UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
(Mark One)
|X| ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 For the fiscal year ended December 31, 2008
|_| TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES AND
EXCHANGE ACT OF 1934 For the transition period from
to
0-6729
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Commission file number
FIRST MONTAUK FINANCIAL CORP.
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(Exact name of small business issuer as specified in its charter)
New Jersey 22-1737915
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(State of incorporation) (IRS Employer Identification Number)
Parkway 109 Office Center
328 Newman Springs Road
Red Bank, NJ 07701
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(Address of principal executive office)
(732) 842-4700
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(Issuer's telephone number)
Securities registered under Section 12(b) of the Exchange Act: NONE
Securities registered under Section 12(g) of the Exchange Act: Common Stock,
no par value
Indicate by check mark if the registrant is a well-known seasoned issuer, as
defined in Rule 405 of the Securities Act. Yes [ ] No [X]
Indicate by check mark if the registrant is not required to file reports
pursuant to Section 13 or 15 (d) of the Securities Exchange Act. Yes [ ] No [X]
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
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 if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (ss.229.405 of this chapter) is not contained herein, and will
not be contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. [ ]
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
State the aggregate market value of the voting and non-voting common equity held
by non-affiliates computed by reference to the price at which the common equity
was last sold, or the average bid and asked price of such common equity, as of
the last business day of the registrant's most recently completed second fiscal
quarter (June 30, 2008): $682,955.
Indicate the number of shares outstanding of each of the registrant's classes of
common stock, as of the latest practicable date: On May 14, 2009 there were
9,956,940 shares outstanding of common stock of the Registrant.
DOCUMENTS INCORPORATED BY REFERENCE
List hereunder the following documents if incorporated by reference and the Part
of the Form 10-K (e.g., Part I, Part II, etc.) into which the document is
incorporated: (1) Any annual report to security holders; (2) Any proxy or
information statement; and (3) Any prospectus filed pursuant to Rule 424(b) or
(e) under the Securities Act of 1933.
None
Table of Contents
PART I
PAGE
Item 1. Business 4
Item 1A. Risk Factors - Not applicable 7
Item 1B. Unresolved Staff Comments 7
Item 2. Properties 7
Item 3. Legal Proceedings 8
Item 4. Submission of Matters to a Vote of Security Holders 10
PART II
Item 5. Market For the Company's Common Equity and Related Stockholder Matters 11
Item 6. Selected Financial Data- Not applicable 12
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 13
Item 7A. Quantitative and Qualitative Disclosures About Market Risk 23
Item 8. Financial Statements and Supplemental Data 23
Item 9A. Controls and Procedures 24
Item 9B. Other Information 25
PART III
Item 10. Directors and Executive Officers of the Registrant 26
Item 11. Executive Compensation 30
Item 12. Security Ownership of Certain Beneficial Owners and Management 36
Item 13. Certain Relationships and Related Transactions 38
Item 14. Principal Accounting Fees and Services 38
PART IV
Item 15. Exhibits and Financial Statement Schedules 40
Disclosure Regarding Forward Looking Statements
Statements included in this Report that do not relate to present or
historical conditions are "forward-looking statements" within the meaning of
that term in Section 27A of the Securities Act of 1933, as amended, and in
Section 21F of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"). Additional oral or written forward-looking statements may be made by the
Company from time to time, and such statements may be included in documents that
are filed with the Securities and Exchange Commission ("SEC"). Such
forward-looking statements involve risks and uncertainties that could cause
results or outcomes to differ materially from those expressed in such
forward-looking statements. Forward-looking statements may include, without
limitation, statements relating to the Company's plans, strategies, objectives,
expectations and intentions and are intended to be made pursuant to the safe
harbor provisions of the Private Securities Litigation Reform Act of 1995. Words
such as "believes," "forecasts," "intends," "possible," "expects," "estimates,"
"anticipates," or "plans" and similar expressions are intended to identify
forward-looking statements.
Item 1. Business
General
First Montauk Financial Corp. (the "Company") is a New Jersey-based
financial services holding company whose principal subsidiary, First Montauk
Securities Corp. ("First Montauk"), had operated as a full service retail and
institutional securities brokerage firm. Since July 2000, First Montauk had
operated under the registered trade name "Montauk Financial Group". References
in this Annual Report on Form 10-K to Montauk Financial Group shall refer solely
to our subsidiary First Montauk. Montauk Financial Group had provided 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. First Montauk Financial Corp. also sold
insurance products through its subsidiary, Montauk Insurance Services, Inc.
At the Annual Meeting of Shareholders held on October 17, 2008, the
shareholders of the Company approved the asset purchase agreement executed by
the Company and its principal subsidiary, First Montauk, with First Allied
Securities, Inc. ("First Allied") as of July 9, 2008 ("Purchase Agreement")
providing for the sale of substantially all of the assets of First Montauk to
First Allied. On December 15, 2008 the Company and First Montauk completed the
transaction. First Allied is an affiliate of Advanced Equities Financial Corp.
("Advanced Equities"). Upon the closing, under the Purchase Agreement, certain
of First Montauk's independent registered representatives joined First Allied,
and First Allied acquired the right to service the customer accounts of those
representatives that join First Allied. As previously disclosed in its proxy
statement to shareholders, dated September 23, 2008, upon completion of the
transaction with First Allied, substantially all of the assets of First Montauk
were acquired by First Allied, and First Montauk ceased its broker-dealer and
investment advisor operations. To that end, on December 23, 2008, First Montauk
filed Form BDW and Form ADV-W with the SEC, effective December 31, 2008, to
withdraw its registration as a broker-dealer and to terminate our registration
as an investment advisor. The Form ADV-W was effective on December 31, 2008 and
the Form BDW was accepted and approved by the SEC on February 23, 2009. In
accordance with generally accepted accounting principles ("GAAP"), due to the
substantial nature of the sale of First Montauk, the Company determined that all
of the operations are considered to be discontinued.
Under the terms of the Purchase Agreement, an aggregate purchase price
of approximately $4,197,000 was determined. Upon the signing of the Purchase
Agreement, First Allied paid $250,000 to First Montauk. At closing, First
Montauk received a credit for the cancellation of the balance of principal and
interest outstanding totaling approximately $1,055,670 under a secured
convertible promissory note, dated December 7, 2007 executed in connection with
a loan to First Montauk by an affiliate of First Allied. The third payment of
$2,000,000 was received on January 15, 2009 with the balance of $891,388
expected on March 17, 2009, in accordance with the Purchase Agreement. On that
date we received $676,431 and were advised by First Allied that they were making
an adjustment to the purchase price of $14,957 and were withholding an
additional $200,000 based on their claim of indemnification under the Purchase
Agreement. We agreed with the purchase price adjustment of $14,957 but
challenged First Allied's right to withhold $200,000. We subsequently entered
into an agreement with First Allied in which we permitted them to retain $50,000
and apply it towards any expenses incurred in connection with an attempt by a
former customer to add First Allied as a named respondent in a pending
arbitration case in which we, First Montauk, certain of our executive officers
and certain individual registered representatives were previously named as
respondents. First Allied therefore paid the balance of $150,000 to us in April
2009. The agreement further provides that in the event that First Allied's
defense costs are less than $50,000, First Allied will pay us the remaining
balance and if its expenses exceed $50,000 in connection with this arbitration,
we must indemnify First Allied for its costs above $50,000.
The Company is subject to a court order issued by a New Jersey Superior
Court on January 14, 2009, requiring that the balance of the sale proceeds of
the asset sale to First Allied be held in escrow for the benefit of the
Company's creditors. The court order was issued in conjunction with a lawsuit
initiated by a former customer of First Montauk who invested in a private
offering of a real estate Section 1031 like-kind exchange program, captioned
Dawn A. Dunbar, Zeneth Eidel, and Doris Eidel v. First Montauk Financial Corp.,
First Montauk Securities Corp., Kenneth R. Bolton, et al (Monmouth County Docket
No.L-4949-08). On April 14, 2009, the Court entered a consent order permitting
the Company to pay auditing fees of $80,000 in connection with the filing of the
Company's Form 10-K. On May 8, 2009, the Court entered a second consent order
permitting the Company to pay other expenses from the sale proceeds totaling
$452,065. The Company agreed that the remaining balance of $381,348 would remain
in escrow pending further order of the Court.
As a result of the substantial obligations outstanding that are due and
payable by the Company, we do not anticipate that the Company's shareholders
will receive any distribution of any proceeds of the sale of assets completed to
First Allied. The board of directors is evaluating the benefits of positioning
the Company as a shell company to be used as a potential merger candidate for
another operating business. At this time we do not have any specific merger,
stock exchange, asset acquisition, reorganization or other business combination
under consideration or contemplation. We have not contacted any potential target
business nor had any discussions, formal or otherwise, with respect to such a
possible transaction.
Employees
The employment contracts of Victor K. Kurylak, First Montauk's
President and Chief Executive Officer and Celeste M. Leonard, the Registrant's
Executive Vice President and Chief Compliance Officer of First Montauk,
terminated on December 31, 2008 in accordance with their respective terms and
were not renewed by the Registrant. Mr. Kurylak remains on the Board of
Directors of the Registrant.
As of December 31, 2008, Montauk Financial Group had six employees,
consisting of a Chief Financial Officer and five administrative employees.
Until February 23, 2009, Montauk Financial Group was registered as a
broker-dealer with the SEC, Financial Industry Regulatory Authority ("FINRA")
(formerly the National Association of Securities Dealers), the Municipal
Securities Rule Making Board, the National Futures Association, and the
Securities Investor Protection Corporation ("SIPC"), and was licensed to conduct
its brokerage activities in all 50 states, the District of Columbia, and the
Commonwealth of Puerto Rico.
In the past, competition, government regulation and the volatility of
capital markets affected us and were reported in our public filings. As of the
filing date of this document, such items are no longer applicable to the
Company.
Securities Broker/Dealer Professional Liability Insurance
From January 31, 2006 through January 30, 2009 Montauk Financial Group
carried a securities Broker/Dealer professional liability insurance policy
covering negligent acts, errors or omissions by an insured individual acting on
behalf of the insured Broker/Dealer in providing securities transactions,
investment management services, financial investment advice and the purchase
and/or sale of securities.
This policy excluded coverage for certain types of business activities,
including but not limited to, claims involving the sale of penny stocks and
limited partnerships, accounts handled on a discretionary basis and deliberately
fraudulent and/or criminal acts. Upon the expiration of the prior policy, we
purchased a policy continuation or "run-off policy" for a period of three years
beginning January 31, 2009. The coverage terms of the run-off policy are
essentially the same as the prior policy but with reduced coverage limits
($1,500,000 policy aggregate limit; $500,000 per claim with $25,000 per claim
retention), for the entire three year coverage period. First Montauk offered
this extended coverage to former registered representatives and collected
approximately $60,000 from those who signed up to participate in the program,
which was used to partially offset the $515,000 policy premium. Any former
registered representatives that did not elect to participate in this policy will
not be covered.
Executive and Organization Liability Insurance Policy
We carry an executive and organization liability insurance policy (also
known as Directors and Officers liability insurance), which covers our executive
officers, directors and counsel against any claims for monetary damages arising
from the covered individuals actual or alleged breach of duty, neglect, error,
misstatement, misleading statement or omission when acting in the capacity of
his/her position as an executive officer, director and/or counsel on our behalf.
Policy exclusions include, but are not limited to, claims made against covered
individuals attributable to the committing of any deliberate criminal or
fraudulent acts, illegal or improper payments, and others. Upon the expiration
of the current policy in June 2009, we intend to purchase a "run off" policy
which will extend the policy coverage for an additional six years.
General Business Developments during 2008
Definitive Asset Purchase Agreement
On July 9, 2008, we and First Montauk signed the Purchase Agreement
with First Allied, providing for the sale of substantially all of the assets of
First Montauk to First Allied.
Under the Purchase Agreement, many of First Montauk's independent
registered representatives joined First Allied, and First Allied acquired the
right to service the customer accounts of those registered representatives that
joined First Allied. The aggregate purchase price for the purchased assets was
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 registered
representatives who joined First Allied, which was determined to be
approximately $4,197,000.
On October 27, 2008 at the Annual Meeting of Shareholders, holders of a
majority of our outstanding shares eligible to vote approved the Purchase
Agreement with First Allied and the transaction closed effective on December 15,
2008.
The terms of the Purchase Agreement called for the Purchase Price to be
paid in several installments; the initial payment of $250,000 being made on July
15, 2008. At the closing on December 15, 2008, First Montauk received a credit
for the cancellation of the balance of principal and interest outstanding
totaling approximately $1,055,670 under a secured convertible promissory note,
dated December 7, 2007 executed in connection with a loan to First Montauk by an
affiliate of First Allied. The third payment of $2,000,000 was received on
January 15, 2009 with the balance of $891,388 expected on March 17, 2009, in
accordance with the Purchase Agreement. On that date we received $676,431 and
were advised by First Allied that they were making an adjustment to the purchase
price of $14,957 and were withholding an additional $200,000 based on their
claim of indemnification under the Purchase Agreement. We agreed with the
purchase price adjustment of $14,957 but challenged First Allied's right to
withhold $200,000. We subsequently entered into an agreement with First Allied
in which we permitted them to retain $50,000 and apply it towards any expenses
incurred in connection with an attempt by a former customer to add First Allied
as a named respondent in a pending arbitration case in which we, First Montauk,
certain of our executive officers and certain individual registered
representatives were previously named as respondents. First Allied therefore
paid the balance of $150,000 to us in April 2009. Based on this we adjusted the
amount due from First Allied to $2,826,431. The agreement further provides that
in the event that First Allied's defense costs are less than $50,000, First
Allied will pay us the remaining balance and if its expenses exceed $50,000 in
connection with this arbitration, we must indemnify First Allied for its costs
above $50,000.
Stock Repurchase
On October 20, 2008, we entered into a 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 to purchase 3,300,308
shares of our common stock, no par value, for $100,000. The stock repurchased
was cancelled and had the effect of reducing the total number of our common
shares outstanding from 13,257,248 to 9,956,940.
Election of Directors
At the Annual Meeting of Shareholders on October 17, 2008, holders of a
majority of outstanding shares eligible to vote, voted to elect Celeste M.
Leonard as a Class I director to serve for a three-year term and until her
successor shall have been elected and shall have qualified. On March 23, 2009,
we subsequently received Ms. Leonard's resignation from her position on the
board of directors.
Item 1A. Risk Factors
Not applicable based on filing as smaller reporting company.
Item 1B. Unresolved Staff Comments
None
Item 2. Properties
We maintain our corporate headquarters and executive offices at Parkway
109 Office Center, 328 Newman Springs Road, Red Bank, New Jersey. On September
22, 2004 we entered into a 4th Amendment to our Master Lease dated March 1997
for our corporate headquarters in Red Bank, New Jersey. The amendment provides
for a lease term of five (5) years, which commenced on February 1, 2005, for
27,255 square feet. The lease provides for monthly rent payments of $50,762. As
additional rent, we are required to pay a proportional share of any increases in
real estate taxes and operating expenses above the amount paid during the 2005
calendar year, insurance premiums and all utility charges related to the
premises. The amendment contains a five-year option to renew at a rental payment
equal to the then-current fair market rate per square foot applicable to the
leased premises. We have notified the building landlord of our intent to
terminate our lease prior to the expiration date of January 31, 2010, and have
requested that the space be shown and leased to new tenants. On March 20, 2009,
we received a default notice from the landlord due to our failure to pay the
monthly rental payment for the month of March 2009. The default notice demands
that the premises be vacated by May 1, 2009, which we complied with, so that the
landlord may re-let the premises. In the event that the landlord cannot find a
replacement tenant or tenants, we may be liable for all or a portion of the
remaining rental payments. As of December 31, 2008, the Company has accrued for
all lease payments due through the end of the lease term, January 31, 2010.
Item 3. Legal Proceedings
Many aspects of the broker/dealer business involve substantial risks of
liability. In recent years, there has been an increasing incidence of litigation
and arbitration involving the securities industry.
As a condition to obtaining approval from FINRA for the asset purchase
transaction, First Montauk was required to establish and fund an escrow account
for the benefit of customers with current and/or future claims against the firm.
In November 2008 the escrow account was established with the law firm Becker
Poliakoff, LLP as the escrow agent. In January 2009 the account was funded with
$366,000 pursuant to the requirements of FINRA, which can only be utilized to
pay settlements of customer claims and complaints, any arbitration awards or
judgments with respect to such claims, and legal, accounting and other expenses
related to the investigation, administration and defense of such claims (limited
to the amount of any retention amount for claims covered by insurance.)
Subsequent to the balance sheet date, $65,000 has been paid from the account for
the settlement of two customer arbitrations.
The West Oaks Mall Litigations
There are four (4) separate legal proceedings (three civil law suits
and one FINRA arbitration; each listed below and referred to as "West Oaks
Mall") arising from First Montauk's participation in one particular private
offering involving a Section 1031 tax free exchange investment program, offered
and sold by Investment Properties of America ("IPofA"). The offering, named
"IPofA WOM MASTER Lease Co, LP", required customers seeking a Section 1031 tax
free exchange real estate investment to deposit cash and assume a portion of the
master mortgage on the property, which was a retail mall outside of Houston,
Texas. In 2008, the mall filed for bankruptcy protection and the investors were
required to give up any ownership interest in exchange for a release of their
obligations on the mortgage.
Each of these lawsuits contain similar allegations including fraud,
negligent misrepresentation, breach of duty of care, and violations of the
various state securities laws in the states where each Plaintiff resides. In
addition to naming the Company and First Montauk, each of these suits names the
individual registered representatives, as well as our former President and Chief
Executive Officer ("CEO") and our former Chief Compliance Officer ("CCO"),
as defendants. The complaints also allege an undisclosed relationship between
the IPofA and Mr. Edward H. Okun ("Okun") with Defendants First Montauk and
a former registered representative of First Montauk. Mr. Okun was a private
investor who owned several companies which we had entered into a definitive
merger agreement with in 2006. The merger never took place and in June 2007 we
entered into a settlement agreement with Mr. Okun and several other named
defendants to settle various lawsuits arising out of the terminated merger
agreement. Through his related entities, Mr. Okun had held almost 50% of the
Company's outstanding common stock at certain times during 2007.
On January 26, 2009 we received a coverage determination notice from
Lexington Insurance Company ("Lexington"), the insurance carrier under our
Broker/Dealer Professional Liability Insurance Policy (the "Policy"), regarding
these cases, wherein it described its coverage position with respect to the West
Oaks Mall matters. Lexington is a subsidiary of American International Group,
Inc. ("AIG"). Lexington advised us that under the Policy all of the West Oaks
Mall claims arise out of "Interrelated Wrongful Acts" which provides that all of
these claims be treated as one claim for coverage purposes. Therefore, Lexington
stated that there is $1,000,000 of coverage (subject to the other exclusions
described below), with one $100,000 retention. The letter also stated that
although the Policy would provide defense coverage, no indemnity coverage would
be available for any of these claims as a result of two separate exclusions in
the Policy. The Limited Partnership/REIT Insolvency Exclusion excludes indemnity
coverage for any investment in a limited partnership or REIT that becomes
insolvent. Lexington's position is that the West Oaks Mall matters arise out of
the insolvency of IPofA WOM LeaseCo, LP, as well as the bankruptcy of the West
Oaks Mall. As such, there is no indemnity coverage.
Lexington also cites as an exclusion from coverage the amended
Definition of Investment Banking Activity in the Policy which limits coverage
for Section 1031 exchange programs to those listed in the amended Policy
Endorsement. Because IPofA was not listed among the approved providers of
Section 1031 exchange programs, it is Lexington's position that there is no
indemnity coverage for these claims based upon this provision of the Policy.
The Company will be challenging Lexington's coverage positions with
respect to these claims, but there can be no assurance that First Montauk will
be successful in obtaining indemnity coverage under the Policy for any of the
West Oaks Mall cases. In the event that First Montauk is unable to secure
indemnity coverage, any settlement or adverse judgment or award against First
Montauk, could have a material adverse affect on the Company's financial
condition.
The following lists each of the pending West Oaks Mall-related
litigations and the amounts invested in the program by each of the Plaintiffs:
Caption of Pending Case Venue Invested Amount
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Jeanette E. Newman and Norma Register v. First U.S. District Court, North $2.2 Million
Montauk Financial Corp., First Montauk Securities Carolina
Corp., Kenneth R. Bolton, et al (#7:08-cv-116D).
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Dawn A. Dunbar, Zeneth Eidel, and Doris Eidel v. Superior Court of New $1.94 Million
First Montauk Financial Corp., First Montauk Jersey-Monmouth County
Securities Corp., Kenneth R. Bolton, et al
(#L-4949-08).
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Keith Sperling and Martha A. Olivares-Sperling, Superior Court of New $1.67 Million
Maury Duff Peck, Catharine G. Meeks, Eugene Jersey-Monmouth County
Brughelli, Jr. and Patricia Brughelli v. First
Montauk Financial Corp., First Montauk Securities
Corp., Kenneth R. Bolton, et al
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Michael Sokobin and Helene Sokobin v. First FINRA Arbitration $442,000
Montauk Financial Corp., First Montauk Securities
Corp., Kenneth R. Bolton, et al (FINRA Case No.
08-04146
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Court Order Restricting Use of Asset Sale Proceeds
The Company is subject to a court order issued by a New Jersey superior
court on January 14, 2009, requiring that the balance of the sale proceeds of
the asset sale to First Allied be held in escrow for the benefit of the
Company's creditors. The court order was issued in conjunction with a lawsuit
initiated by a former customer of First Montauk who invested in a private
offering of a real estate Section 1031 like-kind exchange program, captioned
Dawn A. Dunbar, Zeneth Eidel, and Doris Eidel v. First Montauk Financial Corp.,
First Montauk Securities Corp., Kenneth R. Bolton, et al (Monmouth County Docket
No.L-4949-08). On April 14, 2009, the court entered a consent order permitting
the Company to pay auditing fees of $80,000 in connection with the filing of the
Company's Form 10-K. On May 8, 2009, the court entered a second consent order
permitting the Company to pay other expenses from the sale proceeds totaling
$452,065. The Company agreed that the remaining balance of the sale proceeds of
$381,348 would remain in escrow pending further order of the court.
We are a respondent or co-respondent in various other legal
proceedings, which are related to our former securities business. Management is
contesting these claims and believes that there are meritorious defenses in each
case. However, litigation is subject to many uncertainties, and some of these
actions and proceedings may result in adverse judgments. Further, the
availability of insurance coverage is determined on a case-by-case basis by the
insurance carrier, and is limited to the coverage limits within the policy for
any individual claim and in the aggregate. After considering all relevant facts,
available insurance coverage and consultation with litigation counsel,
management believes that significant judgments or other unfavorable outcomes
from pending litigation could have a material adverse impact on our consolidated
financial condition, results of operations, and cash flows in any particular
quarterly or annual period, or in the aggregate.
As of December 31, 2008, the Company has accrued for other potential
legal liabilities that are probable and can be reasonably estimated based on a
review of existing claims and arbitrations. The accrual is included in accrued
expenses at December 31, 2008. Management cannot give assurance that this amount
will be adequate to cover actual costs that may be subsequently incurred.
Further, it is not possible to predict the outcome of other matters pending
against the Company.
Item 4. Submission of Matters on a Vote of Security Holders
On October 17, 2008, we held our annual meeting of shareholders (1) to
consider and act upon the approval and adoption of the Purchase Agreement, and
(2) to consider and act upon the re-election of Celeste M. Leonard as our Class
I Director, both of which received majority approval of shareholders.
PART II
Item 5. Market of and Dividends on our Common Equity and
Related Stockholder Matters
A. Principal Market and Market Information
Our common stock is traded in the over-the-counter market. Trading in
our common stock is reported on the FINRA Bulletin Board system and in the pink
sheets published by Pink Sheets LLC. We believe that there is an established
public trading market for our common stock based on the volume of trading in our
common stock and the existence of market makers who regularly publish quotations
for our common stock. Our common stock commenced trading in the over-the-counter
market in 1987. On May 18, 2009, our common stock had bid and offer prices of
$0.001 and $0.04 per share, respectively. At December 31, 2008 our common stock
had a closing price of $0.01 per share. Quotations on the OTCBB reflect
inter-dealer prices, without retail mark-up, mark-down or commission and may not
necessarily represent actual transactions.
The following is the range of high and low bid prices for such
securities for the periods indicated below:
Common Stock
Calendar Year 2009 High Bid Low Bid
1st Quarter $.005 $.005
Calendar Year 2008 High Bid Low Bid
1st Quarter $.20 $.11
2nd Quarter $.15 $.06
3rd Quarter $.08 $.01
4th Quarter $.02 $.005
Calendar Year 2007 High Bid Low Bid
1st Quarter $.61 $.46
2nd Quarter $.70 $.35
3rd Quarter $.40 $.28
4th Quarter $.30 $.16
B. Number of Record Holders
The approximate number of record holders of our common stock as of May
14, 2009 was 448. Such number of record holders was determined from our
stockholder records, and does not include beneficial owners of our common stock
whose shares are held in the names of various security holders, dealers and
clearing agencies. We believe there are in excess of 350 beneficial holders of
our common stock.
C. Dividend Policy
We have not paid any dividends on our common stock since our inception,
and do not expect to pay any dividends on our common stock in the foreseeable
future and plan to retain earnings, if any, to finance the development and
expansion of our business. We pay quarterly dividends on outstanding shares of
our Series A Preferred Stock at the rate of 6% per annum, subject to the
limitations under the New Jersey Business Corporation Act. There are currently
outstanding 22,282 shares of Series A Preferred Stock.
D. Issuance of Unregistered Securities
There were no issuances of unregistered securities during 2008.
E. Stock Repurchases
On October 20, 2008, we entered into a 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 to purchase 3,300,308
shares of our common stock, no par value, for $100,000. The stock repurchase had
the effect of reducing the total number of our common shares outstanding from
13,257,248 to 9,956,940
F. Securities Authorized For Issuance Under Equity Compensation Plans
See Item 11. "Executive Compensation".
Item 6. Selected Financial Data
Not applicable due to smaller reporting company status.
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations
Forward-Looking Statements
This report contains forward-looking statements within the meaning of
the safe harbor provisions of the Private Securities Litigation Reform Act of
1995. In some cases, forward-looking statements can be identified by words such
as "believe," "expect," "anticipate," "plan," "potential," "continue" or similar
expressions. Forward-looking statements also include the assumptions underlying
or relating to any of the foregoing statements. Such forward-looking statements
are based upon current expectations and beliefs and are subject to a number of
factors and uncertainties that could cause actual results to differ materially
from those described in the forward-looking statements including, but not
limited to, risks described from time to time in the Company's filings with the
SEC, press releases and other communications. All forward-looking statements
included in this report are based on information available to the Company on the
date hereof. The Company undertakes no obligation (and expressly disclaims any
such obligation) to update forward-looking statements made in this report to
reflect events or circumstances after the date of this report or to update
reasons why actual results would differ from those anticipated in such
forward-looking statements.
The following detailed discussion and analysis of the Company's
financial condition and results of operations should be read in conjunction with
the December 31, 2008 financial statements and related notes included in
separate sections of this Form 10-K.
Overview
Substantially all of our business activities consist of the securities
brokerage and investment banking activities of our wholly owned subsidiary,
First Montauk, a FINRA registered broker-dealer. First Montauk conducts
operations in four principal categories, all of which are in the financial
services industry. These categories are:
o securities brokerage activities for which First Montauk earns
commissions or fees;
o corporate finance revenues consisting primarily of fees generated from
private offerings of securities in which we act as placement agent and
new issues of equity and preferred stock offerings in which we
participate as a selling group or syndicate member;
o proprietary trading for which First Montauk records profit or loss,
depending on trading results and riskless principal transactions with
customers; and
o other income, primarily interest earned on customer balances.
Because we operate in the financial services industry, our revenues and
earnings are substantially affected by general financial market conditions.
Therefore, the amount of our revenues depends greatly on levels of market
activity requiring the services we provide.
At the Annual Meeting of Shareholders held on October 17, 2008, the
shareholders of the Company approved the Purchase Agreement executed by the
Company, First Montauk, and First Allied as of July 9, 2008 providing for the
sale of substantially all of the assets of First Montauk to First Allied. On
December 15, 2008 the Company and First Montauk completed the transaction. Upon
the closing, under the Purchase Agreement, certain of First Montauk's
independent registered representatives joined First Allied, and First Allied
acquired the right to service the customer accounts of those representatives
that join First Allied. As previously disclosed in its proxy statement to
shareholders, dated September 23, 2008, upon completion of the sale of assets to
First Allied, substantially all of the assets of First Montauk were sold to and
acquired by First Allied, and First Montauk ceased its broker-dealer and
investment advisor operations. To that end, on December 23, 2008, First Montauk
filed Form BDW and Form ADV-W with the SEC, effective December 31, 2008, to
withdraw its registration as a broker-dealer and to terminate our registration
as an investment advisor. The Form ADV-W was effective on December 31, 2008 and
the Form BDW was accepted and approved by the SEC on February 23, 2009. In
accordance with GAAP, due to the substantial nature of the sale of First
Montauk, the Company determined that all of its operations are considered to be
discontinued.
Under the terms of the Purchase Agreement, an aggregate purchase price
of approximately $4,197,000 was determined. Upon the signing of the Purchase
Agreement, First Allied paid $250,000 to First Montauk. At closing, First
Montauk received a credit for the cancellation of the balance of principal and
interest outstanding totaling approximately $1,055,670 under a secured
convertible promissory note, dated December 7, 2007 executed in connection with
a loan to First Montauk by an affiliate of First Allied. The third payment of
$2,000,000 was received on January 15, 2009 with the balance of $891,388
expected on March 17, 2009, in accordance with the asset purchase agreement. On
that date we received $676,431 and were advised by First Allied that they were
making an adjustment to the purchase price of $14,957 and were withholding an
additional $200,000 based on their claim of indemnification under the Purchase
Agreement. We agreed with the purchase price adjustment of $14,957 but
challenged First Allied's right to withhold $200,000. We subsequently entered
into an agreement with First Allied in which we permitted them to retain $50,000
and apply it towards any expenses incurred in connection with an attempt by a
former customer to add First Allied as a named respondent in a pending
arbitration case in which we, First Montauk, certain of our executive officers
and certain individual registered representatives were previously named as
respondents. First Allied therefore paid the balance of $150,000 to us in April
2009. Based on the two holdbacks mentioned above, we adjusted the amount due
from First Allied as of December 31, 2008 to $2,826,431. The agreement further
provides that in the event that First Allied's defense costs are less than
$50,000, First Allied will pay us the remaining balance and if its expenses
exceed $50,000 in connection with this arbitration, we must indemnify First
Allied for its costs above $50,000.
The Company is subject to a court order issued by a New Jersey Superior
Court on January 14, 2009, requiring that the balance of the sale proceeds of
the asset sale to First Allied be held in escrow for the benefit of the
Company's creditors. The court order was issued in conjunction with a lawsuit
initiated by a former customer of First Montauk who invested in a private
offering of a real estate Section 1031 like-kind exchange program, captioned
Dawn A. Dunbar, Zeneth Eidel, and Doris Eidel v. First Montauk Financial Corp.,
First Montauk Securities Corp., Kenneth R. Bolton, et al (Monmouth County Docket
No.L-4949-08). On April 14, 2009, the Court entered a consent order permitting
the Company to pay auditing fees of $80,000 in connection with the filing of the
Company's Form 10-K. On May 8, 2009, the Court entered a second consent order
permitting the Company to pay other expenses from the sale proceeds totaling
$452,065. The Company agreed that the remaining balance of $381,348 would remain
in escrow pending further order of the Court.
As a result of the substantial obligations outstanding that are due and
payable by the Company to various creditors, we do not anticipate that the
Company's shareholders will receive any distribution of any proceeds of the sale
of assets just completed. The board of directors is evaluating the benefits of
positioning the Company as a shell company to be used as a potential merger
candidate for another operating business. At this time we do not have any
specific merger, stock exchange, asset acquisition, reorganization or other
business combination under consideration or contemplation. We have not contacted
any potential target business or had any discussions, formal or otherwise, with
respect to such a transaction.
The consolidated financial statements for 2008 were prepared on the
going concern basis of accounting, which contemplates realization of assets and
satisfaction of liabilities in the normal course of business as disclosed in
Note 2 to the consolidated financial statements. Certain conditions that exist
raise substantial doubt about our ability to continue as a going concern.
Management's plans are also disclosed in Note 2. The consolidated financial
statements do not include any adjustments that might result from this
uncertainty.
Business Environment in 2008
During the first half of 2008, economic growth in the United States slowed
and the U.S. entered a recession. The lessening of liquidity that began in 2007
accelerated during 2008 and the U.S. markets experienced unprecedented
challenges as credit contracted further, the downturn in economic growth
broadened, and a number of major financial institutions faced serious problems.
Concerns regarding future economic growth and corporate earnings, as well as
illiquidity in the credit markets created challenging conditions for the equity
markets which experienced significant broad-based declines, with equity indices
significantly lower at the end of 2008 as compared to the end of 2007. Fixed
income and equity markets experienced high levels of volatility, broad-based
declines in asset prices and further reduced levels of liquidity, particularly
in the fourth quarter of 2008. The impact of these events created a challenging
environment for investment banking opportunities and sharply narrowed the
ability to distribute securities in the equity and debt capital markets.
The results of our operations for 2008 reflect these challenging market
factors, which contributed to reduced levels of capital markets activity. The
continuation of the volatile markets and unfavorable economic conditions of 2008
had a material impact on our business.
Our financial performance was highly dependent on the environment in which
our business operated. Overall, during 2008, the macro business environment for
our business was extremely challenging, and contributed to our decision to sell
substantially all of our assets and discontinue operations.
Results of Operations
There were several factors that contributed to the decline in overall
revenues and the results of operations. Factors such as the decline in the
number of producing registered representatives and the pending asset sale of the
brokerage operations coupled with the market conditions and slow down in the
economy. Soon after the announcement in October 2008 of the Company's decision
to enter into the asset sale with First Allied, representatives that had decided
not to join First Allied left First Montauk to join other firms. The distraction
caused by the pending asset sale, created an environment of declining revenues
for registered representatives who were evaluating the decision to join First
Allied.
The following provides a breakdown of total revenues by source,
excluding the gain on the sale of our brokerage operations, for the years ended
December 31, 2008 and 2007 (in thousands of dollars).
----------------------------- ----------------------------------
December 31, 2008 December 31, 2007
----------------------------- ----------------------------------
Amount % of Total Amount % of Total
Revenues Revenues
------------ ---------------- ---------------- -----------------
------------ ---------------- ---------------- -----------------
Commissions
Equities $7,913 32% $12,498 32%
Mutual Funds 3,923 16% 6,042 15%
Insurance 3,014 12% 4,386 11%
Investment Advisory 3,981 16% 4,314 11%
Alternative Products 1,300 5% 4,164 10%
Fixed Income 269 1% 324 1%
------------ ---------------- ---------------- -----------------
------------ ---------------- ---------------- -----------------
Total 20,400 82% 31,728 80%
Principal Transactions 1,768 7% 1,535 4%
Investment Banking 674 3% 3,580 9%
Interest and Other
Interest 1,354 5% 2,055 5%
Other 718 3% 658 2%
Total 2,072 8% 2,713 7%
------------ ---------------- ---------------- -----------------
Total revenues $24,914 100% $39,556 100%
2008 Financial Overview (All Operations are Discontinued)
For the year ended December 31, 2008, revenues were $24.9 million,
compared to $39.6 million for the year ended December 31, 2007. The 37 percent
decrease in revenues was driven by decreased commissions of $11.3 million and
investment banking revenues of $2.9 million. Interest income decreased by
approximately $709,000 in 2008 compared to the prior year. Other income
increased approximately $60,000, compared to the prior year. The 2008 year
included a $288,000 insurance recovery 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 14 - "Fraudulent Activity Loss" in the Notes to
the Consolidated Financial Statements for more details). As a result of the
transaction with First Allied, the Company reported approximately $2.9 million
as "gain on sale of brokerage operations" in the financial statements. Loss per
basic and diluted share for the year ended December 31, 2008 was $0.03 compared
to a loss per basic and diluted share of $0.14 for the year ended December 31,
2007. The Company reported a net loss applicable to common shareholders of
$403,000 for the year ended December 31, 2008, compared to a net loss applicable
to common shareholders of $2.2 million for the year ended December 31, 2007.
2008 Compared to 2007
Commission Revenue
Commissions are comprised of revenues from the sale of equities, fixed
income, mutual funds, insurance, asset management fees and alternative products.
Commission revenue for 2008 decreased $11.3 million to $20.4 million from $31.7
million in 2007. The decline in the number of producing registered
representatives and the pending asset sale of the brokerage operations, coupled
with the market conditions and slow down in the economy, contributed to the
decrease in revenues in every category.
Principal Transactions
Total revenues from principal transactions, which include
mark-ups/mark-downs on transactions in which we act as principal, proprietary
trading and the sale of fixed income and equity securities increased $233,000,
from $1.54 million for 2007 to $1.77 million for 2008.
Investment Banking
In 2008, investment banking revenues decreased by $2.9 million, from
$3.6 million in 2007 to 674,000 in 2008. 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 2008 when compared to 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 decreased $641,000 in 2008, or 24%, from $2.7
million in 2007 to $2.1 million in 2008. In 2008, the Company reported an
insurance recovery of $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. Of the net decrease in interest and other income, $701,000 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.
Expenses
Total expenses decreased by $13.4 million, or 32%, in 2008 to $28.2
million from $41.6 million in 2007. Included in the expenses for 2008 are
severance payments for terminated employees of $562,000 and $338,000 of losses
as a result of fraudulent trading activity. (See Note 14 - "Fraudulent Activity
Loss" in the Notes to the Condensed Consolidated Financial Statements for more
details). Also included in total expenses are monthly contractual obligations
for rent, equipment leases and miscellaneous costs of approximately $805,000
that the Company is financially unable to meet and is in default based on its
discontinued operations and therefore has been expensed in total as of December
31, 2008. Included in the expenses for 2007 are severance payments for
terminated employees of $341,000, consulting agreements for two prior executives
of $219,000, litigation costs associated with the Okun affiliates of $400,000
and costs associated with an SEC investigation and the resolution of a
settlement with both the SEC and FINRA of approximately $518,000.
The following chart provides a breakdown of total expenses for the years ended
December 31, 2008 and 2007(in thousands of dollars).
-----------------------------------------------------------
Years Ended
-----------------------------------------------------------
--------------------------- -------------------------------
December 31, 2008 December 31, 2007
--------------------------- -------------------------------
--------------- ---------------
Amount % of Total Amount % of Total
Expenses Expenses
------------- ------------- --------------- ---------------
------------- ------------- --------------- ---------------
Commissions, employee compensation $20,884 74% $33,996 82%
and benefits
Clearing and floor brokerage 1,171 4% 1,478 4%
Communications and occupancy 2,407 8% 1,673 4%
Legal matters and related costs 911 3% 1,672 3%
Other operating expenses 2,709 10% 2,779 7%
Interest 118 1% 26 <1%
Total operating expenses $28,200 100% $41,624 100%
Provision for income taxes $7 $16
Commission expense, consistently the largest expense category and
directly related to commission revenue, decreased 40%, or $11.2 million, from
$28.0 million for 2007, to $16.8 million for 2008. Compensation and benefits
expense for management, operations and clerical personnel, which include
salaries, severance payments, payroll taxes, stock and option compensation,
health insurance premiums, and bonus accruals, decreased for 2008, to $4.07
million from $6.0 million, a decrease of approximately $1.9 million over 2007.
Included in 2008 was approximately $722,000 in severance costs and bonus costs
payments associated with employment contracts for various personnel compared
with approximately $811,000 in 2007.
Clearing and Floor Brokerage
Clearing and floor brokerage costs which are greatly affected by volume
and type of transactions decreased approximately $307,000 from 2007 to 2008.
Communications and Occupancy
Communications and occupancy costs increased approximately $734,000
from 2007 to 2008, from $1.67 million in 2007 to $2.41 million in 2008. Due to
the Company's discontinuation of its brokerage operations and the asset sale,
approximately $773,000 of monthly contractual obligations were expensed in
December 2008. Of this amount, approximately $554,000 was attributable to the
remainder of its monthly rent obligation.
Legal matters and related costs
Legal matters and related settlement costs decreased approximately
$760,000, from $1.67 million in 2007 to $911,000 in 2008. Legal fees for 2008
were $494,000, compared to $1.26 million in 2007. In 2007, we incurred
approximately $400,000 (net of insurance reimbursement) in legal fees related
to various lawsuits involving the termination of an anticipated acquisition in
December 2006. Other legal fees in 2007 included costs associated with an SEC
investigation and a resulting settlement with both the SEC and FINRA of
approximately $518,000, as well as fees associated with customer claims. The
cost of legal settlements for 2008 increased approximately $318,000 when
compared to 2007.
As of December 31, 2008, we have 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.
Other Operating Expenses
Other operating expenses decreased by approximately $70,000, to $2.71
million in 2008 from $2.78 million in 2007. Included in this category is
approximately $338,000 of losses as a result of fraudulent trading activity that
occurred during the first quarter of 2008. (See Note 14 - "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 $408,000. Included in the 2008 operating costs are increases in
depreciation expense of $92,000, E&O insurance premiums of $61,000, professional
fees of $104,000 and broker bad debt expense of $107,000. These increases were
offset by decreases in branch office audits of $128,000, consulting and
professional fees of $267,000, office expense and supplies of $69,000, seminars
and training expense of $49,000 and travel and entertainment expenses of
$44,000.
Income tax expense for the years ended December 31, 2008 and 2007 were
$7,100 and $16,000, respectively. As of December 31, 2008 and 2007, other future
tax benefits have been entirely offset by a valuation allowance because, based
on the weight of available evidence, it is more likely than not that the
recorded deferred tax assets will not be realized in future periods.
Liquidity and Capital Resources
We have sold substantially all of our assets and have ceased our
broker-dealer and investment advisory operations as of December 15, 2008. The
cash proceeds from First Allied, along with any of our remaining cash and other
assets may be insufficient for us to satisfy our known and contingent
liabilities. In addition, we do not have other operations which can generate
additional cash. As a result, there is substantial doubt about our ability to
continue as a going concern. The accompanying consolidated financial statements
have been prepared assuming that we 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. The consolidated financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
Overall, cash decreased for 2008 by $354,000. Net cash used in
operating activities during 2008 was $472,000, as a result of a net loss of
$397,000 and a non-cash gain on sale from brokerage operations of $2,896,000.
These decreases were partially offset by non-cash charges for depreciation and
amortization of $245,000. Cash was further reduced by an increase in prepaid
expenses of $43,000 and net decreases in commissions' payable of $1,329,000 and
other liabilities and income taxes payable of $20,000. Cash was increased by
decreases in due from clearing firm, securities owned, employee and broker
receivables and other assets of $1,620,000, $119,000, $285,000 and $976,000,
respectively. Cash was further increased by increases in accounts payable and
accrued expenses of $46,000 and $922,000, respectively.
Net cash used in operating activities during 2007 was $1,082,000, as a
result of a net loss of $2,085,000 adjusted by non-cash charges including
depreciation and amortization of $140,000. Cash was further reduced by a net
increase in other assets of $561,000 and decreases in commissions payable,
accounts payable and accrued expenses of $639,000, $57,000 and $639,000,
respectively. These decreases to cash were partially offset by decreases in the
amount due from our clearing firm, securities owned, prepaid expenses and
employee and broker receivables of $2,640,000, $39,000, $35,000 and $55,000,
respectively.
Additions to property and equipment of $25,000 offset by cash proceeds
from the sale of brokerage operations received in 2008 of $250,000, provided
cash from investing activities for 2008. In 2007, investing activities consumed
$46,000 for additions to capital expenditures.
Financing activities in 2008 used $107,000 due to the repurchase of
3,300,308 shares of common stock for $100,000 and the payment of preferred stock
dividends of $6,700. Financing activities in 2007 provided net cash of $851,000
due to the issuance of a convertible secured note in the amount of $1,000,000,
partially offset by payments of preferred stock dividends of $124,000.
Financing Activities
On December 7, 2007, the Company entered into a note purchase agreement
(the "Note Purchase Agreement") with AEFC-FMFK Investment Corp. ("AEFC-IC"),
another company affiliated with First Allied and Advanced Equities (See Note 1
to the Consolidated Financial Statements), pursuant to which AEFC-IC was issued
a 10% Convertible Secured Note due on December 31, 2008 for a principal amount
borrowed of $1,000,000 (the "AEFC-IC Note"). The AEFC-IC Note accrued interest
on the unpaid principal amount at the rate of 10% per annum, which was paid
monthly in arrears on or before the 10th day of the month following the interest
accrual. The principal amount of the AEFC-IC Note and all accrued and unpaid
interest was due to be paid in full on December 31, 2008.
On December 15, 2008, the date of closing of the Purchase Agreement,
principal of $1,000,000 and accrued interest of $55,670, was applied toward the
purchase price and the Note was cancelled and deemed paid in full. In connection
with the cancellation of the AEFC-IC Note, all security interests, including the
shares of stock of the Company's subsidiaries, First Montauk and Montauk
Insurance Services, Inc., were released back to the Company.
As a result of the substantial obligations outstanding that are due and
payable by the Company, we do not anticipate that the Company's shareholders
will receive any distribution of any proceeds of the sale of assets completed to
First Allied. The board of directors is evaluating the benefits of positioning
the Company as a shell company to be used as a potential merger candidate for
another operating business. At this time we do not have any specific merger,
stock exchange, asset acquisition, reorganization or other business combination
under consideration or contemplation. We have not contacted any potential target
business, or had any discussions, formal or otherwise, with respect to such a
possible transaction.
Net Capital
At December 31, 2008, First Montauk had net capital of $966,052 which
was $800,990 in excess of its required net capital of $165,062 and the ratio of
aggregate indebtedness to net capital was 2.56 to 1.
Contractual Obligations
The Company has contractual obligations to make future payments in
connection with its short-term debt and non-cancelable lease agreements. Future
minimum lease commitments under all non-cancelable leases have been accrued
based on the Company's discontinuation of its brokerage and other business
operations and its inability to continue meeting its monthly contractual
obligations (See Notes 9 and 12 to the Notes to Consolidated Financial
Statements).
Critical Accounting Policies
We prepare our financial statements in accordance with accounting
principles generally accepted in the United States of America. Preparing
financial statements in accordance with generally accepted accounting principles
requires us to make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent assets and liabilities as
of the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. The following paragraphs include a
discussion of some of the significant accounting policies and methods applied to
the preparation of our consolidated financial statements. (See Note 3 to the
Notes to Consolidated Financial Statements for further discussion of significant
accounting policies.)
Use of Estimates
In presenting the consolidated financial statements, management makes
estimates regarding the valuation of certain securities owned, the carrying
value of investments, the realization of deferred tax assets, the outcome of
litigation, and other matters that affect the reported amounts and disclosure of
contingencies in the financial statements. Estimates, by their nature, are based
on judgment and available information. Therefore, actual results could differ
from those estimates and could have a material impact on the consolidated
financial statements and it is possible that such changes could occur in the
near term.
Revenue Recognition
Securities transactions, commission income, sales concessions from
participation in syndicated offerings and related expenses are recorded on a
trade date basis. Insurance and mutual fund commissions received from outside
vendors are recognized as income when earned. Securities owned and securities
sold, but not yet repurchased are stated at quoted market value with unrealized
gains and losses included in earnings. Investment account securities not readily
marketable are carried at estimated fair value as determined by management with
unrealized gains and losses included in earnings.
Long-lived Assets
We evaluate impairment losses on long-lived assets used in operations,
primarily fixed assets, when events and circumstances indicate that the carrying
value of the assets might not be recoverable in accordance with FASB Statement
No. 144 "Accounting for the Impairment or Disposal of Long-lived Assets". For
purposes of evaluating the recoverability of long-lived assets, the undiscounted
cash flows estimated to be generated by those assets would be compared to the
carrying amounts of those assets. If and when the carrying values of the assets
exceed their fair values, the related assets will be written down to fair value.
Income Taxes
Due to significant operating losses from we have established a
valuation allowance against all of our deferred tax benefits as of December 31,
2008, and we intend to maintain it until we determine that it is more likely
than not that deferred tax assets will be realized. Our income tax expense
recorded in the future will be reduced to the extent of offsetting decreases in
our valuation allowance. The realization of our remaining deferred tax assets is
primarily dependent on forecasted future taxable income.
The Company adopted FIN 48 "Accounting for Uncertainty in Income Taxes"
in January 2007 to measure its tax positions in the consolidated financial
statements. The Company's practice is to recognize interest and/or penalties
related to income tax matters in income tax expense.
New Accounting Standards
In September 2006, the FASB issued Statement of Financial Accounting
Standards ("SFAS") No. 157, Fair Value Measurements ("SFAS 157"), to define how
the fair value of assets and liabilities should be measured in accounting
standards where it is allowed or required. In addition to defining fair value,
the Statement established a framework within GAAP for measuring fair value and
expanded required disclosures surrounding fair value measurements. In February
2008, the FASB issued FASB Staff Position (FSP) FAS 157-2, Effective Date of
FASB Statement No. 157, which delayed the effective date by one year 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. On October 2008, the FASB issued FSP FAS 157-3, Determining the Fair
Value of a Financial Asset When the Market for That Asset Is Not Active, to
clarify the application of SFAS 157 in a market that is not active and provides
an example to illustrate key considerations in determining the fair value of a
financial asset when the market for that financial asset is not active. This FSP
was effective immediately. In April 2009, the FASB issued FSP FAS 157-4.
Determining Fair Value When the Volume and Level of Activity for the Asset or
Liability Have Significantly Decreased and Identifying Transactions That Are Not
Orderly, to provide additional guidance for estimating fair value when the
volume and level of activity for the asset or liability have significantly
decreased. This FSP will be effective for interim and annual reporting periods
ending after June 15, 2009. We adopted SFAS 157 for financial assets and
financial liabilities on January 1, 2008, and the adoption did not have a
material impact on our financial position, results of operations, or cash flows.
In February 2007, the FASB issued SFAS No. 159, "The Fair Value Option
for Financial Assets and Financial Liabilities-Including an Amendment of FASB
Statement No. 115" ("SFAS 159"). SFAS 159 allows companies to measure certain
financial instruments at fair value without having to apply complex hedge
accounting provisions and to report unrealized gains and losses on elected items
in earnings. This Statement is effective for financial statements issued for
fiscal years beginning after November 15, 2007. The adoption of SFAS 159 did not
have a material impact on the Company's results of operations or financial
position because we had no assets or liabilities for which we elected the fair
value option.
In December 2007, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards ("SFAS") No. 141R (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"). 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 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 ("SFAS 161"). 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 161 on its
consolidated financial statements.
In April 2009, the FASB issued FSP No. FAS 107-1 and APB 28-1, Interim
Disclosures about Fair Value of Financial Instruments, to require disclosures
about fair value of financial instruments for interim reporting periods of
publicly traded companies as well as in annual financial statements. This FSP
also amends APB Opinion No. 28, Interim financial Reporting, to require those
disclosures in summarized financial information at interim reporting periods.
The Company will comply with the additional disclosure requirements beginning in
the second quarter of 2009.
In April 2009, the FASB issued FSP No. FAS 115-2 and FAS 124-2,
Recognition and Presentation of Other-Than-Temporary Impairments. This FSP
amends the other-than-temporary impairment guidance in U.S. GAAP for debt and
equity securities in the financial statements. This FSP does not amend existing
recognition and measurement guidance related to other-than-temporary impairments
of equity securities. The FSP shall be effective for interim and annual
reporting periods ending after June 15, 2009. The Company currently does not
have any financial assets that are other-than-temporary impaired.
In April 2009, the SEC released Staff Accounting Bulletin No. 111 ("SAB
111"), which amends SAB Topic 5-M. SAB 111 notes that FSP No. 115-2 and FAS
124-2 were scoped to debt securities only, and the FSP referred readers to SEC
SAB Topic 5-M for factors to consider with respect to other-than-temporary
impairments for equity securities. With the amendments in SAB 111, debt
securities are excluded from the scope of Topic 5-M, but the SEC staff's views
on equity securities are still included within the topic. The Company currently
does not have any financial assets that are other-than-temporary impaired.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
Market Risk Exposure
We have financial instruments that are subject to interest rate risk
and market risk. Historically, we have not experienced material gains or losses
due to interest rate changes. Based on the current holdings, the exposure to
interest rate risk and market risk are not material.
Item 8. Financial Statements
See Financial Statements attached hereto at pages F-1 to F-33.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None
Item 9A. Controls and Procedures
a) Evaluation of Disclosure Controls and Procedures.
Under the supervision and with the participation of management,
including the Company's Chief Executive Officer and Acting Chief Financial
Officer, the Company conducted an evaluation of the Company's disclosure
controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the
Exchange Act) as of December 31, 2008. The Company's disclosure controls and
procedures are designed to ensure that information required to be disclosed in
the reports the Company files 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 the
Company's management, including our Chief Executive Officer and Acting Chief
Financial Officer, to allow for timely decisions regarding required disclosures.
Based on this evaluation, the Company's Chief Executive Officer and
Acting Chief Financial Officer concluded that, as of December 31, 2008, the
Company's disclosure controls and procedures were not effective, since the
Company did not file its Form 10-K within the required due date as required by
the rules and regulations of the SEC.
b) Management's Annual Report on Internal Control over Financial Reporting.
Management is responsible for establishing and maintaining adequate
internal control over financial reporting. The Company's internal control over
financial reporting is a process designed to provide reasonable assurance
regarding the reliability of the Company's financial reporting and the
preparation of the Company's financial statements for external purposes in
according with the U.S. generally accepted accounting principles. The Company's
internal control over financial reporting includes policies and procedures that:
o Pertain to the maintenance of records that, in reasonable
detail, accurately and fairly reflect transactions and
dispositions of assets of the Company;
o Provide reasonable assurance that transactions are recorded
as necessary to permit preparation of consolidated financial
statements in accordance with U.S. generally accepted
accounting principles, and that receipts and expenditures are
being made only in according with authorizations of management
and directors of the Company; and
o Provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of
the Company's assets that could have a material effect on the
consolidated financial statements.
Because of its inherent limitations, internal control over financial
reporting may not prevent or detect misstatements. In addition, projections of
any evaluation of effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions, or that the
degree of compliance with the policies or procedures may deteriorate.
As of December 31, 2008, management has assessed the effectiveness of
the Company's internal control over financial reporting based on the framework
established in "Internal Control--Integrated Framework" issued by the Committee
of Sponsoring Organizations of the Treadway Commission. A material weakness is a
deficiency or a combination of deficiencies in internal control over financial
reporting, such that there is a reasonable possibility that a material
misstatement of the Company's annual or interim consolidated financial
statements will not be prevented or detected on a timely basis.
Our management, with the participation of the Chief Executive Officer
and Acting Chief Financial Officer, evaluated the effectiveness of the Company's
internal control over financial reporting as of December 31, 2008. Based on this
evaluation, our management, with the participation of the Chief Executive
Officer and Acting Chief Financial Officer, concluded that, as of December 31,
2008, our internal control over financial reporting was effective.
This annual report does not include an attestation report of the
Company's independent registered public accounting firm regarding internal
control over financial reporting. Management's report was not subject to
attestation by the Company's registered public accounting firm pursuant to
temporary rules of the SEC that permit the Company to provide only management's
report in this annual report.
c) Changes in Internal Control Over Financial Reporting
During the quarter ended December 31, 2008, there has been no change in
our internal control over financial reporting (as defined in Rule 13a-15(f) and
15d-15(f) under the Exchange Act) that has materially affected, or is reasonably
likely to materially affect, our internal control over financial reporting.
Item 9B. Other Information
None
PART III
Item 10. Directors and Executive Officers
The names and ages of each director of the Company, each of their principal
occupations at present and for the past five (5) years and certain other
information about each of the directors are set forth below:
Director
Name Age Since
- -------------------------------------------------------------------------------------------- ------------- -----------
- -------------------------------------------------------------------------------------------- ------------- -----------
VICTOR K. KURYLAK served as Chief Executive Officer from February 1, 2005 through December 52 2005
31, 2008. From January 1, 2004 through January 31, 2005, Mr. Kurylak was our President and
Chief Operating Officer. From January 2001 through December 2003, Mr. Kurylak was a
self-employed business consultant, and was retained by us prior to his becoming our
President and Chief Operating Office. From November 1995 through December 2000 he was the
owner and Executive Vice President for Madison Consulting Group/Summit Insurance, an
independent insurance brokerage firm. Mr. Kurylak received his Bachelor of Sciences degree
in Engineering from Princeton University in 1979.
- -------------------------------------------------------------------------------------------- ------------- -----------
- -------------------------------------------------------------------------------------------- ------------- -----------
- -------------------------------------------------------------------------------------------- ------------- -----------
- -------------------------------------------------------------------------------------------- ------------- -----------
WARD R. JONES, JR. was employed by Shearson Lehman Brothers as a registered representative 77 1991
from 1955 through 1990, eventually achieving the position of Vice President. Mr. Jones was
a registered representative of Montauk Financial Group from 1991 to 2005 but did not
engage in any securities business. Mr. Jones is now retired from the securities business.
- -------------------------------------------------------------------------------------------- ------------- -----------
- -------------------------------------------------------------------------------------------- ------------- -----------
- -------------------------------------------------------------------------------------------- ------------- -----------
- -------------------------------------------------------------------------------------------- ------------- -----------
BARRY D. SHAPIRO, CPA has been with the accounting firm, Withum, Smith + Brown since 67 2000
October 2000 in its Red Bank office and is currently a shareholder. Prior to that, Mr.
Shapiro was a partner of Shapiro & Weisman CPAs P.A. from 1976 through 1996 when he became
a partner of Rudolf, Cinnamon & Calafato. P.A. until joining Withum, Smith + Brown. Mr.
Shapiro is a member of the New Jersey Society of Certified Public Accounts, where he
currently participates on the IRS Co-Op and State Tax Committees. Mr. Shapiro is a past
Trustee, Treasurer and Vice President of the NJSCPA. He has been involved in many civic
and community activities, as well as charitable organizations, including the Monmouth
County New Jersey Chapter of the American Cancer Society and the Ronald McDonald House of
Long Branch, NJ. Mr. Shapiro received a B.S. in accounting from Rider University in 1965.
- -------------------------------------------------------------------------------------------- ------------- -----------
- -------------------------------------------------------------------------------------------- ------------- -----------
- -------------------------------------------------------------------------------------------- ------------- -----------
- -------------------------------------------------------------------------------------------- ------------- -----------
DAVID I. PORTMAN rejoined our Board of Directors on February 24, 2006, and had previously 67 2002
served on our Board from 1993 until 2002. Mr. Portman is the president of TRIAD
Development, a real estate company that has numerous commercial and rental properties in
New Jersey, a position that he has held since 1988. In addition, Mr. Portman currently
services as a director of Pacifichealth Laboratories, Inc., a publicly held nutrition
technology company, a position he has held since August 1995. Mr. Portman has a BS in
Pharmacy and an MBA.
- -------------------------------------------------------------------------------------------- ------------- -----------
- -------------------------------------------------------------------------------------------- ------------- -----------
- -------------------------------------------------------------------------------------------- ------------- -----------
- -------------------------------------------------------------------------------------------- ------------- -----------
CELESTE M. LEONARD has served as an Executive Vice President and Chief Compliance Officer 53 2007
of First Montauk from September 2006 through December 31, 2008. Ms. Leonard has over 28
years of compliance and supervision experience in the financial services industry. Prior
to joining the Company in 2006, Ms. Leonard had been the Sales Practice Director for Smith
Barney Citigroup in New York City, a position she had held since November 2004. She
previously worked as a Senior Vice President for Business Control Management for Neuberger
Berman, LLC in New York from March 2004 through November 2004. From February 1996 through
March 2004, Ms. Leonard was an Executive Director/National Director of Branch Supervision
for CIBC Oppenheimer Corp. and oversaw supervision and risk management for the private
client division's 19 branch locations. On March 23, 2009, Ms. Leonard resigned effective
immediately as a director of the Company.
- -------------------------------------------------------------------------------------------- ------------- -----------
Additional Executive Officers of the Company who are Not Directors:
- ---------------------------- ------- ---------------------------------------------------------------------------------
Name Age
- ---------------------------- ------- ---------------------------------------------------------------------------------
- ---------------------------- ------- ---------------------------------------------------------------------------------
Mindy A. Horowitz 51 Ms. Horowitz has served as our Acting Chief Financial Officer from February 1,
2005 through April 30, 2009. She has been the Interim Chief Executive Officer, as of
January 1, 2009, since Mr. Kurylak's employment as President and Chief Executive
Officer expired. In January 2005, she became the Chief Financial
Officer and Financial and Operations Principal of First Montauk Securities
Corp. When she first joined the Company in September 1995, she was the Vice
President of Finance. Prior to that, Ms. Horowitz was a tax partner with and
held other positions at the accounting firm of Broza, Block & Rubino from 1981
through 1995 when she joined First Montauk. Ms. Horowitz graduated with a MS in
accounting from Monmouth University in 1981. She is a past President of the
Estate and Financial Planning Council of Central New Jersey.
- ---------------------------- ------- ---------------------------------------------------------------------------------
Our Certificate of Incorporation provides for the classification of the
Board of Directors into three classes of Directors, each class as nearly equal
in number as possible but not less than one Director, each Director to serve for
a three-year term, staggered by class. The Certificate of Incorporation further
provides that a Director or the entire Board of Directors may be removed only
for cause and only by the affirmative vote of the holders of at least 70% of the
combined voting power of our voting stock, with vacancies on the Board being
filled only by a majority vote of the remaining Directors then in office.
"Cause" is defined as the willful failure of a Director to perform in any
substantial respect such Director's duties to our company (other than any such
failure resulting from incapacity due to physical or mental illness), willful
malfeasance by a Director in the performance of his duties to the company which
is materially and demonstrably injurious to the company, the commission by a
Director of an act of fraud in the performance of his duties, the conviction of
a Director for a felony punishable by confinement for a period in excess of one
year, or the ineligibility of a Director for continuation in office under any
applicable rules, regulations or orders of any federal or state regulatory
authority. All officers serve at the discretion of the Board of Directors.
Certain Reports
No person who, during the year ended December 31, 2008, was a Director,
officer or beneficial owner of more than ten percent of our common stock (which
is the only class of our securities registered under Section 12 of the Exchange
Act) failed to file on a timely basis, reports required by Section 16 of the
Exchange Act during the most recent fiscal year or prior years. The foregoing is
based solely upon our review of Forms 3 and 4 during the most recent fiscal year
as furnished us under Rule 16a-3(d) under the Exchange Act, and Forms 5 and
amendments thereto furnished to us with respect to its most recent fiscal year,
and any representation received by us from any reporting person that no Form 5
is required.
Meetings of Directors
During 2008, the full Board of Directors met on six occasions. No
member of the Board of Directors attended less than 75% of the aggregate number
of (i) the total number of meetings of the Board of Directors or (ii) the total
number of meetings held by all Committees of the Board of Directors.
Committees of the Board of Directors
The Board of Directors has three committees: Audit Committee,
Compensation Committee and Special Committee. Our Board of Directors
currently consists of five individuals, three of whom are independent directors
as defined in the Marketplace Rules of the Nasdaq Stock Market. Our independent
directors are Ward R. Jones, Jr., Barry D. Shapiro and David I. Portman.
For the year ended December 31, 2008, the members of the committees,
and a description of the duties of the Committees were as follows:
Audit Committee. Our Audit Committee acts to:
o review with management our finances, financial condition and interim
financial statements;
o review with our independent auditors the year-end financial
statements; and
o review implementation with the independent auditors and management any
action recommended by the independent auditors and the retention and
termination of our independent auditors.
During the year ended December 31, 2008, the Audit Committee met on five
occasions. The Audit Committee adopted a written charter governing its actions
effective June 23, 2000. During the year, the members of the Audit Committee
were Ward R. Jones, Barry D. Shapiro and David I. Portman. Both of the members
of our Audit Committee were "independent" within the definition of that term as
provided in the Marketplace Rules of the Nasdaq Stock market. The Board has
determined that Mr. Barry D. Shapiro qualified as the Audit Committee financial
expert as defined under applicable Securities and Exchange Commission rules. Mr.
Shapiro serves as chairman of this committee. Mr. Portman was appointed to serve
on this committee at the time of his election to our Board in February 2006.
Compensation Committee. The Compensation Committee functions include
administration of our 2002 Incentive Stock Option Plan and 1996 Senior
Management Option Plan and the negotiation and review of all employment and
separation agreements with our executive officers. The Compensation Committee's
members during 2008 were Ward R. Jones, Barry D. Shapiro and David Portman. Mr.
Jones serves as chairman of this committee. During the year ended December 31,
2008, the committee met on two occasions.
Special Committee. The Special Committee of the Board was formed on
February 24, 2006 for the purpose of reviewing and evaluating any transactions
that may be presented to the Board for the benefit of the shareholders. Mr.
David Portman serves as chairman of this committee. The Special Committee, which
consists of our three independent members of the Board, did not meet as a
separate committee in 2008.
Compensation Committee Interlocks and Insider Participation
There are no Compensation Committee interlocks between the members of
our Compensation Committee and any other entity. None of the members of the
Board's Compensation Committee are executive officers of our company.
Compensation of Directors
We pay our Directors who are not also our employees a retainer of $250
per meeting of the Board of Directors attended and for each meeting of a
committee of the Board of Directors not held in conjunction with a Board of
Directors meeting. In 2007 the Board authorized an increase in the annual
payment from $5,000 to $15,000 payable in advance in quarterly installments.
Members of the Audit Committee are also entitled to any additional $5,000
payment per annum payable in advance in quarterly installments.
Code of Ethics
On March 29, 2004, our Board of Directors approved the Code of Ethics
and Business Conduct for our company. Our Code of Ethics and Conduct covers all
our employees and Directors, including our Chief Executive Officer and President
and Acting Chief Financial Officer. A copy of our Code of Ethics and Conduct was
filed as Exhibit 14 to our Annual Report on Form 10-K for 2003. We did not amend
or waive any provisions of the Code of Ethics and Business Conduct during the
year ended December 31, 2008.
Item 11. Executive Compensation
The following table provides certain information concerning all Plan
and Non-Plan (as defined in Item 402 (a)(ii) of Regulation S-K) compensation
awarded to, earned by, paid or accrued by us during the years ended December 31,
2008, 2007 and 2006 to each of our NEO's.
o
Non-Equity Nonqualifiedn
Incentive Deferred
Stock Option Plan Compensati-o All Other
Name and Principal Fiscal Salary Bonus Awar-ds Awards Compensa-tion Earnings Compensa-ti Total
Position Year ($) ($) ($) ($) ($) ($) ($) ($)
Victor K. Kurylak,
President, Chief 2008 270,000 0 0 0 0 0 312,270(1) 582,270
Executive Officer, 2007 292,500 0 0 0 0 0 0 292,500
FMFC and Montauk 2006 300,000 200,000 0 0 0 0 500,000
Financial. Group
Celeste M. Leonard,
Chief Compliance 2008 200,000 100,000(2) 0 0 0 0 0 300,000
Officer, Montauk 2007 200,000 100,000 0 0 0 0 0 300,000
Financial Group 2006 200,000 200,000 0 0 0 0 0 400,000
Mindy A. Horowitz,
Acting Chief
Financial Officer,
FMFC, Chief Financial
Officer and Fin. Op.
Montauk Financial 2008 160,000 20,000 0 0 0 0 140,000(3) 320,000
Group 2007 160,000 0 0 0 0 0 0 160,0000
2006 152,000 35,000 0 0 0 0 0 187,000
1) Due to the expiration of Mr. Kurylak's employment agreement effective
December 31, 2008, he was entitled to a severance payment equivalent to
one year's base salary. The amount due and payable to him was $300,000
as of December 31, 2008. This amount has been accrued for on the
Company's books but has not yet paid. In addition, Mr. Kurylak received
commissions of $12,270 in 2008.
2) In accordance with Ms. Leonard's employment agreement she was entitled
to a $100,000 bonus for 2008. This amount has been accrued for on the
Company's books but has not yet been paid.
3) On November 13, 2008, an amended and restated employment agreement was
signed between Mindy A. Horowitz and the Company. In exchange for Ms.
Horowitz agreeing to extend her employment agreement through April 30,
2009 and to waive any annual salary or severance pay payable under the
Original Agreement, the Company agreed to pay Ms. Horowitz $140,000 in
November 2008.
Employment Contracts, Termination of Employment and Change in Control Agreements
Victor K. Kurylak
Effective February 1, 2005, the Board approved the appointment of
Victor K. Kurylak as our Chief Executive Officer and entered into a new
employment agreement. Mr. Kurylak was granted 1,000,000 shares of our common
stock as a bonus for our performance for the year ended December 31, 2004, and
in consideration of his assuming the position of Chief Executive Officer, which
shares vest in increments of one third commencing on February 1, 2005, December
31, 2005 and December 31, 2006. In the event of a change of control of the
Company, all unvested shares would vest. Mr. Kurylak agreed to the cancellation
of 250,000 of his outstanding stock options with an exercise price of $0.75 per
share. His prior agreement entered into effective January 1, 2004 was
terminated.
Under the terms of Mr. Kurylak's employment agreement, he received a
base salary of $275,000 per year; subject to annual increases of 10% provided we
have profits of at least $500,000 per annum. In addition, Mr. Kurylak was
entitled to receive medical and other benefits that we have in effect for its
executives. Mr. Kurylak was entitled to participate in our executive bonus pool,
which has been established by the Board to constitute 15% of our net pre tax
profit. Further, Mr. Kurylak was also entitled to a portion of the corporate
finance bonus pool defined as 20% of all underwriters and/or placement agent
warrants or options that are granted to Montauk Financial Group upon the same
price, terms and conditions afforded to Montauk Financial Group as the
underwriter or placement agent, but not to exceed 50% of what is retained by
Montauk Financial Group after issuance to the registered representatives who
participated in the placements. In the event of termination without cause, Mr.
Kurylak would be entitled to a severance payment consisting of accrued
compensation, continuation of his benefits and payment of his base salary for a
period of the greater of three months or the unexpired term.
As of May 9, 2007, the Company and Mr. Kurylak executed an Amended and
Restated Employment Agreement ("Amended Employment Agreement"). Pursuant to the
Amended Employment Agreement, Mr. Kurylak continued his employment with the
Company as President. On June 15, 2007, the Company and Mr. Kurylak executed
Amendment Number One to the Amended and Restated Employment Agreement
("Amendment to Amended Employment Agreement") to correctly state that Mr.
Kurylak remains employed in the capacity of President and Chief Executive
Officer of both the Company and First Montauk. Mr. Kurylak's employment contract
was renewed for one year under the terms of the Amended Employment Agreement
previously filed and expired on December 31, 2008.
Pursuant to the terms of the Amended and Restated Employment Agreement,
since Mr. Kurylak's employment terminated as a result of the expiration of his
agreement at the end of the Term, Mr. Kurylak is entitled to the severance
payment which is currently due and owing by the Company.
The Agreement provided that in the event Mr. Kurylak is a member of the
Board of Directors of the Company on the termination date, the payment of any
and all compensation due under the Amended Employment Agreement, except the
accrued compensation, is expressly conditioned on Mr. Kurylak's resignation from
the Board of Directors within five (5) business of the termination date.
However, by agreement between Mr. Kurylak and the Board of Directors, Mr.
Kurylak agreed to remain on the Board Directors without forfeiting his rights to
any compensation then due and owing.
The Amended Employment Agreement contains confidentiality obligations
that survive indefinitely and non-solicitation and non-competition obligations
that end on the first anniversary of the date of cessation of Mr. Kurylak's
employment.
Pursuant to the terms of his agreement, Mr. Kurylak's employment
terminated on December 31, 2008. A severance payment of $300,000 remains due and
owing him by the Company.
Celeste M. Leonard
In August 2006, First Montauk entered into an employment agreement with
Ms. Celeste M. Leonard with respect to her new position as a Chief Compliance
Officer of First Montauk. The employment agreement provides her with an annual
base salary of $200,000 and bonuses of $200,000 for 2006 and $100,000 each year
through December 31, 2008, provided she is still employed by the Company at the
end of each year. Ms. Leonard's employment terminated on December 31, 2008. A
bonus payment of $100,000 for 2008 remains due and owing her by the Company.
Mindy A. Horowitz
In 2005, we entered into a new employment agreement with Mindy Horowitz
who serves as our Acting Chief Financial Officer. The Board also approved a
restricted stock award to her of 100,000 shares of common stock as a performance
bonus award and as an incentive to continue her employment with us. The
agreement had an initial term of one year ending February 1, 2006 and is
renewable for successive one-year terms unless we provide 120 days' prior
written notice of our intention not to renew the agreement. This agreement is
currently in effect.
Under her agreement, Ms. Horowitz received a base salary of $140,000
per year, which was increased to $160,000 per year in 2007. She is eligible to
participate in our bonus and option plans, receives health and benefits as
provided to our executives and is entitled to a car allowance. In the event of
termination of her employment without cause, Ms. Horowitz would be entitled to
receive a severance payment equal to the sum of (i) one year's salary, (ii) her
portion of the bonus pool payments she would otherwise be entitled to following
termination and (iii) payment of the costs of health and other benefits for 12
months following termination.
In October 2008, Ms. Horowitz executed an Amended and Restated
Employment Agreement ("Amended Employment Agreement"). The Amended Employment
Agreement was executed to ensure that Ms. Horowitz would be available to provide
her services and experience to the Company for up to an additional three months
after the expiration of her prior employment agreement to assist with the wind
down of the Company's affairs. Under the terms of Ms. Horowitz's original
employment agreement, her employment by the Company was scheduled to expire on
January 31, 2009 at which time she would have been entitled to severance pay in
the amount of $140,000 if her employment was were not renewed. Under the terms
of the Amended Employment Agreement, Ms. Horowitz continued her duties as Senior
Vice President and Acting Chief Financial Officer of the Company through January
31, 2009 and received her base salary and other benefits. During the extended
period from February 1, through April 30, 2009, Ms. Horowitz has continued to
serve as the Company's Acting Chief Financial Officer but has not received any
salary. She is being provided with an 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 Ms. Horowitz during the extended period, she received
a lump sum payment in the amount of $140,000 on November 14, 2008.
The Amended Employment Agreement contains non-solicitation and
non-competition obligations that end on the first anniversary of the date of
cessation of Ms. Horowitz's employment.
Ms. Horowitz has also been serving as Interim Chief Executive Officer,
as of January 1, 2009, since Mr. Kurylak is no longer employed by the Company as
President and Chief Executive Officer.
SUMMARY OF CASH AND CERTAIN OTHER COMPENSATION
2008 GRANTS OF PLAN-BASED AWARDS
There were no grants made to any NEOs of options or restricted stock
during the year ended December 31, 2008.
OUTSTANDING EQUITY AWARDS AT 2008 YEAR-END
Options Awards Stock Awards
- --------------- ------------ ------------ ------------ -------- ------------ -------------- --------------- ------------ ----------
Equity
Incentive
Plan
Equity Awards:
Incentive Market or
Equity Plan Payout
Incentive Awards: Value of
Plan Number of Unearned
Awards Unearned Shares,
Number of Number of Number of Shares, Units or
Securities Securities Securities Number of Market Value of Units Other
Underlying Underlying Underlying Options Shares or Units Shares or Units or Other Rights
Unexercised Unexercised Unexercised Exercise Option of Stock That of Stock That Rights That That Have
Options (#) Options (#) Unearned Price Expiration Have Not Have Not Have Not Not Vested
Name Exercisable Unexercisable Options (#) ($) Date Vested (#) Vested ($) Vested (#) ($)
- --------------- ------------ ------------ ------------ -------- ------------ -------------- --------------- ------------ ----------
- --------------- ------------ ------------ ------------ -------- ------------ -------------- --------------- ------------ ----------
Mindy A. 75,000(1) 0 - 1.25 07/27/10 - - - -
Horowitz
- --------------- ------------ ------------ ------------ -------- ------------ -------------- --------------- ------------ ----------
1) Represents the number of vested stock options as of December 31,
2008. These options vested 100% upon grant on July 28, 2005. Options
expire 5 years from the date of grant.
2008 OPTION EXERCISES AND STOCK VESTED
There were no options exercises or stock that vested during the year
ended December 31, 2008.
2008 DIRECTOR'S COMPENSATION TABLE
The following table shows, for the year ended December 31, 2008, the
compensation paid to each of our non-executive directors:
------------------------------ --------------------- ---------------- ---------------------
Name Fees Earned or Paid Option Awards Total ($)
in Cash ($) ($)(2)
------------------------------ --------------------- ---------------- ---------------------
------------------------------ --------------------- ---------------- ---------------------
Barry Shapiro 22,750(1) 0 22,750
------------------------------ --------------------- ---------------- ---------------------
------------------------------ --------------------- ---------------- ---------------------
Ward R Jones Jr. 22,750(1) 0 22,750
------------------------------ --------------------- ---------------- ---------------------
------------------------------ --------------------- ---------------- ---------------------
David Portman 22,500(1) 0 22,500
------------------------------ --------------------- ---------------- ---------------------
(1) Represents payments made to each Mr. Shapiro, Mr. Jones and Mr.
Portman for a) annual cash payment of $15,000 as a non-executive board
member, b) annual cash payment of $5,000 as a member of the Audit
Committee, and c) cash payment of $2,750 to each Mr. Shapiro and Mr.
Jones and $2,250 to Mr. Portman for attendance at Board and Audit
Committee meetings in 2008.
Incentive Stock Option Plan
In June 2002, we adopted the 2002 Incentive Stock Option Plan (the
"2002 Incentive Plan"), which provides for the grant of options to purchase up
to 5,000,000 shares of our common stock by our employees, registered
representatives and consultants. Under the terms of the 2002 Incentive Plan,
options granted there under may or may not be designated as options which
qualify for incentive stock option treatment under Section 422A of the Code.
The 2002 Incentive Plan is administered by our Board of Directors which
has the discretion to determine the eligible employees to whom, and the times
and the price at which, options will be granted; whether such options shall be
Incentive Stock Options or Non-Incentive Stock Options; the periods during which
each option will be exercisable; and the number of shares subject to each
option. The Board has full authority to interpret the 2002 Incentive Plan and to
establish and amend rules and regulations relating thereto.
Under the 2002 Incentive Plan, the exercise price of an option
designated as an Incentive Stock Option shall not be less than the fair market
value of the common stock on the date the option is granted. However, in the
event an option designated as an Incentive Stock Option is granted to a ten
percent stockholder such exercise price shall be at least 110% of such fair
market value. Exercise prices of Non-Incentive Stock Options may be less than
such fair market value. The aggregate fair market value of shares subject to
options granted to a participant that are designated as Incentive Stock Options
that become exercisable in any calendar year may not exceed $100,000.
The Board may, in its sole discretion, grant bonuses or authorize loans
to or guarantee loans obtained by an optionee to enable such optionee to pay any
taxes that may arise in connection with the exercise or cancellation of an
option. Unless sooner terminated, the 2002 Incentive Plan will expire in 2012.
Effective as of the date of this Annual Report, since the adoption of
the 2002 Incentive Plan, we have issued 1,000 options to registered
representatives and employees, which have not been exercised or cancelled.
Director Plan
In June 2002, we adopted the Non-Executive Director Stock Option Plan
(the "Director Plan"). The Director Plan provides that each Non-Executive
Director will automatically be granted an option to purchase 20,000 shares each
September 1st, provided such person has served as a director for the 12 months
immediately prior to such September 1st. A Non-Executive Director who has not
served as a director for an entire year prior to September 1st of each year
shall receive a pro rata number of options. Options are granted under the
Director Plan until 2012 to Non-Executive Directors who are not our full time
employees.
The exercise price for options granted under the Director Plan shall be
100% of the fair market value of the common stock on the date of grant. Until
otherwise provided in the Director Plan the exercise price of options granted
under the Director Plan must be paid at the time of exercise, either in cash, by
delivery of shares of our common stock or a combination of both. The term of
each option commenced on the date it is granted and unless terminated sooner as
provided in the Director Plan, expires five years from the date of grant. The
Director Plan is administered by a committee of the Board of Directors composed
of not fewer than two persons who are our officers (the "Committee"). The
Committee has no discretion to determine which non-executive director will
receive options or the number of shares subject to the option, the term of the
option or the exercisability of the option. However, the Committee will make all
determinations of the interpretation of the Director Plan. Options granted under
the Director Plan are not qualified for incentive stock option treatment.
In 2006, due to the then pending merger agreement with the Okun
Purchasers, no options were issued to Non-Executive Directors. However, in 2007,
following termination of the merger agreement, we issued 55,000 options to the
three Non-Executive Directors with respect to the 2006 year, as well as 60,000
options granted for 2008. No options were issued under the Director Plan in
2008. To date, a total of 195,000 options are outstanding in our Non-Executive
Director Plan.
Senior Management Plan
In 1996, we adopted the 1996 Senior Management Incentive Plan (the
"1996 Management Plan"). The 1996 Management Plan provides for the issuance of
up to 2,000,000 shares of common stock either upon issuance of options issued
under the 1996 Management Plan or grants of restricted stock or incentive stock
rights. The Board of Directors or a committee of the Board may grant awards
under the 1996 Management Plan to executive management employees, if one is
appointed for this purpose. The 1996 Management Plan provides for four types of
awards: stock options, incentive stock rights, stock appreciation rights, and
restricted stock purchase agreements. The stock options granted under the 1996
Management Plan can be either incentive stock options or non-incentive stock
options, similar to the options granted under the 2002 Incentive Plan, except
that the exercise price of non-incentive stock options shall not be less than
85% of the fair market value of the common stock on the date of grant. Incentive
stock rights consist of incentive stock units equivalent to one share of common
stock in consideration for services performed for us. If services of the holder
terminate prior to the incentive period, the rights become null and void unless
termination is caused by death or disability. Stock appreciation rights allow a
grantee to receive an amount in cash equal to the difference between the fair
market value of the stock and the exercise price, payable in cash or shares of
common stock. The Board or a committee of the Board may grant limited stock
appreciation rights, which become exercisable upon a "change of control" of our
Company. A change of control includes the purchase by any person of 25% or more
of the voting power of our outstanding securities, or a change in the majority
of the Board of Directors.
In June 2000, at our Annual Meeting of Shareholders, a resolution was
passed amending the 1996 Management Plan to increase the number of shares of
common stock reserved for issuance from 2,000,000 to 4,000,000. Options to
purchase 225,000 shares of our common stock are currently outstanding under the
1996 Management Plan and to date we have issued an aggregate of 2,300,000 shares
of our common stock as restricted stock awards to senior management under this
Plan.
Awards granted under the 1996 Management Plan are also entitled to
certain acceleration provisions that cause awards granted under this Plan to
immediately vest in the event of a change of control or sale of our company. The
1996 Management Plan expired in June 2006 and therefore no additional grants are
available to be made under this Plan.
Item 12. Security Ownership of Certain
Beneficial Owners and Management
The following table sets forth certain information as of April 15, 2009
with respect to (i) each director and each executive officer, (ii) all directors
and officers as a group, and (iii) the persons (including any "group" as that
term is used in Section l3(d)(3) of the Exchange Act ), known by us to be the
beneficial owner of more than five (5%) percent of our common stock. Shares of
common stock subject to options exercisable within 60 days from the date of this
table are deemed to be outstanding and beneficially owned for purposes of
computing the percentage ownership of such person but are not treated as
outstanding for purposes of computing the percentage ownership of others.
Directors, Officers Amount and Percentage
and 5% Shareholders (1) Of Beneficial Ownership (1)
----------------------- ---------------------------
Number of Shares Percent
Victor K. Kurylak (6)
Parkway 109 Office Center
328 Newman Springs Road
Red Bank, NJ 07701 1,250,000 12.55%
Celeste M. Leonard (7)
Parkway 109 Office Center
328 Newman Springs Road
Red Bank, NJ 07701 0 0%
Mindy A. Horowitz
Parkway 109 Office Center
328 Newman Springs Road
Red Bank, NJ 07701 175,000 (2) 1.74%
Ward R. Jones
300 West Jersey Road
Lehigh Acres, FL 33936 100,000 (3) 1.00%
David I. Portman
142 Highway 35
Eatontown, NJ 07724 85,000 (4) *
Barry D. Shapiro, CPA
331 Newman Springs Road
Red Bank, NJ 07701 80,000 (5) *
All Directors and Officers as a
group (6 persons in number) 1,690,000 16.97%
- ------------------------------------------
* Indicates less than 1%
(1) Unless otherwise indicated below, each director, officer and 5% shareholder
has sole voting and sole investment power with respect to all shares that
he beneficially owns.
(2) Includes vested and presently exercisable options of Ms. Horowitz to
purchase 75,000 shares of common stock. Amounts and percentages indicated
for Ms. Horowitz include an aggregate of 100,000 shares of common stock.
(3) Includes vested and presently exercisable options of Mr. Jones to purchase
80,000 shares of common stock.
(4) Includes vested and presently exercisable options of Mr. Portman to
purchase 35,000 shares of common stock.
(5) Includes vested and presently exercisable options of Mr. Shapiro to
purchase 80,000 shares of common stock.
(6) Mr. Kurylak's employment agreement expired on December 31, 2008 and was
not renewed. Mr. Kurylak remains a director of the Company.
(7) Ms. Leonard's employment agreement expired on December 31, 2008 and
was not renewed. Ms. Leonard resigned as a director of the Company on
March 23, 2009.
Equity Compensation Plan Information
The following table provides information about our common stock that
may be issued upon the exercise of options and rights under all of our existing
equity compensation plans as of December 31, 2008, including the 2002 Incentive
Stock Option Plan, the Director Plan and the 1996 Management Plan, as amended.
Information concerning each of the aforementioned plans is set forth above. Each
of the 1992 Non-Executive Director Stock Option Plan and 1996 Management Plan
has expired and no additional options may be granted under such plans. Unexpired
options granted pursuant to such plans prior to their expiration, however,
remain exercisable (when vested) until the expiration of the individual option
grant.
============================== =========================== =========================== ==============================
Number of Securities
Remaining Available for
Number of Securities to Future Issuance Under Equity
be Issued upon Exercise Compensation Plans Excluding
of Outstanding Options Weighted Average Exercise Securities Reflected in
and Rights Price of Outstanding Column (a)
Plan Category (a) Options (b) (c)
============================== =========================== =========================== ==============================
============================== =========================== =========================== ==============================
Equity Compensation Plans
Approved by Stockholders 1,056,000(1) $0.81 4,263,802(2,3)
- ------------------------------ --------------------------- --------------------------- ------------------------------
- ------------------------------ --------------------------- --------------------------- ------------------------------
Equity Compensation Plans
Not Approved by Stockholders N/A N/A N/A
- ------------------------------ --------------------------- --------------------------- ------------------------------
- ------------------------------ --------------------------- --------------------------- ------------------------------
Total 1,056,000(1) $0.81 4,263,802(2,3)
============================== =========================== =========================== ==============================
1. Includes 506,000 options issued pursuant to the our 2002 Incentive
Plan, 195,000 options issued pursuant to our Director Plan, and 355,000
options and shares issued pursuant to our 1996 Management Plan.
2. Includes 3,950,802 options available for issuance under our 2002
Incentive Plan.
3. Includes 300,000 options assumed available for issuance under our
Director Plan.
Item 13. Certain Relationships and Related Transactions, and Director
Independence
There were no related-party transactions during 2008. For
information concerning the terms of the employment agreements entered into
between us and Mr. Victor K. Kurylak, Ms. Mindy A. Horowitz, and Ms. Celeste
M. Leonard, see Item 11. "Executive Compensation" above.
Item 14. Principal Accountant Fees and Services.
Our Audit Committee has engaged Parente Randolph, LLC, Certified Public
Accountants, as its independent accountants for the current fiscal year. Our
predecessor auditors, Lazar Levine & Felix LLP merged into Parente Randolph, LLC
on February 15, 2009. The audit services provided by our auditors consist of
examination of financial statements, services relative to filings with the SEC,
and consultation in regard to various accounting matters. The following table
presents the total fees paid for professional audit and non-audit services
rendered by our independent auditors for the audit of our annual financial
statements for the year ended December 31, 2008 and 2007, respectively, and fees
billed for other services rendered by our independent auditors during those
periods.
---------------------------------- ------------------------------ ------------------------------------
Year Ended Year Ended
December 31, 2008 December 31, 2007
---------------------------------- ------------------------------ ------------------------------------
Audit Fees (1) $178,755 $ 184,238
---------------------------------- ------------------------------ ------------------------------------
Audit-Related Fees (2) $1,000 $ 19,000
---------------------------------- ------------------------------ ------------------------------------
Tax Fees (3) $34,700 $ 42,290
---------------------------------- ------------------------------ ------------------------------------
All Other Fees (4) $19,300 $ 10,000
---------------------------------- ------------------------------ ------------------------------------
Total $233,755 $ 255,528
---------------------------------- ------------------------------ ------------------------------------
(1) Audit services consist of audit work performed in the preparation of
financial statements for the fiscal year and for the review of
financial statements included in Quarterly Reports on Form 10-Q during
the fiscal year, as well as work that generally only the independent
auditor can reasonably be expected to provide, including consents for
registration statement flings and responding to SEC comment letters on
annual and quarterly filings.
(2) Audit-related services consist of assurance and related services that
are traditionally performed by the independent auditor, including due
diligence related to mergers and acquisitions, agreed upon procedures
report and accounting and regulatory consultations.
(3) Tax services consist of all services performed by the independent
auditor's tax personnel, except those services specifically related to
the audit of the financial statements, and includes fees in the areas
of tax compliance, tax planning, and tax advice.
(4) Other services consist of those service not captured in the other
categories.
Our Audit Committee has determined that the services provided by our
independent auditors and the fees paid to them for such services has not
compromised the independence of our independent auditors.
Consistent with SEC policies regarding auditor independence, the Audit
Committee has responsibility for appointing, setting compensation and overseeing
the work of the independent auditor. In recognition of this responsibility, the
Audit Committee has established a policy to pre-approve all audit and
permissible non-audit services provided by the independent auditor. Prior to
engagement of the independent auditor for the next year's audit, management will
submit a detailed description of the audit and permissible non-audit services
expected to be rendered during that year for each of four categories of services
described above to the Audit Committee for approval. In addition, management
will also provide to the Audit Committee for its approval a fee proposal for the
services proposed to be rendered by the independent auditor. Prior to the
engagement of the independent auditor, the Audit Committee will approve both the
description of audit and permissible non-audit services proposed to be rendered
by the independent auditor and the budget for all such services. The fees are
budgeted and the Audit Committee requires the independent auditor and management
to report actual fees versus the budget periodically throughout the year by
category of service.
During the year, circumstances may arise when it may become necessary
to engage the independent auditor for additional services not contemplated in
the original pre-approval. In those instances, the Audit Committee requires
separate pre-approval before engaging the independent auditor. To ensure prompt
handling of unexpected matters, the Audit Committee may delegate pre-approval
authority to one or more of its members. The member to whom such authority is
delegated must report, for informational purposes only, any pre-approval
decisions to the Audit Committee at its next scheduled meeting. The four
categories of services provided by the independent auditor are as defined in the
footnotes to the fee table set forth above.
PART IV
Item 15. Exhibits
1. Financial Statements
See the Consolidated Financial Statements and Notes thereto, together
with the report thereon of Parente Randolph, LLC dated May 14, 2009 and Lazar
Levine & Felix LLP dated March 27, 2008, beginning on page F-1 of this report.
2. Exhibits
Incorporated by reference to the Exhibit Index at the end of this
Report.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Company has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized.
FIRST MONTAUK FINANCIAL CORP.
By /s/ Mindy A. Horowitz
-------------------------------------------
Dated: May 18, 2009 Mindy A. Horowitz
Interim Chief Executive Officer and
Acting Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this Report has been signed below by the following persons on behalf of the
Company and in the capacities and on the dates indicated.
/s/ Mindy A. Horowitz May 18, 2009
- --------------------------------------------
Mindy A. Horowitz, Interim Chief Executive
Officer and Acting Chief Financial Officer
and Principal Accounting Officer
/s/ Victor K. Kurylak May 18, 2009
- --------------------------------------------
Victor K. Kurylak, Director
/s/ Ward R. Jones, Jr. May 18, 2009
- --------------------------------------------
Ward R. Jones, Jr., Director
/s/ Barry D. Shapiro May 18, 2009
- --------------------------------------------
Barry D. Shapiro, Director
/s/ David I. Portman May 18, 2009
- --------------------------------------------
David I. Portman, Director
EXHIBIT INDEX
The exhibits designated with an asterisk (*) are filed herewith. All other
exhibits have been previously filed with the Commission and, pursuant to 17
C.F.R. ss.230.411, are incorporated by reference to the document referenced in
brackets following the descriptions of such exhibits.
---------------- ---------------------------------------------------------------------------------------------
Exhibit No. Description
2.1 Agreement and Plan of Merger dated as of February 10, 2005 by and among First Montauk
Financial Corp., Olympic Cascade Financial Corp. and FMFC Acquisition Corporation
(Previously filed as Exhibit 10.1 to our Current Report on
Form 8-K dated February 11, 2005).
2.2 Amended and Restated Agreement and Plan of Merger dated as of June 27, 2005 by and among
First Montauk Financial Corp., Olympic Cascade Financial Corp. and FMFC Acquisition
Corporation (Previously filed as Exhibit 10.1 to our Current Report on Form 8-K dated June
28, 2005).
2.3 Letter Agreement dated as of October 24, 2005 terminating the Amended and Restated Agreement
and Plan of Merger, dated June 27, 2005, by and among Olympic Cascade Financial Corporation,
OLY Acquisition Corporation and First Montauk Financial Corp. (Previously filed as Exhibit
10.2 to our Current Report on Form 8-K dated October 25, 2005).
2.4 Agreement and Plan of Merger dated as of May 5, 2006 by and among FMFG Ownership, Inc.,
FMFG Acquisition Co. Inc. and First Montauk Financial Corp. (Previously filed as Exhibit
10.1 to our Current Report on Form 8-K dated May 9, 2006).
2.5 Settlement Agreement, dated as of May 8, 2007, among First Montauk Financial Corp., Edward
H. Okun, Investment Properties of America, LLC, IPofA Waterview, LLC, FMFC Acquisition Co.,
FMFG Ownership I Co., FMFG Ownership II, Victor K. Kurylak, Ward R. Jones, Jr., Barry
Shapiro, David Portman and Mindy Horowitz (Previously filed as Exhibit 10.1 to our Current
Report on Form 8-K dated May 11, 1007).
2.6 Settlement Agreement dated as of June 15, 2007 among First Montauk Financial Corp., Edward
H. Okun, Investment Properties of America, LLC, IPofA Waterview, LLC, FMFG Acquisition Co.,
FMFG Ownership II, Victor K. Kurylak, Ward R. Jones, Jr., Barry Shapiro, David Portman and
Mindy Horowitz (Previously filed as Exhibit 10.1 to our Current Report on Form 8-K dated
June 15, 2007).
3.1 Amended and Restated Certificate of Incorporation adopted at 1989 Special Meeting in lieu
of Annual Meeting of Shareholders (Previously filed with the Commission as an exhibit to
our Registration Statement on Form S-l, File No. 33-24696).
3.2 Amended and Restated By-Laws (Previously filed with the Commission as an exhibit to our
Registration Statement on Form S-l, File No. 33-24696).
3.3 Certificate of Designations of Series A Preferred Stock. (Previously filed with the
Commission as an exhibit to our Annual Report on Form 10-K for the fiscal year ended
December 31, 2002).
3.4 Form of Certificate of Amendment of Certificate of Designation of Rights and Preferences of
Series B Preferred Stock (Previously filed as Exhibit 3.1 to our Current Report on Form 8-K
dated February 9, 2005).
3.5 Amendment to Amended and Restated Certificate of Incorporation adopted at Annual Meeting of
Shareholders held on June 23, 2005 (Previously filed as Exhibit A to Definitive Proxy
Statement dated May 19, 2005).
4.1 Form of Common Stock. (Previously filed with the Commission as an exhibit to our
Registration Statement on Form S-l, File No. 33-24696).
4.2 Form of Debenture Sold in Private Placement. (Previously filed with the Commission as
Exhibit 4.1 to Report on Form 8-K dated March 27, 2003).
4.3 Form of Placement Agent Warrant (Previously filed with the Commission as Exhibit 4.2 to
Report on Form 8-K dated March 27, 2003).
4.4 Form of Debenture Sold in Private Placement. (Previously filed with the Commission as
Exhibit 4.1 to Report on Form 8-K dated January 5, 2004).
4.5 Form of Placement Agent Warrant (Previously filed with the Commission as Exhibit 4.2 to
Report on Form 8-K dated January 5, 2004).
4.6 Promissory Note issued to Herbert Kurinsky dated February 1, 2006 (Previously filed as Exhibit
4.1 to Current Report on Form 8-K dated February 1, 2006).
4.7 Rights Agreement, dated as of August 8, 2004, among First Montauk Financial Corp. and
Continental Stock Transfer & Trust Company, as Rights Agent (Previously filed as Exhibit
4.1 to our Current Report on Form 8-K dated August 8, 2007).
4.8 First Amendment to the Rights Agreement, dated as of December 7, 2007, by and between First
Montauk Financial Corp. and Continental Stock Transfer & Trust Company, as Rights Agent
(Previously filed as Exhibit 10.2 to our Current Report on Form 8-K dated December 13,
2007).
4.9 Note Purchase Agreement, dated as of December 7, 2007, by and between First Montauk
Financial Corp. and AEFC FMFK Investment Corp. (Previously filed as Exhibit 10.1 to our
Current Report on Form 8-K dated December 13, 2007).
4.10 Amendment to Note Purchase Agreement, dated as of December 17, 2007, by and between First
Montauk Financial Corp. and AEFC-FMFK Investment Corp. (Previously filed as Exhibit 4.8.1
to our Annual Report on Form 10-K for the fiscal year ended December 31, 2007).
4.11 Amendment to Note Purchase Agreement, dated as of December 17, 2007, by and between First
Montauk Financial Corp. and AEFC FMFK Investment Corp. (Previously filed as Exhibit 4.8.1
to our Annual Report on Form 10-K/A dated May 9, 2008).
4.12 Secured Convertible Promissory Note, dated December 7, 2007, executed by First Montauk
Financial Corp. (Previously filed as Exhibit 4.8.2 to our Annual Report on Form 10-K/A
dated May 9, 2008).
4.13 Stock Pledge Agreement, dated as of December 7, 2007, by and between First Montauk
Financial Corp. and AEFC FMFK Investment Corp. (Previously filed as Exhibit 4.8.3 to our
Annual Report on Form 10-K/A dated May 9, 2008).
4.14 Contingent Warrant, executed by First Montauk Financial Corp. (Previously filed as Exhibit
4.8.4 to our Annual Report on Form 10-K/A dated May 9, 2008).
4.15 Prepayment Warrant, executed by First Montauk Financial Corp. (Previously filed as Exhibit
4.8.5 to our Annual Report on Form 10-K/A dated May 9, 2008).
10.1 Office Lease Agreement between First Montauk Securities Corp. and River Office Equities
dated March 5, 1997 (Previously filed with the Commission as an exhibit to our Annual
Report on Form 10-K for the fiscal year ended December 31, 1997).
10.2 First Amendment to Office Lease Agreement dated March 5, 1997 between First Montauk
Securities Corp. and River Office Equities dated March 3, 1998 (Previously filed with the
Commission as Exhibit 28.8 to Form 10-K for the fiscal year ended December 31, 1998).
10.3++ Employment Agreement between First Montauk Securities Corp. and Mark Lowe dated October 15,
1998 (Previously filed with the Commission as an exhibit to our Annual Report on Form
10-K for the fiscal year ended December 31, 1998).
10.4 Sublease Agreement between Aim net Solutions, Inc. and First Montauk Financial Corp. dated
January 15, 2002 (Previously filed with the Commission as an exhibit to our Annual Report
on Form 10-K for the fiscal year ended December 31, 2001).
10.5++ Employment Agreement dated as of January 1, 2004 between Herbert Kurinsky and First Montauk
Financial Corp. (Previously filed as Exhibit 10.13 to our Annual Report on Form 10-K for
the fiscal year ended December 31, 2004).
10.6++ Employment Agreement dated as of January 1, 2004 between William J. Kurinsky and First Montauk
Financial Corp. (Previously filed as Exhibit 10.14 to our Annual Report on Form 10-K for the
fiscal year ended December 31, 2004).
10.7++ Employment Agreement dated as of January 1, 2004 between Victor K. Kurylak and First Montauk
Financial Corp. (Previously filed as Exhibit 10.15 to our Annual Report on Form 10-K for the
fiscal year ended December 31, 2004).
10.8++ 1992 Incentive Stock Option Plan (Previously filed with the Commission as an exhibit to our
Registration Statement on Form S-l, File No. 33-24696).
10.9++ 1992 Non-Executive Director Stock Option Plan (Previously filed with the Commission as an
exhibit to our Registration Statement on Form S-l, File No. 33-24696).
10.10++ Amended and Restated 1992 Incentive Stock Option Plan. (Previously filed with the
Commission as an exhibit to our Proxy Statement dated May 30, 1996).
10.11++ Non-Executive Director Stock Option Plan - Amended and Restated June 28, 1996 (Previously filed
with the Commission as an exhibit to our Proxy Statement dated May 30, 1996).
10.12++ 1996 Senior Management Incentive Stock Option Plan (Previously filed with the Commission as
an exhibit to our Proxy Statement dated May 30, 1996).
10.13++ Second Amended and Restated 1992 Incentive Stock Option Plan (Previously filed with the
Commission as an exhibit to our Proxy Statement dated May 23, 2000).
10.14++ 1996 Senior Management Incentive Plan Amended as of June 23, 2000 (Previously filed with the
Commission as an exhibit to our Proxy Statement dated May 23, 2000).
10.15++ 2002 Incentive Stock Option Plan. (Previously filed with the Commission as an Exhibit A to
our Proxy Statement dated May 20, 2002).
10.16++ 2002 Non-Executive Director Stock Option Plan. (Previously filed with the Commission as
Exhibit B to our Proxy Statement dated May 20, 2002).
10.17++ Form of Non-Executive Director Stock Option Award. (Previously filed as Exhibit 10.1 to our
Report on Form 8-K dated September 2, 2004).
10.18++ Form of Stock Option Award pursuant to Incentive Stock Option Plan. (Previously filed as
Exhibit 10.26 to our Annual Report on Form 10-K for the year ended December 31, 2004).
10.19++ Form of Stock Option Award pursuant to 1996 Senior Management Stock Option Plan.
(Previously filed as Exhibit 10.27 to our Annual Report on Form 10-K for the year ended
December 31, 2004).
10.20 Fourth Amendment to Office Lease Agreement dated September 22, 2004 between First Montauk
Securities Corp. and River Office Equities (Previously filed with the Commission as Exhibit
10.1 to Form 8-K dated September 28, 2004).
10.21++ Separation Agreement between First Montauk Financial Corp. and William J. Kurinsky,
effective as of February 1, 2005. (Previously filed as Exhibit 10.29 to our Annual Report
on Form 10-K for the year ended December 31, 2004).
10.22++ Consulting Agreement between First Montauk Financial Corp. and William J. Kurinsky,
effective as of February 1, 2005. (Previously filed as Exhibit 10.30 to our Annual Report
on Form 10-K for the year ended December 31, 2004).
10.23++ Employment Agreement dated as of February 1, 2005 between Victor K. Kurylak and First
Montauk Financial Corp. (Previously filed as Exhibit 10.31 to our Annual Report on Form
10-K for the year ended December 31, 2004).
10.24++ Employment Agreement dated as of February 8, 2005 between Robert I. Rabinowitz and First
Montauk Financial Corp. (Previously filed as Exhibit 10.32 to our Annual Report on Form
10-K for the year ended December 31, 2004).
10.25++ Employment Agreement dated as of February 8, 2005 between Mindy A. Horowitz and First
Montauk Financial Corp. (Previously filed as Exhibit 10.33 to our Annual Report on Form
10-K for the year ended December 31, 2004).
10.26 Termination of Clearing Agreement between First Montauk Securities Corp. and Fiserv
Securities, Inc. dated April 21, 2005 (Previously filed as Exhibit 10.1 to Current Report
on Form 8-K filed on April 27, 2005).
10.27 Termination of Financial and Security Agreement among First Montauk Financial Corp., First
Montauk Securities Corp. and Fiserv Securities, Inc. dated April 21, 2005 (Previously filed
as Exhibit 10.2 to Current Report on Form 8-K filed on April 27, 2005).
10.28++ Separation Agreement between First Montauk Financial Corp. and Herbert Kurinsky dated
February 1, 2006 (Previously filed as Exhibit 10.1 to Current Report on Form 8-K dated
February 1, 2006).
10.29++ Employment Agreement between First Montauk Securities Corp. and Celeste Leonard dated
August 7, 2006 (Previously filed as Exhibit 10.1 to Current Report on Form 8-K dated
February 26, 2007).
---------------- ---------------------------------------------------------------------------------------------
10.30++ Agreement and Release between First Montauk Financial Corp. and Robert I. Rabinowitz dated
November 14, 2006 (Previously filed on November 14, 2006 as Exhibit 10.1 to Quarterly
Report on Form 10-Q for the quarterly period ended September 30, 2006).
10.31++ Consulting Agreement between First Montauk Financial Corp. and Robert I. Rabinowitz dated
as of January 19, 2007.
10.32++ Employment Agreement between First Montauk Securities Corp. and Jeffrey J. Fahs dated as of
January 24, 2007.
10.33++ Amended and Restated Employment Agreement between First Montauk Financial Corp. and Victor
K. Kurylak, dated as of May 9, 2007 (Previously filed as Exhibit 10.2 to our Current Report
on Form 8-K filed on May 11, 2007).
10.34++ Amendment Number One, dated as of June 15, 2007, to the Amended 2nd Restated Employment
Agreement, dated as of May 9, 2007, between Victor K. Kurylak and First Montauk Financial Corp.
(Previously filed as Exhibit 10.3 to Form 10-Q for the Quarter Ended June 30, 2007, dated
August 14, 2007).
10.35++ Consulting Agreement between First Montauk Financial Corp. and Phillip P. D'Ambrisi, dated
September 1, 2007 (Previously filed as Exhibit 10.1 to our Current Report on Form 8-K filed
on September 6, 2007.)
10.36 Asset Purchase Agreement, dated as of July 9, 2008, by and among First Allied Securities,
Inc., First Montauk Securities Corp. and First Montauk Financial Corp. (Previously filed as
Exhibit 10.1 to our Current Report on Form 8-K dated July 14, 2008).
10.37 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.
(Previously filed as Exhibit 10.1 to our Quarterly Report on Form 10-Q dated November 19,
2008).
10.38 Amended and Restated Employment Agreement, dated as of November 13, 2008 by and between
First Montauk Financial Corp. and Mindy A. Horowitz (Previously filed as Exhibit 10.2 to
our Quarterly Report on Form 10-Q dated November 19, 2008).
14 Code of Ethics (Filed as Exhibit 14 to our Annual Report on Form 10-K for the year ended
December 31, 2003).
21* Subsidiary Companies
23.1* Consent of Parente Randolph, LLC.
23.2* Consent of Lazar Levine & Felix LLP
31.1* Certification of Interim Chief Executive Officer and Acting Chief Financial Officer
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1 * Certification of Mindy A. Horowitz pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002.
---------------- ---------------------------------------------------------------------------------------------
++ Denotes management contracts or compensation plans or arrangements in which
directors or executive officers are eligible to participate.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
First Montauk Financial Corp. and Subsidiaries
Red Bank, New Jersey:
We have audited the consolidated statement of financial condition of First
Montauk Financial Corp. and Subsidiaries (the "Company") as of December 31,
2008, and the related consolidated statements of operations, stockholders'
equity, and cash flows for the year then ended. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audit.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. The Company is not required to
have, nor were we engaged to perform, an audit of its internal control over
financial reporting. Our audit included consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company's internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of First Montauk
Financial Corp. and Subsidiaries as of December 31, 2008, and the results of
their operations and their cash flows for the year then ended in conformity with
accounting principles generally accepted in the United States of America.
The accompanying consolidated financial statements for the year ended December
31, 2008, have been prepared assuming that the Company will continue as a going
concern. As disclosed in Note 1 to the consolidated financial statements, the
Company sold its broker-dealer and investment advisory operations on December
15, 2008. The cash proceeds from the sale may not be sufficient to satisfy the
known and contingent liabilities of the ongoing Company which has no continuing
operations. Management's plans concerning these matters are also disclosed in
Note 1 to the consolidated financial statements. The consolidated financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
/s/Parente Randolph, LLC
- ---------------------------
Parente Randolph, LLC
Morristown, New Jersey
May 14, 2009
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders
First Montauk Financial Corp.
Red Bank, New Jersey:
We have audited the consolidated statement of financial condition of First
Montauk Financial Corp. and subsidiaries as of December 31, 2007, and the
related consolidated statements of operations, stockholders' equity, and cash
flows for the year then ended. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audit.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements and the schedule are free of material misstatement. The Company is
not required to have, nor were we engaged to perform, an audit of its internal
controls over financial reporting. Our audit included consideration of internal
control over financial reporting as a basis for designing audit procedures that
are appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company's internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements and the schedule, assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall presentation of the financial statements and the schedule. We believe
that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of First Montauk
Financial Corp. and subsidiaries as of December 31, 2007, and the results of
their operations and their cash flows for the year then ended, in conformity
with accounting principles generally accepts in the United States of America.
/s/ Lazar Levine & Felix LLP
---------------------------------
LAZAR LEVINE & FELIX LLP
New York, New York
March 27, 2008
F-2
FIRST MONTAUK FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(A DISCONTINUED OPERATION)
December 31, December 31,
2008 2007
------------ ------------
ASSETS
Cash $ 515,052 $ 868,836
Restricted cash 86,982 -
Due from clearing firm 727,577 2,347,946
Due from First Allied Securities 2,826,431 -
Securities owned, at fair value 40,421 159,773
Prepaid expenses 294,243 250,948
Employee and broker receivables - net of reserve for bad debt
of $180,023 and $758,615, respectively 3,096 288,049
Property and equipment - net - 175,463
Other assets 183,957 1,159,893
----------- ------------
Total assets $ 4,677,759 $ 5,250,908
=========== ============
LIABILITIES
10% convertible note $ - $ 1,000,000
Securities sold, not yet purchased, at fair value - 201
Commissions payable 411,115 1,739,713
Broker incentive payments 1,085,743 -
Accounts payable 302,957 256,549
Accrued expenses 1,689,395 556,527
Income taxes payable 2,872 11,358
Other liabilities 39,571 51,528
--------- ----------
Total liabilities 3,531,653 3,615,876
--------- ----------
Commitments and contingencies
STOCKHOLDERS' EQUITY
Preferred stock, 3,929,898 shares authorized, $.10 par value,
no shares issued - -
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 - -
Common stock, no par value, 60,000,000 shares authorized,
9,956,940 and 13,257,248 shares issued and outstanding; respectively 9,535,468 9,621,030
Additional paid-in capital 4,035,064 4,035,064
Accumulated deficit (12,426,654) (12,023,290)
------------ ------------
Total stockholders' equity 1,146,106 1,635,032
------------ ------------
Total liabilities and stockholders' equity $ 4,677,759 $ 5,250,908
============ ============
See notes to consolidated financial statements.
F-3
FIRST MONTAUK FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(A DISCONTINUED OPERATION)
Year ended Dec 31,
---------------------------------
2008 2007
----------- -----------
Revenues:
Commissions $20,399,448 $31,728,518
Principal transactions 1,768,343 1,534,794
Investment banking 674,342 3,579,838
Interest and other income 2,071,766 2,712,648
----------- -----------
Total revenues 24,913,899 39,555,798
----------- -----------
Expenses:
Commissions, employee compensation and benefits 20,884,562 33,995,993
Clearing and floor brokerage 1,171,477 1,477,482
Communications and occupancy 2,406,874 1,672,992
Legal matters and related costs 911,068 1,672,716
Other operating expenses 2,708,708 2,778,928
Interest 117,240 26,420
----------- -----------
Total expenses 28,199,929 41,624,531
----------- -----------
Loss before sale of brokerage operations and
provision for income taxes (3,286,030) (2,068,733)
Gain on sale of brokerage operations 2,896,463 -
----------- ------------
Loss before provision for income taxes (389,567) (2,068,733)
Provision for income taxes 7,112 16,333
----------- -----------
Net (loss) (396,679) (2,085,066)
Preferred stock dividends (6,685) (123,966)
----------- ------------
Net (loss) applicable to common stockholders $ (403,364) $ (2,209,032)
=========== ============
Basic and diluted net (loss) per share $ (0.03) $ (0.14)
=========== ============
Weighted average number of shares of stock outstanding,
basic and diluted 12,597,457 15,635,136
See notes to consolidated financial statements.
F-4
FIRST MONTAUK FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2008 AND 2007
(A DISCONTINUED OPERATION)
Series A Convertible Series C Participating
Preferred Stock Cumulative Preferred Stock Common Stock
--------------------- -------------------------- --------------------- Additional
Shares Amount Shares Amount Shares Amount Paid-in Capital
--------------------- -------------------------- --------------------- ---------------
Balances at December 31, 2006 305,369 30,537 - - 18,526,553 11,646,620 950,592
Amortization of deferred compensation - - - - - 29,823 -
Payment of preferred stock dividends - - - - - - -
Exercise of incentive stock options - - - - 3,000 750 -
Redemption of preferred A stock - (1,629,549) - - - - 1,629,549
Cancellation of preferred A stock (283,087) 1,601,240 - - - - (1,601,240)
Cancellation of preferred B stock - - - - - - 1,000,000
Cancellation of common stock - - - - (5,272,305) (2,056,163) 2,056,163
Net loss - - - - - - -
------------------------ -------------------- -------------------------- ------------
Balances at December 31, 2007 22,282 2,228 - - 13,257,248 9,621,030 4,035,064
Amortization of deferred compensation - - - - - 14,438 -
Payment of preferred stock dividends - - - - - - -
Repurchase of common stock - - - - - - -
Cancellation of common stock (3,300,308) (100,000)
Net income - - - - - - -
------------------------ -------------------- -------------------------- ------------
Balances at December 31, 2008 22,282 $ 2,228 - $ - 9,956,940 $9,535,468 $ 4,035,064
======================== ==================== ========================== ============
See notes to consolidated financial statements.
F-5
FIRST MONTAUK FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2008 AND 2007
(A DISCONTINUED OPERATION)
Accumulated Treasury Stock Stockholders'
Deficit Shares Amount Equity
------------------ -------------------------------------------------
Balances at December 31, 2006 (9,814,258) - - 2,813,491
Amortization of deferred compensation - - - 29,823
Payment of preferred stock dividends (123,966) - - (123,966)
Exercise of incentive stock options - - - 750
Cancellation of preferred A stock - - - -
Cancellation of preferred B stock - - - 1,000,000
Cancellation of common stock - - - -
Net loss (2,085,066) - - (2,085,066)
-------------- -------------------------------------------
Balances at December 31, 2007 (12,023,290) - - 1,635,032
Amortization of deferred compensation - - - 14,438
Payment of preferred stock dividends (6,685) - - (6,685)
Repurchase of common stock - (3,300,308) (100,000) (100,000)
Cancellation of common stock - 3,300,308 100,000
Net loss (396,679) - - (396,679)
-------------- -------------------------------------------
Balances at December 31, 2008 $ (12,426,654) - $ - $ 1,146,106
============== ===========================================
See notes to consolidated financial statements.
F-6
FIRST MONTAUK FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(A DISCONTINUED OPERATION)
Twelve months ended Dec 31,
------------------------------
2008 2007
----------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (396,679) $(2,085,066)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization of property and equipment 200,812 109,163
Amortization of stock compensation and deferred costs 44,438 29,823
Gain on sale of brokerage operations (2,896,463) -
Increase (decrease) in cash attributable to changes in assets
and liabilities:
Due from clearing firm 1,620,369 2,640,801
Securities owned 119,352 38,674
Prepaid expenses (43,295) 34,532
Employee and broker receivables 284,953 55,442
Other assets 975,936 (561,925)
Securities sold, not yet purchased (201) (294)
Commissions payable (1,328,598) (639,222)
Accounts payable 46,408 (56,878)
Accrued expenses 921,661 (638,899)
Income taxes payable (8,486) 7,191
Other liabilities (11,957) (15,628)
----------- -----------
NET CASH (USED IN) OPERATING ACTIVITIES (471,750) (1,082,286)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment (25,349) (45,593)
Proceeds from sale of brokerage operations, net of
amount used for restricted cash of $86,982 163,018 -
Restricted cash 86,982 -
----------- -----------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES 224,651 (45,593)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payment of capital lease - (820)
Proceeds from exercise of incentive stock option - 750
Payment of preferred stock dividends (6,685) (123,966)
Proceeds from issuance of 10% convertible note - 1,000,000
Repurchase of common stock (100,000) -
Payment of convertible debenture - (25,000)
----------- -----------
NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES (106,685) 850,964
----------- -----------
Net (decrease) in cash (353,784) (276,915)
Cash at beginning of period 868,836 1,145,751
----------- -----------
CASH AT END OF PERIOD $ 515,052 $ 868,836
=========== ===========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 119,373 $ 19,844
=========== ===========
Income taxes $ 19,278 $ 11,343
=========== ===========
Noncash financing activity:
Cancellation and redemption of Preferred A stock $ - $ 28,309
Cancellation of Preferred B stock $ - $ 1,000,000
Cancellation of common stock $ - $ 2,056,199
In connection with the sale of the brokerage
operations, the following non-cash items were
incurred in fiscal 2008:
Due from First Allied Securities, Inc. $2,826,431
Cancellation of 10% Convertible Note and
accrued interest $1,055,670
Broker incentive payments $1,085,743
Legal and other accrued expenses $ 155,537
See notes to consolidated financial statements.
F-7
FIRST MONTAUK FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - DESCRIPTION OF BUSINESS AND SALE OF BROKERAGE OPERATIONS
First Montauk Financial Corp. (the "Company") is a holding
company whose principal subsidiary, First Montauk Securities
Corp. ("First Montauk"), operated as a securities
broker-dealer and investment adviser registered with the
Securities and Exchange Commission ("SEC"). Since July 2000,
First Montauk had operated under the registered trade name
"Montauk Financial Group". Through First Montauk, the Company
executed principal and agency transactions primarily for
retail customers, performed investment banking services, and
traded securities on a proprietary basis. First Montauk's
registered representatives offered and sold a variety of
investment related, insurance based products through Montauk
Insurance Services, Inc. ("MISI"), another subsidiary of the
Company. The Company operated in one business segment.
Customers were located primarily throughout the United States.
First Montauk cleared all customer transactions on a fully
disclosed basis through independent clearing firms.
Accordingly, First Montauk did not carry securities accounts
for customers nor did it perform custodial functions related
to those securities. First Montauk was a member of the
Financial Industry Regulatory Authority ("FINRA") and the
National Futures Association ("NFA").
At the Annual Meeting of Shareholders held on October 17,
2008, the shareholders of the Company approved the definitive
asset purchase agreement ("Purchase Agreement") executed by
the Company and its principal subsidiary, First Montauk
Securities Corp. ("First Montauk"), with First Allied
Securities Inc. ("First Allied") providing for the sale of
substantially all of the assets of First Montauk to First
Allied. On December
15, 2008, the Company and First Montauk completed the
transaction. Upon the closing, certain of First Montauk's
independent registered representatives joined First Allied,
and First Allied acquired the right to service the customer
accounts of those representatives that join First Allied.
Following the closing, First Montauk ceased its broker-dealer
and investment advisor operations. On December 23, 2008, First
Montauk filed Form BDW with the SEC, effective December 31,
2008, to withdraw its registration as a broker-dealer. The
filing was approved by the SEC on February 23, 2009. In
addition, on December 23, 2008, First Montauk filed Form ADV-W
to terminate its registration as an investment advisor, which
became effective on December 31, 2008.
Under the terms of the Purchase Agreement with First Allied,
the aggregate purchase price was approximately $4,197,000.
First Allied paid $250,000 to First Montauk upon the signing
of the Purchase Agreement on July 11, 2008. At the closing on
December 15, 2008, First Montauk received a credit for the
cancellation of the balance of principal and interest
F-8
outstanding totaling approximately $1,055,670 under a secured
convertible promissory note, dated December 7, 2007, executed
in connection with a loan to First Montauk by an affiliate of
First Allied (as further described in the next paragraph
below), leaving a balance due under the Purchase Agreement of
$2,826,431, after the purchase price adjustments of $14,957
and $50,000 (see below). The third payment of $2,000,000 was
received on January 15, 2009 with the balance of $891,388
expected on March 17, 2009, in accordance with the Purchase
Agreement. On that date we received $676,431 and were advised
by First Allied that they were making an adjustment to the
purchase price of $14,957 and were withholding an additional
$200,000 based on its claim of indemnification under the
Purchase Agreement. We agreed with the purchase price
adjustment of $14,957 but challenged First Allied's right to
withhold $200,000. On April 14, 2009 we entered into an
agreement with First Allied in which we permitted First Allied
to retain $50,000 and apply it towards any expenses incurred
in connection with an attempt by a former customer of First
Montauk to add First Allied as a named respondent in a pending
arbitration case. As a result, First Allied paid the balance
of $150,000 to us in April 2009. The agreement further
provides that in the event that First Allied's defense costs
are less than $50,000, they will pay us the remaining balance
and if First Allied's expenses exceed $50,000 in connection
with this arbitration, we must indemnify First Allied for its
costs above $50,000.
On December 7, 2007, the Company entered into a note purchase
agreement (the "Note Purchase Agreement") with AEFC-FMFK
Investment Corp. ("AEFC-IC"), an affiliate of First Allied,
which itself is a subsidiary of Advanced Equities Financial
Corp., pursuant to which AEFC-IC was issued a 10% Convertible
Secured Note due on December 31, 2008 for a principal amount
borrowed of $1,000,000 (the "AEFC-IC Note"). The AEFC-IC Note
accrued interest on the unpaid principal amount at the rate of
10% per annum, which was paid monthly in arrears on or before
the 10th day of the month following the interest accrual. The
principal amount of the AEFC-IC Note and all accrued and
unpaid interest was due to be paid in full on December 31,
2008. On December 15, 2008, the date of closing of the
Purchase Agreement, the principal amount and accrued interest
of $1,055,670 was applied toward the aggregate purchase price
and the AEFC-IC Note was cancelled and deemed paid in full. In
connection with the cancellation of the AEFC-IC Note, all
security interests, including the shares of stock of the
Company's subsidiaries, First Montauk and Montauk Insurance
Services Inc., were released back to the Company.
As a result of the sale of substantially all of the assets of
First Montauk, the Company determined that its business
activities should be considered discontinued operations and to
distinguish this operationally and for financial reporting
purposes, each financial statement is labeled "a discontinued
operation".
F-9
The gain on the sale of brokerage operations was determined as
follows:
Aggregate purchase price $4,197,058
Less: Legal costs related to sale (149,895)
Purchase price adjustment (14,957)
Indemnification agreement with First Allied (50,000)
Retention payments to brokers (1,085,743)
-----------
Gain on sale $2,896,463
===========
NOTE 2 - GOING CONCERN
As disclosed in Note 1, the Company sold substantially all of
its assets and ceased its broker-dealer and investment
advisory operations of First Montauk as of December 15, 2008.
The cash proceeds received from First Allied along with any
remaining cash and other assets of the Company will be used to
settle known and contingent liabilities. However, the Company
does not have other operations which can generate additional
cash or revenues. The Board of Directors is evaluating whether
to position the Company as a shell company, but does not have
any specific plans. As a result, there is substantial doubt
about the Company's ability to continue as a going concern.
The accompanying consolidated financial statements have been
prepared, however, 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. The consolidated financial
statements do not include any adjustments that might result
from the outcome of this uncertainty.
NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The consolidated financial statements include the accounts of
the Company and its subsidiaries, all of which are wholly
owned. All intercompany accounts and transactions have been
eliminated in consolidation.
Use of Estimates
The preparation of our financial statements requires us to
makes estimates that affect the reported amounts of assets,
liabilities, revenue and expense, and related disclosure of
contingent assets and liabilities. Accounting estimates are
based on historical experience and other factors that are
believed to be reasonable under the circumstances. However,
actual results may vary from these estimates under different
assumptions or condition.
Revenue Recognition Policies
Commissions. All customer securities transactions and
insurance and mutual fund commissions are reported in the
Consolidated Statements of Operations on a trade-date basis.
Revenues from alternative products received from outside
vendors were recognized as income when earned. Asset
management fees include revenues we received from management
fees from third-party managed funds and management and
administrative fees we received for assets managed by our
registered representatives who are Series 65 licensed. These
fees were based on the value of assets under management and
are generally recognized over the period that the related
service is provided based upon the beginning or ending Net
Asset Value of the relevant period. Our accounting for
commissions included the guidance contained in Emerging Issues
Task Force ("EITF") Issue No. 99-19, Reporting Revenues Gross
versus Net, and because we are the primary obligor of any such
arrangements, accordingly, we do not net expense against the
commission revenues.
F-10
Principal Transactions. Financial instruments owned and
financial instruments sold, but not yet purchased (all of
which are recorded on a trade-date basis) are valued at quoted
market value, with unrealized gains and losses reflected in
Principal transactions in the Consolidated Statements of
Operations on a trade-date basis. Market value generally is
determined based on listed prices or broker quotes. Securities
not readily marketable are carried at fair value based on our
management's best estimate, giving appropriate consideration
to reported prices, the extent of public trading in similar
securities and the discount from the listed price associated
with the cost at the date of acquisition, among other factors.
The Company's principal transaction revenues, by reporting
categories at December 31, 2008 and 2007, are as follows:
2008 2007
------------------ ------------------------------ ------------------------------
------------------ --------------- -------------- -------------- ---------------
Amount % Amount %
------ - ------ -
Equities 669,187 37.84% 386,361 25.17%
Fixed Income 1,099,156 62.16% 1,148,433 74.83%
------------------ --------------- -------------- -------------- ---------------
------------------ --------------- -------------- -------------- ---------------
Total 1,768,343 100.00% 1,534,794 100.00%
================== =============== ============== ============== ===============
Investment Banking. Investment banking revenues are recorded
at the time a transaction is completed and the related income
is reasonably determined. Investment banking revenues include
management fees, net of reimbursable expenses, earned in
connection with private placement fees. Revenues from sales
concessions from participation in syndicated offerings are
recorded on a trade-date basis.
Interest Income. We recognize interest earned from clearing
firm rebates when received. Interest on broker loans is
recorded on the accrual basis.
Advertising
Advertising costs were expensed as incurred and totaled
$44,843 and $86,944 in 2008 and 2007, respectively.
Property and Equipment and Depreciation
Furniture, equipment and leasehold improvements were stated at
cost. Betterments are capitalized, while all other items are
expensed. Depreciation on furniture and equipment is computed
over the estimated useful lives of the assets, ranging from
three to ten years. Capitalized leased equipment is amortized
over the lease term. Leasehold improvements are amortized over
the shorter of either the asset's useful life or the related
lease term. Depreciation is computed using the straight-line
method for financial reporting purposes and on an accelerated
basis for income tax purposes. As of December 31, 2008, the
carrying value of furniture, equipment and leasehold
improvements was considered to be impaired, due to the sale of
the brokerage operations, and the impairment loss was
recognized as part of depreciation expense.
Cash
The Company maintains cash with major financial institutions.
From time to time the Company has funds on deposit with
commercial banks that exceed federally insured limits. As of
December 31, 2008 and December 31, 2007, the Company had cash
of $352,034 and $618,836, respectively, in excess of insured
limits.
F-11
Net Loss per Common Share
Basic net loss per share is computed on the basis of the
weighted average number of common shares outstanding. Diluted
net loss per share is computed on the basis of the weighted
average number of common shares outstanding plus the potential
dilution that could occur if securities or other contracts to
issue common shares were exercised and converted. In
determining basic net loss per share for the periods
presented, dividends paid on Series A Convertible Preferred
Stock are deducted to the net loss. No dividends were paid on
the Series C Participating Cumulative Preferred Stock. For
2008 and 2007, the basic and diluted loss per share
calculation is the same due to net losses. Accordingly, the
result of including potentially dilutive securities would be
anti-dilutive.
In accordance with Statement of Financial Accounting Standards
("SFAS") No. 128, the following table reconciles basic shares
outstanding to fully diluted shares outstanding:
Years Ended December 31,
2008 2007
---- ----
Numerator:
Net loss $(396,679) $(2,085,066)
Preferred stock dividends (6,685) (123,966)
-------------- -----------------
-------------- -----------------
Numerator for basic and diluted loss per share - - net
loss attributable to common stockholders $(403,364) $(2,209,032)
============== =================
============== =================
Denominator:
Denominator for basic and diluted loss per share -
-weighted average shares 12,597,457 15,635,136
============== =================
The following securities, presented on a common share
equivalent basis, have been excluded from the diluted loss per
share computations because they are antidilutive:
Year ended December 31,
2008 2007
---- ----
Stock Options 1,056,000 1,871,200
Warrants -- 304,518
Convertible note -- 2,857,143
Convertible preferred stock 44,564 44,564
-------------------- --------------------
-------------------- --------------------
TOTAL 1,100,564 5,077,425
==================== ====================
F-12
Long-lived Assets
The Company evaluates impairment losses on long-lived assets
used in operations, primarily property and equipment, when
events and circumstances indicate that the carrying value of
the assets might not be recoverable in accordance with FAS No.
144 "Accounting for the Impairment or Disposal of Long-lived
Assets". For purposes of evaluating the recoverability of
long-lived assets, the undiscounted cash flows estimated to be
generated by those assets would be compared to the carrying
amounts of those assets. If and when the carrying values of
the assets exceed their fair values, the related assets will
be written down to fair value. In connection with the sale of
substantially all of the assets of the Company, the Company
has determined that there was an impairment of property and
equipment for the year ended December 31, 2008 and has
therefore recognized a loss for the remaining carrying value
($132,528) of those assets.
Income Taxes
The Company uses the liability method to determine its income
tax expense as required under SFAS No. 109 (SFAS 109). Under
SFAS 109, deferred tax assets and liabilities are computed
based on differences between financial reporting and tax basis
of assets and liabilities, and are measured using the enacted
tax rates and laws that will be in effect when the differences
are expected to reverse.
Deferred tax assets are reduced by a valuation allowance if,
based on the weight of the available evidence, it is more
likely than not that all or some portion of the deferred tax
assets will not be realized. The ultimate realization of the
deferred tax asset depends on the Company's ability to
generate sufficient taxable income in the future. The Company
files a consolidated tax return for federal purposes and
separate state tax returns for the parent and each of its
subsidiaries.
Stock-based Compensation
The Company has periodically issued stock options to
employees, non-employee consultants and non-employee
independent registered representatives in accordance with the
provisions of its various stock option plans (collectively,
the "Plans"), with the exercise price of the stock options
being set at the greater of $ .50 or 120% of the closing
market price of the common stock on the date of grant.
Accounting for Employee Awards:
Effective January 1, 2006, the Plans are accounted for in
accordance with the recognition and measurement provisions of
SFAS No. 123 (revised 2004), Share-Based Payment ("SFAS
123(R)"), which replaces SFAS No. 123, Accounting for
Stock-Based Compensation ("SFAS 123"), and supersedes
Accounting Principles Board Opinion No. 25 ("APB 25"),
Accounting for Stock Issued to Employees, and Related
Interpretations. SFAS 123(R) requires compensation costs
related to share-based payment transactions, including
employee stock options, to be recognized in the financial
statements. In addition, the Company adheres to the guidance
set forth within SEC Staff Accounting Bulletin ("SAB") No.
107, which provides the Staff's views regarding the
interaction between SFAS 123(R) and certain SEC rules and
regulations and provides interpretations with respect to the
F-13
adopting SFAS 123(R), the Company applied the modified
prospective approach to the transition. Under the modified
prospective approach, the provisions of SFAS 123(R) are to be
applied to new employee awards and to employee awards
modified, repurchased, or cancelled after the required
effective date. Additionally, compensation cost for the
portion of employee awards for which the requisite service has
not been rendered that are outstanding as of the required
effective date shall be recognized as the requisite service is
rendered on or after the required effective date. The
compensation cost for that portion of employee awards shall be
based on the grant-date fair value of those awards as
calculated for either recognition or pro-forma disclosures
under SFAS 123.
As a result of the adoption of SFAS 123(R), the Company's
results for the years ended December 31, 2008 and 2007 include
share-based compensation expense for the employee options and
shares totaling approximately $5,495 and $5,375, respectively,
and is included in the Consolidated Statements of Operations
within commissions, employee compensation and benefits. No
income tax benefit has been recognized in the Consolidated
Statements of Operations for share-based compensation
arrangements as the Company has provided for 100% valuation
allowance on net deferred tax assets.
Employee stock options 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 awards. The Company has not adjusted the
expense by estimated forfeitures, as required by SFAS 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 accounts for options granted to its non-employee
consultants and non-employee registered representatives using
the fair value in accordance with FAS 123 and EITF Issue No.
96-18 "Accounting for Equity Instruments That Are Issued to
Other Than Employees" ("EITF 96-18"). The adoption of FAS
123(R) and SAB 107 (defined below) 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 96-18.
Stock compensation expense related to non-employee options was
$8,943 for the year ended December 31, 2008 compared to
$24,447 for the year ended December 31, 2007. These amounts
are included in Consolidated Statements of Operations within
commissions, employee compensation and benefits.
The weighted average estimated fair value of all stock options
granted during the years ended December 31, 2008 and 2007 was
$249 and $6,846, respectively. The fair value of options at
the date of grant was estimated using the Black-Scholes option
pricing model. The expected volatility is based upon
historical volatility of our common 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.
F-14
The assumptions made in calculating the fair values of all
options are as follows:
2008 2007
---- ----
Expected volatility 86% 64%
Expected dividend yield 0% 0%
Risk-free interest rate 1.55%-4.54% 3.45%-4.47%
Expected term (in years) 0 years 1-4 years
Recent Accounting Pronouncements
In September 2006, the Financial Accounting Standards Board
("FASB") issued SFAS No. 157, Fair Value Measurements ("SFAS
157"), to define how the fair value of assets and liabilities
should be measured in accounting standards where it is allowed
or required. In addition to defining fair value, the Statement
established a framework within GAAP for measuring fair value
and expanded required disclosures surrounding fair value
measurements. In February 2008, the FASB issued FASB Staff
Position ("FSP") SFAS 157-2, Effective Date of FASB Statement
No. 157, which delayed the effective date by one year 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. In October 2008,
the FASB issued FSP SFAS 157-3, Determining the Fair Value of
a Financial Asset When the Market for That Asset Is Not
Active, to clarify the application of SFAS 157 in a market
that is not active and provides an example to illustrate key
considerations in determining the fair value of a financial
asset when the market for that financial asset is not active.
This FSP was effective immediately. In April 2009, the FASB
issued FSP SFAS 157-4. Determining Fair Value When the Volume
and Level of Activity for the Asset or Liability Have
Significantly Decreased and Identifying Transactions That Are
Not Orderly, to provide additional guidance for estimating
fair value when the volume and level of activity for the asset
or liability have significantly decreased. This FSP will be
effective for interim and annual reporting periods ending
after June 15, 2009. We adopted SFAS 157 for financial assets
and financial liabilities on January 1, 2008, and the adoption
did not have a material impact on our financial position,
results of operations, or cash flows.
In February 2007, the FASB issued SFAS No. 159, The Fair Value
Option for Financial Assets and Financial
Liabilities-Including an Amendment of FASB Statement No. 115
("SFAS 159"). SFAS 159 allows companies to measure certain
financial instruments at fair value without having to apply
complex hedge accounting provisions and to report unrealized
gains and losses on selected items in earnings. This Statement
is effective for financial statements issued for fiscal years
beginning after November 15, 2007. The adoption of SFAS 159
did not have a material impact on the Company's results of
operations or financial position because we had no assets or
liabilities for which we elected the fair value option.
F-15
In December 2007, the FASB issued SFAS No. 141 (revised 2007),
Business Combinations ("SFAS 141(R)") 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 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"). 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 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 ("SFAS 161"). 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 161 on its consolidated financial statements.
In April 2009, the FASB issued FSP No. FAS 107-1 and APB 28-1,
Interim Disclosures about Fair Value of Financial Instruments,
to require disclosures about fair value of financial
instruments for interim reporting periods of publicly traded
companies as well as in annual financial statements. This FSP
also amends APB Opinion No. 28, Interim Financial Reporting,
to require those disclosures in summarized financial
information at interim reporting periods. The Company will
comply with the additional disclosure requirements beginning
in the second quarter of 2009.
In April 2009, the FASB issued FSP No. SFAS 115-2 and SFAS
124-2, Recognition and Presentation of Other-Than-Temporary
Impairments. This FSP amends the other-than-temporary
impairment guidance in U.S. GAAP for debt and equity
securities in the financial statements. This FSP does not
amend existing recognition and measurement guidance related to
other-than-temporary impairments of equity securities. This
FSP shall be effective for interim and annual reporting
periods ending after June 15, 2009. The Company currently does
not have any financial assets that are other-than-temporary
impaired.
F-16
In April 2009, the SEC released SAB No. 111 ("SAB 111"), which
amends SAB Topic 5-M. SAB 111 notes that SFAS No. 115-2 and
SFAS 124-2 were scoped to debt securities only, and the FSP
referred readers to SEC SAB Topic 5-M for factors to consider
with respect to other-than-temporary impairments for equity
securities. With the amendments in SAB 111, debt securities
are excluded from the scope of Topic 5-M, but the SEC staff's
views on equity securities are still included within the
topic. The Company currently does not have any financial
assets that are other-than-temporary impaired.
NOTE 4 - SECURITIES OWNED and SECURITIES SOLD, NOT YET PURCHASED
December 31,
2008 2007
------------------------------ -------------------------------
------------------------------ -------------------------------
Fair Value Fair Value
---------- ----------
Sold not yet Sold not yet
Owned purchased Owned purchased
Corporate stocks $38,847 $ -- $152,816 $201
U.S. government agency and
municipal obligations 1,574 -- 6,756 --
Other -- -- 201 --
------------ ----------------- ------------- -----------------
------------ ----------------- ------------- -----------------
$40,421 $ -- $159,773 $201
============ ================= ============= =================
Securities owned and securities sold, not yet purchased
consist of trading securities at quoted market values.
Included in corporate stocks are warrants in various
companies, some of which are publicly offered and can be sold
and some of which cannot be publicly offered or sold until
registered under the Securities Act of 1933, as amended
("Securities Act"). At December 31, 2007, the estimated fair
value of these warrants was $85,215.
F-17
NOTE 5 - EMPLOYEE AND BROKER RECEIVABLES
December 31,
-----------------------------------------------
----------------------- -----------------------
2008 2007
---- ----
Commission advances $124,373 $291,364
Forgivable loans -- 167,083
Other loans 58,746 588,217
----------------------- -----------------------
----------------------- -----------------------
183,119 1,046,664
Less: reserve for bad debt ( 180,023) (758,615)
----------------------- -----------------------
----------------------- -----------------------
$3,096 $288,049
======================= =======================
In the past, the Company provided forgivable loans to certain
registered representatives primarily for recruiting and
retention purposes. These loans were recorded at face value at
the time the loan was made. If the registered representative
did not meet specific requirements or terminated his or her
registration with the Company prior to the forgiveness of the
loan, management would evaluate the collectability of the
remaining loan amount. The loans were amortized to commission
expense for financial reporting purposes over the term of the
loan. Loan amortization charged to compensation was $0 and
$53,343 in 2008 and 2007, respectively. Other loans to
employees and registered representatives are payable in
installments generally over periods of one to five years with
interest rates ranging up to 8% per annum.
The Company establishes a reserve based on identification on a
loan by loan basis and records a bad debt expense at the time
a reserve is made. The collectability of each loan is
evaluated separately.
NOTE 6 - PROPERTY AND EQUIPMENT
December 31, Estimated
2007 Useful Life
Computer and office equipment $2,947,268 3 to 7 years
Furniture and fixtures 1,699,715 7 to 10 years
Leasehold improvements 807,227 Term of lease
---------------------
---------------------
5,454,210
Less: accumulated depreciation
and amortization expense (5,278,747)
---------------------
---------------------
$175,463
=====================
Depreciation and amortization expense was $200,812 (including
$132,528 related to impaired assets due to the sale of the
brokerage operations) and $109,163 in 2008 and 2007,
respectively.
NOTE 7 - OTHER ASSETS
Other assets consist of the following:
December 31,
--------------------------------------
2008 2007
---- ----
Commissions receivable $133,957 $531,460
Security deposits 50,000 473,092
Insurance recovery receivable -- 124,999
Deferred financing costs -- 30,000
Other -- 342
------------------ -------------------
------------------ -------------------
$183,957 $1,159,893
================== ===================
F-18
Commissions receivable include amounts earned on mutual fund
and insurance transactions.
NOTE 8 - REPURCHASE OF COMMON SHARES
On October 20, 2008, the Company entered into a 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 common stock was cancelled by the Company on
December 31, 2008 and resulted in the reduction of the total
number of our common shares outstanding from 13,257,248 to
9,956,940.
NOTE 9 - ACCRUED EXPENSES
December 31,
Accrued expenses consist of the following: 2008 2007
---- ----
Accrued litigation costs $179,219 $227,000
Accrued payroll 100,000 100,000
Accrued employment agreement costs 424,367 40,801
Accrued professional fees 138,155 151,210
Other accrued expenses 847,654 37,516
------------------- ----------------
------------------- ----------------
$1,689,395 $556,527
=================== ================
Other accrued expenses include monthly contractual
obligations for rent of $554,375, various equipment leases of
$169,616 and miscellaneous services of $80,848 that the
Company accrued on December 31, 2008 under SFAS No. 146,
Accounting for Costs Associated With Exit or Disposal
Activities. These expenses are included in communication and
occupancy and other operating expenses. Therefore, these
expenses, that would normally be expensed through 2011 have
been expensed and accrued for as of December 31, 2008.
NOTE 10 - BROKER INCENTIVE PAYMENTS
In connection with the Purchase Agreement (see Note 1), the
Company provided incentive payments to those First Montauk
registered representatives who agreed to become affiliated
with and accepted by First Allied. The incentive payment
amounts were based upon a percentage of the gross production
generated by those registered representatives for the period
from July 1, 2007 through June 30, 2008. The total amount of
these incentive payments was $1,085,743 and was paid from the
proceeds of the transaction with First Allied on January 20,
2009.
F-19
NOTE 11 - INCOME TAXES
The provision for income taxes consists of the following:
Years ended December 31,
2008 2007
-------------------- ------------------
-------------------- ------------------
Currently payable:
Federal $ - $ -
State 7,100 16,000
-------------------- ------------------
-------------------- ------------------
7,100 16,000
Deferred:
Federal - -
State - -
-------------------- ------------------
-------------------- ------------------
$7,100 $16,000
==================== ==================
Following is a reconciliation of the income tax provision with
income taxes based on the federal statutory rate:
Years ended December 31,
2008 2007
-------------------- -------------------
-------------------- -------------------
Expected federal tax benefit at statutory rate $(132,000) $(704,000)
including the tax impact of the sale of the
brokerage operations in 2008
State taxes, net of federal tax rate 4,700 11,000
Non-deductible expenses 10,000 149,000
Increase in valuation allowance 282,000 543,000
Other reserves not deductible (157,600) 17,000
-------------------- -------------------
-------------------- -------------------
Provision for income taxes $ 7,100 $ 16,000
==================== ===================
F-20
The tax effects of the temporary differences that give rise to
significant portions of the deferred tax assets and
liabilities as of December 31, 2008 and 2007 are:
Years ended December 31,
2008 2007
-------------------- ---------------------
-------------------- ---------------------
Deferred tax assets:
Reserves and allowances $ 636,000 $ 286,000
Federal tax loss carryforwards 1,794,000 1,611,000
State tax loss carryforwards 146,000 427,000
Accrued and stock-based compensation 436,000 442,000
Other 56,000 20,000
-------------------- ---------------------
-------------------- ---------------------
Subtotal 3,068,000 2,786,000
Valuation allowance (3,068,000) (2,786,000)
-------------------- ---------------------
-------------------- ---------------------
Net deferred tax assets $ -- $ --
==================== =====================
The Company has determined that, based upon available
information, the probability of utilizing its deferred tax
assets does not meet the "more likely than not" test under
SFAS 109. As such, a 100% valuation allowance has been
provided against deferred tax assets as of December 31, 2008
and 2007.
On January 1, 2007, the Company adopted FASB Interpretation
No. 48, "Accounting for Uncertainty in Income Taxes--an
interpretation of FASB Statement No. 109" ("FIN 48"). FIN 48
prescribes a comprehensive model for recognizing, measuring,
presenting and disclosing in the consolidated financial
statements tax positions taken or expected to be taken on a
tax return, including a decision whether to file or not to
file in a particular jurisdiction. At the adoption date of
January 1, 2007 and at December 31, 2007 and December 31,
2008, the Company did not have any unrecognized tax
benefits. The Company's practice is to recognize interest
and/or penalties related to income tax matters in income tax
expense.
The Company and its subsidiaries file a consolidated federal
tax return and separate state returns. At December 31, 2008,
the Company has approximately $5,274,000 and $7,655,000 of
federal and state operating loss carryforwards, respectively,
available to offset future taxable income. These losses expire
at various dates through 2027. The 2007, 2006 and 2005 tax
returns are still open and potentially subject to examination
by federal and state taxing authorities.
F-21
NOTE 12 - COMMITMENTS AND CONTINGENT LIABILITIES
Operating Leases:
The Company leases office facilities and equipment under
operating leases expiring at various dates through 2011.
Certain leases require the Company to pay increases in real
estate taxes, operating costs and repairs over certain base
year amounts. Operating lease expense for the years ended
December 31, 2008 and 2007 was approximately $1,394,900 and
$734,500, respectively.
Future minimum lease commitments under all non-cancelable
leases have been expensed and accrued for as of December 31,
2008 based on the Company's sale of its broker-dealer
operations. (See Note 9).
Employment Agreements:
In 2007, the Company and Victor K. Kurylak executed an Amended
and Restated Employment Agreement pursuant to which Mr.
Kurylak's employment contract was renewed for one year through
December 31, 2008.
Mr. Kurylak's employment terminated as a result of the
expiration of his agreement at the end of the term on December
31, 2008. Pursuant to the terms of his Amended and Restated
Employment Agreement, Mr. Kurylak is entitled to accrued
compensation, any applicable bonus and a severance payment. A
severance payment of $300,000 remains due and owing him by the
Company.
Mr. Kurylak's Amended and Restated Employment Agreement also
contains confidentiality obligations that survive indefinitely
and non-solicitation and non-competition obligations that end
on the first anniversary of the date of cessation of his
employment.
In August 2006, First Montauk entered into an employment
agreement with Ms. Celeste M. Leonard, its Chief Compliance
Officer. The employment agreement provided her with an annual
base salary of $200,000 and bonuses of $200,000 for 2006 and
$100,000 for 2007 and 2008, provided she is still employed by
the Company at the end of each year. Ms. Leonard's employment
terminated on December 31, 2008 when her agreement was not
renewed. A bonus payment of $100,000 for 2008 remains due and
owing her by the Company.
In October 2008, Ms. Mindy A. Horowitz, the Acting Chief
Financial Officer ("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 after the
expiration of her prior employment agreement to assist with
the wind down of the Company's affairs. Under the terms of the
original employment agreement, her employment by the Company
was scheduled to expire on January 31, 2009 at which time she
would have been entitled to severance pay in the amount of
$140,000 if her employment was were not renewed. Under the
terms of the Amended Employment Agreement, the CFO continued
her duties through January 31, 2009 and received her base
salary and other benefits. During the extended period from
February 1, through April 30, 2009, the CFO continued to serve
as the Company's Acting Chief Financial Officer but did not
receive any salary. 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 extended period, she received a lump sum
payment in the amount of $140,000 on November 14, 2008.
F-22
Ms. Horowitz's Amended Employment Agreement also contains
non-solicitation and non-competition obligations that end on
the first anniversary of the date of cessation of her
employment.
Legal Matters:
Many aspects of the broker/dealer business involve
substantial risks of liability. In recent years, there has
been an increasing incidence of litigation and arbitration
involving the securities industry.
As a condition to obtaining approval from FINRA for the sale
of substantially all of it assets to First Allied, First
Montauk was required to establish and fund an escrow account
for the benefit of customers with current and/or future claims
against the firm. In November 2008 the escrow account was
established with the Company's law firm acting as the escrow
agent. In January 2009 the account was funded with $366,000
(as required by FINRA) which can only be utilized to pay
settlements of customer claims and complaints, any arbitration
awards or judgments with respect to such claims, and legal,
accounting and other expenses related to the investigation,
administration and defense of such claims (limited to the
amount of any retention amount for claims covered by
insurance.) Subsequent to the balance sheet date, $65,000 has
been paid from the account for the settlement of two customer
arbitrations.
The West Oaks Mall Litigations:
There are four (4) separate legal proceedings (three civil law
suits and one FINRA arbitration; each listed below and
referred to as "West Oaks Mall") arising from First Montauk's
participation in one particular private offering involving a
Section 1031 tax free exchange investment program, offered and
sold by Investment Properties of America ("IPofA"). The
offering, named "IPofA WOM MASTER Lease Co, LP", required
customers seeking a Section 1031 tax free exchange real estate
investment to deposit cash and assume a portion of the master
mortgage on the property, which was a retail mall outside of
Houston, Texas. In 2008 the mall filed for bankruptcy
protection and the investors were required to give up any
ownership interest in exchange for a release of their
obligations on the mortgage.
Each of these lawsuits contain similar allegations
including fraud, negligent misrepresentation, breach of duty
of care, and violations of the various state securities laws
in the states where each Plaintiff resides. In addition to
naming the Company and First Montauk, each of these suits
names the individual registered representatives, as well as
our former President and Chief Executive Officer ("CEO") and
our former Chief Compliance Officer ("CCO"), as defendants.
The complaints also allege an undisclosed relationship between
the IPofA and Mr. Edward H. Okun ("Okun") with Defendants
First Montauk and a former registered representative of First
Montauk. Through his related entities, Mr. Okun had held
almost 50% of the Company's outstanding common stock
at certain times during 2007. Mr. Okun was a private investor
who owned several companies with which we had entered into a
definitive merger agreement in 2006. The merger never
took place and in June 2007, following several lawsuits
arising out of the terminated merger agreement, we entered
into a settlement agreement with Mr. Okun and several other
named defendants.
F-23
We have given requisite notice of these cases to our insurance
carrier, Lexington Insurance Company ("Lexington"), under our
Directors and Officers Liability Insurance Policy ("Policy")
due to the fact our CEO and CCO have been personally named in
the lawsuits due to their positions as officers of the
Company. First Montauk is being represented by outside
counsel in each of these cases.
On January 26, 2009 we received a coverage determination
notice from Lexington regarding these cases, wherein it
described its coverage position with respect to the West Oaks
Mall matters.
Lexington advised us that under the Policy, all of the West
Oaks Mall claims arise out of "Interrelated Wrongful Acts"
which provides that all of these claims be treated as one for
coverage purposes. Therefore, Lexington states that there is
$1,000,000 of coverage (subject to the other exclusions
described below), with one $100,000 retention. The letter also
stated that although the Policy would provide defense
coverage, no indemnity coverage would be available for any of
these matters as a result of two separate exclusions in the
Policy. The Limited Partnership/REIT Insolvency Exclusion
excludes indemnity coverage for any investment in a limited
partnership or REIT that becomes insolvent. The insurance
company's position is that the West Oaks Mall matters arise
out of the insolvency of IPofA WOM LeaseCO LP, as well as the
bankruptcy of the West Oaks Mall.
Lexington also cites as an exclusion from coverage the amended
Definition of Investment Banking Activity in the Policy which
limits coverage for Section 1031 exchange programs to those
listed in the amended Policy Endorsement. Because IPofA was
not listed among the approved providers of Section 1031
exchange programs, it is the insurance company's position that
there is no indemnity coverage for these claims based upon
this provision of the Policy.
The Company and First Montauk will be challenging Lexington's
position on coverage under the Policy with respect to these
matters, but there can be no assurance that First Montauk will
be successful in obtaining indemnity coverage under the Policy
for any of the West Oaks Mall cases. In the event that First
Montauk is unable to secure indemnity coverage, any settlement
or adverse judgment or award against First Montauk, could have
a material adverse affect on the Company's financial
condition.
We are a respondent or co-respondent in various other legal
proceedings, which are related to our former securities
business. Management is contesting these claims and believes
that there are meritorious defenses in each case. However,
litigation is subject to many uncertainties, and some of these
actions and proceedings may result in adverse judgments.
Further, the availability of insurance coverage is determined
on a case-by-case basis by the insurance carrier, and is
limited to the coverage limits within the policy for any
individual claim and in the aggregate. After considering all
relevant facts, available insurance coverage and consultation
with litigation counsel, management believes that significant
judgments or other unfavorable outcomes from pending
litigation could have a material adverse impact on our
consolidated financial condition, results of operations, and
cash flows in any particular quarterly or annual period, or in
the aggregate.
F-24
Management has accrued a liability for litigation costs for
the suits related to the high-yield bonds and other litigation
that are probable and can be reasonably estimated. The accrual
is included in accrued expenses at December 31, 2008.
Management cannot give assurance that this accrual will be
adequate to absorb actual costs that may be subsequently
incurred. Further, it is not possible to predict the outcome
of other matters pending against the Company.
As of December 31, 2008, the Company has accrued for other
potential legal liabilities that are probable and can be
reasonably estimated based on a review of existing claims and
arbitrations. Management cannot give assurance that this
amount will be adequate to cover actual costs that may be
subsequently incurred. As of December 31, 2008, it was not
possible to predict the outcome of any of these legal matters
pending against the Company and First Montauk. For litigation
that is not probable, the Company cannot estimate the possible
range of loss.
NOTE 13- CLEARING AGREEMENT TERMINATIONS
In connection with the withdrawal of First Montauk's
broker-dealer registration, the clearing agreements with
National Financial Services, LLC ("NFS") and Pension Financial
Services Inc. were terminated effective December 31, 2008. The
clearing agreement with NFS included a termination fee in the
event that First Montauk terminated the agreement prior to May
2014. However, as a result of the withdrawal of First
Montauk's broker-dealer registration, this fee was waived.
NOTE 14 - FRAUDULENT ACTIVITY LOSS
On January 24, 2008, a series of fraudulent purchase order
transactions were executed over the order entry system of NFS,
the Company's clearing broker, through an Internet protocol
address over the Internet, which reflected the user
identification and password information of one of First
Montauk'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, First Montauk took prompt market action to
liquidate the securities fraudulently purchased in order to
mitigate the loss to the Company. These transactions resulted
in a net loss to the Company of approximately $338,000 in the
quarter ended March 31, 2008, which is reflected in other
expenses in the Condensed Consolidated Statements of
Operation. The Company 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, First Montauk received written
notification that its fidelity bond carrier, National Union
Fire Insurance Co. of Pittsburgh, Pennsylvania, would 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, First Montauk received the payment of
$288,000.
NOTE 15 - FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK and
CONCENTRATION OF CREDIT RISK
The Company executed securities transactions on behalf of its
customers. If either the customer or a counter-party fails to
perform, the Company by agreement with its clearing broker may
F-25
be required to discharge the obligations of the non-performing
party. In such circumstances, the Company may sustain a loss
if the market value of the security is different from the
contract value of the transaction.
The Company seeks to control credit sheet risk by monitoring
the market value of securities held or given as collateral in
compliance with regulatory and internal guidelines. Pursuant
to such guidelines, the Company's clearing firm requires
additional collateral or reduction of positions, when
necessary. The Company also completes credit evaluations where
there is thought to be credit risk.
The Company has sold securities that it does not currently own
and will therefore be required to purchase such securities at
a future date. The Company has recorded these obligations in
the financial statements at market values of the related
securities of $0 and $201 at December 31, 2008 and 2007,
respectively, and will incur a loss if the market value of the
securities increases subsequent to year-end.
Financial instruments that potentially subject the Company to
significant concentrations of credit risk consist principally
of cash, securities inventories and employee and broker
receivables. The Company maintains all inventory positions and
a significant portion of its cash balances at its clearing
firm. Cash balances held at commercial banks may periodically
exceed federal insurance limits (see Note 3).
NOTE 16 - PENSION PLAN
The Company sponsored a defined contribution 401(k) pension
plan ("the Plan") covering substantially all employees who met
minimum age and service requirements. The Company may have
elected to contribute up to 100% of each participant's annual
contribution to the plan. There were no employer contributions
in 2008 or 2007. As a result of the Company's cessation of
business operations, the Plan was terminated effective
December 31, 2008 and all participants' accounts were
subsequently distributed.
NOTE 17 - STOCKHOLDERS' EQUITY
The Company's charter authorizes the issuance of up to
5,000,000 shares of Preferred Stock. After the issuance of the
Series A, Series B and Series C Preferred Shares described
below, the Company is authorized to issue an additional
3,929,898 of Preferred Stock. The rights and preferences, if
any, to be given to these preferred shares would be designated
by the board of directors at the time of issuance.
F-26
SERIES A CONVERTIBLE PREFERRED STOCK
In 1999, the Company's board of directors designated a Series
A Convertible Preferred Stock with the following features:
Shares authorized: 625,000
Par value: $.10 per share
Dividends: 6% per annum, payable quarterly at the rate of
$.075 per share until conversion
Voting rights: None
Liquidation preference: $5.00 per share
Conversion: Convertible at the option of the holder anytime
into two shares of Common Stock at $2.50 per share; automatic
conversion once the closing price for the Common Stock is
$3.50 or above for 20 consecutive trading days, and the shares
are registered for public sale.
In 1999, the Company 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%.
In June 2006, an affiliate of Mr. Okun purchased 283,087
shares of the Company's then 305,369 outstanding shares of
Series A Preferred Stock in privately negotiated transactions.
On June 15, 2007, as part of the settlement with Mr. Okun and
the Okun defendants an agreement was reached which required
the Okun Defendants to surrender for cancellation effective
June 15, 2007, all shares of Series A Preferred Stock (283,087
shares), all shares of Series B Preferred Stock (197,824
shares) and 5,272,305 shares of common stock previously owned
by the Okun defendants.
The Company has 22,282 Series A preferred shares issued and
outstanding with respect to which dividends were paid on the
Series A Preferred Stock in the amount of $6,685 and $67,077
during 2008 and 2007, respectively.
TEMPORARY EQUITY-SERIES B CONVERTIBLE REDEEMABLE PREFERRED
STOCK
In February 2005, the Company's board of directors designated
a Series B Convertible Redeemable Preferred Stock with the
following features:
Shares authorized: 445,102
Par value: $.10 per share
Dividends: 8% per annum, payable quarterly at the rate of $.10
per share until conversion or redemption.
Voting rights: Holders of Series B Preferred Stock are
entitled to vote together with common stockholders on all
matters in which they are entitled to vote. The number of
votes to which holders of Series B Preferred are entitled to
cast are ten per each share of Series B Preferred Stock
subject to certain adjustments.
Liquidation preference: $5.055 per share
Conversion: Convertible at the option of the holder anytime
into ten shares of common stock with automatic conversion once
the closing price for the common stock is $1.01 for more than
60 trading days if the average daily trading volume exceeds
20,000 shares, or $1.26 for more than 60 trading days if the
average daily trading volume exceeds 10,000 shares, or $1.51
for more than 60 trading days.
Redemption: Optional redemption. The holder may require the
Company to redeem all or a portion of Series B Preferred Stock
by paying cash equal to the issue price plus all accrued and
unpaid dividends within 180 days after a redemption event. A
redemption event occurs: if the Company ceases to be a
reporting entity under the Securities Act; if the Company's
common stock ceases to be publicly traded for any reason; or,
upon liquidation of the Company.
F-27
In connection with a Separation Agreement entered into with
Mr. William J. Kurinsky, a former director and officer of the
Company, in 2005, 197,824 shares of a newly created class of
Series B Convertible Redeemable Preferred Stock ("Series B"),
par value $0.10 per share were issued, which had a deemed
issue price of $1,000,000, and was convertible into common
stock on the basis of ten shares of common stock for each
share of Series B. The Series B also provided that the
preferred shares have voting rights based upon the number of
shares of common stock into which it would be converted. The
Series B also included a cumulative dividend of 8% per year.
The shares are restricted securities under the Securities Act
and the regulations of the SEC and we relied upon the
exemption from registration under Section 4(2) of the
Securities Act to issue the shares of Series B.
On February 23, 2007, Mr. Okun purchased all the shares of
Series B in a private transaction at a price of $10.00 per
share of Series B. On June 15, 2007, as part of the settlement
with Mr. Okun and the Okun defendants an agreement was reached
which required the parties to surrender all shares of Series B
previously owned by the Okun defendants. On June 15, 2007,
197,824 shares of Series B were surrendered and cancelled.
There are currently no shares of Series B outstanding.
The Company paid no dividends on the Series B preferred stock
in 2008. In 2007 the Company paid $56,889 of dividends on the
shares of Series B preferred stock.
SERIES C PARTICIPATING CUMULATIVE PREFERRED STOCK-PREFERRED
STOCK PURCHASE RIGHTS
The board of directors of the Company adopted a
shareholder-rights plan in August 2008 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, subject to adjustment. The Company has
created a series of 200,000 shares of authorized but not
issued preferred stock for the Series C Stock authorized in
this shareholder-rights plan. No shares of Series C Stock are
currently issued and outstanding.
The rights will become exercisable on the tenth business day
(unless further extended by a resolution adopted by a majority
of the "continuing directors" of our board of directors as of
the close of business on August 9, 2007 (the date of our 2007
Annual Meeting) following public announcement that a person or
group of affiliated or associated persons has acquired or
obtained the right to acquire beneficial ownership of 10% or
more of the common stock without approval of a majority of the
board of directors of the Company. The rights expire on August
8, 2017 unless earlier redeemed or exchanged by the Company.
F-28
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.
COMMON STOCK
During the second quarter of 2005, the board of directors
adopted and the shareholders approved an amendment
to the Company's Restated Certificate of Incorporation, to
increase the authorized number of shares of common stock from
30,000,000 to 60,000,000.
On October 20, 2008, the Company entered into a 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 stock repurchase had the effect of reducing
the total number of our common shares from 13,257,248 to
9,956,940.
NOTE 19 - STOCK OPTION PLANS
2002 Stock Incentive Plan
In June 2002, the Company adopted, and its stockholders
approved, the 2002 Incentive Stock Option Plan (the "2002
Plan"), replacing the 1992 Incentive Stock Option Plan (the
"1992 Plan"), which expired in September 2002. As of December
31, 2008, there were no options remaining under the 1992 Plan.
The Company has reserved up to 5,000,000 shares of common
stock for issuance under the 2002 Plan. The 2002 Plan provides
for the grant of options, including incentive stock options
("ISOs") to employees; non-qualified stock options (NQSOs) to
employees; consultants and independent registered
representatives; and stock appreciation rights or any
combination thereof (collectively, "Awards"). The board of
directors determines the terms and provisions of each Award
granted under the 2002 Plan, including the exercise price,
term and vesting schedule. In the case of ISO's, the per share
exercise price must be equal to at least 100% of the fair
market value of a share of common stock on the date of grant,
and no individual will be granted ISOs corresponding to shares
with an aggregate fair value in excess of $100,000 in any
F-29
calendar year. The 2002 Plan will terminate in 2012. As of
December 31, 2008, options to purchase a total of 506,000
shares were outstanding and 3,950,802 shares remained
available for future issuance under the 2002 Plan.
2002 Non-Executive Director Stock Option Plan
In June 2002, the Company adopted and its stockholders
approved the 2002 Non-Executive Director Stock Option Plan
(the "2002 Director Plan"), replacing the 1992 Non-Executive
Director Stock Option Plan, which expired in September 2002.
Under the 2002 Director Plan, each non-executive director will
automatically be granted an option to purchase 20,000 shares,
pro rata, on September 1st of each year or partial year of
service. The Plan will be administered by the board of
directors or a committee of the Board, which shall at all
times consist of not less than two officer/directors of the
Company who are ineligible to participate in the 2002 Director
Plan. The 2002 Director Plan does not contain a reserve for a
specific number of shares available for grant. Each option
issued under the 2002 Director Plan will be immediately vested
NQSOs, and will have a five-year term and an exercise price
equal to the 100% of the fair market value of the shares
subject to such option on the date of grant. The 2002 Director
Plan will terminate in 2012. As of December 31, 2008, 195,000
options were outstanding under the 2002 Non-Executive Director
Stock Plan.
1996 Senior Management Plan
In June 2000, the Company's stockholders approved an amendment
to the 1996 Senior Management Plan (the "1996 Plan") to
increase the number of shares reserved for issuance to key
management employees from 2,000,000 to 4,000,000 shares.
Awards can be granted through the issuance of incentive stock
rights, stock options, stock appreciation rights, limited
stock appreciation rights, and shares of restricted Common
Stock. The exercise price of an option designated as an ISO
may in no event be less than 100% of the then fair market
price of the stock (110% with respect to ten percent
stockholders), and not less than 85% of the fair market price
in the case of other options. As of December 31, 2008, options
to purchase 355,000 shares of restricted common stock were
issued and outstanding. The 1996 Plan terminated in June 2006.
F-30
A summary of the activity in the Company's stock option plans
(excluding restricted common shares) for the two-year period
ended December 31, 2008 is presented below:
Weighted
Average
Exercise
Shares Prices
Options outstanding, December 31, 2006 2,137,402 $.79
Granted 456,000 .54
Exercised (3,000) .25
Canceled (719,202) .79
------------
Options outstanding, December 31, 2007 1,871,200 $.73
Granted 6,000 .50
Exercised 0 .00
Canceled (821,200) .66
------------------------
Options outstanding, December 31, 2008 1,056,000 $.79
Shares of common stock available for future grant under
Company plans totaled 3,963,802 as of December 31, 2008. This
number does not include options that are expected to be issued
during the remaining term of the 2002 Director's Plan, but for
which no specific reserve has been established.
The weighted-average grant date fair value per option granted
during the twelve months ended December 31, 2008 and 2007 was
$0.04 and $0.54, respectively. The intrinsic value of all
stock options exercisable and outstanding during the twelve
months of 2008 and 2007 was $0. Cash received from the
exercise of all stock options for the twelve months ended
December 31, 2008 and 2007 was $0 and $750, respectively.
F-31
Additional information as of December 31, 2008 with respect to
all outstanding options is as follows:
Options Outstanding Options Exercisable
Weighted
Average Weighted Weighted
Remaining Average Average
Number Contractual Exercise Number Exercise
Range of prices Outstanding Life Prices Exercisable Prices
$0.25 - $0.50 354,000 1.99 $0.44 286,200 $0.43
$0.51 - $1.00 329,000 2.02 $0.69 270,800 $0.63
$1.01 - $1.25 373,000 1.64 $1.20 350,800 $1.21
- -------------------------------------------------------------------------------------------------------------------
$0.25 - $1.25 1,056,000 1.87 $.79 907,800 $0.79
- -------------------------------------------------------------------------------------------------------------------
NOTE 20 - FAIR VALUE OF FINANCIAL INSTRUMENTS
Financial instruments reported in the Company's consolidated
statement of financial condition consist of cash, due from
clearing firm, due form First Allied Securities, Inc.,
securities owned and sold, not yet purchased, loans
receivable, warrants subject to put options, 10% convertible
notes, accounts payable and accrued expenses, the carrying
value of which approximated fair value at December 31, 2008
and 2007. The fair value of the financial instruments
disclosed is not necessarily representative of the amount that
could be realized or settled nor does the fair value amount
consider the tax consequences of realization or settlement.
NOTE 21 - NET CAPITAL REQUIREMENTS
First Montauk was subject to the SEC Uniform Net Capital Rule
(Rule 15c3-1), which required First Montauk to maintain
minimum net capital, as defined. At December 31, 2008, First
Montauk had net capital of $966,052, which was $800,990 in
excess of its required net capital of $165,062. First
Montauk's ratio of aggregate indebtedness to net capital was
2.56 to 1.
F-32
NOTE 22 - FAIR VALUE MEASUREMENTS
The Company adopted 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). The
three levels are described below:
Level 1 Inputs - Unadjusted quoted prices in active markets
for identical assets or liabilities that
are accessible by the Company;
Level 2 Inputs - Quoted prices in markets that are not
active or financial instruments for which
all significant inputs are observable,
either directly or indirectly;
Level 3 Inputs - Unobservable inputs for the asset or
liability including significant
assumptions of the Company and other
market participants.
The Company determines fair values for its investment assets
as follows:
Investments, at fair value - The Company investments, at fair
value, consist of corporate stocks which are valued at market
and classified within Level 1 of the fair value hierarchy and
U.S. Government agency and Municipal obligations which are
valued at market and classified within Level 2.
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 as of December 31, 2008
-------------------------------- ------------------------------------------------------------------
-------------------------------- -------------- ----------------- ---------------- ----------------
Total Level 1 Level 2 Level 3
-------------------------------- -------------- ----------------- ---------------- ----------------
-------------------------------- -------------- ----------------- ---------------- ----------------
Assets:
-------------------------------- -------------- ----------------- ---------------- ----------------
-------------------------------- -------------- ----------------- ---------------- ----------------
Corporate Stocks $38,847 $38,847
-------------------------------- -------------- ----------------- ---------------- ----------------
-------------------------------- -------------- ----------------- ---------------- ----------------
U.S. Government Agency and
Municipal Obligations $1,574 $1,574
-------------------------------- -------------- ----------------- ---------------- ----------------
-------------------------------- -------------- ----------------- ---------------- ----------------
$40,421 $38,847 $1,574 $--
-------------------------------- -------------- ----------------- ---------------- ----------------
NOTE 23 - SUBSEQUENT EVENT
Court Order Restricting Use of Asset Sale Proceeds
The Company is subject to a court order issued by a New Jersey
Superior Court on January 14, 2009, requiring that the balance
of the sale proceeds of the asset sale to First Allied be held
in escrow for the benefit of the Company's creditors. The
court order was issued in conjunction with a lawsuit initiated
by a former customer of First Montauk who invested in a
private offering of a real estate Section 1031 like-kind
exchange program, captioned Dawn A. Dunbar, Zeneth Eidel, and
Doris Eidel v. First Montauk Financial Corp., First Montauk
Securities Corp., Kenneth R. Bolton, et al (Monmouth County
Docket No.L-4949-08). On April 14, 2009, the Court entered a
consent order permitting the Company to pay auditing fees of
$80,000 in connection with the filing of the Company's Form
10-K. On May 8, 2009, the Court entered a second consent order
permitting the Company to pay other expenses from the sale
proceeds totaling $452,065. The Company agreed that the
remaining balance of $381,348 would remain in escrow pending
further order of the Court.
F-33