-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Mxy7WtH6PLScnSA6s0yeCWkTYHuz3Z7PCD7UOjGMrKC+PEb+Vraa266EIByxnGUB vfWJH6WGo3uP5qMqWu3EPQ== 0000083125-06-000047.txt : 20061114 0000083125-06-000047.hdr.sgml : 20061114 20061114172212 ACCESSION NUMBER: 0000083125-06-000047 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 20060930 FILED AS OF DATE: 20061114 DATE AS OF CHANGE: 20061114 FILER: COMPANY DATA: COMPANY CONFORMED NAME: FIRST MONTAUK FINANCIAL CORP CENTRAL INDEX KEY: 0000083125 STANDARD INDUSTRIAL CLASSIFICATION: SECURITY BROKERS, DEALERS & FLOTATION COMPANIES [6211] IRS NUMBER: 221737915 STATE OF INCORPORATION: NJ FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-06729 FILM NUMBER: 061216916 BUSINESS ADDRESS: STREET 1: 328 NEWMAN SPRINGS RD STREET 2: PKWY 109 OFFICE CTR CITY: RED BANK STATE: NJ ZIP: 07701 BUSINESS PHONE: 7328424700 MAIL ADDRESS: STREET 1: 328 NEWMAN SPRINGS RD STREET 2: PKWY 109 OFFICE CTR CITY: RED BANK STATE: NJ ZIP: 07701 FORMER COMPANY: FORMER CONFORMED NAME: MCC PRESIDENTIAL INC DATE OF NAME CHANGE: 19871203 FORMER COMPANY: FORMER CONFORMED NAME: RENAULT WINERY INC DATE OF NAME CHANGE: 19740725 FORMER COMPANY: FORMER CONFORMED NAME: PRESIDENTIAL APARTMENTS INC DATE OF NAME CHANGE: 19740327 10-Q 1 form10q9302006.txt FORM 10-Q FOR QUARTER ENDED SEPTEMBER 30, 2006 ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (Mark One) QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE |X| SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2006 |_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO Commission File Number: 0-6729 FIRST MONTAUK FINANCIAL CORP. - -------------------------------------------------------------------------------- (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) New Jersey 22-1737915 ---------------------- ---------------------------------- (State of Incorporation) (I.R.S. Employer Identification No.) Parkway 109 Office Center, 328 Newman Springs Road, Red Bank, New Jersey 07701 - -------------------------------------------------------------------------------- (Address of principal executive offices)(Zip Code) (732) 842-4700 - -------------------------------------------------------------------------------- (Registrant's telephone number, including area code) - -------------------------------------------------------------------------------- (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 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 the filing requirements for the past 90 days. Yes |X| No |_| Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes |_| No |X| Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). |_| Yes |X| No APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PRECEDING FIVE YEARS Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d)of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. |_| Yes |_| No APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date: 18,511,553 shares of Common Stock were outstanding at November 14, 2006. 02 FIRST MONTAUK FINANCIAL CORP. FORM 10-Q SEPTEMBER 30, 2006 INDEX Page PART I. FINANCIAL INFORMATION: Item 1. Financial Statements Consolidated Statements of Financial Condition as of September 30, 2006 (unaudited) and December 31, 2005 .. F-1 Consolidated Statements of Operations for the Nine Months and Three Months Ended September 30, 2006 (unaudited) and 2005 (unaudited) ........................................ F-2 Consolidated Statements of Changes in Stockholders' Equity (Deficit) for the period from January 1, 2005 to September 30, 2006 .......................................F-3-F-4 Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2006 (unaudited) and 2005 (unaudited) ... F-5 Notes to Consolidated Financial Statements ..................... 6-16 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations ................. 17-26 Item 3. Risk Management ........................................ 26-27 Item 4. Controls and Procedures ................................ 28 PART II. OTHER INFORMATION: Item 1. Legal Proceedings ...................................... 29 Item 1A. Risk Factors ........................................... 29 Item 2. Unregistered Sales of Equity Securities................. 29 Item 3. Defaults Upon Senior Securities ........................ 29 Item 4. Submission of Matters to a Vote of Securities Holders .................................... 29 Item 5. Other Information ..................................... 29-30 Item 6. Exhibits ............................................... 31 Signatures ...................................................... 31 FIRST MONTAUK FINANCIAL CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION September December 2006 2005 ----------- --------- (unaudited) ASSETS Cash and cash equivalents $ 873,883 $ 1,990,815 Due from clearing firm 5,262,388 4,756,646 Securities owned, at market value 292,613 303,612 Prepaid expenses 544,658 287,394 Employee and broker receivables - net of reserve for bad debt of $1,018,242 and $1,085,135 respectively 417,921 310,289 Property and equipment - net 260,278 449,460 Other assets 530,647 622,804 --------- --------- Total assets $ 8,182,388 $ 8,721,020 ========= ========= LIABILITIES 6% convertible debentures 25,000 1,250,000 Securities sold, not yet purchased, at market value 4,750 3,564 Commissions payable 2,309,340 2,027,379 Accounts payable 411,462 486,676 Accrued expenses 743,953 1,373,354 Income taxes payable 32,667 32,167 Capital leases payable 1,630 8,555 Note payable -- 200,000 Other liabilities 74,231 111,474 --------- --------- Total liabilities 3,603,033 5,493,169 --------- --------- Commitments and contingencies (See notes) STOCKHOLDERS' EQUITY Preferred stock, 3,929,898 shares authorized, $.10 par value, no shares issued and outstanding -- -- Series A convertible preferred stock, 625,000 shares authorized, $.10 par value 305,369 shares issued and outstanding; liquidation preference $1,526,845 30,537 30,537 Series B convertible redeemable preferred stock, 445,102 shares authorized, $.10 par value, 197,824 shares issued and outstanding, liquidation preference: $1,000,000 19,782 19,782 Common stock, no par value, 60,000,000 and 30,000,000 shares authorized, 18,503,553 and 15,937,407 shares issued and outstanding, respectively 11,645,674 10,444,110 Additional paid-in capital 1,930,810 1,930,810 Accumulated deficit (9,047,448) (8,809,203) Less: deferred compensation -- (388,185) --------- ----------- Total stockholders' equity 4,579,355 3,227,851 --------- ---------- Total liabilities and stockholders' equity $ 8,182,388 $ 8,721,020 ========= ========= See notes to consolidated financial statements. F-1
04 FIRST MONTAUK FINANCIAL CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS Nine months ended September 30 Three months ended September 30 2006 2005 2006 2005 ---------- ---------- ---------- ----------- (unaudited) (unaudited) (unaudited) (unaudited) Revenues: Commissions $29,509,203 $28,130,672 $9,081,813 $9,594,354 Principal transactions 3,318,729 4,374,706 833,929 1,468,303 Investment banking 2,914,197 4,221,343 596,963 395,283 Interest and other income 2,449,776 7,943,791 761,470 1,066,426 ---------- ---------- ---------- ---------- Total revenue 38,191,905 44,670,512 11,274,175 12,524,366 ---------- ---------- ---------- ---------- Expenses: Commissions, employee compensation and benefits 31,712,982 33,063,647 9,592,676 10,306,231 Executive separation 951,266 1,432,937 - - Clearing and floor brokerage 1,111,675 1,591,748 415,896 621,522 Communications and occupancy 1,369,832 1,744,033 486,539 582,792 Legal matters and related costs 772,193 1,043,929 159,642 728,985 Other operating expenses 2,296,864 2,842,866 762,089 909,846 Interest 74,803 72,145 8,057 28,752 ---------- ---------- ---------- ---------- Total expenses 38,289,615 41,791,305 11,424,899 13,178,128 ---------- ---------- ---------- ---------- Net income (loss) before income taxes (97,710) 2,879,207 (150,724) (653,762) Provision (benefit) for income taxes 14,331 22,615 (30,730) 3,095 ---------- ---------- ----------- ---------- Net income (loss) $ (112,041) $2,856,592 $(119,994) $(656,857) Preferred stock dividends (126,204) (285,340) (42,866) (42,906) ---------- ---------- ----------- ---------- Net income (loss) applicable to common stockholders $ (238,245) $2,571,252 $(162,860) $(699,763) ========== ========== =========== ========== Earnings/(loss) per share: Basic $ (0.01) $ 0.19 $ (0.01) $ (0.05) Diluted $ (0.01) $ 0.14 $ (0.01) $ (0.04) Weighted average number of shares of stock outstanding: Basic 16,531,580 13,859,366 18,496,886 14,622,209 Diluted 16,531,580 20,116,007 18,496,886 14,622,209 See notes to consolidated financial statements. F-2
FIRST MONTAUK FINANCIAL CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN STODKHOLDERS' EQUITY (DEFICIT) FOR THE PERIOD FROM JANUARY 1, 2005 TO SEPTEMBER 30, 2006 Series A Convertible Series B Convertible Preferred Stock Preferred Stock Common Stock -------------------------------------------- ------------------------- Additional Shares Amount Shares Amount Shares Amount Paid-in Capital -------------------------------------------- ------------------------- ---------------- Balances at January 1, 2005 305,369 $30,537 - - 10,258,509 $7,257,292 $ 950,592 Increase in deferred compensation 154,464 Amortization of deferred compensation Common stock issued in connection with legal settlements 25,000 25,000 Issuance of restricted stock in connection with employment agreements 1,300,000 741,000 Issuance of preferred stock in connection with separation agreement 197,824 $19,782 $ 980,218 Exercise of incentive stock options 560,998 343,071 Cashless exercise of warrants 262,900 158,283 Conversion of bonds into common stock 3,530,000 1,765,000 Payment of preferred stock dividends Net income for the year ---------------------- --------------------- ------------------------- ------------- Balances at December 31, 2005 305,369 30,537 197,824 19,782 15,937,407 10,444,110 1,930,810 Amortization of deferred compensation Reclass to common stock (105,288) Exercise of incentive stock options 45,800 22,034 Cashless exercise of incentive stock options 27,586 - Cashless exercise of warrants 42,760 22,211 Expired warrant obligation -- 37,607 Conversion of bonds into common stock 2,450,000 1,225,000 Payment of preferred stock dividends Net loss for the period ---------------------- --------------------- ------------------------- ------------- Balances at September 30, 2006 (unaudited) 305,369 $30,537 197,824 $19,782 18,503,553 $11,645,674 $ 1,930,810 ====================== ===================== ========================= ============= See notes to consolidated financial statements. F-3
FIRST MONTAUK FINANCIAL CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT) FOR THE PERIOD FROM JANUARY 1, 2005 TO SEPTEMBER 30, 2006 Retained Earnings Stockholders' (Accumulated Deferred Treasury Stock Equity Deficit) Compensation Shares Amount (Deficit) ------------ ------------ -------------------- --------- Balances at January 1, 2005 $(10,948,157) $ (388,881) $ (3,098,617) Increase in deferred compensation (154,464) - Amortization of deferred compensation 896,160 896,160 Common stock issued in connection with legal settlements 25,000 Issuance of restricted stock in connection with employment agreements (741,000) - Issuance of preferred stock in connection with separation agreement 1,000,000 Exercise of incentive stock options 343,071 Exercise of warrants 158,283 Conversion of bonds into common stock 1,765,000 Payment of preferred stock dividends (285,340) (285,340) Net income for the year 2,424,294 2,424,294 ----------- ------------ --------------------- ---------- Balances at December 31, 2005 (8,809,203) (388,185) - - 3,227,851 Amortization of deferred compensation 282,897 282,897 Reclass to common stock 105,288 - Exercise of incentive stock options 22,034 Cashless exercise of incentive stock options - Cashless exercise of warrants 22,211 Expired warrant obligation 37,607 Conversion of bonds into common stock 1,225,000 Payment of preferred stock dividends (126,204) (126,204) Net loss for the period (112,041) (112,041) ----------- ------------- --------------------- ----------- Balances at September 30, 2006 (unaudited) $(9,047,448) $ - - - $4,579,355 ============= ============= ===================== ============ See notes to consolidated financial statements. F-4
FIRST MONTAUK FINANCIAL CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS Nine months ended September 30 2006 2005 (unaudited) (unaudited) INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS CASH FLOWS FROM OPERATING ACTIVITIES Net income (loss) $ (112,041) $ 2,856,592 Adjustments to reconcile net income (loss) to net cash (used in) provided by operating activities: Depreciation and amortization of property and equipment 202,413 303,144 Amortization of deferred costs 351,752 902,700 Amortization of deferred income - (5,105,116) Preferred shares issued in connection with separation agreement - 1,000,000 Increase (decrease) in cash attributable to changes in assets and liabilities: Payment on note payable (200,000) - Due from clearing firm (505,741) (269,283) Securities owned 10,999 (121,172) Prepaid expenses (257,264) (287,272) Employee and broker receivables (107,632) 164,101 Income taxes receivable - 40,525 Other assets 23,301 (12,045) Warrants subject to put options - (122,073) Securities sold, not yet purchased 1,186 (150,194) Commissions payable 281,961 (316,570) Accounts payable (75,213) (93,290) Accrued expenses (629,401) 264,273 Income taxes payable 500 (15,023) Other liabilities 22,575 232,860 ----------- --------- NET CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES (992,605) (727,843) ----------- --------- CASH FLOWS FROM INVESTING ACTIVITIES: Additions to property and equipment (13,232) (37,826) ----------- --------- NET CASH USED IN INVESTING ACTIVITIES (13,232) (37,826) ----------- --------- CASH FLOWS FROM FINANCING ACTIVITIES: Payment of capital leases (6,925) (51,739) Proceeds from exercise of incentive stock option 22,034 340,201 Payment of preferred stock dividends (126,204) (240,249) ----------- -------- NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES (111,095) 48,213 ----------- -------- Net decrease in cash and cash equivalents (1,116,932) (717,456) Cash and cash equivalents at beginning of period 1,990,815 1,034,681 ----------- ---------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 873,883 $ 317,225 =========== ========== Supplemental disclosures of cash flow information: Cash paid during the period for: Interest $ 33,891 $ 92,949 =========== ========== Income taxes $ 118,018 $ 63,020 =========== ========== Noncash financing activity: Proceeds from exercise of warrants $ 22,211 $ 119,196 6% convertible debentures converted into common stock $ 1,225,000 $ 1,755,000 See notes to consolidated financial statements. F-5
FIRST MONTAUK FINANCIAL CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 - BASIS OF PRESENTATION The interim financial information as of September 30, 2006 and for the nine-month and three-month periods ended September 30, 2006 and 2005 has been prepared without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (the "SEC"). Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations, although management believes that the disclosures made are adequate to provide for fair presentation. These Consolidated Financial Statements should be read in conjunction with the Consolidated Financial Statements and the notes thereto, included in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2005, previously filed with the SEC. In the opinion of management, all adjustments (which include normal recurring adjustments) necessary to present a fair statement of financial position as of September 30, 2006, and results of operations and cash flows for the nine months and three months ended September 30, 2006 and 2005, as applicable, have been made. The results of operations for the nine and three months ended September 30, 2006 are not necessarily indicative of the operating results for the full fiscal year or any future periods. NOTE 2 - RECENT ACCOUNTING PRONOUNCEMENTS SEC Staff Accounting Bulletin 108 ("SAB 108"), Considering the Effects of Prior Year Misstatements when Qualifying Misstatements in Current Year Financial Statements: In September 2006, the SEC staff issued Staff Accounting Bulletin No. 108, "Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements." SAB 108 was issued in order to eliminate the diversity of practice surrounding how public companies quantify financial statement misstatements. Traditionally, there have been two widely recognized methods for quantifying the effects of financial statement misstatements: the "roll-over" method and the "iron curtain" method. The roll-over method focuses primarily on the impact of a misstatement on the income statement--including the reversing effect of prior year misstatements--but its use can lead to the accumulation of misstatements in the balance sheet. The iron-curtain method, on the other hand, focuses primarily on the effect of correcting the period-end balance sheet with less emphasis on the reversing effects of prior year errors on the income statement. In SAB 108, the SEC staff established an approach that requires quantification of financial statement misstatements based on the effects of the misstatements on each of the company's financial statements and the related financial statement disclosures. This model is commonly referred to as a "dual approach" because it requires quantification of errors under both the iron curtain and the roll-over methods. SAB 108 permits existing public companies to initially apply its provisions either by (i) restating prior financial statements as if the "dual approach" had always been used or (ii) recording the cumulative effect of initially applying the "dual approach" as adjustments to the carrying values of assets and liabilities as of January 1, 2006 with an offsetting adjustment recorded to the opening balance of retained earnings. We will adopt the provisions of SAB 108 in connection with the preparation of our annual financial statements for the year ending December 31, 2006. We are in the process of evaluating the impact, if any, on our financial statements of initially applying the provisions of SAB 108. Statement of Financial Accounting Standard 157, Fair Value Measurements ("SFAS 157"): On September 15, 2006, the Financial Accounting Standard Board issued a standard that provides enhanced guidance for using fair value to measure assets and liabilities. The standard applies whenever other standards require (or permit) assets or liabilities to be measured at fair value. The standard does not expand the use of fair value in any new circumstances. This Statement is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. Earlier application is encouraged, provided that the reporting entity has not yet issued financial statements for that fiscal year, including financial statements for an interim period within that fiscal year. The Company will adopt this pronouncement effective for periods beginning January 1, 2008. We are currently evaluating the impact of adopting this pronouncement on our financial statements. FSP FAS 123(R )-5, Amendment of FASB Staff Position FAS 123(R)-1 FSP FAS 123(R)-5 was issued on October 10, 2006. The FSP provides that instruments that were originally issued as employee compensation and then modified, and that modification is made to the terms of the instrument solely to reflect an equity restructuring that occurs when the holders are no longer employees. No change in the recognition or the measurement (due to a change in classification) of those instruments will result if both of the following conditions are met: (a). There is no increase in fair value of the award (or the ratio of intrinsic value to the exercise price of the award is preserved, that is, the holder is made whole), or the antidilution provision is not added to the terms of the award in contemplation of an equity restructuring; and (b). All holders of the same class of equity instruments (for example, stock options) are treated in the same manner. The provisions in this FSP shall be applied in the first reporting period beginning after the date the FSP is posted to the FASB website. We will adopt this FSP from its effective date. We currently do not believe that its adoption will have any impact on our financial statements. NOTE 3 - STOCK-BASED COMPENSATION The Company periodically issues common stock to employees, non-employee consultants and non-employee independent registered representatives in accordance with the provisions of the following shareholder approved equity compensation plans ("the Plans"): 2002 Stock Incentive Plan The 2002 Incentive Stock Option Plan, which replaced the 1992 Incentive Stock Option Plan that expired in September 2002, has reserved up to 5,000,000 shares of common stock for issuance to employees, non-employee consultants and non-employee registered representatives of the Company. Only options issued to employees qualify for incentive stock option treatment ("ISOs"). 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 calendar year. The 2002 Incentive Stock Plan will terminate in 2012. 2002 Non-Executive Director Stock Option Plan Under the 2002 Director Plan, which replaced the 1992 Non-Executive Director Stock Option Plan that expired in September 2002, 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 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 non-qualified stock options, and will have a five-year term and an exercise price equal to 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. 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. The 1996 Plan terminated in June 2006. The Plans provide for accelerated vesting if there is a change in control as defined in the plans. Accounting for Employee Awards: Effective January 1, 2006, the Plans are accounted for in accordance with the recognition and measurement provisions of Statement of Financial Accounting Standards No. 123 (revised 2004), Share-Based Payment ("FAS 123(R)"), which replaces SFAS No. 123, Accounting for Stock-Based Compensation ("FAS 123"), and supersedes Accounting Principles Board Opinion No. 25 ("APB 25"), Accounting for Stock Issued to Employees, and related interpretations. FAS 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 Securities and Exchange Commission ("SEC") Staff Accounting Bulletin No. 107, which provides the Staff's views regarding the interaction between FAS 123(R) and certain SEC rules and regulations and provides interpretations with respect to the valuation of share-based payments for public companies. Prior to January 1, 2006, the Company accounted for similar employee transactions in accordance with APB 25, which employed the intrinsic value method of measuring compensation cost. Accordingly, compensation expense was not recognized for employee fixed stock options if the exercise price of the option equaled or exceeded the fair value of the underlying stock at the grant date. While FAS 123, for employee options, encouraged recognition of the fair value of all stock-based awards on the date of grant as expense over the vesting period, companies were permitted to continue to apply the intrinsic value-based method of accounting prescribed by APB 25 and disclose certain pro-forma amounts as if the fair value approach of FAS 123 had been applied. In December 2002, FAS No. 148, Accounting for Stock-Based Compensation-Transition and Disclosure, an amendment of FAS 123, was issued, which, in addition to providing alternative methods of transition for a voluntary change to the fair value method of accounting for stock-based employee compensation, required more prominent pro-forma disclosures in both the annual and interim financial statements. The Company complied with these disclosure requirements for all applicable periods prior to January 1, 2006. In adopting FAS 123(R), the Company applied the modified prospective approach to the transition. Under the modified prospective approach, the provisions of FAS 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 FAS 123. As a result of the adoption of FAS 123(R), the Company's results for the nine and three month periods ended September 30, 2006 include share-based compensation expense for employee options and shares totaling approximately $235,000 and $22,000, respectively. Such amounts have been included in the Consolidated Statements of Operations within commissions, employee compensation and benefits. No income tax benefit has been recognized in the income statement for share-based compensation arrangements as the Company has provided for a 100% valuation allowance on net deferred tax assets. Stock compensation expense for employee options and shares recorded under APB 25 in the Consolidated Statements of Operations for the nine and three months ended September 30, 2005 totaled $959,000 and $389,000, respectively. Employee stock option compensation expense in 2006 is the estimated fair value of options granted amortized on a straight-line basis over the requisite service period for the entire portion of the award. The Company has not adjusted the expense by estimated forfeitures, as required by FAS 123(R) for employee options, since the forfeiture rate based upon historical data was determined to be immaterial. Accounting for Non-employee Awards: The Company previously accounted for options granted to its non-employee consultants and non-employee registered representatives using the fair value cost in accordance with FAS 123 and EITF No. 96-18. The adoption of FAS 123(R) and SAB 107 as of January 1, 2006, had no material impact on the accounting for non-employee awards. The Company continues to consider the additional guidance set forth in EITF Issue No. 96-18 ("EITF 96-18"), "Accounting for Equity Instruments That Are Issued to Other Than Employees". Stock compensation expense related to non-employee options was $48,000 for the nine months ended September 30, 2006 compared to $102,000 for the nine months ended September 30, 2005. For the three months ended September 30, 2006, the Company had a $2,000 reversal due to the reduction in the market price of the stock. This compares with stock compensation expense of $37,000 for the three months ended September 30, 2005. These amounts are included in the Consolidated Statements of Operations within commissions, employee compensation and benefits. The weighted average estimated fair value of all stock options granted in the nine months ended September 30, 2006 and 2005 was $0.59 and $0.41, respectively. The fair value of options at the date of grant was estimated using the Black-Scholes option pricing model. During 2006, the Company took into consideration guidance under FAS 123(R) and SEC Staff Accounting Bulletin No. 107 ("SAB 107") when reviewing and updating assumptions. The expected volatility is based upon historical volatility of our stock and other contributing factors. The expected term is based upon observation of actual time elapsed between date of grant and exercise of options for all employees. Previously such assumptions were determined based on historical data. The assumptions made in calculating the fair values of all options are as follows: Nine Months Ended Three Months Ended ----------------- ------------------ September 30, September 30, September 30, September 30, 2006 2005 2006 2005 ---- ---- ---- ---- Expected volatility 66% 102% 66% 102% Expected dividend yield 0% 0% 0% 0% Risk-free interest rate 3.71%-5.10% 2.93%-3.72% 3.71%-4.59% 2.93%-3.72% Expected term (in years) 0-5 years 0-5 years 0-4.5 years 0-5 years
In the fourth quarter of 2005, the Company changed the basis for estimating the volatility component of the Black Scholes model. Previously the Company used historical daily price observations of its stock as a basis for determining expected volatility. The Company determined that monthly price observations provide a more reliable measure of its stock trading activity and resulting volatility estimate. This change is considered a change in estimate and is accounted for prospectively to new grants. Pro Forma Information under SFAS No. 123 for Periods Prior to doption of FAS 123(R): The following table illustrates the effect on the net income and earnings per share as if the fair value recognition provisions of FAS 123 had been applied to all outstanding and unvested employee awards in the prior year comparable period. Nine months ended Three months ended September 30, 2005 September 30, 2005 ------------------ ------------------ (unaudited) (unaudited) Net income (loss), as reported $2,856,592 ($656,857) Add: Employee stock-based compensation expense determined under the fair value based method for all awards (no tax effect) (308,900) (272,809) ---------- --------- Pro forma net income (loss) attributable to common stockholders 2,547,692 (929,666) Add: preferred stock dividends 285,340 42,906 Add: convertible debenture interest 56,250 18,750 --------- --------- Pro forma net income (loss) $2,889,282 ($868,010) ========== ========= Earnings (loss) per share: Basic - as reported $ 0.19 $ (0.05) Basic - pro forma $ 0.16 $ (0.07) Diluted - as reported $ 0.14 $ (0.04) Diluted - pro forma $ 0.14 $ (0.06)
The following table represents all our stock options granted, exercised, and forfeited during the nine months of 2006. Weighted Weighted Average Average Remaining Number Exercise Price Contractual Aggregate Stock Options of Shares per Share Term Intrinsic Value ------------- --------- -------------- ----------- --------------- Outstanding at January 1, 2006 2,707,302 $0.85 ---------------------------------------------------------------------------------------------------------------- Granted 3,000 $1.04 Exercised (240,400) $0.71 Forfeited/expired (213,500) $1.35 ---------------------------------------------------------------------------------------------------------------- ---------------------------------------------------------------------------------------------------------------- Outstanding at September 2,256,402 $0.81 2.7 $485,459 30, 2006 ---------------------------------------------------------------------------------------------------------------- ================================================================================================================ Exercisable at September 1,832,121 $0.81 2.7 $424,355 30, 2006 ================================================================================================================
The weighted-average grant date fair value of all share options granted during the nine months ended September 30, 2006 and 2005 was $0.59 and $0.41, respectively. The intrinsic value of all stock options exercised during the nine months of 2006 and 2005 was $49,000 and $171,000, respectively. Cash received from the exercise of all stock options in the nine months ended September 30, 2006 and 2005 was $22,000 and $302,701, respectively. The Company has issued shares that vest over time (as the term is defined in FAS 123(R)) to its senior officers. The following table summarizes the activity during the nine months ended September 30, 2006: ----------------------------------- -------------------------------- ----------------------------- Weighted-Average Grant-Date Nonvested Shares Shares Fair Value ----------------------------------- -------------------------------- ----------------------------- ----------------------------------- -------------------------------- ----------------------------- Nonvested January 1, 2006 950,000 $0.47 ----------------------------------- -------------------------------- ----------------------------- ----------------------------------- -------------------------------- ----------------------------- Granted -- -- ----------------------------------- -------------------------------- ----------------------------- ----------------------------------- -------------------------------- ----------------------------- Vested (850,000) $0.46 ----------------------------------- -------------------------------- ----------------------------- ----------------------------------- -------------------------------- ----------------------------- Forfeited -- -- ----------------------------------- -------------------------------- ----------------------------- ----------------------------------- -------------------------------- ----------------------------- Nonvested September 30, 2006 100,000 $0.57 ----------------------------------- -------------------------------- -----------------------------
The total fair value of shares vested during the nine months ended September 30, 2006 and 2005, was $773,500 and $935,000, respectively. As of September 30, 2006, there was $123,000 of total unrecognized compensation cost, net of estimated forfeitures, related to all unvested stock options and shares, which is expected to be recognized over a weighted average period of approximately 1.8 years. NOTE 4 - PREPAID EXPENSES Prepaid expenses at September 30, 2006 include a payment for errors and omissions insurance coverage. The unamortized amount at September 30, 2006 is $343,000, which will be written off over the next four months. NOTE 5 - ACCOUNTS PAYABLE Accounts payable at September 30, 2006 includes an insurance premium financing agreement with a current balance of $105,000, payable in one remaining monthly installment, including interest at the rate of 4.97% per annum. NOTE 6 - LEGAL MATTERS The Company is a respondent or co-respondent in various legal proceedings, including customer arbitrations and regulatory investigations. Management is contesting these claims and believes that there are meritorious defenses in each case. However, litigation is subject to many uncertainties, and some of these actions and proceedings may result in an adverse judgment. Further, the availability of insurance coverage is determined on a case-by-case basis by the insurance carrier, and is limited to the coverage limits within the policy for any individual claim and in the aggregate. After considering all relevant facts, available insurance coverage and consultation with litigation counsel, management believes that significant judgments or other unfavorable outcomes from pending litigation could have a material adverse impact on the Company's consolidated financial condition, results of operations, and cash flows in any particular quarterly or annual period, or in the aggregate, and could impair the Company's ability to meet the statutory net capital requirements of its securities business. On September 29, 2006, First Montauk Securities Corp. ("FMSC") entered into a Consent Order with the New Jersey Bureau of Securities relating to an investigation into FMSC's sale of certain high yield bonds to it's clients from 1998 to 2001, and the subsequent resale of those securities to other customers in 2001. As a result, FMSC paid a civil monetary penalty of $475,000 on September 29, 2006, which was fully reserved for in previous periods, and agreed to retain an independent consultant to review FMSC's business practices and procedures for branch office supervision, suitability standards, and monitoring of agent sales activities. As of September 30, 2006, the Company has accrued for 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. Further, it is not possible to predict the outcome of other matters pending against the Company. All such cases will continue to be vigorously defended. NOTE 7 - EARNINGS (LOSS) PER SHARE Basic earnings (loss) per share for the nine and three months ended September 30, 2006 and 2005 is based on the weighted average number of shares of common stock outstanding. The following table sets forth the weighted average number of shares of common stock and dilutive securities outstanding used in the computation of basic and diluted earnings (loss) per share: Nine months ended Three months ended September 30 September 30 -------------------------- --------------------------- 2006 2005 2006 2005 ---- ---- ---- ---- Numerator - basic: Net income (loss) $ (112,041) $ 2,856,592 $ (119,994) $ (656,857) Deduct: preferred stock dividends (126,204) (285,340) ( 42,866) ( 42,906) ---------- ----------- ----------- ----------- Numerator for basic earnings (loss) per share $ (238,245) $ 2,571,252 $ (162,860) $ (699,763) ========= =========== =========== =========== Numerator - diluted: Numerator for basic earnings (loss) per share $ (238,245) $ 2,571,252 $ (162,860) $ (699,763) Add: preferred stock dividends -- 285,340 -- 42,906 Add: convertible debenture interest, net of tax -- 56,250 -- 18,750 ---------- ----------- ----------- ----------- Numerator for diluted $ (238,245) $ 2,912,842 $ (162,860) $ (638,107) earnings (loss) per share ========== =========== =========== =========== Denominator: Weighted average common shares outstanding 16,531,580 13,859,366 18,382,826 14,622,209 Effect of dilutive securities: Stock options and warrants -- 1,219,094 -- -- Convertible preferred stock -- 1,978,240 -- -- Nonvested employee stock -- 559,307 -- -- Convertible debentures -- 2,500,000 -- -- ----------- ----------- ----------- ----------- Denominator for diluted earnings (loss) per share 16,531,580 20,116,007 18,382,826 14,622,209 =========== =========== =========== ===========
The following securities have been excluded from the dilutive per share computation, as they are antidilutive: Nine months ended Three months ended September 30 September 30 2006 2005 2006 2005 ----------------------- ----------------------- Stock options -- 1,916,275 -- 2,721,102 Warrants -- 50,457 -- 464,724 Convertible debt -- -- -- 2,500,000 Convertible preferred stock -- 610,738 -- 2,588,978 Nonvested employee stock -- 724,027 -- 1,283,334
As required by FAS 128, "Earnings per Share", cumulative preferred stock dividends for the nine and three months ended September 30, 2006 and 2005 were deducted from net income (loss) to arrive at the numerator for basic and diluted earnings (loss) per share. NOTE 8 - DEFINITIVE MERGER AGREEMENT On May 5, 2006, the Company entered into a definitive merger agreement with FMFG Ownership, Inc. ("Ownership"), and FMFG AcquisitionCo, Inc. ("AcquisitionCo"), affiliates of Investment Properties of America, LLC ("IPofA"), a privately owned, diversified real estate investment and management company. Pursuant to the agreement, upon the completion of the merger, each holder of the Company's common stock will receive $1.00 per share in cash, each holder of the Company's Series A preferred stock, which is convertible into two shares of common stock, will be entitled to receive $2.00 per Series A preferred share in cash, and each holder of the Company's Series B preferred stock, which is convertible into ten shares of common stock, will be entitled to receive $10.00 per Series B preferred share in cash. In addition, the purchaser has agreed to contribute at least $3,000,000 of new equity capital to the surviving corporation in the merger on or before the closing date. In conjunction with the signing of the merger agreement, certain directors and officers of the Company, who beneficially own approximately 26.1% of the outstanding voting shares of the Company, as of the record date, June 26, 2006, have entered into voting agreements with the purchaser to vote their shares in favor of the merger. A special committee of the Board of Directors of the Company consisting of all independent directors received an opinion from Capitalink, L.C., an independent investment banking firm, that the merger consideration was fair from a financial point of view to the Company's shareholders. On August 17, 2006, shareholders representing 98.2% of the shares voting at a special meeting approved the proposed merger with AcquisitionCo. The merger is subject to, among other conditions, compliance with state and federal securities laws and regulations, and regulatory approval. The transaction is anticipated to close during the fourth quarter of 2006. However, as a result of the foregoing uncertainties, there can be no assurances that the transaction will be completed. On September 27, 2006, the Company and AcquisitionCo., entered into Amendment No. 1 to the merger agreement extending the termination date of the merger agreement from October 31, 2006 to December 31, 2006. All other terms of the merger agreement were unchanged. NOTE 9 - SEPARATION AGREEMENT On February 1, 2006, the Company entered into a Separation Agreement with Herbert Kurinsky, the Chairman of the Board of Directors. Under the terms of the Separation Agreement, the parties agreed to terminate the employment relationship and the rights and obligations of the parties under the employment agreement dated January 1, 2004. Mr. Kurinsky continued to serve as Chairman of the Board of the Company until he resigned effective November 9, 2006 (See Note 13). As a result of the separation agreement, the Company expensed a total of $951,266, which includes the following: o A lump sum severance payment of $300,000. o A promissory note in the principal amount of $550,217, payable in monthly installments of $12,500 over a period of 48 months and bearing interest at the rate of 4.5% per annum, the remaining balance of which was paid pursuant to the change of control provisions in the Separation Agreement and Promissory Note. (See Notes 10 and 13) o Medical and dental benefits to Mr. Kurinsky and his wife for a period of 48 months. o Automobile allowance of $600 per month for a period of 36 months, the remaining balance of which was subsequently paid pursuant to the change of control provisions in the Separation Agreement. (See Notes 10 and 13) o The full vesting of all restricted stock in accordance with his employment agreement. Due to the change in control provisions in the Separation Agreement and Promissory Note, on July 17, 2006, the Company paid the remaining balances, including accrued interest on the note payable and automobile allowance of $486,000 and $19,000, respectively. The Company and Mr. Kurinsky have also exchanged mutual releases except to the extent each has reserved their rights as provided in the Separation Agreement. NOTE 10 - CHANGE IN CONTROL During June 2006, through purchases of common stock and convertible debentures, which were subsequently converted to common stock, FMFG Ownership, Inc. obtained beneficial ownership of 24.6% of the Company's common stock, as of the record date, triggering the change of control provisions in certain agreements. As a result, in June 2006 the Company expensed $73,000 for stock and options that became immediately vested in accordance with its CEO's employment agreement. In addition, in July 2006 the remaining note payable balance and automobile allowance totaling $505,000 was paid to Mr. Herbert Kurinsky in accordance with the change of control provisions of his Separation Agreement and Promissory Note. (See Notes 9 and 13) NOTE 11 - AMENDMENT TO CLEARING AGREEMENT During the second quarter of 2006, FMSC signed an amendment to Exhibit A of its clearing agreement with National Financial Services LLC ("NFS"), adopting, among other things, a schedule of reduced clearing rates. NOTE 12 - SIGNED RELEASE WITH NFS During the second quarter of 2006, FMSC signed a release with NFS for and in consideration of the payment of $1,000,000 by NFS relating to conversion and transition expenses incurred by FMSC in prior periods, as a result of its conversion from Fiserv Securities Inc. to NFS in 2005. The payment was received on June 29, 2006 and was recorded by FMSC among various expense and revenue categories. NOTE 13 - SUBSEQUENT EVENTS New Lease Agreement - On September 22, 2006, the Company, as tenant, and IPofA Water View, LLC, a Delaware limited liability company, as landlord ("Landlord"), entered into a Deed of Lease Agreement ("Lease") for general office space consisting of approximately 29,800 useable square feet located at 10 Highway 35, Red Bank, New Jersey ("Leased Premises"). The Company will use the Leased Premises as its corporate headquarters and general office space for its business operations. The Lease is for a term of ten years (120 months) with a commencement date of September 22, 2006, however since the Landlord was unable to give the Company possession on that date, the commencement date will be adjusted to the date the Company is given possession of the premises, and the expiration date will be adjusted to reflect the term of the Lease. Since the Leased Premises are scheduled to undergo renovations, the actual commencement date is anticipated to be during the second calendar quarter of 2007. Pursuant to the Lease the rent will be $61,090.00 per month. Landlord is an indirect wholly owned subsidiary of Edward H. Okun, a private investor and controlling person of FMFG Ownership, Inc. and FMFG AcquisitionCo, Inc. Resignation of Board Members - In a letter agreement with the New Jersey Bureau of Securities, Herbert Kurinsky and William J. Kurinsky, each have agreed to resign from the Company's Board of Directors. On November 9, 2006, the Company received the written resignations from William J. Kurinsky and Herbert Kurinsky, effective on November 8 and November 9, 2006, respectively. Separation Agreement - On November 14, 2006, the Company entered into a separation agreement with Robert I. Rabinowitz, the Company's executive vice president, secretary and general counsel. Under the terms of the agreement, Mr. Rabinowitz's employment contract will not be renewed and will terminate effective January 31, 2007. Pursuant to the terms of the separation agreement, Mr. Rabinowitz will be provided with severance pay equal to one year's base salary, and benefits for a period of one year in accordance with the terms of his employment agreement. He will also be paid an additional consideration for his continued cooperation in providing assistance to the Company in the transition of his responsibilities to new personnel. The additional consideration is conditioned upon the closing of the merger with FMFG AcquisitionCo., Inc. and Mr. Rabinowitz's full compliance with his obligations under the separation agreement. Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Factors Affecting "Forward-Looking Statements" From time to time, we may publish "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities and Exchange Act of 1934, as amended, or make oral statements that constitute forward-looking statements. These forward-looking statements may relate to such matters as anticipated financial performance, future revenues or earnings, business prospects, projected ventures, new products, anticipated market performance, and similar matters. The Private Securities Litigation Reform Act of 1995 provides a safe harbor for forward-looking statements. In order to comply with the terms of the safe harbor, we caution readers that a variety of factors could cause our actual results to differ materially from the anticipated results or other expectations expressed in our forward-looking statements. These risks and uncertainties, many of which are beyond our control, include, but are not limited to: (i) transaction volume in the securities markets, (ii) the volatility of the securities markets, (iii) fluctuations in interest rates, (iv) changes in regulatory requirements which could affect the cost of doing business, (v) fluctuations in currency rates, (vi) general economic conditions, both domestic and international, (vii) changes in the rate of inflation and related impact on securities markets, (viii) competition from existing financial institutions and other new participants in the securities markets, (ix) legal developments affecting the litigation experience of the securities industry, (x) the timely completion of the acquisition of the Company by a private investor, and (xi) changes in federal and state tax laws which could affect the popularity of products sold by us. We do not undertake any obligation to publicly update or revise any forward-looking statements. The reader is referred to our previous filings with the Commission, including our Form 10-K for the year ended December 31, 2005. Overview We are a New Jersey-based financial services holding company whose wholly owned subsidiary, First Montauk Securities Corp., ("FMSC") has operated as a full service retail and institutional securities brokerage firm since 1987. Since July 2000, FMSC has operated under the trade name "Montauk Financial Group" and provides a broad range of securities brokerage and investment services to a diverse retail and institutional clientele, as well as corporate finance and investment banking services to corporations and businesses. We also sell insurance products through our subsidiary, Montauk Insurance Services, Inc. Montauk Financial Group has approximately 286 registered representatives and services over 50,000 retail and institutional customers, which comprise over $3.2 billion in customer assets. All of our 116 branch office and satellite locations in 28 states are owned and operated by affiliates; who are independent representatives who maintain all appropriate licenses and are responsible for all office overhead and expenses. Montauk Financial Group also employs registered representatives directly at its corporate headquarters. Montauk Financial Group is registered as a broker-dealer with the Securities and Exchange Commission, the National Association of Securities Dealers, the Municipal Securities Rule Making Board, the National Futures Association, and the Securities Investor Protection Corporation and is licensed to conduct its brokerage activities in all 50 states, the District of Columbia, and the Commonwealth of Puerto Rico, and registered as an International broker-dealer to conduct business with institutional clients in the province of Ontario, Canada. Securities transactions are cleared through National Financial Services LLC ("NFS") of Boston, MA, and Penson Financial Services Inc of Dallas, TX, with various floor brokerage and specialist firms also providing execution services. These arrangements provide Montauk Financial Group with back office support and transaction processing services on all principal, national and international securities exchanges, and access to many other financial services and products which allows Montauk Financial Group to offer products and services comparable to larger brokerage firms. On May 5, 2006, we entered into a definitive merger agreement with FMFG Ownership, Inc. ("Ownership"), and FMFG AcquisitionCo, Inc. ("AcquisitionCo"), affiliates of Investment Properties of America, LLC ("IPofA"), a privately owned, diversified real estate investment and management company. Ownership and AcquisitionCo are wholly owned subsidiaries of Edward H. Okun, a private investor who is the controlling person of IPofA. Pursuant to the merger agreement, upon completion of the merger, each holder of our common stock will receive $1.00 per share in cash, each holder of our Series A preferred stock, which is convertible into two shares of common stock, will be entitled to receive $2.00 per Series A preferred share in cash, and each holder of our Series B preferred stock, which is convertible into ten shares of common stock, will be entitled to receive $10.00 per Series B preferred share in cash. In addition, the purchaser has agreed to contribute at least $3,000,000 of new equity capital to the surviving corporation in the merger on or before the closing date. In conjunction with the signing of the merger agreement, certain of our directors and officers, who beneficially own approximately 26.1% of our outstanding voting shares as of the record date, have entered into voting agreements with the purchaser to vote their shares in favor of the merger. Prior to the record date, Ownership purchased, from holders, an aggregate of 2,159,348 shares of our common stock in the open market and privately negotiated transactions, and in privately negotiated transactions purchased 283,087 shares of our Series A preferred stock at a price of $4.00 per share, providing Ownership with 92.7% of the outstanding shares of our Series A preferred stock. In addition, Ownership purchased $1,190,000 principal amount of our outstanding convertible debentures, from holders, in privately negotiated transactions, which were subsequently converted by Ownership into 2,380,000 shares of our common stock. As a result of all of these purchases, as of the record date, Ownership beneficially owns 24.6% of our common stock (assuming no shares of Series A preferred stock are converted into common stock). On August 17, 2006, shareholders representing 98.2% of the shares voting at a special meeting approved the proposed merger with AcquisitionCo. The merger is subject to, among other conditions, compliance with state and federal securities laws and regulations, and regulatory approval. The transaction is anticipated to close during the fourth quarter of 2006. However, as a result of the foregoing uncertainties, there can be no assurances that the transaction will be completed. On September 27, 2006, we and AcquisitionCo., entered into Amendment No. 1 to the merger agreement extending the termination date of the merger agreement from October 31, 2006 to December 31, 2006. All other terms of the merger agreement were unchanged. On February 1, 2006, we entered into a Separation Agreement with Herbert Kurinsky, our Chairman of the Board of Directors, Which provided for the termination of his employment as of that date. Pursuant to the terms of the Agreement, we paid the Chairman a cash payment of $300,000 and issued a promissory note in the amount of $550,217 plus interest at the rate of 4.5% per annum for 48 months. Furthermore, the Separation Agreement provided for a continuation of medical insurance coverage for 48 months for the Chairman and his wife, an automobile allowance of $600 for 36 months, which resulted in a charge to earnings of $64,691, and the immediate vesting of all stock grants in accordance with his employment agreement, which resulted in an additional charge to earnings of $36,458. Both the Separation Agreement and Promissory Note contained a change of control provision requiring the acceleration of certain payments in the event of a change in control of the Company. As a result of Ownership's purchase of 24.6% of our stock, the change of control provisions of Mr. Kurinsky's promissory note and separation agreement were triggered, and consequently, in July 2006 we paid Mr. Kurinsky $505,000. During the second quarter of 2006, FMSC signed an amendment to Exhibit A of its clearing agreement with NFS, adopting, among other things, a schedule of reduced clearing rates. Also during the second quarter of 2006, FMSC signed a release with NFS for and in consideration of the payment of $1,000,000 by NFS relating to conversion and transition expenses incurred by the broker-dealer in prior periods, as a result of its conversion from its prior clearing firm, Fiserv Securities Inc., to NFS in 2005. The payment was received on June 29, 2006 and was recorded by FMSC among various expense and revenue categories as described in more detail below. On September 22, 2006, we, as tenant, and IPofA Water View, LLC, a Delaware limited liability company, as landlord ("Landlord"), entered into a Deed of Lease Agreement ("Lease") for general office space consisting of approximately 29,800 useable square feet located at 10 Highway 35, Red Bank, New Jersey ("Leased Premises"). We will use the Leased Premises as our corporate headquarters and general office space for our business operations. The Lease is for a term of ten years (120 months) with a commencement date of September 22, 2006, however since the Landlord was unable to give us possession on that date, the commencement date will be adjusted to the date we are given possession of the premises, and the expiration date will be adjusted to reflect the term of the Lease. Since the Leased Premises are scheduled to undergo renovations, the actual commencement date is anticipated to be during the second calendar quarter of 2007. Pursuant to the Lease the rent will be $61,090.00 per month. Landlord is an indirect wholly owned subsidiary of Edward H. Okun, a private investor and controlling person of FMFG Ownership, Inc. and FMFG AcquisitionCo, Inc. RESULTS OF OPERATIONS Three Months Ended September 30, 2006 Compared to Three Months Ended September 30, 2005 Revenues by Source The following provides a breakdown of total revenues by source for the three-month periods ended September 30, 2006 and 2005 (in thousands of dollars). Three Months Ended ----------------------------------------------------------------- ------------------------------ --- ------------------------------ September 30, 2006 September 30, 2005 ------------------------------ ------------------------------ Amount % of Total Amount % of Total Revenues Revenues Commissions Equities $ 4,223 37% $ 5,219 42% Mutual Funds 1,320 12% 1,564 12% Insurance 1,584 14% 1,073 8% Alternative Products 946 8% 952 8% Asset Management Fees 980 9% 766 7% Fixed Income 29 1% 20 <1% -------------- --------------- -------------- --------------- -------------- --------------- -------------- --------------- Total 9,082 81% 9,594 77% Principal Transactions 834 7% 1,468 12% Investment Banking 597 5% 395 3% Interest and Other Interest 588 5% 605 4% Other 173 2% 462 4% -------------- --------------- -------------- --------------- -------------- --------------- -------------- --------------- Total 761 7% 1,067 8% -------------- --------------- -------------- --------------- -------------- --------------- -------------- --------------- Total revenues $ 11,274 100% $ 12,524 100% ============== =============== ============== ===============
Overview Total revenues decreased $1.25 million, or 10%, for the three months ended September 30, 2006 (the "2006 quarter"), to $11.3 million, compared to $12.5 million for the three months ended September 30, 2005 (the "2005 quarter"). The decrease was primarily attributable to a reduction in commissions from equity and principal transactions of $1.6 million and mutual fund commissions of $243,000. These decreases were offset by increases in revenues from insurance, asset management fees and investment banking revenues of $927,000, inclusively. Other income decreased by $289,000 as a result of a reduction in the recovery of receivables previously written off and unrealized gains on marketable securities of $223,000. Expenses decreased in the 2006 quarter by $1.75 million, or 15%, compared to the 2005 quarter. There were reductions in all expenses categories, most notably being the reduction in legal matters and related costs of $569,000 and commission expense of $457,000 in the 2006 quarter when compared to the 2005 quarter. The net loss attributable to common stockholders for the 2006 quarter decreased approximately $537,000 from a loss of $700,000, or ($.05) and ($.04) per basic and diluted share, respectively, in the 2005 quarter to a loss of $163,000, or ($.01) per basic and diluted share for the 2006 quarter. 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 the 2006 quarter was $9.1 million compared to $9.6 million for the 2005 quarter, a decrease of approximately $500,000. Commissions from the sale of equities and mutual funds decreased $996,000 and $244,000, respectively, when compared to the 2005 quarter. On the other hand, commissions from insurance products and asset management fees increased approximately $511,000, or 48%, and $214,000, or 28%, respectively in the 2006 quarter. Principal Transactions Principal transactions, which include mark-ups/mark-downs on customer transactions in which we act as principal, proprietary trading, and the sale of fixed income securities, decreased $634,000, or 43%, from $1.5 million for the 2005 quarter to $834,000 for the 2006 quarter. This decrease highlights the change that our business mix has been going through over the last several years, moving primarily from transactional to more fee based in nature. Investment Banking Investment banking revenues for the 2006 quarter increased $202,000 from $395,000 in the 2005 quarter, to $597,000 in the 2006 quarter. This category includes 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. Interest and Other Income Interest and other income for the 2006 quarter totaled $761,000, as compared to $1.07 million for the 2005 quarter, a decrease of $306,000. Other income, which includes the recovery of receivables previously written off and unrealized gains on marketable securities, decreased by $223,000 when compared to the 2005 quarter. Commissions, Employee Compensation and Benefits Commission expense, consistently the largest expense category and directly related to commission revenue, decreased 5%, or $457,000, from $8.67 million for the 2005 quarter, to $8.21 million for the 2006 quarter. Compensation and benefits expense for management, operations and clerical personnel, which include salaries and payroll taxes, stock and option compensation, health insurance premiums, and bonus accruals, decreased for the 2006 quarter, to $1.38 million (12% of total revenues) from $1.63 million (13% of total revenues), a reduction of approximately $247,000 over the 2005 quarter. Salaries, bonuses accruals and payroll taxes decreased by approximately $120,000, from $1.38 million for the 2005 quarter, to $1.26 million for the 2006 quarter. Stock and option compensation costs decreased approximately $122,000 for the 2006 quarter as compared to the 2005 quarter. Clearing and Floor Brokerage Clearing and floor brokerage costs which are greatly affected by volume and type of transactions, decreased $206,000 in the 2006 quarter when compared to the 2005 quarter. As a result of the amendment to our clearing agreement in June 2006, clearing costs, as a percentage of transaction-based commissions, decreased from 7.8% in the 2005 period to 6.7% in the 2006 quarter. Clearing costs, as a percentage of gross revenues, fluctuate depending upon the product mix. Communications and Occupancy Communications and occupancy costs decreased $96,000, from $583,000 in the 2005 quarter to $487,000 in the 2006 quarter primarily due to a reduction in quote services of approximately $93,000. Legal matters and related costs Legal matters and related settlement costs decreased $569,000, from $729,000 during the 2005 quarter to $160,000 for the 2006 quarter. Legal fees during the 2006 quarter decreased $269,000. During the 2005 quarter, we expensed $245,000 related to the proposed merger with Olympic Cascade, which was terminated in October 2005. These fees were previously deferred and carried as other assets on our statement of financial condition. Settlement costs decreased by $300,000 for the 2006 quarter when compared to the 2005 quarter. During the 2005 quarter we reserved for six legal claims totaling in excess of $180,000 compared to no claims during the 2006 quarter Other Operating Expenses Other operating costs decreased approximately $148,000, to $762,000 in the 2006 quarter from $910,000 during the 2005 quarter. The largest decreases in other operating expenses during the 2006 quarter were for consulting fees of $76,000, accounting fees of $69,000 and depreciation of $33,000. Nine Months Ended September 30, 2006 Compared to Nine Months Ended September 30, 2005 Revenues by Source The following provides a breakdown of total revenues by source for the nine-month periods ended September 30, 2006 and 2005 (in thousands of dollars). Nine Months Ended ----------------------------------------------------------------- ------------------------------ --- ------------------------------ September 30, 2006 September 30, 2005 ------------------------------ ------------------------------ Amount % of Total Amount % of Total Revenues Revenues Commissions Equities $ 14,987 39% $ 15,325 34% Mutual Funds 4,531 12% 4,821 11% Insurance 3,774 10% 3,402 8% Alternative Products 3,201 8% 2,083 5% Asset Management Fees 2,884 8% 2,409 5% Fixed Income 132 <1% 91 <1% -------------- --------------- -------------- --------------- Total 29,509 76% 28,131 63% Principal Transactions 3,319 9% 4,375 10% Investment Banking 2,914 8% 4,221 9% Interest and Other Interest 1,915 5% 1,936 4% Deferred revenue -- -- 5,105 12% Other 535 1% 903 2% -------------- --------------- -------------- --------------- Total 2,450 6% 7,944 18% -------------- --------------- -------------- --------------- Total revenues $ 38,192 100% $ 44,671 100% ============== =============== ============== ===============
Overview Overall, revenues decreased $6.5 million, or 15%, for the nine months ended September 30, 2006 (the "2006 period"), to $38.2 million, compared to $44.7 million for the nine months ended September 30, 2005 (the "2005 period"). The decrease was primarily attributable to the inclusion of $4.9 million during the 2005 period, from the recognition of the remaining deferred revenue in connection with the termination of our Financial Agreement with Fiserv Securities, Inc. ("Fiserv"), our prior clearing firm. Commission revenues increased by $1.4 million while revenues from principal transactions and investment banking decreased by $1.05 million and $1.31 million, respectively. Included in interest and other income for the 2006 period is an additional $180,000 of margin interest, a partial allocation of the $1.0 million received from NFS. This was as a result of an amendment to Exhibit A of the clearing agreement signed by our wholly owned subsidiary, First Montauk Securities Corp. ("FMSC") on June 29, 2006. Taking into consideration the $180,000 of additional interest income in the 2006 period and the $4.9 million of deferred revenue recognition in the 2005 period, revenue in the 2006 period decreased $1.04 million, or 3%, compared to the same period in 2005. Expenses in the 2006 period decreased by approximately $3.5 million, which includes an $820,000 credit due to a partial allocation of the $1.0 million received from NFS on June 29, 2006. Taking into consideration the $820,000 received from NFS, expenses decreased by $2.68 million during the 2006 period, when compared to the 2005 period, a decrease of 6%. Included in the 2006 decrease is a reduction in executive separation costs of $482,000, clearing costs of $480,000, communications and occupancy of $374,000, legal matters and related costs of $272,000 and other operating expenses of $546,000. Net loss applicable to shareholders in the 2006 period was ($238,000), or ($0.01) per basic and diluted share, compared to net income of $2.6 million, or $0.19 and $0.14 per basic and diluted shares, respectively, for the 2005 period. Commission Revenue Commission revenue for the nine months ended September 30, 2006 increased $1.4 million to $29.5 from $28.1 million in the same period in 2005. Although agency and mutual fund commissions declined by $518,000, revenues from alternative investments, which includes sales of REIT's, 1031 exchanges and oil & gas programs, as well as insurance and asset management fees, increased overall by $1.96 million during the 2006 period. Principal Transactions Principal transactions decreased $1.06 million, or 24%, from $4.4 million for the 2005 period to $3.3 million for the 2006 period. Revenues from all fixed income sources, which include municipal, government, and corporate bonds and unit investment trusts decreased for the 2006 period by $704,000, from $3.2 million in the 2005 period to $2.5 million in the 2006 period. Revenues from riskless principal trades of equity securities decreased $419,000, from $954,000 in the 2005 period to $535,000 in the 2006 period. Investment Banking Investment banking revenues for the 2006 period decreased $1.3 million, or 31%, from $4.2 million in the 2005 period, to $2.9 million in the 2006 period. The decrease in investment banking revenues was primarily due to an overall reduction in the number of closings of private offerings in 2006 when compared to 2005. In 2005, however, we reported our highest investment banking revenues, and although revenues decreased during the nine months ended September 30, 2006 when compared to the same period in 2005. The 2006 revenues are higher than any other similar period reported prior to 2005. Interest and Other Income Interest and other income decreased $5.5 million during the 2006 period when compared to the 2005 period. Other income in the 2005 period includes the recognition of the remaining deferred revenue for cash advances received in prior years from Fiserv Inc., our former clearing firm. During 2005, we terminated our financing agreement with Fiserv and recorded the remaining unamortized balance of $4.9 million to other income. Commissions, Employee Compensation and Benefits Commission expense decreased approximately $274,000, from $27.6 million for the 2005 period to $27.3 million for the 2006 period. Compensation and benefits expense for management, operations and clerical personnel decreased $1.08 million in the 2006 period to $4.4 million compared to $5.5 million in the 2005 period. A reduction in officer bonus accruals and amortization of deferred compensation from $1.04 million in the 2005 period to $283,000 in the 2006 period contributed to the decrease. Executive Separation During the 2005 period, we recorded compensation expense of approximately $1.43 million in connection with a separation agreement with our former CEO. This compares to $951,000 of recorded expense in connection with the termination of an employment agreement with our former Chairman of the Board during the 2006 period. Clearing and Floor Brokerage Clearing and floor brokerage costs decreased approximately $480,000, from $1.6 million for the 2005 period, to $1.1 million for the 2006 period. In June 2006, we allocated approximately $544,000 of the $1 million received in the settlement from NFS to clearing fees. Excluding this reduction, clearing and floor brokerage costs would have increased by approximately $64,000. This category for the 2005 period includes expense rebates provided by our former clearing firm of $143,000. Communications and Occupancy Communications and occupancy costs decreased $374,000 during the 2006 period, from $1.74 million in the 2005 period to $1.37 in 2006. In addition to a $135,000 reduction in reports, as part of the $1.0 million received from NFS on June 29, 2006, the decrease in expense is due to reductions in occupancy and related costs from the elimination of a company leased branch office in New York City in 2005 and reductions in quote services due to a decrease in brokers and discounted market data pricing received from our clearing firm. Legal matters and related costs Legal matters and related settlement costs decreased approximately $272,000, from $1.04 million for the 2005 period to $772,000 for the 2006 period. The 2006 period includes an additional reserve of $75,000 in connection with the investigation by the New Jersey Bureau of Securities (See Note 6). The 2005 period included a $164,000 credit adjustment for the valuation of warrants issued in settlement of an arbitration claim that occurred in a previous period. Legal expense during the 2006 period increased $56,000. During the 2005 period, we expensed $245,000 related to the proposed merger with Olympic Cascade, which was terminated in October 2005. The 2006 period includes legal fees of $271,000 in connection with the anticipated acquisition of the Company by a private investor. Other Operating Expenses Other operating costs decreased by approximately $546,000, to $2.3 million in the 2006 period, from $2.8 million in the 2005 period. Due to the exercise of the majority of our outstanding convertible debentures in 2005, we accelerated $130,000 of the amortization of the deferred financing costs related to these debentures during the 2005 period, compared to an acceleration of $56,000 during the 2006 period. In 2006, reductions in advertising, accounting, consulting fees, depreciation, postage and liability insurance costs of $484,000 accounted for the majority of the decrease. Liquidity and Capital Resources We maintain a highly liquid balance sheet with approximately 79% of our assets consisting of cash, securities owned, and receivables from our clearing firm and other broker-dealers and insurance companies. The balances in these accounts can and do fluctuate significantly from day to day, depending on general economic and market conditions, volume of activity, and investment opportunities. These accounts are monitored on a daily basis in order to ensure compliance with regulatory capital requirements and to preserve liquidity. Overall, cash and cash equivalents decreased during the nine months ended September 30, 2006 by $1.1 million. Net cash used in operating activities during the 2006 period was $993,000, which consists of net loss of $112,000, increased by non-cash charges including depreciation of $202,000, amortization of deferred costs of $352,000 offset by the payment of a $200,000 note issued in connection with a separation agreement. Cash was reduced by increases in due from clearing firm, prepaid expenses and broker receivables of $506,000, $257,000 and $108,000, respectively, and decreases in accrued expenses and accounts payable of $629,000 and $75,000, respectively. Cash was increased by reductions in commission's payable of $282,000 and other assets of $23,000 and a decrease in other liabilities of $23,000. Additions to property and equipment of $13,000 accounted for the use of cash from investing activities during the nine months ended September 30, 2006. Financing activities used net cash of $111,000 due to the payment of preferred stock dividends of $126,000 and capital leases of $6,900 offset by proceeds from option exercises of $22,000 during the first nine months of 2006. During the first quarter of 2006, $30,000 of the Company's convertible debentures was converted into shares of common stock, and in June 2006, FMFG Ownership Inc. purchased $1,190,000 principal amount of debentures, from holders, which were sold in privately negotiated transactions. Subsequently, Ownership converted such debentures into 2,380,000 common shares. As of September 30, 2006, there is an aggregate principal amount of $25,000 of convertible debentures outstanding, which is convertible at $.50 per share. During the second quarter of 2006, FMSC signed a release with NFS for and in consideration of the payment of $1,000,000 by NFS relating to conversion and transition expenses incurred by the broker-dealer as a result of its conversion from Fiserv Securities Inc. to NFS in 2005. The payment was received on June 29, 2006, The financing agreement with Premium Assignment for the renewal of our errors and omissions insurance policy had a balance at September 30, 2006 of approximately $105,000, payable in one remaining monthly installment, including interest at the rate of 4.97% per annum. Consolidated Contractual Obligations and Lease Commitments The table below provides information about our commitments related to debt obligations, leases, guarantees and investments as of September 30, 2006. This table does not include any projected payment amounts related to our potential exposure to arbitrations and other legal matters. As of September 30, 2006 Expected Maturity Date - -------------------------- ---------------- ----------------- ---------------- ---------------- -------------- --------- ----------- After Category 2006 2007 2008 2009 2010 2010 Total - -------------------------- ---------------- ----------------- ---------------- ---------------- -------------- --------- ----------- Debt Obligations 0 $ 25,000 0 0 0 0 $25,000 - -------------------------- ---------------- ----------------- ---------------- ---------------- -------------- --------- ----------- Capital Lease Obligations $1,630 0 0 0 0 0 $ 1,630 - -------------------------- ---------------- ----------------- ---------------- ---------------- -------------- --------- ----------- Operating Lease Obligations $264,114 $912,183 $659,057 $619,376 $50,762 0 $2,505,492 -------------------------- ---------------- ----------------- ---------------- ---------------- -------------- --------- ---------- Total $265,744 $937,183 $659,057 $619,376 $50,762 0 $2,532,122 - -------------------------- ---------------- ----------------- ---------------- ---------------- -------------- --------- -----------
Net Capital At September 30, 2006, Montauk Financial Group had net capital of $2,982,589, which was $2,732,589 in excess of its required net capital of $250,000, and the ratio of aggregate indebtedness to net capital was 1.13 to 1. Series A Convertible Preferred Stock In 1999, we issued 349,511 shares of Series A Convertible Preferred Stock in an exchange offering related to a settlement with holders of certain leases. Each share of the Preferred Stock is convertible into two shares of Common Stock and pays a quarterly dividend of 6%. As of September 30, 2006, we have 305,369 Series A preferred shares issued and outstanding. Quarterly dividends of $23,532 were paid during the three months ended September 30, 2006. Series B Convertible Redeemable Preferred Stock In connection with a Separation Agreement we entered into with Mr. William J. Kurinsky in 2005, we issued an aggregate of 197,824 shares of a newly created class of Series B Convertible Redeemable Preferred Stock ("Series B"), par value $0.10 per share, which will have a deemed issue price of $1,000,000, and is convertible into common stock on the basis of ten shares of common stock for each share of Series B. The Series B also provides 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 includes a cumulative dividend of 8% per year. The shares are restricted securities under the Securities Act of 1933 and the regulations of the SEC and we relied upon the exemption from registration under Section 4(2) of the Securities Act of 1933 to issue the shares of Series B. A quarterly dividend of $20,000 was paid during the three months ended September 2006. Application of Critical Accounting Policies Generally accepted accounting principles are complex and require management to apply significant judgments to various accounting, reporting and disclosure matters. Our management must use assumptions and estimates to apply these principles where actual measurement is not possible or practical. For a complete discussion of our significant accounting policies, see "Management Discussion and Analysis" and "Notes to the Consolidated Financial Statements" in our 2005 Annual Report filed on Form 10-K. Certain policies are considered critical because they are highly dependent upon subjective or complex judgments, assumptions and estimates. Changes in such estimates may have a significant impact on the financial statements. Off-Balance Sheet Arrangements We execute securities transactions on behalf of our customers. If either the customer or counter-party fails to perform, we, by agreement with our clearing broker may be required to discharge the obligations of the non-performing party. In such circumstances, we may sustain a loss if the market value of the security is different from the contract value of the transaction. We seek to control off-balance-sheet risk by monitoring the market value of securities held or given as collateral in compliance with regulatory and internal guidelines. Pursuant to such guidelines, our clearing firm requires additional collateral or reduction of positions, when necessary. We also complete credit evaluations where there is thought to be credit risk. Item 3. Risk Management Risk is an inherent part of our business and activities. The extent to which we properly and effectively identify, assess, monitor and manage the various types of risk involved in our activities is critical to our soundness and profitability. We seek to identify, assess, monitor and manage the following principal risks involved in its business activities: market, credit, operational and legal. Senior management takes an active role in the risk management process and requires specific administrative and business functions to assist in the identification, assessment and control of various risks. Our risk management policies and procedures are subject to ongoing review and modification. Market Risk. Certain of our business activities expose us to market risk. This market risk represents the potential for loss that may result from a change in value of a financial instrument as a result of fluctuations in interest rates, equity prices or changes in credit rating of issuers of debt securities. This risk relates to financial instruments we hold as investment and for trading. Securities inventories are exposed to risk of loss in the event of unfavorable price movements. Securities positions are marked to market on a daily basis. Market-making activities are client-driven, with the objective of meeting clients' needs while earning a positive spread. At September 30, 2006 and December 31, 2005, the balances of our securities positions owned, and sold, not yet purchased were approximately $293,000 and $5,000, and $304,000 and $4,000, respectively. In our view, the potential exposure to market risk, trading volatility and the liquidity of securities held in the firm's inventory accounts could potentially have a material effect on its financial position. Credit Risk. Credit risk represents the loss that we would incur if a client, counterparty or issuer of securities or other instruments that we hold fails to perform its contractual obligations. Client activities involve the execution, settlement, and financial of various transactions on behalf of its clients. Client activities are transacted on either a cash or margin basis. Client activities may expose us to off-balance sheet credit risk. We may have to purchase or sell financial instruments at the prevailing market price in the event of the failure of a client to settle a trade on its original terms or in the event that cash and securities in the client margin accounts are not sufficient to fully cover the client losses. We seek to control the risks associated with client activities by requiring clients to maintain collateral in compliance with various regulations and company policies. Operational Risk. Operational risk generally refers to the risk of loss resulting from our operations, including, but not limited to, improper or unauthorized execution and processing of transactions, deficiencies in our operating systems, business disruptions and inadequacies or breaches in our internal control processes. We operate in diverse markets and rely on the ability of our employees and systems to process high numbers of transactions often within short time frames. In the event of a breakdown or improper operation of systems, human error or improper action by employees, we could suffer financial loss, regulatory sanctions or damage to our reputation. In order to mitigate and control operational risk, we have developed and continue to enhance policies and procedures that are designed to identify and manage operational risk at appropriate levels. Included in our operational risk management practice is disaster recovery for our critical systems. We believe that our disaster recovery program, including off-site back-up technology and operational facilities, is adequate to handle a reasonable business disruption. However, there can be no assurances that a disaster directly affecting our headquarters or operations center would not have a material adverse impact. Insurance and other safeguards might only partially reimburse us for our losses. Legal Risk. Legal risk includes the risk of non-compliance with applicable legal and regulatory requirements. We are subject to extensive regulation in the different jurisdictions in which we conduct our business. We have various procedures addressing issues such as regulatory capital requirements, sales and trading practices, use of and safekeeping of customer funds, credit granting, collection activities, anti money-laundering and record keeping. Item 4. Controls and Procedures Evaluation of Disclosure Controls and Procedures We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure based closely on the definition of "disclosure controls and procedures" in Rule 13a-15(e). In designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management necessarily was required to apply its judgment in designing and evaluating the controls and procedures. Based on their evaluation, as of September 30, 2006, our Chief Executive Officer and our Chief Financial Officer concluded that our disclosure controls and procedures were effective. Changes in Internal Controls There have not been any changes in our internal control over financial reporting (as defined in Rules 13a-15(f) under the Exchange Act) that occurred during the quarter ended September 30, 2006, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. PART II OTHER INFORMATION Item 1. Legal proceedings On September 29, 2006, FMSC entered into a Consent Order with the New Jersey Bureau of Securities relating to an investigation into FMSC's sale of certain high yield bonds to it's clients from 1998 to 2001, and the subsequent resale of those securities to other customers in 2001. As a result, FMSC paid a civil monetary penalty of $475,000 on September 29, 2006, and agreed to retain an independent consultant to review FMSC's business practices and procedures for branch office supervision, suitability standards, and monitoring of agent sales activities. Item 1A. Risk Factors Refer to December 31, 2005 Form 10-K. Item 2. Unregistered Sales of Equity Securities (a) Not applicable. (b) Not applicable. (c) Not applicable. Item 3. Defaults Upon Senior Securities. None. Item 4. Submission of Matters to a Vote of Security Holders. Not applicable. Item 5. Other Information Definitive Merger Agreement On May 5, 2006, the Company entered into a definitive merger agreement with FMFG Ownership, Inc. ("Ownership"), and FMFG AcquisitionCo, Inc. ("AcquisitionCo"), affiliates of Investment Properties of America, LLC ("IPofA"), a privately owned, diversified real estate investment and management company. Pursuant to the agreement, upon the completion of the merger, each holder of the Company's common stock will receive $1.00 per share in cash, each holder of the Company's Series A preferred stock, which is convertible into two shares of common stock, will be entitled to receive $2.00 per Series A preferred share in cash, and each holder of the Company's Series B preferred stock, which is convertible into ten shares of common stock, will be entitled to receive $10.00 per Series B preferred share in cash. In addition, the purchaser has agreed to contribute at least $3,000,000 of new equity capital to the surviving corporation in the merger on or before the closing date. In conjunction with the signing of the merger agreement, certain directors and officers of the Company, who beneficially own approximately 26.1% of the outstanding voting shares of the Company, as of the record date, June 26, 2006, have entered into voting agreements with the purchaser to vote their shares in favor of the merger. A special committee of the Board of Directors of the Company consisting of all independent directors received an opinion from Capitalink, L.C., an independent investment banking firm, that the merger consideration was fair from a financial point of view to the Company's shareholders. On August 17, 2006, shareholders representing 98.2% of the shares voting at a special meeting approved the proposed merger with AcquisitionCo. The merger is subject to, among other conditions, compliance with state and federal securities laws and regulations, and regulatory approval. The transaction is anticipated to close during the fourth quarter of 2006. However, as a result of the foregoing uncertainties, there can be no assurances that the transaction will be completed. On September 27, 2006, the Company and AcquisitionCo., entered into Amendment No. 1 to the merger agreement extending the termination date of the merger agreement from October 31, 2006 to December 31, 2006. All other terms of the merger agreement were unchanged. On November 14, 2006, we entered into a separation agreement with Robert I. Rabinowitz, Executive Vice President and General Counsel, effective January 31, 2007. Change in Control During June 2006, FMFG Ownership, Inc. an affiliate of IPofA, purchased from holders, an aggregate of 2,159,348 shares of the Company's common stock in the open market and privately negotiated transactions, and, in privately negotiated transactions purchased 283,087 shares of Series A preferred stock at a price of $4.00 per share, providing them with 92.7% of the outstanding shares of Series A preferred stock. In addition, Ownership purchased $1,190,000 principal amount of the Company's convertible debentures, from holders, in privately negotiated transactions, which were subsequently converted into 2,380,000 shares of the Company's common stock. As a result of all of these purchases, as of the record date, Ownership beneficially owns 24.6% of the Company's common stock (assuming no shares of Series A preferred stock are converted into common stock). Item 6. Exhibits The exhibits designated with an asterisk (*) are filed herewith. All other exhibits have been previously filed with the Commission and, pursuant to 17 C.F.R. ss. 230.411, are incorporated by reference to the document referenced in brackets following the description of such exhibits. - ----------------- ---------------------------------------------------------------------------------------------------- 10.1 Form of Deed of Lease Agreement dated as of September 22, 2006 between IPofA Water View, LLC and First Montauk Financial Corp. (Filed as Exhibit 10.1 to the Form 8-K dated September 26, 2006) - ----------------- ---------------------------------------------------------------------------------------------------- - ----------------- ---------------------------------------------------------------------------------------------------- 2.01 Amendment No. 1, dated as of September 25, 2006, to the Agreement and Plan of Merger, by and among First Montauk Financial Corp., FMFG Ownership, Inc. and FMFG AcquisitionCo, Inc. (Filed as Exhibit 2.01 to the Form 8-K dated September 28, 2006) - ----------------- ---------------------------------------------------------------------------------------------------- - ----------------- ---------------------------------------------------------------------------------------------------- *10.2 Agreement and Release dated November 14, 2006 between First Montauk Financial Corp. and Robert I. Rabinowitz - ----------------- ---------------------------------------------------------------------------------------------------- - ----------------- ---------------------------------------------------------------------------------------------------- *31.1 Certification of President and Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 - ----------------- ---------------------------------------------------------------------------------------------------- - ----------------- ---------------------------------------------------------------------------------------------------- *31.2 Certification of Acting Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 - ----------------- ---------------------------------------------------------------------------------------------------- - ----------------- ---------------------------------------------------------------------------------------------------- *32.1 Certification of President and Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 - ----------------- ---------------------------------------------------------------------------------------------------- - ----------------- ---------------------------------------------------------------------------------------------------- *32.2 Certification of Acting Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 - ----------------- ----------------------------------------------------------------------------------------------------
SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. FIRST MONTAUK FINANCIAL CORP. (Registrant) Dated: November 14, 2006 /s/ Mindy A. Horowitz -------------------------------------------- Mindy A. Horowitz Acting Chief Financial Officer /s/ Victor K. Kurylak -------------------------------------------- Victor K. Kurylak President and Chief Executive Officer EX-31 2 exhibit1.txt EXHIBIT 31.1 Exhibit 31.1 CERTIFICATION I, Victor K. Kurylak, Chief Executive Officer, certify that: 1. I have reviewed this quarterly report on Form 10-Q of First Montauk Financial Corp.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer and I am responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) (Not applicable). c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: November 14, 2006 /s/ Victor K. Kurylak - ----------------------------- VICTOR K. KURYLAK CHIEF EXECUTIVE OFFICER EX-31 3 exhibit2.txt EXHIBIT 31.2 Exhibit 31.2 CERTIFICATION I, Mindy A. Horowitz, Acting Chief Financial Officer, certify that: 1. I have reviewed this quarterly report on Form 10-Q of First Montauk Financial Corp.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer and I am responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) (Not applicable). c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: November 14, 2006 /s/ Mindy A. Horowitz - -------------------------------- MINDY A. HOROWITZ ACTING CHIEF FINANCIAL OFFICER EX-32 4 exhibit3.txt EXHIBIT 32.1 Exhibit 32.1 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of FIRST MONTAUK FINANCIAL CORP. (the "Company") on Form 10-Q for the period ending September 30, 2006 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Victor K. Kurylak, President and Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company. /s/ Victor K. Kurylak - ------------------------------------- Victor K. Kurylak President and Chief Executive Officer November 14, 2006 EX-32 5 exhibit4.txt EXHIBIT 32.1 Exhibit 32.2 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of FIRST MONTAUK FINANCIAL CORP. (the "Company") on Form 10-Q for the period ending September 30, 2006 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Mindy A. Horowitz, Acting Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company. /s/ Mindy A. Horowitz - ------------------------------- Mindy A. Horowitz Acting Chief Financial Officer November 14, 2006 EX-10 6 exhibit5.txt EXHIBIT 10.2 AGREEMENT AND RELEASE CONSULT WITH AN ATTORNEY BEFORE SIGNING THIS AGREEMENT AND RELEASE. BY SIGNING THIS AGREEMENT AND RELEASE, YOU GIVE UP AND WAIVE IMPORTANT LEGAL RIGHTS. Agreement between First Montauk Financial Corp., its stockholders, subsidiaries, affiliates, divisions, successors and assigns, their respective past and present officers, directors, employees, agents, attorneys, whether as individuals or in their official capacity, and each of their respective successors and assigns (hereinafter collectively referred to as "FMFC" or the "Company") and by his own free will, Robert I. Rabinowitz ("Rabinowitz" or "Employee"). WHEREAS, Rabinowitz has been an employee of FMFC, and WHEREAS, Rabinowitz has been employed pursuant to a written employment agreement dated as of February 8, 2005 (the "Employment Agreement"); and WHEREAS, Employee and FMFC each desire an amicable cessation of the employment relationship, NOW, THEREFORE, in consideration of the covenants and promises contained herein and for other good and valuable consideration, receipt of which is hereby acknowledged, Employee and FMFC (who hereinafter collectively may be referred to as the "Parties") hereby agree as follows: 1. Employee acknowledges and agrees that: a. FMFC has served Employee with a valid and timely notice that his employment will not be renewed pursuant to paragraph 1 of the Employment Agreement; b. effective the close of business January 31, 2007, Employee's employment and the Employment Agreement shall be terminated (the "Termination Date".), and all terms of the Employment Agreement shall be deemed superseded by this Agreement. 2. In consideration for Employee's execution of this Agreement, and for the release of claims against FMFC, the Company will give Employee the following: a. Solely for the purpose of determining the benefits under the Employment Agreement, the termination of Employee's Employment shall be deemed a non-renewal pursuant to paragraph 7 (E) of the Employment Agreement. b. Employee shall receive and be paid, in accordance with the terms and conditions of paragraph 7 (E) of the Employment Agreement, the sum of $200,000 representing one year of the Initial Base Salary c. As additional consideration for the release of claims and for the transitional services to be provided by Employee as set forth in this paragraph 2 (c), FMFC shall pay Employee an additional $100,000 provided Employee complies with his obligations under this paragraph. Such sum shall be paid by FMFC as follows: $50,000 on August 30, 2007, and the balance of $50,000 on January 31, 2008. i) The foregoing payments shall be conditioned on Employee providing assistance to FMFC in the transition of his responsibilities to new personnel and the closing of the merger with FMFG AcquisitionCo., Inc., and full compliance by Employee, in all material respects, of his obligations under this Agreement. d. The conditions to the vesting of any outstanding stock options and stock grants granted to the Employee under any of the Company's stock option plans, shall be deemed void and all such incentive awards shall be immediately and fully vested as of the date of this agreement and the terms of the awards shall be deemed amended to provide that the awards shall remain exercisable for the duration of their original term. 3. Benefits: a. Group health benefits will continue until January 31, 2008 as provided in paragraph 5 (A) of the Employment Agreement, and except as otherwise expressly provided in this Agreement, Employee will not be entitled to receive any other benefits after the Termination Date. FMFC shall be responsible for providing equivalent health benefits or paying all "COBRA" charges through January 31, 2008. b. To the extent Employee has unreimbursed business expenses, incurred through the Termination Date, Employee must immediately submit the expenses with all appropriate documentation; those expenses which meet the Company's guidelines will be reimbursed. Any expense account that Employee has with the Company terminates effective on the Termination Date, and any expenses already incurred will be reviewed and processed in accordance with the policies and procedures of the Company. No new expenses may be incurred after the Termination Date. Employee agrees to promptly pay any outstanding balance on these accounts that represent non-reimbursable expenses. 4. Employee understands that this Agreement does not constitute an admission by the Company of any liability, error or omission, including without limitation, any: (a) violation of any statute, law, or regulation; (b) breach of contract, actual or implied; or (c) commission of any tort. Employee further acknowledges that in the event the merger with FMFG AcquisitionCo., Inc. is not consummated, Employee shall have no claim against FMFG AcquisitionCo, Inc. FMFG Ownership, Inc., Investment Properties of America, LLC, Edward H. Okun, or any of their affiliates. 5. Employee acknowledges that the consideration provided in this Agreement exceed that to which Employee would otherwise be entitled under the normal operation of any benefit plan, policy or procedure of the Company or under any previous agreement (written or oral) between Employee and the Company. Employee further acknowledges that the agreement by FMFC to provide consideration pursuant to this Agreement beyond Employee's entitlement is conditioned upon Employee's release of all claims against FMFC and Employee's compliance with all the terms and conditions of this Agreement. 6. The Parties agree that, except as provided for herein, there shall be no other payments or benefits payable to Employee, including but not limited to, salary, bonuses, commissions, finder's fees and/or other payments. 7. Arbitration: a. The Parties specifically and knowingly and voluntarily agree to an arbitrate any controversy, dispute or claim which has arisen or should arise in connection with Employee's employment, the cessation of Employee's employment, or in any way related to the terms of this Agreement. The Parties agree to arbitrate any and all such controversies, disputes, and claims before a panel of the NASD or a single arbitrator, as the case may be, in the State of New Jersey in accordance with the Rules of the National Association of Securities Dealers, Inc. ("NASD"), or in the alternative if the NASD does not accept jurisdiction of the controversy, the American Arbitration Association. The arbitrator shall be selected by the NASD, or if applicable, the Association and shall be an attorney-at-law experienced in the field of corporate law and admitted to practice in the State of New Jersey. In the course of any arbitration pursuant to this Agreement, Employee and the Company agree (i) to request that a written award be issued by the arbitrator and (ii) that each side is entitled to receive any and all relief it would be entitled to receive in a court proceeding. The Parties knowingly and voluntarily agree to enter into this arbitration clause and to waive any rights that might otherwise exist to request a jury trial or other court proceeding, except that Employee agrees that FMFC has the right to seek injunctive or other equitable relief from a court to enforce Paragraphs 8 , 9 and 10 of this Agreement. This paragraph is intended to be both a post-dispute and pre-dispute arbitration clause. Any judgment upon any arbitration award may be entered in any court, federal or state, having competent jurisdiction of the parties. b. The Parties' agreement to arbitrate disputes includes, but is not limited to, any claims of unlawful discrimination and/or unlawful harassment under Title VII of the Civil Rights Act of 1964, as amended, the Age Discrimination in Employment Act 1967, as amended, the Americans with Disabilities Act, the New Jersey and New York Civil Rights Laws, the New Jersey Law Against Discrimination, the New York Executive Law, the New York City Human Rights Law, the New Jersey Conscientious Employee Protection Act, the New Jersey Family Leave Act, or any other federal, state or local law relating to discrimination in employment and any claims relating to wage and hour claims and any other statutory or common law claims. 8. Employee and FMFC agree that the terms and existence of this Agreement are and shall remain confidential and agrees not to disclose any terms or provisions of this Agreement, or to talk or write about the negotiation, execution or implementation of this Agreement, without the prior written consent of the other, except (a) as required by law; (b) as required by regulatory authorities; (c) as required within FMFC to process this Agreement; or (d) in connection with any arbitration or litigation arising out of this Agreement. Anything herein to the contrary notwithstanding, Employee may disclose the terms of this Agreement to Employee's immediate family, accountant or attorney, provided they are made aware of and agree to the confidentiality provisions. 9. Employee further acknowledges and agrees that any non-public and/or proprietary information of the Company and/or its customers disclosed to or prepared by Employee during Employee's employment remains confidential and may not be used and/or disclosed by Employee hereafter without the prior written consent of FMFC. Employee further agrees that the provisions of paragraph 6 of the Employment Agreement ("Restrictive Covenants") shall remain in full force and effect. 10. As long as Employee is entitled to receive any benefits under this Agreement, Employee shall not make any negative or derogatory statements in verbal, written, electronic or any other form about the Company, or its officers, employees and directors including, but not limited to, a negative or derogatory statement made in, or in connection with, any article or book, on a website, in a chat room or via the internet. 11. Litigation a. Employee shall cooperate fully with the Company in the prosecution or defense, as the case may be, of any and all actions, governmental inquiries or other legal or regulatory proceedings in which Employee's assistance may be reasonably requested by the Company. Reasonable expenses arising from the cooperation will be reimbursed within the Company's guidelines. Consistent with the Certificate of Incorporation of FMFC, and the Company's Amended and Restated By-Laws, FMFC will hold harmless and indemnify Employee from and against any expenses (including attorneys' reasonable fees), judgments, fines and amounts paid in settlement arising from any claim, suit or other action against Employee by any third party, on account of any action or inaction by Employee taken or omitted to be taken by Employee on behalf of FMFC during the course of his employment, up to his date of termination, provided that such action or inaction by Employee was within the scope of Employee's employment and consistent with the Company's policies and procedures. b. Promptly after receipt by Employee under this paragraph 11 of notice of the commencement of any action, suit or proceeding, Employee shall notify FMFC in writing of the commencement thereof (but the failure so to notify shall not relieve FMFC from any liability which it may have under this paragraph except to the extent that it has been prejudiced in any material respect by such failure or from any liability which it may have otherwise). In case any such action is brought against Employee, and Employee notifies FMFC of the commencement thereof, FMFC will be entitled to participate therein, and to the extent it may elect by written notice delivered to the Employee promptly after receiving the aforesaid notice from Employee, FMFC may assume the defense thereof with counsel reasonably satisfactory to such Employee. Notwithstanding the foregoing, Employee shall have the right to employ his own counsel in any such case but the fees and expenses of such counsel shall be at the expense of Employee unless (i) the employment of such counsel shall have been authorized in writing by the FMFC in connection with the defense of such action at the expense of FMFC, (ii) FMFC shall not have employed counsel reasonably satisfactory to Employee to have charge of the defense of such action within a reasonable time after notice of commencement of the action, or (iii) Employee shall have reasonably concluded that there may be defenses available to him that are different from or additional to those available to FMFC (in which case FMFC shall not have the right to direct the defense of such action on behalf of Employee), in any of which events such fees and expenses of one additional counsel shall be borne by FMFC. Anything in this paragraph to the contrary notwithstanding, neither Employee or FMFC shall be liable for any settlement of any claim or action effected without its written consent; provided however, that such consent was not unreasonably withheld. c. Employee acknowledges that he has advised the Company completely and candidly of all facts of which he is aware that may give rise to legal matters. d. The Company is not aware of any claim against Employee by the Company at the present time, and does not have a present intention to commence any civil claim or arbitration against Employee. This representation is based on the actual knowledge of the executive officers of the Company. 12. You agree to cause all requests for references to be forwarded in writing to the Company, attention: Office of the President. The Company will state in response to such inquiries your dates of employment and positions held. The Company shall not be responsible for responses to reference requests sought or obtained other than under the procedures set forth in this paragraph. 13. Employee realizes there are many laws and regulations prohibiting employment discrimination, or otherwise regulating employment or claims related to employment pursuant to which Employee may have rights or claims. These include but are not limited to Title VII of the Civil Rights Act of 1964, as amended; the Americans with Disabilities Act of 1990; the Pregnancy Discrimination Act; the National Labor Relations Act, as amended; 42 U.S.C 1981; the Employee Retirement Income Security Act of 1974, as amended; the Age Discrimination in Employment Act of 1967, as amended; the Civil Rights Act of 1991; the Worker Adjustment and Retraining Notification Act; the New York State and City Human Rights Laws; the New Jersey Law Against Discrimination; the New Jersey Conscientious Employee Protection Act, the New Jersey Family Leave Act, and other Federal, State and local human rights, fair employment and other laws. Employee also understands there are other statutes and contract and tort laws which relate to Employee's employment and/or the termination of Employee's employment. Employee hereby knowingly and voluntarily agrees to waive and release any rights or claims Employee may have under these and other laws, but does not intend to, nor is Employee waiving any rights or claims that may arise after the date that this Agreement is signed by Employee. Notwithstanding the foregoing sentence, Employee's waiver and release shall not extend to (i) any rights, remedies, or claims Employee may have in enforcing the terms of the Agreement; and (ii) any rights Employee may have to receive vested amounts under FMFC's stock option plans or pension plans. 14. This Agreement shall be deemed to have been made within the County of Monmouth, State of New Jersey, and shall be interpreted and construed and enforced in accordance with the laws of the State of New Jersey without regard to its conflicts of law provision. 15. Employee is hereby advised of Employee's rights to review this Agreement with counsel of Employee's choice. Employee has had the opportunity to consult with an attorney and/or other advisor of Employee's choosing before signing the Agreement, and was given a period of twenty-one (21) days to consider the Agreement. Employee is permitted, at his discretion, to return the Agreement prior to the expiration of this 21-day period. Employee acknowledges that in signing this Agreement, Employee has relied only on the promises written in this Agreement, and not on any other promise made by the Company or any other entity or person. 16. Employee represents that Employee has not filed any complaints, charges or claims against FMFC with any local, State, or Federal agency or court, or with any other forum. 17. Upon request of FMFC, Employee agrees to immediately return any FMFC property no matter where located including, but not limited to, FMFC I.D. card, corporate credit card, keys, computer disks, and written/electronic material prepared in the course of employment at FMFC. 18. If any provision of this Agreement, or any part thereof, is held to be invalid or unenforceable because of the scope or duration of or the area covered by such provision, Employee and FMFC agree that the court or other appropriate decision-making authority making such determination shall reduce the scope, duration and/or area of such provision (and shall substitute appropriate provisions for any such invalid or unenforceable provisions) in order to make such provision enforceable to the fullest extent permitted by law and/or shall delete specific words and phrases, and such modified provision shall then be enforceable and shall be enforced. In the event that any court or other appropriate decision-making authority determines that the time period or the area, or both, are unreasonable and that any of the covenants is to that extent invalid or unenforceable, the parties hereto agree that such covenants will remain in full force and effect, first, for the greatest time period, and second, in the greatest geographical area that would not render them unenforceable. If any provision of this Agreement is held to be invalid or unenforceable, the remaining provisions of this Agreement shall nonetheless survive and be enforced to the fullest extent permitted by law. 19. Except as otherwise expressly provided herein, this Agreement and Release, together with the General Release constitute the entire agreement between the Parties and supersede any and all prior agreements, whether written or oral. This Agreement may not be modified or changed, except in a written agreement signed by both Parties. 20. The Agreement may be executed in multiple counterparts, each of which shall be considered an original but all of which shall constitute one agreement. IN WITNESS WHEREOF, the parties have executed this Agreement as of the dates set forth below. I have read this Agreement, and I understand all of its terms. I enter into and sign this Agreement knowingly and voluntarily with full knowledge of what it means. I understand that I have twenty-one (21) days to consider this Agreement and return it toFMFC. I also understand that I have seven (7) days to revoke this Agreement in writing after I sign it. I understand that a revocation will become effective only if I furnish FMFC with written notice, within such seven (7) day period. This Agreement will not become effective or enforceable until FMFC's receipt back of Employee's executed Agreement and the expiration of the seven day revocation period. Employee /s/ Robert I. Rabinowitz November 14, 2006 ------------------------ ------------------ Robert I. Rabinowitz Date First Montauk Financial Corp. By /s/ Victor K. Kurylak November 14, 2006 -------------------------------------- ------------------ Victor K. Kurylak, President & C.E.O. Date CONSULT WITH AN ATTORNEY BEFORE SIGNING GENERAL RELEASE. BY SIGNING THIS GENERAL RELEASE, YOU GIVE UP AND WAIVE IMPORTANT LEGAL RIGHTS. GENERAL RELEASE Robert I. Rabinowitz understands and, of my own free will, enters into this General Release. In consideration of the payments, benefits, agreements, and other consideration to be provided by FMFC as described in the agreement of which this General Release is a part (such agreement, this General Release, together, the "Agreement"), Robert I. Rabinowitz, for himself or herself and for his heirs, executors, administrators, and their respective successors and assigns (collectively, "Employee"), HEREBY RELEASES AND FOREVER DISCHARGES, to the maximum extent permitted by law, First Montauk Financial Corp., its stockholders, subsidiaries, affiliates, divisions, successors and assigns, their respective current and former officers, directors, employees, agents, attorneys, whether as individuals or in their official capacity, and each of their respective successors and assigns (hereinafter collectively referred to as "FMFC") of and from all or any manner of actions, causes and causes of action, suits, debts, obligations, damages, complaints, liabilities, losses, covenants, contracts, controversies, agreements, promises, variances, trespasses, judgments and expenses (including attorneys' fees and costs), extents, executions, claims and demands whatsoever at law or in equity ("claims"), specifically including by way of example but not limitation, Title VII of the Civil Rights Acts of 1964 and 1991, as amended; the Civil Rights Act of 1866; the Employee Retirement Income Security Act of 1974, as amended; the National Labor Relations Act, as amended; the Americans with Disabilities Act of 1990; the Age Discrimination in Employment Act of 1967, as amended; the Worker Adjustment and Retraining Notification Act; the Pregnancy Discrimination Act; and all Federal, State and local statutes, regulations, decisional law and ordinances and all human rights, fair employment, contract and tort laws relating to Employee's employment with FMFC and/or the termination thereof including, again by way of example but without limitation, the New Jersey and New York Civil Rights Laws, the New Jersey Law Against Discrimination, the New York Executive Law, the New York City Human Rights Law, the New Jersey Conscientious Employee Protection Act, the New Jersey Family Leave Act, any civil rights or human rights law, as well as all claims for wrongful discharge, breach of contract, personal injury, defamation, mental anguish, injury to health and reputation, and sexual harassment, which Employee ever had, now has, or which Employee hereafter can, shall or may have for, upon or by reason of any matter, cause or thing whatsoever arising out of Employee's employment by FMFC or the termination thereof, provided that this General Release shall not extend to (i) any rights, remedies, or claims Employee may have in enforcing the terms of this Agreement; (ii) any rights Employee may have to receive vested amounts under FMFC's stock option plan, 401-K or pension plans; (iii) Employee's rights to medical benefit continuation coverage, on a self-pay basis, pursuant to federal law (COBRA); and (iv) claims for indemnification (whether under state law, the Company's by-laws or otherwise) for acts performed as an officer or director of the Company or any of its affiliates. Employee takes this action filly aware of Employee's rights arising under the laws of the United States (and any State or local governmental entity thereof) and voluntarily waives and releases all such rights or claims under these or other laws, but does not intend to, nor is Employee waiving any rights or claims that may arise after the date that this Agreement is signed by Employee. The provisions of any laws providing in substance that releases shall not extend to claims which are at the time unknown to or unsuspected by the person executing such release, are hereby waived. Employee represents that Employee has been advised to and has had an opportunity to consult with an attorney and/or any other advisors of Employee's choosing before signing this Agreement, and was given a period of twenty-one (21) days to consider this Agreement. Employee is permitted, at his discretion, to return the Agreement prior to the expiration of this 21-day period. Employee has relied only on the promises written in the Agreement, and not on any other promise made by FMFC or any other entity or person. Employee has seven (7) days to revoke the Agreement after Employee signs it. The Agreement will not become effective or enforceable until FMFC's receipt back of Employee's executed Agreement and the expiration of the seven day revocation period. Employee has read and understood the Agreement and enters into it knowingly and voluntarily. IN WITNESS WHEREOF, Robert I. Rabinowitz has set his hand this 14th day of November, 2006 having had the opportunity to review this with counsel of his or her choice. /s/ Robert I. Rabinowitz November 14, 2006 ------------------------------- ----------------- Robert I. Rabinowitz Date -----END PRIVACY-ENHANCED MESSAGE-----