $835,000 during the 2007 period.
Legal Matters and Related Costs
Legal matters and related settlement costs decreased $600,000, from
$984,000 during the 2007 period, to $384,000 for the 2008 period, all of which
was related to legal fees. During the 2007 period, we expensed $430,000 related
to various lawsuits involving a proposed merger that was terminated in December
2006. There were no legal fees related to this matter during the 2008 period.
22
Other Operating Expenses
Other operating expenses increased $16,000, from $1.42 million during
the 2007 period to $1.44 million for the 2008 period. Included in this category,
during the first quarter of 2008, is approximately $338,000 of losses as a
result of fraudulent trading activity. (See Note 11 - Fraudulent Activity Loss
in the Notes to the Condensed Consolidated Financial Statements for more
details). Absent this loss, other operating expenses would have decreased by
approximately $322,000. Reductions in this category include consulting fees of
$46,000, depreciation of $36,000, branch office audits of $62,000, office
expense of $44,000 and training related to the Company's "Harvard Institute" of
$43,000.
Liquidity and Capital Resources
Approximately 66% of our assets consist of cash, securities owned, and
receivables from our clearing firm and other broker-dealers and insurance
companies. The balances in these accounts can and do fluctuate significantly
from day to day, depending on general economic and market conditions, volume of
activity, and investment opportunities. These accounts are monitored on a daily
basis in order to ensure compliance with regulatory capital requirements and to
preserve liquidity.
Overall, cash and cash equivalents decreased during the six months
ended June 30, 2008 by $413,000. Net cash used in operating activities during
the 2008 period was $407,000, which consists of a net loss of $940,000,
increased by non-cash charges including depreciation of $36,000, amortization of
stock compensation and deferred costs of $20,000. Cash was reduced by increases
in securities owned and prepaid expenses of $181,000 and $476,000, respectively,
and decreases in accrued expenses and commissions' payable of $12,000 and
$530,000, respectively. Cash was increased by a decrease in the amount due from
clearing firm, employee and broker receivables and other assets of $341,000,
$103,000 and $726,000, respectively, and increases in accounts payable of
$433,000 and other liabilities of $60,000.
Additions to property and equipment of $2,800 accounted for the use of
cash from investing activities during the six months ended June 30, 2008.
Financing activities used net cash of $3,300 due to the payment of
preferred stock dividends during the first six months of 2008.
The financing agreement with AICCO Inc. for the renewal of our errors
and omissions insurance policy had a balance at June 30, 2008 of approximately
$301,000, payable in four remaining monthly installments of approximately
$75,000 each, including interest at the rate of 4.22% per annum.
Future Cash Requirements and Uncertainties Regarding Our Liquidity
Future Cash Requirements
Our primary future cash requirements will be to repay the convertible
secured note payable and fund general operating costs of the Company, including
commissions and employee costs:
Other than funding our general operating costs, we specifically expect
our primary cash requirements for the remainder of 2008 to be impacted by the
following specific use of cash:
o Convertible secured note payments -- In accordance with the terms of
the AEFC-IC Note payable agreement with AEFC-IC, the Company will be
required to repay any outstanding principal balance and unpaid interest
on December 31, 2008. At June 30, 2008, the AEFC-IC Note had a
$1,000,000 principal balance outstanding.
Uncertainties Regarding Our Liquidity
If we do not generate sufficient cash from operations, face
unanticipated cash needs or do not otherwise have sufficient cash and cash
equivalents, we will need to incur additional debt or issue equity. If we are
unable to obtain financing in the future and operations do not generate
sufficient cash we may be unable to continue as a going concern.
We believe the following uncertainties exist regarding our liquidity:
o Ability to Increase Revenue--Our ability to generate cash from
operating activities will be a primary source of our liquidity. If
our revenues were to decline, our ability to generate net cash from
operating activities in a sufficient amount to meet our cash needs
could be adversely affected. Our capacity to generate cash in the
future is subject to general economic, financial, competitive,
legislative, regulatory and other factors that are beyond our
control.
o Legal Matters-- The Company, in the normal course of business, is
subject to various legal proceedings. The costs associated with legal
defense services and possible unfavorable legal settlements may
negatively impact the Company's liquidity.
23
Recent Accounting Pronouncements
See Note 3 "Recent Accounting Pronouncements" in the Notes to Financial
Statements in Item 1 for a full description of recent accounting pronouncements,
including the expected dates of adoption and estimated effects on results of
operations and financial condition, which is incorporated herein.
Contractual Obligations
The Company has contractual obligations to make future payments in
connection with its short-term debt and non-cancelable lease and service
agreements. The following table sets forth these contractual obligations by
year. This table does not include any projected payment amounts related to our
potential exposure to arbitrations and other legal matters.
Expected Maturity Date
Category 2008 2009 2010 2011 Total
------------------------- -------------- --------------- -------------- ------------ -------------------
------------------------- -------------- --------------- -------------- ------------ -------------------
Short-term debt(1) $1,000,000 $0 $0 $0 $1,000,000
Operating Leases 483,941 775,868 112,796 35,091 1,407,696
------------------------- -------------- --------------- -------------- ------------ -------------------
Total $1,483,941 $775,868 $112,796 $35,091 $2,407,696
========================= ============== =============== ============== ============ ===================
(1) Short-term includes the AEFC-IC Note in the amount of $1,000,000
maturing on December 31, 2008.
Net Capital
At June 30, 2008, Montauk Financial Group had net capital of $848,267,
which was $598,267 in excess of its required net capital of $250,000, and the
ratio of aggregate indebtedness to net capital was 2.45 to 1.
Series A Convertible Preferred Stock
In 1999, we issued 349,511 shares of Series A Convertible Preferred
Stock in an exchange offering related to a settlement with holders of certain
leases. Each share of the Preferred Stock is convertible into two shares of
Common Stock and pays a quarterly dividend of 6%.
As of June 30, 2008, we have 22,282 Series A preferred shares issued
and outstanding. Quarterly dividends of $1,671 and $42,900 were paid during the
three months ended June 30, 2008 and 2007, respectively.
24
Series C Participating Cumulative Preferred Stock
The Board of Directors of the Company adopted a shareholder rights plan
as of August 8, 2007 and in connection therewith designated a Series C
Participating Cumulative Preferred Stock, $.10 par value per share ("Series C
Stock"). The rights were declared as a dividend of one preferred share purchase
right for each outstanding share of the common stock of the Company. The
dividend distribution was payable on August 8, 2007 to shareholders of record on
that date. When exercisable, each right will entitle its holder to purchase from
the Company one one-hundredth of a share of the Company's new Series C Stock, at
a price of $2.00 per one one-hundredth of a share of Series C Stock, subject to
adjustment. The Company has created a series of 200,000 shares of authorized but
not issued preferred stock for the Series C Stock authorized in this shareholder
rights plan. No shares of Series C Stock are currently issued and outstanding.
The rights will become exercisable on the tenth business day (unless
further extended by a resolution adopted by a majority of the "continuing
directors" of our Board of Directors as of the close of business on August 9,
2007 (the date of our 2007 Annual Meeting) following public announcement that a
person or group of affiliated or associated persons has acquired or obtained the
right to acquire beneficial ownership of 10% or more of the common stock without
approval of a majority of the Board of Directors of the Company. The rights
expire on August 8, 2017 unless earlier redeemed or exchanged by the Company.
In the event the Company is acquired in a merger or other business
combination transaction after the rights become exercisable, each holder of a
right would be entitled to receive that number of shares of the acquiring
company's common stock equal to the result obtained by multiplying the then
current purchase price by the number one one-hundredths of a share of Series C
Stock for which a right is then exercisable and dividing that product by 50% of
the then current market price per share of the acquiring company.
Application of Critical Accounting Policies
Generally accepted accounting principles are complex and require
management to apply significant judgments to various accounting, reporting and
disclosure matters. Our management must use assumptions and estimates to apply
these principles where actual measurement is not possible or practical.
For a complete discussion of our significant accounting policies, see
"Management Discussion and Analysis" and "Notes to the Consolidated Financial
Statements" in our 2007 Annual Report filed on Form 10-K/A. Certain policies are
considered critical because they are highly dependent upon subjective or complex
judgments, assumptions and estimates. Changes in such estimates may have a
significant impact on the financial statements.
Off-Balance Sheet Arrangements
We execute securities transactions on behalf of our customers. If
either the customer or counter-party fails 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.
25
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Business Risk. Our business is subject to significant risk from a decline in
revenues due to the loss of registered representatives, expenses related to
legal matters associated with our terminated merger plans and regulatory
exposure. We may incur further losses in the future and such losses would
necessarily affect the nature, scope and level of our future business.
To date, we have been able to finance our operations through cash
generated from operations and proceeds from the AEFC-IC Note. On July 9, 2008,
we entered into the Purchase Agreement with First Allied Securities, Inc. (see
Note 9). If the terms of the Purchase Agreement are not approved by our
shareholders or is not consummated for other reasons, we will be required to
raise additional financing and/or renegotiate the repayment terms of the AEFC-IC
Note in order to fund operational expenditures and/or repay such Note. There is
no assurance that we will be successful in consummating the Purchase Agreement
or in obtaining alternative funding or debt renegotiation on terms satisfactory
to us. If we cannot raise additional financing and/or renegotiate the repayment
terms of the AEFC-IC Note, the Company may not be able to continue as a
going concern.
Our ability to obtain additional financing from other sources depends
on many factors, some of which are beyond our control, including the state of
the capital markets and the uncertainties that are common in the securities
industry. The necessary additional financing may not be available to us or may
be available only on terms that would result in dilution to the current owners
of our common stock. If additional funding cannot be obtained, we will review
alternative courses of action to conserve our cash flow.
As a securities broker-dealer, we are 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. In the event of a substantial change in market
conditions or a loss of a substantial number of registered representatives from
whom our revenues are derived, our financial condition and results of operations
would be adversely affected.
Market Risk. Market risk is the risk of loss to the Company resulting from
changes in interest rates and equity prices. The Company has exposure to market
risk primarily through FMSC, its broker-dealer subsidiary. FMSC carries debt
obligations on behalf of its customers and acts as a market maker in
approximately 15 over-the-counter equity securities. In connection with these
activities, the Company maintains inventories to facilitate client transactions.
Occasionally, the Company invests for its own proprietary equity investment
accounts.
26
The following table represents the fair value of trading inventories
associated with the Company's broker-dealer client facilitation, market-making
activities and proprietary trading activities.
June 30, 2008 December 31, 2007
------------------------------- ----------------------------------- ------------------------------------
Securities Sold Securities Sold
Securities but not yet Securities but not yet
Owned Purchased Owned Purchased
------------------------------- ----------------- ----------------- ---------------- -------------------
Marketable:
Government $ 6,687 $ 0 $ 6,756 $ 0
Corporate 0 0 0 0
Municipal 0 0 0 0
Certificates
of deposit 0 0 0 0
------------------------------- ----------------- ----------------- ---------------- -------------------
Total debt securities 6,687 0 6,756
Equity securities 311,109 20,023 71,019 0
Mutual funds 0 0 9,463 201
Options 0 0 0 0
Warrants 23,427 0 72,535 0
------------------------------- ----------------- ----------------- ---------------- -------------------
Total $341,223 $ 0 $ 159,773 $ 201
=============================== ================= ================= ================ ===================
Changes in value of the Company's inventory may result from
fluctuations in interest rates, credit ratings of the issuer, equity prices and
the correlation among these factors. The Company's primary method of controlling
risk is through the establishment and monitoring of limits on the dollar amount
of securities positions that can be entered into. Position limits in inventory
accounts are monitored on a daily basis. Management also monitors inventory
levels and trading results, as well as inventory aging, pricing, concentration
and securities ratings.
27
Since the inventory accounts are used primarily to facilitate customer
transactions the number of positions and absolute dollar amounts are maintained
well within Company limits and therefore represents minimal market risk to the
Company. Our policy is to hold securities pending customer transactions and
therefore we generally do not maintain positions longer than one year.
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 4T. Controls and Procedures
We maintain disclosure controls and procedures that are designed to ensure that
information required to be disclosed in our Exchange Act reports is recorded,
processed, summarized and reported within the time periods specified in the
SEC's rules and forms, and that such information is accumulated and communicated
to our management, including our Chief Executive Officer and our Acting Chief
Financial Officer as appropriate, to allow timely decisions regarding required
disclosure under Rules 13a-15(e) and 15d-15(e). Disclosure controls and
procedures, no matter how well designed and operated, can provide only
reasonable, rather than absolute, assurance of achieving the desired control
objectives.
As of June 30, 2008, we carried out an evaluation under the supervision and with
the participation of our Chief Executive Office and our Acting Chief Financial
Officer, of the effectiveness of the design and operation of our disclosure
controls and procedures. Based on the foregoing, our Chief Executive Officer and
Acting Chief Financial Officer concluded that our disclosure controls and
procedures were effective at the reasonable assurance level to ensure that
information required to be disclosed by us in the reports that we file or submit
under the Exchange Act is recorded, processed, summarized and reported, within
the time periods specified in the SEC's rules and forms and that such
information is accumulated and communicated to our management, including our
Chief Executive Officer and Chief Financial Officer, to allow timely decisions
required disclosure.
There have been no changes in internal controls over financial reporting that
occurred during the current quarter that have materially affected, or are
reasonably likely to materially affect our internal controls over financial
reporting.
28
PART II
OTHER INFORMATION
Item 1. Legal proceedings
Civil Lawsuit
The Company and certain of its principals are defendants in a lawsuit
filed in the United States District Court for the Eastern District of North
Carolina. The complaint, brought by two former clients of FMSC, alleges fraud,
negligent misrepresentation, breaches of duty of care and violations of the
North Carolina Securities Act in connection with the Plaintiff's participation
in a 1031 tax-free exchange investment. The Company intends to vigorously defend
this case and believes it has meritorious defenses to this claim.
SEC Order
The SEC issued a Cease-And-Desist Order ("Order") on April 24, 2008,
which determined that the Company failed reasonably to supervise the trading and
research activities of a former institutional analyst and that the Company
failed to adopt reasonable policies and procedures so as to prevent and detect
certain conduct, which led to the former institutional trader's violations of
federal securities laws. The order involves conduct that occurred during the
time period from March through December 2003. The Order imposed a censure and
fine of $100,000 against the Company, and a six-month supervisory suspension and
fine of $50,000 against the Company's former president and CEO. The Company's
monetary fine had been accrued for in 2007 and paid in April 2008.
Item 1A. Risk Factors
Our operating results and financial condition have varied in the past and may in
the future vary significantly depending on a number of factors. Except for the
historical information in this report, the matters contained in this report
include forward-looking statements that involve risks and uncertainties. The
following factors, among others, could cause actual results to differ materially
from those contained in forward-looking statements made in this report and
presented elsewhere by management from time to time. You are referred to Item 1A
("Risk Factors") of our Annual Report on Form 10-K/A for the fiscal year ended
December 31, 2007 for a discussion of the risks associated with our business,
financial condition and results of operations. Such factors, among others, may
have a material adverse effect upon our business, results of operations and
financial condition.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
(a) Not applicable.
(b) Not applicable.
(c) Not applicable.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Submission of Matters to a Vote of Security Holders.
Not applicable.
Item 5. Other Information
Not applicable.
29
Item 6. Exhibits
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 description of such exhibits.
- ----------------- ----------------------------------------------------------------------------------------------------
10.1 Asset Purchase Agreement, dated as of July 9, 2008, by and among First Allied Securities, Inc.,
First Montauk Securities Corp. and First Montauk Financial Corp. (Previously filed with the SEC as
Exhibit 10.1 to the Current Report on Form 8-K dated July 14, 2008).
- ----------------- ----------------------------------------------------------------------------------------------------
- ----------------- ----------------------------------------------------------------------------------------------------
*31.1 Certification of President and Chief Executive Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
- ----------------- ----------------------------------------------------------------------------------------------------
- ----------------- ----------------------------------------------------------------------------------------------------
*31.2 Certification of Acting Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002
- ----------------- ----------------------------------------------------------------------------------------------------
- ----------------- ----------------------------------------------------------------------------------------------------
*32.1 Certification of President and Chief Executive Officer pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
- ----------------- ----------------------------------------------------------------------------------------------------
- ----------------- ----------------------------------------------------------------------------------------------------
*32.2 Certification of Acting Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002
- ----------------- ----------------------------------------------------------------------------------------------------
- ----------------- ----------------------------------------------------------------------------------------------------
- ----------------- ----------------------------------------------------------------------------------------------------
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
FIRST MONTAUK FINANCIAL CORP.
(Registrant)
Dated: August 15, 2008 /s/ Mindy A. Horowitz
------------------------------------------
Mindy A. Horowitz
Acting Chief Financial Officer
Dated: August 15, 2008 /s/ Victor K. Kurylak
-------------------------------------------
Victor K. Kurylak
President and Chief Executive Officer
30