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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
SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD
|X| ENDED:
SEPTEMBER 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
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(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 November 19, 2008.
FIRST MONTAUK FINANCIAL CORP.
FORM 10-Q
September 30, 2008
INDEX
Page
PART I. FINANCIAL INFORMATION:
Item 1. Financial Statements
Condensed Consolidated Statements of Financial Condition as of
September 30, 2008 (unaudited) and December 31, 2007........................ F-1
Condensed Consolidated Statements of Operations for the Nine Months and
Three Months Ended September 30, 2008 (unaudited) and 2007 (unaudited)...... F-2
Condensed Consolidated Statements of Cash Flows for the Nine Months Ended
September 30, 2008 (unaudited) and 2007 (unaudited)......................... F-3
Notes to Condensed Consolidated Financial Statements (unaudited)............... 4-13
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.................................... 14-23
Item 3. Quantitative and Qualitative Disclosures About Market Risk............. 23-25
Item 4T. Controls and Procedures................................................ 26
PART II. OTHER INFORMATION:
Item 1. Legal Proceedings...................................................... 27
Item 1A. Risk Factors........................................................... 27
Item 2. Unregistered Sales of Equity Securities................................ 27
Item 3. Defaults Upon Senior Securities........................................ 27
Item 4. Submission of Matters to a Vote of Security Holders.................... 28
Item 5. Other Information...................................................... 28
Item 6. Exhibits............................................................... 29
Signatures....................................................................... 29
FIRST MONTAUK FINANCIAL CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
September 30, December 31,
2008 2007
------------- ------------
(unaudited)
ASSETS
Cash and cash equivalents $ 647,067 $ 868,836
Due from clearing firm 2,097,320 2,347,946
Securities owned, at market value 220,587 159,773
Prepaid expenses 521,403 250,948
Employee and broker receivables - net of reserve for bad debt
of $706,275 and $758,515 respectively 117,172 288,049
Property and equipment - net 149,565 175,463
Other assets 397,948 1,159,893
----------- -----------
Total assets $ 4,151,062 $ 5,250,908
=========== ===========
LIABILITIES
10% convertible note 1,000,000 1,000,000
Securities sold, not yet purchased, at market value 41,828 201
Commissions payable 1,231,321 1,739,713
Accounts payable 625,015 256,549
Accrued expenses 609,018 556,527
Income taxes payable 2,872 11,358
Other liabilities 277,302 51,528
----------- ----------
Total liabilities 3,787,356 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 9,625,872 9,621,030
Additional paid-in capital 4,035,064 4,035,064
Accumulated deficit (13,299,458) (12,023,290)
------------ -----------
Total stockholders' equity 363,706 1,635,032
------------ -----------
Total liabilities and stockholders' equity $ 4,151,062 $ 5,250,908
============ ===========
See notes to condensed consolidated financial statements.
F-1
FIRST MONTAUK FINANCIAL CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Nine Months Ended September 30, Three Months Ended September 30,
2008 2007 2008 2007
----------- ----------- ---------- -----------
(unaudited) (unaudited) (unaudited) (unaudited)
Revenues:
Commissions $ 16,827,135 $ 24,941,439 $ 4,964,503 $ 7,708,284
Principal transactions 1,567,518 1,261,458 587,203 306,482
Investment banking 671,486 3,440,269 183,600 960,849
Interest and other income 1,629,978 2,068,309 677,062 546,178
------------- ------------- ------------ ------------
Total revenues 20,696,117 31,711,475 6,412,368 9,521,793
------------- ------------- ------------ ------------
Expenses:
Commissions, employee compensation and benefits 16,969,499 27,491,131 5,168,195 8,264,249
Clearing and floor brokerage 984,243 1,134,419 318,453 334,866
Communications and occupancy 1,248,425 1,262,127 381,199 427,583
Legal matters and related costs 766,963 1,221,588 383,244 237,337
Other operating expenses 1,901,373 2,471,582 461,863 1,048,368
Interest 89,657 17,875 28,889 5,032
------------- ------------- ------------ ------------
Total expenses 21,960,160 33,598,722 6,741,843 10,317,435
------------- ------------- ------------ ------------
Loss before provision for income taxes (1,264,043) (1,887,247) (329,475) (795,642)
Provision for income taxes 7,112 16,199 1,901 600
------------- ------------- ------------ ------------
Net loss (1,271,155) (1,903,446) (331,376) (796,242)
Preferred stock dividends (5,014) (122,294) (1,671) (36,490)
------------- ------------- ------------ ------------
Net loss applicable to common stockholders $(1,276,169) $(2,025,740) $ (333,047) $(832,732)
============= ============== ============ ============
Loss per share:
Basic $ (0.10) $ (0.12) $ (0.03) $ (0.06)
Diluted $ (0.10) $ (0.12) $ (0.03) $ (0.06)
Weighted average number of shares of stock outstanding:
Basic 13,248,477 16,439,992 13,248,477 13,245,477
Diluted 13,248,477 16,439,992 13,248,477 13,245,477
See notes to condensed consolidated financial statements.
F-2
FIRST MONTAUK FINANCIAL CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months Ended September 30,
2008 2007
(unaudited) (unaudited)
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $(1,271,155) $ (1,903,446)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation of property and equipment 51,247 89,195
Amortization of stock compensation and deferred costs 27,343 38,173
Increase (decrease) in cash attributable to changes in assets
and liabilities:
Due from clearing firm 250,626 2,476,006
Securities owned (60,814) 29,505
Prepaid expenses (270,455) (179,156)
Employee and broker receivables 170,877 69,632
Other assets 739,445 (493,355)
Securities sold, not yet purchased 41,627 (484)
Commissions payable (508,392) (145,015)
Accounts payable 368,466 615,814
Accrued expenses 52,491 (235,229)
Income taxes payable (8,486) 7,191
Other liabilities 225,774 (19,486)
----------- -------------
NET CASH USED IN OPERATING ACTIVITIES (191,406) 349,345
----------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment (25,349) (45,593)
----------- -------------
NET CASH USED IN INVESTING ACTIVITIES (25,349) (45,593)
----------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payment of capital lease - (819)
Payment of preferred stock dividends (5,014) (122,294)
----------- -------------
NET CASH USED IN FINANCING ACTIVITIES (5,014) (123,113)
----------- -------------
Net decrease in cash and cash equivalents (221,769) 180,639
Cash and cash equivalents at beginning of period 868,836 1,145,751
----------- -------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 647,067 $ 1,326,390
=========== =============
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 14,588 $ 17,500
=========== =============
Income taxes $ 16,118 $ 10,823
============ =============
Noncash financing activities:
Cancellation and Redemption of Preferred A stock - $ 28,309
Cancellation of Preferred B stock - $ 1,000,000
Cancellation of Common stock - $ 2,056,163
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 September 30, 2008, the
Company had an accumulated deficit, and working capital of
$922,000, which does not include the repayment of the
$1,000,000 "AEFC-IC Note" (as defined in Note 9 - "Convertible
Note Purchase Agreement"). For the nine months ended September
30, 2008, the Company incurred a net loss of $1,271,155.
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 8
- Material Definitive Purchase Agreement). On October 17, 2008
at our Annual Meeting of Shareholders, a majority of voting
common shareholders and Series A Preferred Shareholders voted
to approve the Asset Purchase Agreement. The transaction is
currently scheduled to close on or about December 12, 2008 and
is contingent upon receiving FINRA approval, as well as other
conditions set forth in the Purchase Agreement. As a result of
the foregoing uncertainties, there can be no assurances that
the transaction will be completed. If the terms of the
purchase agreement are not consummated for any other reason,
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 September 30, 2008 and
for the nine-month and three-month periods ended September 30,
2008 and September 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 nine months and three months
ended September 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 nine and three month periods
ended September 30, 2008 includes share-based compensation
expense for employee options totaling approximately $1,680 and
$0 compared to approximately $6,200 and $1,000 for the nine
and three month periods ended September 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 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 nine and three month
periods ended September 30, 2008 compared to approximately
$32,000 and $590 for the nine and three month periods ended
September 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. The Company
takes 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:
--------------------- ------------------------------------------- -------------------------------------------
Nine Months Ended Three Months Ended
--------------------- ------------------------------------------- -------------------------------------------
--------------------- --------------------- --------------------- --------------------- ---------------------
September 30, 2008 September 30, 2007 September 30, 2008 September 30, 2007
--------------------- --------------------- --------------------- --------------------- ---------------------
--------------------- --------------------- --------------------- --------------------- ---------------------
Expected volatility 76% 66% 76% 66%
--------------------- --------------------- --------------------- --------------------- ---------------------
--------------------- --------------------- --------------------- --------------------- ---------------------
Expected dividend
yield 0% 0% 0% 0%
--------------------- --------------------- --------------------- --------------------- ---------------------
--------------------- --------------------- --------------------- --------------------- ---------------------
Risk-free interest
rate 2.98%-4.54% 3.71%-4.54% 2.98%-4.54% 3.71%-4.54%
--------------------- --------------------- --------------------- --------------------- ---------------------
--------------------- --------------------- --------------------- --------------------- ---------------------
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 nine
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 (327,400) $0.79
----------------------------- -------------- ------------------ --------------------- ------------------
----------------------------- -------------- ------------------ --------------------- ------------------
Outstanding at 1,549,800 $0.72 1.5 0
September 30, 2008
----------------------------- -------------- ------------------ --------------------- ------------------
----------------------------- -------------- ------------------ --------------------- ------------------
Exercisable at
September 30, 2008 1,359,280 $0.71 1.3 0
----------------------------- -------------- ------------------ --------------------- ------------------
The weighted average estimated per share fair value of all
share options granted during the nine months ended September
30, 2008 and 2007 was $0.001 and $0.54, respectively. There
were no stock options exercised during the first nine months
of 2008 and 2007.
NOTE 5 - PREPAID EXPENSES
Prepaid expenses at September 30, 2008 include a payment for
errors and omissions insurance coverage. The unamortized
amount at September 30, 2008 is approximately $249,000, which
will be expensed over the next four months.
7
NOTE 6 - OTHER ASSETS
Other assets at September 30, 2008 is primarily comprised of
commissions' receivable due from vendors for insurance, mutual
funds and fees totaling approximately $339,000 and deposits of
$50,000.
NOTE 7 - ACCOUNTS PAYABLE
Accounts payable at September 30, 2008 includes insurance
premium financing agreements with current balances of $75,000,
payable in one remaining monthly installment of approximately
$75,000, including interest at the rate of 4.22% per annum and
$49,000, payable in six remaining monthly installments of
approximately $8,400 each, including interest at the rate of
6.75% per annum. Also included are, legal and accounting fees
of $183,000, market data services of $111,000 and telephone
and communication fees of $18,000.
NOTE 8- MATERIAL DEFINITIVE PURCHASE AGREEMENT
At the Company's 2008 annual meeting of shareholders held on
October 17, 2008, the shareholders of the Company approved the
definitive asset purchase agreement ("Asset Purchase
Agreement") executed by the Company and its principal
subsidiary, First Montauk Securities Corp. ("FMSC"), with
First Allied Securities Inc. ("First Allied") as of July 9,
2008 providing for the sale of substantially all of the assets
of FMSC to First Allied. The Asset Purchase Agreement remains
subject to several conditions, including without limitation,
the approval of the Financial Industry Regulatory Authority,
Inc. ("FINRA"). The transaction is expected to close during
the fourth quarter of 2008. However, as a result of the
foregoing uncertainties, there can be no assurances that the
transaction will be completed.
NOTE 9 - 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, an Advanced Equities Financial Corp. company (See Note
8 - 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 September 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,
8
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.
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. See also Note 8.
NOTE 10 - REPURCHASE OF SHARES
On October 20, 2008, the Company entered into a stock
repurchase agreement ("Stock Repurchase Agreement") with FMFG
Ownership Inc. by Gerard A. McHale, Jr. as Chapter 11
Bankruptcy Trustee of The 1031 Tax Group LLC et al., as
Chapter 11 Debtors (the "Selling Stockholder") to purchase
3,300,308 shares of the Company's common stock, no par value,
owned by the Selling Stockholder for $100,000. The purchase is
being completed in escrow and is subject to the approval of
the sale by the U.S. Bankruptcy Court within 40 calendar days
of the date of execution of the stock repurchase agreement.
The foregoing description of the Stock Repurchase Agreement is
qualified in its entirety by reference to the full text of the
Stock Repurchase Agreement, which is filed as Exhibit 10.1
hereto.
NOTE 11 - 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 $ 263,224
2009 751,574
2010 118,958
2011 36,645
2012 7,983
---------------------
$ 1,178,384
=====================
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
9
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 September 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.
Civil Lawsuit
The Company and certain of its principals are defendants in a
lawsuit filed in the Superior Court of New Jersey, Monmouth
County Law Division, which was filed in October 2008. The
complaint, brought by two former clients of FMSC, alleges
fraud, negligent misrepresentation, breaches of duty of care
and violations of the New Jersey Securities Act in connection
with the Plaintiffs' participation in a 1031 tax-free exchange
real estate investment. This action is similar to one which
was brought against the Company and many of the same
individually named Defendants in July 2008 which was filed in
the United States District Court for the Eastern District of
North Carolina, which was first reported by the Company in its
Form 10-Q for the period ending June 30, 2008. The Company has
advised its Broker/Dealer professional liability insurance
carrier, as well as its directors and officers liability
insurance company of these claims and is seeking coverage
under both policies. The Company intends to vigorously defend
both of these cases and believes it has meritorious defenses
to each claim.
NOTE 12 - AMENDED AND RESTATED EMPLOYMENT AGREEMENT WITH ACTING CHIEF
FINANCIAL OFFICER
As of November 13, 2008, the Company and the Acting Chief
Financial Officer and Senior Vice President
of the Company ("CFO") executed an Amended and Restated
Employment Agreement ("Amended Employment Agreement"). The
Amended Employment Agreement was executed to ensure that the
CFO would be available to provide her services and experience
to the Company for up to an additional three months from
February 1 to April 30, 2009 ("Secondary Period"). Under the
terms of the CFO's original employment agreement, her
employment by the Company was scheduled to expire on January
31, 2009 at which time she would be entitled to severance pay
in the amount of $140,000 if her employment were not renewed.
Under the terms of the Amended Employment Agreement, the CFO
will continue her duties as Senior Vice President and Acting
Chief Financial Officer of the Company through January 31,
2009 and will receive her base salary and other benefits.
During the Secondary Period, the CFO will continue to serve as
the Company's Acting Chief Financial Officer. She will not,
however, receive any salary but will be provided with an
10
office and facilities commensurate with the performance of her
duties as well as certain other fringe benefits provided to
other executive officers. In lieu of any annual salary or
severance pay under her original employment agreement and in
consideration of the duties and services to be provided by the
CFO during the Secondary Period, she will receive on November
14, 2009, a lump sum payment in the amount of $140,000.
The Amended Employment Agreement contains non-solicitation and
non-competition obligations that end on the first anniversary
of the date of cessation of the CFO's employment.
The foregoing description of the Amended Employment Agreement
is qualified in its entirety by reference to the full text of
the Amended Employment Agreement, which is filed as Exhibit
10.2 hereto.
NOTE 13 - 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 for the nine
months ended September 30, 2008. The Company 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.
On August 15, 2008, FMSC received written notification that
its fidelity bond carrier, National Union Fire Insurance Co.
of Pittsburgh. PA. ("National Union"), will pay to FMSC the
sum of $288,000 in settlement of the Company's fidelity bond
claim arising out of fraudulent stock purchases. On September
17, 2008, FMSC received payment in full.
NOTE 14 - LOSS PER SHARE
Basic loss per share for the nine and three months ended
September 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:
Nine months ended September 30, Three months ended September 30,
2008 2007 2008 2007
(unaudited) (unaudited) (unaudited) (unaudited)
Numerator - basic and
diluted:
Net loss $(1,271,155) $(1,903,446) $ (331,376) $ (796,242)
Deduct: dividends paid
during the year (5,014) (122,294) (1,671) (36,490)
--------------------- ------------------- ----------------------- -------------------
Numerator for basic and
diluted loss per share $(1,276,169) $(2,025,740) $(333,047) $(832,732)
===================== =================== ======================= ===================
Denominator:
Denominator for basic
and diluted loss per
share 13,248,477 16,439,992 13,248,477 13,245,477
11
The following securities have been excluded from the dilutive
per share computation, as they are antidilutive:
---------------------- ------------------------------------ ---------------------------------------
Nine months ended September 30, Three months ended September 30,
---------------------- ----------------- ------------------ ------------------ --------------------
2008 2007 2008 2007
---- ---- ---- ----
---------------------- ----------------- ------------------ ------------------ --------------------
Stock options 1,549,800 1,941,800 1,661,800 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
---------------------- ----------------- ------------------ ------------------ --------------------
As required by FAS 128, "Earnings per Share", cumulative
preferred stock dividends for the nine and three months ended
September 30, 2008 and 2007 were deducted from net loss to
arrive at the numerator for basic and diluted loss per share.
NOTE 15 - 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 September 30, 2008, FMSC had net capital of
$804,152, which was $554,152 in excess of its required net
capital of $250,000. FMSC's ratio of aggregate indebtedness to
net capital was 2.59 to 1.
NOTE 16 - 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.
12
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.
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 Using
----------------------------------------------------------------
Quoted Prices in Significant
Active Markets for Significant Other Unobservable
Identical Assets Observable Inputs Inputs
Description September 30, 2008 (Level 1) (Level 2) (Level 3)
-------------------------------------------- ----------------------- --------------------- ------------------
Assets:
Securities Owned $220,587 $220,587 $-- $--
--------------------- ----------------------- --------------------- ------------------
Total Assets $220,587 $220,587 $-- $--
===================== ======================= ===================== ==================
Liabilities: $ -- $ -- $-- $--
--------------------- ----------------------- --------------------- ------------------
Total Liabilities $ -- $ -- $--
$--
===================== ======================= ===================== ==================
13
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 124 registered
representatives that service both retail and institutional customers. All of our
branch office and satellite locations 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.
14
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. ("First Allied"), an Advanced Equities Financial
Corp. company, 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 First Allied, and First
Allied will acquire the right to service the customer accounts of those
registered representatives that join First Allied. 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 regulatory
consent of FINRA, the acceptance and transfer of customer accounts accepted by
First Allied to their clearing firm, and the estimated aggregate production of
the Closing Date Representatives greater than $12,250,000. The Purchase
Agreement also contains customary representations, warranties, covenants and
indemnities for breach.
On October 17, 2008, at our annual meeting of shareholders, a majority
of voting common shareholders and Series A Preferred Shareholders voted to
approve the Purchase Agreement. The transaction is currently scheduled to close
on or about December 12, 2008 and is contingent upon receiving FINRA approval,
as well as other conditions set forth in the Purchase Agreement. 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 September 30, 2008, the
Company had an accumulated deficit, and working capital of $922,000, which does
not include the repayment of the $1,000,000 "AEFC-IC Note" (as defined in Note 9
- - "Convertible Note Purchase Agreement" in the Notes to Condensed Consolidated
Financial Statements). For the nine months ended September 30, 2008, the Company
incurred a net loss of $1,271,155.
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. If the transaction with First Allied is not consummated, 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.
15
RESULTS OF OPERATIONS
Three Months Ended September 30, 2008 Compared to Three Months Ended
September 30, 2007
Revenues by Source
The following provides a breakdown of total revenues by source for the
three-month periods ended September 30, 2008 and 2007 (in thousands of dollars).
Three Months Ended
---------------------------------------------------------------
September 30, 2008 September 30, 2007
---------------------------- ------------------------------
Commissions Amount % of Total Amount % of Total
Revenues Revenues
Equities $1,776 28% $ 2,932 31%
Mutual Funds 956 15% 1,437 15%
Insurance 655 10% 1,268 13%
Alternative Products 385 6% 965 10%
Asset
Management
Fees 1,139 18% 1,010 11%
Fixed Income 53 1% 96 1%
------------ --------------- -------------- ---------------
Total 4,964 78% 7,708 81%
Principal Transactions 587 9% 307 3%
Investment Banking 184 3% 961 10%
Interest and Other
Interest 342 5% 456 5%
Other 335 5% 90 1%
------------ --------------- -------------- ---------------
Total 677 10% 546 6%
------------ --------------- -------------- ---------------
Total revenues 6,412 100% $ 9,522 100%
============ =============== ============== ===============
Overview
Total revenues decreased $3.11 million, or 33%, for the three months
ended September 30, 2008 (the "2008 quarter"), to $6.41 million from $9.52
million for the three months ended September 20, 2007 (the "2007 quarter"). The
decline in the number of producing registered representatives coupled with the
market conditions and slow down in the economy contributed to the decrease in
revenues in almost every category of revenue.
Expenses decreased in the 2008 quarter by $3.58 million, or 35%,
compared to the 2007 quarter. Commissions, employee compensation and benefits
decreased by $3.1 million, from $8.3 million in the 2007 quarter to $5.2 million
in the 2008 quarter. Of the $3.1 million decrease, $2.7 million was attributable
to the reduction in commission expense, which is directly related to the
decrease in revenues for the 2008 quarter.
16
The net loss applicable to common stockholders for the 2008 quarter was
$333,000, or ($0.03) per basic and diluted shares compared to a net loss
applicable to common stockholders for the 2007 quarter of $833,000, or ($0.06)
per basic and diluted shares.
Commission Revenue
Commissions are comprised of revenues from transactions related to
equities, fixed income, mutual funds, insurance, alternative investment products
and asset management fees. Commission revenue for the 2008 quarter was $4.96
million compared to $7.71 million for the 2007 quarter, a decrease of
approximately $2.75 million. There were decreases in almost every category of
commissions. Decreases in commissions from equity transactions of $1.16 million,
alternative investment products of $580,000, mutual funds of $481,000 and
insurance of $613,000, accounted for the majority of the reduction in commission
revenues when compared to the 2007 quarter. These decreases highlight the result
of the reduction in producing registered representatives from the 2007 quarter
to the 2008 quarter, as well as adverse market conditions quarter over 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 $280,000, from $307,000 for the 2007 quarter
to $587,000 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 and fixed income transactions.
Investment Banking
Investment banking revenues for the 2008 quarter decreased $777,000
from $961,000 in the 2007 quarter, to $184,000 in the 2008 quarter, a decrease
of approximately 81%. The decrease in investment banking revenues is
attributable to the Company having completed a smaller number of investment
banking transactions, primarily in PIPE (private investments in public equities)
deals, during the third quarter of 2008 when compared to the same quarter in
2007. The PIPE business slowed considerably in 2008. Almost three-fourths of
overall PIPE transactions that were completed in 2007 had resulted in losses in
2008, at least in mark-to-market terms (or in terms of the present value of
their investments). Therefore, institutions and private equity firms were much
more conservative when considering investments in PIPEs during 2008 limiting the
number of new PIPE transactions. This category also 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 increased by
approximately $131,000 when compared to the 2007 quarter. Included in interest
and other income for the 2008 quarter, is $288,000 received from our fidelity
bond carrier resulting from a claim filed arising out of fraudulent stock
purchases in the first quarter of 2008 (See Note 13 to the consolidated
financial statements). Interest income decreased by approximately $114,000 when
compared to the 2007 quarter. This decrease was directly related to the amount
of margin debit carried by customers, along with the reduction in interest
charged on these accounts.
Commissions, Employee Compensation and Benefits
Commission expense, consistently the largest expense category and
directly related to commission revenue, decreased 39%, or $2.67 million, from
$6.87 million for the 2007 quarter to $4.21 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
$959,000 from $1.39 million, a decrease of approximately $431,000, or 31%, over
the 2007 quarter. Salaries for the 2008 quarter were down $357,000 due to
reductions in personnel quarter over quarter. In addition, insurance costs and
bonus accruals for the 2008 quarter were reduced by $57,000 and $77,000,
respectively, when compared with the 2007 quarter. In contrast, severance
payments increased $76,000 when compared with the 2007 quarter, due to
contractual obligations.
Clearing and Floor Brokerage
Clearing and floor brokerage costs which are greatly affected by volume
and type of transactions, decreased $16,000 in the 2008 quarter when compared to
the 2007 quarter. Clearing costs, as a percentage of gross revenues, fluctuate
depending upon the product mix.
17
Communications and Occupancy
Communications and occupancy costs decreased $46,000 during the 2008
quarter, from $427,000 in the 2007 quarter to $381,000 in the 2008 quarter.
Legal Matters and Related Costs
Legal matters and related settlement costs increased $146,000, from
$237,000 during the 2007 quarter, to $383,000 for the 2008 quarter, most of
which was related to legal settlement costs for arbitrations. During the 2008
quarter, we settled or accrued for five arbitration claims totaling $129,000.
Other Operating Expenses
Other operating expenses decreased approximately $586,000, from
$1,048,000 during the 2007 quarter to $462,000 for the 2008 quarter. During the
2007 period, the Company settled two regulatory inquiries; one with the SEC and
one with FINRA. The total fines related to these two investigations were
$275,000 and were accrued for by the Company in August and September 2007. Other
reductions in this category include consulting & professional fees of $139,000,
postage of $51,000, business insurance of $38,000 and office expense of $31,000.
Nine Months Ended September 30, 2008 Compared to Nine Months Ended
September 30, 2007
Revenues by Source
The following provides a breakdown of total revenues by source for the
nine-month periods ended September 30, 2008 and 2007 (in thousands of dollars).
Nine Months Ended
-----------------------------------------------------------------
September 30, 2008 September 30, 2007
------------------------------- ------------------------------
% of Total % of Total
Commissions Amount Revenues Amount Revenues
----------- ------ ---------- ------ -----------
Equities $6,766 33% $ 9,801 31%
Mutual Funds 3,085 15% 4,729 15%
Insurance 2,339 11% 3,582 11%
Alternative Products 1,271 6% 3,579 11%
Asset Management Fees 3,142 15% 3,080 10%
Fixed Income 224 1% 171 1%
-------------- ---------------- -------------- ---------------
Total 16,827 81% 24,942 79%
Principal Transactions 1,568 8% 1,261 4%
Investment Banking 671 3% 3,440 11%
Interest and Other
Interest 1,126 6% 1,631 5%
Other 504 2% 437 1%
-------------- ---------------- -------------- ---------------
Total 1,630 8% 2,068 6%
-------------- ---------------- -------------- ---------------
Total revenues $20,696 100% $ 31,711 100%
============== ================ ============== ===============
18
Overview
Overall, revenues decreased $11 million for the nine months ended
September 30, 2008 (the "2008 period"), to $20.7 million, compared to $31.7
million, for the nine months ended September 30, 2007 (the "2007 period").
Commission revenues decreased by $8.1 million while revenues from investment
banking decreased by $2.8 million. The decline in the number of producing
registered representatives coupled with the market conditions and slow down in
the economy contributed to the decrease in revenues 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
nine months of 2008 compared to the same period in 2007.
Expenses in the 2008 period decreased by approximately $11.6 million,
or 35%, compared to the 2007 period. Commissions, employee compensation and
benefits accounted for the largest decrease of $10.5 million, from $27.5 million
in the 2007 period compared to $17.0 million in the 2008 period.
The net loss applicable to common stockholders for the 2008 period was
$1,271,000, or ($0.10) per basic and diluted shares compared to a net loss
applicable to common stockholders for the 2007 period of $1,903,000, or ($0.12)
per basic and diluted shares.
Commission Revenue
Commissions are comprised of revenues from transactions related to
equities, fixed income, mutual funds, insurance, alternative investment products
and asset management fees. Commission revenue for the 2008 period decreased $8.1
million to $16.8, from $24.9 million in the 2007 period. There were decreases in
every category of commission revenue. The largest decreases were in equity
transactions of $ 3.04 million, alternative investment products of $2.31 million
each and mutual funds of $1.64 million. These decreases highlight the result of
the reduction in producing registered representatives from the 2007 period to
the 2008 period, as well as adverse market conditions towards the latter part of
the 2008 period.
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 $306,000 during the 2008 period when compared
to the 2007 period. The increase is primarily due to unrealized gains in
restricted stock that the Company received during 2008 as compensation for
investment banking activities.
Investment Banking
Investment banking revenues for the 2008 period decreased $2.77
million, from $3.44 million in the 2007 period, to $671,000 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, primarily PIPE deals, during the 2008 period when compared
to the 2007 period. The PIPE (private investments in public equities) business
slowed considerably in 2008. Almost three-fourths of overall PIPE transactions
that were completed in 2007 had resulted in losses in 2008, at least in
mark-to-market terms (or in terms of the present value of their investments).
Therefore, institutions and private equity firms were much more conservative
when considering investments in PIPEs during 2008. This category also 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.
19
Interest and Other Income
Interest and other income for the 2008 period decreased by
approximately $438,000 when compared to the 2007 period. Included in interest
and other income for the 2008 period, is $288,000 received from our fidelity
bond carrier resulting from a claim filed arising out of fraudulent stock
purchases in the first quarter of 2008 (See Note 13-"Fraudulent Activity Loss"
in the Notes to the Condensed Consolidated Financial Statements). Of the net
decrease, $503,000 was from the reduction in interest income. This decrease was
directly related to the amount of margin debit carried by customers, along with
the reduction in interest charged on these accounts.
Commissions, Employee Compensation and Benefits
Commission expense, consistently the largest expense category and
directly related to commission revenue, decreased 38%, or $8.7 million, from
$22.7 million for the 2007 period, to $14.0 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 $2.97
million from $4.81 million, a decrease of approximately $1.84 million, or 38%,
over the 2007 period. Salaries and payroll taxes for the 2008 period were down
$1.32 million due to reductions in personnel period over period. In addition,
insurance costs, severance payments and bonus accruals for the 2008 period were
reduced by $133,000, $130,000 and $274,000, 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 $150,000 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 decreased $14,000 during the 2008
period, to $1,248,000, from $1,262,000 during the 2007 period.
Legal Matters and Related Costs
Legal matters and related settlement costs decreased $455,000, from
$1,222,000 during the 2007 period, to $767,000 for the 2008 period. In 2007, we
incurred $407,000 related to various lawsuits involving a proposed merger that
was terminated in December 2006. The amount for the 2007 period was net of a
$600,000 reimbursement from our insurance carrier, which was received in August
2007. There were no legal fees related to this matter during the 2008 period.
Other Operating Expenses
Other operating expenses decreased $570,000, from $2,470,000 during the
2007 period to $1,900,000 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 13 - "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
$908,000. During the 2007 period, the Company settled two regulatory inquiries;
one with the SEC and one with FINRA (see Note 11 -"Commitments and Contingencies
- - Legal Matters" in the Notes to the Condensed Consolidated Financial
Statements). The total fines related to these two investigations were $275,000
and were accrued for by the Company in August and September 2007. Reductions in
this category include consulting & professional fees of $212,000, travel &
entertainment of $38,000, office expenses of $75,000 and training related to the
Company's continuing education seminars.
20
Liquidity and Capital Resources
Approximately 79% of our assets consist of cash, securities owned, and
receivables from our clearing firm and other product sponsors. 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 nine months
ended September 30, 2008 by $222,000. Net cash used in operating activities
during the 2008 period was $191,000, which consists of a net loss of $1,271,000,
increased by non-cash charges including depreciation of $51,000, amortization of
stock compensation and deferred costs of $27,000. Cash was reduced by increases
in securities owned and prepaid expenses of $61,000 and $270,000, respectively,
and decreases in commissions' payable of $508,000. Cash was increased by a
decrease in the amount due from clearing firm, employee and broker receivables
and other assets of $250,000, $170,000 and $739,000, respectively, and increases
in account payable, accrued expenses, securities sold and other liabilities of
$368,000, $52,000, $42,000 and $226,000, respectively.
Additions to property and equipment of $25,000 accounted for the use of
cash from investing activities during the nine months ended September 30, 2008.
Financing activities used net cash of $5,000 due to the payment of
preferred stock dividends during the first nine months of 2008.
A financing agreement with AICCO Inc. for the renewal of our errors
and omissions insurance policy had a balance at September 30, 2008 of
approximately $75,000, payable in one remaining monthly installment of
approximately $75,000, 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 Purchase Agreement with AEFC-IC, the Company will be
required to repay any outstanding principal balance and unpaid interest
on December 31, 2008. It is anticipated that the loan will be repaid
out of the proceeds of the asset purchase transaction which is
currently scheduled to close prior to December 31, 2008. At September
30, 2008, the AEFC-IC Note had a $1,000,000 principal balance
outstanding.
Uncertainties Regarding Our Liquidity
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 the Purchase Agreement with
First Allied, a related company of AEFC-IC (See Note 8 - Material Definitive
Purchase Agreement in the Notes to the Condensed Consolidated Financial
Statements). On October 17, 2008 at our annual meeting of shareholders, a
majority of voting common shareholders and Series A Preferred Shareholders voted
21
to approve the Purchase Agreement. The transaction is currently scheduled to
close on or about December 12, 2008 and is contingent upon receiving FINRA
approval, as well as other conditions set forth in the Purchase Agreement. As a
result of the foregoing uncertainties, there can be no assurances that the
transaction will be completed. If the terms of the Purchase Agreement are not
consummated for any other reason, 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.
Recent Accounting Pronouncements
See Note 3 "Recent Accounting Pronouncements" in the Notes to the
Condensed Consolidated 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.
Net Capital
At September 30, 2008, Montauk Financial Group had net capital of
$804,152, which was $554,152 in excess of its required net capital of $250,000,
and the ratio of aggregate indebtedness to net capital was 2.59 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 September 30, 2008, we have 22,282 Series A preferred shares
issued and outstanding. Quarterly dividends of $1,671 and $19,601 were paid
during the three months ended September 30, 2008 and 2007, respectively.
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 of shareholders) 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.
22
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 Condensed 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.
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 (see Note
9-"Convertible Note Purchase Agreement" in the Notes to the Condensed
Consolidated Financial Statements). If the terms of the Purchase Agreement are
not consummated for any reason, 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.
23
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 occasionally acts as a market maker
in 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.
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.
September 30, 2008 December 31, 2007
------------------------------- ----------------------------------- ------------------------------------
Securities Sold Securities Sold
but not yet Securities but not yet
Securities Owned Purchased Owned Purchased
------------------------------- ----------------- ----------------- ---------------- -------------------
Marketable:
Government $ 1,616 $ 0 $ 6,756 $ 0
Corporate 0 0 0 0
Municipal 0 0 0 0
Certificates
of deposit 0 0 0 0
------------------------------- ----------------- ----------------- ---------------- -------------------
Total debt securities 1,616 0 6,756
Equity securities 218,971 41,828 71,019 0
Mutual funds 0 0 9,463 201
Options 0 0 0 0
Warrants 0 0 72,535 0
------------------------------- ----------------- ----------------- ---------------- -------------------
Total $220,587 $41,828 $ 159,773 $ 201
=============================== ================= ================= ================ ===================
24
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.
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.
25
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 September 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.
26
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 Superior Court of New Jersey, Monmouth County Law Division that was
filed in October 2008. The complaint, brought by two former clients of FMSC,
alleges fraud, negligent misrepresentation, breaches of duty of care and
violations of the New Jersey Securities Act in connection with the Plaintiffs'
participation in a 1031 tax-free exchange real estate investment. This action is
similar to one which was brought against the Company and many of the same
individually named Defendants in July 2008 which was filed in the United States
District Court for the Eastern District of North Carolina, which was first
reported by the Company in its Form 10-Q for the period ending June 30, 2008.
The Company has advised its Broker/Dealer professional liability insurance
carrier, as well as its directors and officers liability insurance company of
these claims and is seeking coverage under both policies. The Company intends to
vigorously defend both of these cases and believes it has meritorious defenses
to each claim.
Item 1A. Risk Factors
As provided for under the Private Securities Litigation Reform Act of 1995, we
wish to caution shareholders and investors that the important factors, among
others discussed throughout this Report on Form 10-Q and previously disclosed in
Part I, Item 1A ("Risk Factors") of our Annual Report on Form 10-K/A for the
fiscal year ended December 31, 2007, should be read carefully.
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. These
risk 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.
27
Item 4. Submission of Matters to a Vote of Security Holders.
We held our annual meeting of shareholders on October 17, 2008. As of
the record date of August 25, 2008, there were 13,257,248 shares of common stock
outstanding and eligible to vote and 22,282 shares of Series A preferred stock
outstanding and eligible to vote at the Annual Meeting. A total of 11,231,364
shares of our common stock were present or represented by proxy at the meeting.
A total of 16,895 shares of our Series A preferred stock were present or
represented by proxy at the meeting.
At the annual meeting, shareholders were requested to vote on the
approval and adoption of the Asset Purchase Agreement, dated as of October 17,
2008, by and among First Allied, FMSC and the Company (Proposal 1). The results
were as follows:
----------------------- ----------------------- --------------------------- ----------------------- ---------------------
Votes Cast for
Adoption of Votes Cast Against
Proposal I Proposal I Votes Abstaining Not Voted
----------------------- ----------------------- --------------------------- ----------------------- ---------------------
Common Stock 5,239,181 4,003,141 5,631 1,983,411
----------------------- ----------------------- --------------------------- ----------------------- ---------------------
Series A Preferred 16,895 0 0 0
Stock
----------------------- ----------------------- --------------------------- ----------------------- ---------------------
Also at the annual meeting, shareholders were requested to vote on the
election of the following Class I Director, who was re-elected as Class I
Director by the shareholders for a three-year term:
------------------------------- ---------------------------- --------------------------------
Name of Nominee Votes Cast In Favor Votes Withheld
------------------------------- ---------------------------- --------------------------------
Celeste Leonard 7,105,351 4,126,013
------------------------------- ---------------------------- --------------------------------
Victor K. Kurylak, Ward R. Jones, Jr., Barry Shapiro and David Portman
all continue as directors of First Montauk.
Item 5. Other Information
Not applicable.
28
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 Stock Repurchase Agreement, dated as of October 20, 2008 by and between Gerard A. McHale, Jr., as
Chapter 11 Trustee of The 1031 Tax Group LLC and First Montauk Financial Corp.
- ----------------- ----------------------------------------------------------------------------------------------------
- ----------------- ----------------------------------------------------------------------------------------------------
*10.2 Amended and Restated Employment Agreement, dated as of November 13, 2008 by and between First
Montauk Financial Corp. and Mindy A. Horowitz
- ----------------- ----------------------------------------------------------------------------------------------------
- ----------------- ----------------------------------------------------------------------------------------------------
*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: November 19, 2008 /s/ Mindy A. Horowitz
-------------------------------------
Mindy A. Horowitz
Acting Chief Financial Officer
Dated: November 19, 2008 /s/ Victor K. Kurylak
-------------------------------------
Victor K. Kurylak
President and Chief Executive Officer
29