-----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, RxbyQSpzaLMFU5YGlOkG15WW+GxVaM4o8mR7Zp0/cQe9Bpfrr3uEtzZ9zmf1dZpl FdoBVnY7VEenzK69L7jdKA== 0000083125-08-000028.txt : 20081119 0000083125-08-000028.hdr.sgml : 20081119 20081119162155 ACCESSION NUMBER: 0000083125-08-000028 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 20080930 FILED AS OF DATE: 20081119 DATE AS OF CHANGE: 20081119 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: 001-33656 FILM NUMBER: 081201259 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 form10q9302008.txt FORM 10-Q FOR QUARTER ENDED SEPTEMBER 30, 2008 ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (Mark One) QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD |X| ENDED: SEPTEMBER 30, 2008 |_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO Commission File Number: 0-6729 FIRST MONTAUK FINANCIAL CORP. - -------------------------------------------------------------------------------- (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) New Jersey 22-1737915 ----------------- -------------------- (State of Incorporation) (I.R.S. Employer Identification No.) Parkway 109 Office Center, 328 Newman Springs Road, Red Bank, New Jersey 07701 - -------------------------------------------------------------------------------- (Address of principal executive offices)(Zip Code) (732) 842-4700 - -------------------------------------------------------------------------------- (Registrant's telephone number, including area code) - -------------------------------------------------------------------------------- (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer", "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act. Check one: Large accelerated filer |_| Accelerated filer |_| Non-accelerated filer |_| Smaller Reporting Company |X| (Do not check if a smaller reporting company) Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). |_| YES |X| NO APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PRECEDING FIVE YEARS Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. |_| Yes |_| No APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date: 13,257,248 shares of common stock were outstanding at November 19, 2008. FIRST MONTAUK FINANCIAL CORP. FORM 10-Q September 30, 2008 INDEX Page PART I. FINANCIAL INFORMATION: Item 1. Financial Statements Condensed Consolidated Statements of Financial Condition as of September 30, 2008 (unaudited) and December 31, 2007........................ F-1 Condensed Consolidated Statements of Operations for the Nine Months and Three Months Ended September 30, 2008 (unaudited) and 2007 (unaudited)...... F-2 Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2008 (unaudited) and 2007 (unaudited)......................... F-3 Notes to Condensed Consolidated Financial Statements (unaudited)............... 4-13 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.................................... 14-23 Item 3. Quantitative and Qualitative Disclosures About Market Risk............. 23-25 Item 4T. Controls and Procedures................................................ 26 PART II. OTHER INFORMATION: Item 1. Legal Proceedings...................................................... 27 Item 1A. Risk Factors........................................................... 27 Item 2. Unregistered Sales of Equity Securities................................ 27 Item 3. Defaults Upon Senior Securities........................................ 27 Item 4. Submission of Matters to a Vote of Security Holders.................... 28 Item 5. Other Information...................................................... 28 Item 6. Exhibits............................................................... 29 Signatures....................................................................... 29
FIRST MONTAUK FINANCIAL CORP. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION September 30, December 31, 2008 2007 ------------- ------------ (unaudited) ASSETS Cash and cash equivalents $ 647,067 $ 868,836 Due from clearing firm 2,097,320 2,347,946 Securities owned, at market value 220,587 159,773 Prepaid expenses 521,403 250,948 Employee and broker receivables - net of reserve for bad debt of $706,275 and $758,515 respectively 117,172 288,049 Property and equipment - net 149,565 175,463 Other assets 397,948 1,159,893 ----------- ----------- Total assets $ 4,151,062 $ 5,250,908 =========== =========== LIABILITIES 10% convertible note 1,000,000 1,000,000 Securities sold, not yet purchased, at market value 41,828 201 Commissions payable 1,231,321 1,739,713 Accounts payable 625,015 256,549 Accrued expenses 609,018 556,527 Income taxes payable 2,872 11,358 Other liabilities 277,302 51,528 ----------- ---------- Total liabilities 3,787,356 3,615,876 ----------- ---------- Commitments and contingencies STOCKHOLDERS' EQUITY Preferred stock, 3,929,898 shares authorized, $.10 par value, no shares issued and outstanding - - Series A Convertible Preferred Stock, 625,000 shares authorized, $.10 par value 22,282 shares issued and outstanding; liquidation preference: $111,410 2,228 2,228 Series C Participating Cumulative Preferred Stock, 200,000 shares authorized, $.10 par value, no shares issued and outstanding - - Common stock, no par value, 60,000,000 shares authorized, 13,257,248 shares issued and outstanding 9,625,872 9,621,030 Additional paid-in capital 4,035,064 4,035,064 Accumulated deficit (13,299,458) (12,023,290) ------------ ----------- Total stockholders' equity 363,706 1,635,032 ------------ ----------- Total liabilities and stockholders' equity $ 4,151,062 $ 5,250,908 ============ =========== See notes to condensed consolidated financial statements. F-1
FIRST MONTAUK FINANCIAL CORP. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS Nine Months Ended September 30, Three Months Ended September 30, 2008 2007 2008 2007 ----------- ----------- ---------- ----------- (unaudited) (unaudited) (unaudited) (unaudited) Revenues: Commissions $ 16,827,135 $ 24,941,439 $ 4,964,503 $ 7,708,284 Principal transactions 1,567,518 1,261,458 587,203 306,482 Investment banking 671,486 3,440,269 183,600 960,849 Interest and other income 1,629,978 2,068,309 677,062 546,178 ------------- ------------- ------------ ------------ Total revenues 20,696,117 31,711,475 6,412,368 9,521,793 ------------- ------------- ------------ ------------ Expenses: Commissions, employee compensation and benefits 16,969,499 27,491,131 5,168,195 8,264,249 Clearing and floor brokerage 984,243 1,134,419 318,453 334,866 Communications and occupancy 1,248,425 1,262,127 381,199 427,583 Legal matters and related costs 766,963 1,221,588 383,244 237,337 Other operating expenses 1,901,373 2,471,582 461,863 1,048,368 Interest 89,657 17,875 28,889 5,032 ------------- ------------- ------------ ------------ Total expenses 21,960,160 33,598,722 6,741,843 10,317,435 ------------- ------------- ------------ ------------ Loss before provision for income taxes (1,264,043) (1,887,247) (329,475) (795,642) Provision for income taxes 7,112 16,199 1,901 600 ------------- ------------- ------------ ------------ Net loss (1,271,155) (1,903,446) (331,376) (796,242) Preferred stock dividends (5,014) (122,294) (1,671) (36,490) ------------- ------------- ------------ ------------ Net loss applicable to common stockholders $(1,276,169) $(2,025,740) $ (333,047) $(832,732) ============= ============== ============ ============ Loss per share: Basic $ (0.10) $ (0.12) $ (0.03) $ (0.06) Diluted $ (0.10) $ (0.12) $ (0.03) $ (0.06) Weighted average number of shares of stock outstanding: Basic 13,248,477 16,439,992 13,248,477 13,245,477 Diluted 13,248,477 16,439,992 13,248,477 13,245,477 See notes to condensed consolidated financial statements. F-2
FIRST MONTAUK FINANCIAL CORP. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS Nine Months Ended September 30, 2008 2007 (unaudited) (unaudited) INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS CASH FLOWS FROM OPERATING ACTIVITIES Net loss $(1,271,155) $ (1,903,446) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation of property and equipment 51,247 89,195 Amortization of stock compensation and deferred costs 27,343 38,173 Increase (decrease) in cash attributable to changes in assets and liabilities: Due from clearing firm 250,626 2,476,006 Securities owned (60,814) 29,505 Prepaid expenses (270,455) (179,156) Employee and broker receivables 170,877 69,632 Other assets 739,445 (493,355) Securities sold, not yet purchased 41,627 (484) Commissions payable (508,392) (145,015) Accounts payable 368,466 615,814 Accrued expenses 52,491 (235,229) Income taxes payable (8,486) 7,191 Other liabilities 225,774 (19,486) ----------- ------------- NET CASH USED IN OPERATING ACTIVITIES (191,406) 349,345 ----------- ------------- CASH FLOWS FROM INVESTING ACTIVITIES: Additions to property and equipment (25,349) (45,593) ----------- ------------- NET CASH USED IN INVESTING ACTIVITIES (25,349) (45,593) ----------- ------------- CASH FLOWS FROM FINANCING ACTIVITIES: Payment of capital lease - (819) Payment of preferred stock dividends (5,014) (122,294) ----------- ------------- NET CASH USED IN FINANCING ACTIVITIES (5,014) (123,113) ----------- ------------- Net decrease in cash and cash equivalents (221,769) 180,639 Cash and cash equivalents at beginning of period 868,836 1,145,751 ----------- ------------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 647,067 $ 1,326,390 =========== ============= Supplemental disclosures of cash flow information: Cash paid during the period for: Interest $ 14,588 $ 17,500 =========== ============= Income taxes $ 16,118 $ 10,823 ============ ============= Noncash financing activities: Cancellation and Redemption of Preferred A stock - $ 28,309 Cancellation of Preferred B stock - $ 1,000,000 Cancellation of Common stock - $ 2,056,163 See notes to condensed consolidated financial statements. F-3
FIRST MONTAUK FINANCIAL CORP. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) NOTE 1- GOING CONCERN AND LIQUIDITY CONSIDERATIONS The accompanying condensed consolidated financial statements have been prepared assuming that the Company will continue as a going concern, which contemplates, among other things, the realization of assets and satisfaction of liabilities in the normal course of business. As of September 30, 2008, the Company had an accumulated deficit, and working capital of $922,000, which does not include the repayment of the $1,000,000 "AEFC-IC Note" (as defined in Note 9 - "Convertible Note Purchase Agreement"). For the nine months ended September 30, 2008, the Company incurred a net loss of $1,271,155. To date, the Company has been able to finance its operations through cash generated from operations and proceeds from the issuance of the AEFC-IC Note. On July 9, 2008, the Company entered into a definitive asset purchase agreement ("Purchase Agreement") with First Allied Securities, Inc., a related company of AEFC-FMFK Investment Corp. ("AEFC-IC") (See Note 8 - Material Definitive Purchase Agreement). On October 17, 2008 at our Annual Meeting of Shareholders, a majority of voting common shareholders and Series A Preferred Shareholders voted to approve the Asset Purchase Agreement. The transaction is currently scheduled to close on or about December 12, 2008 and is contingent upon receiving FINRA approval, as well as other conditions set forth in the Purchase Agreement. As a result of the foregoing uncertainties, there can be no assurances that the transaction will be completed. If the terms of the purchase agreement are not consummated for any other reason, the Company will be required to raise additional financing and/or renegotiate the repayment terms of the AEFC-IC Note in order to fund operational expenditures and/or repay the AEFC-IC Note. There is no assurance that the Company will be successful in consummating the Purchase Agreement or in obtaining alternative funding or debt renegotiation on terms satisfactory to the Company. If the Company cannot raise additional financing and/or renegotiate the repayment terms of the AEFC-IC Note, the Company may not be able to continue as a going concern. NOTE 2 - BASIS OF PRESENTATION The interim financial information as of September 30, 2008 and for the nine-month and three-month periods ended September 30, 2008 and September 30, 2007 has been prepared without audit, in accordance with accounting principles generally accepted in the United States of America and pursuant to the interim financial statements rules and regulations of the Securities and Exchange Commission (the "SEC"). Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles in the United States of America have been condensed or omitted pursuant to such rules and regulations, although management believes that the disclosures made are adequate to provide for fair presentation. These condensed consolidated financial statements should be read in conjunction with management's discussion and analysis of financial condition and results of operations ("MDA") included elsewhere in this report on Form 10-Q and the Company's Annual Report on Form 10-K/A for the fiscal year ended December 31, 2007, previously filed with the SEC on August 8, 2008. In the opinion of management, all adjustments (which include normal recurring adjustments) necessary for a fair presentation of the financial position have been made. The results of operations for the nine months and three months ended September 30, 2008 are not necessarily indicative of the operating results for the full fiscal year or any future periods. 4 NOTE 3 - RECENT ACCOUNTING PRONOUNCEMENTS In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements, which defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements. This statement does not require any new fair value measurements, but provides guidance on how to measure fair value by providing a fair value hierarchy used to classify the source of the information. SFAS No. 157 is effective for fiscal years beginning after November 15, 2007, and all interim periods within those fiscal years. In February 2008, the FASB released FASB Staff Position (FSP FAS 157-2 - Effective Date of FASB Statement No. 157) which delays the effective date of SFAS No. 157 for all nonfinancial assets and nonfinancial liabilities, except those that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually), to fiscal years beginning after November 15, 2008 and interim periods within those fiscal years. The implementation of SFAS No. 157 for financial assets and liabilities, effective January 1, 2008, did not have an impact on the Company's financial position and results of operations. The Company is currently evaluating the impact of adoption of this statement on its non-financial assets and liabilities in the first quarter of fiscal 2009. In December 2007, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 141 (revised 2007), Business Combinations, which replaces SFAS No 141. The statement retains the purchase method of accounting for acquisitions, but requires a number of changes, including changes in the way assets and liabilities are recognized in the purchase accounting. It also changes the recognition of assets acquired and liabilities assumed arising from contingencies, requires the capitalization of in-process research and development at fair value, and requires the expensing of acquisition-related costs as incurred. SFAS No. 141R is effective for business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. In December 2007, the FASB issued SFAS No. 160. "Noncontrolling Interests in Consolidated Financial Statements-and Amendment of ARB No. 51." SFAS 160 establishes accounting and reporting standards pertaining to ownership interests in subsidiaries held by parties other than the parent, the amount of net income attributable to the parent and to the noncontrolling interest, changes in a parent's ownership interest, and the valuation of any retained noncontrolling equity investment when a subsidiary is deconsolidated. This statement also establishes disclosure requirements that clearly identify and distinguish between the interests of the parent and the interests of the noncontrolling owners. SFAS 160 is effective for fiscal years beginning on or after December 15, 2008. The adoption of SFAS 160 is not currently expected to have a material effect on the Company's consolidated financial position, results of operations, or cash flows. In March 2008, the Financial Accounting Standards Board (FASB) issued FASB Statement No. 161, Disclosures about Derivative Instruments and Hedging Activities. The new standard is intended to improve financial reporting about derivative instruments and hedging activities by requiring enhanced disclosures to enable investors to better understand their effects on an entity's financial position, financial performance, and cash flows. It is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008, with early application encouraged. The Company is currently evaluating the impact of adopting SFAS. No. 161 on its consolidated financial statements. 5 NOTE 4 - STOCK-BASED COMPENSATION The Company periodically issues common stock to employees, non-employee consultants and non-employee independent registered representatives in accordance with the provisions of the shareholder approved equity compensation plans. The Company's results for the nine and three month periods ended September 30, 2008 includes share-based compensation expense for employee options totaling approximately $1,680 and $0 compared to approximately $6,200 and $1,000 for the nine and three month periods ended September 30, 2007. Such amounts have been included in the condensed consolidated statements of operations within commissions, employee compensation and benefits. No income tax benefit has been recognized in the income statement for share-based compensation arrangements as the Company has provided for a 100% valuation allowance on net deferred tax assets. Employee stock option compensation expense in 2008 and 2007 is the estimated fair value of options granted amortized on a straight-line basis over the requisite service period for the entire portion of the award. The Company has not adjusted the expense by estimated forfeitures, as required by FAS 123(R) for employee options, since the forfeiture rate based upon historical data was determined to be immaterial. Accounting for Non-employee Awards: The Company previously accounted for options granted to its non-employee consultants and non-employee registered representatives using the fair value in accordance with FAS 123 and EITF No. 96-18. The adoption of FAS 123(R) and SAB 107, as of January 1, 2006, had no material impact on the accounting for non-employee awards. The Company continues to consider the additional guidance set forth in EITF Issue No. 96-18 ("EITF 96-18"), "Accounting for Equity Instruments That Are Issued to Other Than Employees". Stock compensation expense related to non-employee options was approximately $0 and $3,160 for the nine and three month periods ended September 30, 2008 compared to approximately $32,000 and $590 for the nine and three month periods ended September 30, 2007. These amounts are included in the condensed consolidated statements of operations within commissions, employee compensation and benefits. The fair value of options at the date of grant was estimated using the Black-Scholes option pricing model. The Company takes into consideration guidance under FAS 123(R) and SEC Staff Accounting Bulletin No. 107 ("SAB 107") when reviewing and updating assumptions. The expected volatility is based upon historical volatility of our stock and other contributing factors. The expected term is based upon observation of actual time elapsed between date of grant and exercise of options for all employees. Previously such assumptions were determined based on historical data. 6 The assumptions made in calculating the fair values of all options are as follows: --------------------- ------------------------------------------- ------------------------------------------- Nine Months Ended Three Months Ended --------------------- ------------------------------------------- ------------------------------------------- --------------------- --------------------- --------------------- --------------------- --------------------- September 30, 2008 September 30, 2007 September 30, 2008 September 30, 2007 --------------------- --------------------- --------------------- --------------------- --------------------- --------------------- --------------------- --------------------- --------------------- --------------------- Expected volatility 76% 66% 76% 66% --------------------- --------------------- --------------------- --------------------- --------------------- --------------------- --------------------- --------------------- --------------------- --------------------- Expected dividend yield 0% 0% 0% 0% --------------------- --------------------- --------------------- --------------------- --------------------- --------------------- --------------------- --------------------- --------------------- --------------------- Risk-free interest rate 2.98%-4.54% 3.71%-4.54% 2.98%-4.54% 3.71%-4.54% --------------------- --------------------- --------------------- --------------------- --------------------- --------------------- --------------------- --------------------- --------------------- --------------------- Expected term (in years) 1-5 years 1-5 years 1-5 years 1-5 years --------------------- --------------------- --------------------- --------------------- --------------------- The following table represents all of our stock options granted, exercised and forfeited/expired during the first nine months of 2008. ----------------------------- -------------- ------------------ --------------------- ------------------ Weighted Average Weighted Average Number Exercise Price Remaining Aggregate Stock Options of Shares per Share Contractual Term Intrinsic Value ----------------------------- -------------- ------------------ --------------------- ------------------ ----------------------------- -------------- ------------------ --------------------- ------------------ Outstanding at January 1, 2008 1,871,200 $0.73 2.2 0 ----------------------------- -------------- ------------------ --------------------- ------------------ ----------------------------- -------------- ------------------ --------------------- ------------------ Granted 6,000 $0.50 ----------------------------- -------------- ------------------ --------------------- ------------------ ----------------------------- -------------- ------------------ --------------------- ------------------ Exercised - - ----------------------------- -------------- ------------------ --------------------- ------------------ ----------------------------- -------------- ------------------ --------------------- ------------------ Forfeited/expired (327,400) $0.79 ----------------------------- -------------- ------------------ --------------------- ------------------ ----------------------------- -------------- ------------------ --------------------- ------------------ Outstanding at 1,549,800 $0.72 1.5 0 September 30, 2008 ----------------------------- -------------- ------------------ --------------------- ------------------ ----------------------------- -------------- ------------------ --------------------- ------------------ Exercisable at September 30, 2008 1,359,280 $0.71 1.3 0 ----------------------------- -------------- ------------------ --------------------- ------------------
The weighted average estimated per share fair value of all share options granted during the nine months ended September 30, 2008 and 2007 was $0.001 and $0.54, respectively. There were no stock options exercised during the first nine months of 2008 and 2007. NOTE 5 - PREPAID EXPENSES Prepaid expenses at September 30, 2008 include a payment for errors and omissions insurance coverage. The unamortized amount at September 30, 2008 is approximately $249,000, which will be expensed over the next four months. 7 NOTE 6 - OTHER ASSETS Other assets at September 30, 2008 is primarily comprised of commissions' receivable due from vendors for insurance, mutual funds and fees totaling approximately $339,000 and deposits of $50,000. NOTE 7 - ACCOUNTS PAYABLE Accounts payable at September 30, 2008 includes insurance premium financing agreements with current balances of $75,000, payable in one remaining monthly installment of approximately $75,000, including interest at the rate of 4.22% per annum and $49,000, payable in six remaining monthly installments of approximately $8,400 each, including interest at the rate of 6.75% per annum. Also included are, legal and accounting fees of $183,000, market data services of $111,000 and telephone and communication fees of $18,000. NOTE 8- MATERIAL DEFINITIVE PURCHASE AGREEMENT At the Company's 2008 annual meeting of shareholders held on October 17, 2008, the shareholders of the Company approved the definitive asset purchase agreement ("Asset Purchase Agreement") executed by the Company and its principal subsidiary, First Montauk Securities Corp. ("FMSC"), with First Allied Securities Inc. ("First Allied") as of July 9, 2008 providing for the sale of substantially all of the assets of FMSC to First Allied. The Asset Purchase Agreement remains subject to several conditions, including without limitation, the approval of the Financial Industry Regulatory Authority, Inc. ("FINRA"). The transaction is expected to close during the fourth quarter of 2008. However, as a result of the foregoing uncertainties, there can be no assurances that the transaction will be completed. NOTE 9 - CONVERTIBLE NOTE PURCHASE AGREEMENT On December 7, 2007 the Company entered into a note purchase agreement (the "Note Purchase Agreement") with AEFC-FMFK Investment Corp. ("AEFC-IC"), a related company of First Allied, an Advanced Equities Financial Corp. company (See Note 8 - Material Definitive Purchase Agreement), pursuant to which AEFC-IC was issued a 10% Convertible Secured Note due on December 31, 2008 for an aggregate principal amount up to $2,000,000 (the "AEFC-IC Note"). The AEFC-IC Note accrues interest on the unpaid principal amount at the rate of 10% per annum, which will be paid monthly in arrears on or before the 10th day of the month following the interest accrual. The principal of the AEFC-IC Note and all accrued and unpaid interest thereon will be payable in full on December 31, 2008. The AEFC-IC Note is convertible into shares of common stock at $0.35 per share, as adjusted, beginning July 1, 2008 if the AEFC-IC Note is not prepaid prior to such date. The AEFC-IC Note is prepayable at any time prior to July 1, 2008 subject to an escalating prepayment penalty based on the date of prepayment which is payable by us in cash and the issuance of a warrant to purchase shares of common stock at an exercise price of $0.35 per share, as adjusted. In the event the Company (i) does not draw the full $2,000,000 principal amount available under the AEFC-IC Note and (ii) the AEFC-IC Note has not been prepaid by July 1, 2008, the Company will issue AEFC-IC a warrant to purchase shares of common stock at an exercise price of $0.35 per share, as adjusted, for each one dollar of principal amount available but not drawn upon under the AEFC-IC Note. The parties also executed a registration rights agreement. At September 30, 2008, the Company had $1,000,000 of outstanding borrowings under the Note Purchase Agreement. In connection with, and concurrent with, the execution of the Note Purchase Agreement, the AEFC-IC Note and the related documents, the Company entered into the First Amendment, dated as of December 7, 2007 ("First Amendment to the Rights Agreement"), of the Rights Agreement, dated August 1, 2007, 8 between us and Continental Stock Transfer & Trust Company, as Rights Agent ("Rights Agreement") as more fully described above. The First Amendment to the Rights Agreement provides that AEFC-IC will not be deemed to be an "Acquiring Person" under the Rights Agreement by reason of (i) the execution of the AEFC-IC Note Purchase Agreement; (ii) the issuance of the AEFC-IC Note; (iii) the issuance of shares of common stock upon the conversion of the AEFC-IC Note into shares of our common stock; (iv) the issuance of any warrants to AEFC-IC pursuant to the Note Purchase Agreement or any shares of common stock upon exercise of such warrants; (v) the purchase by AEFC-IC of all or any of the 3,300,308 shares of common stock owned by Mr. Okun or any affiliates of Mr. Okun (collectively, the "Okun Parties"); (vi) the approval, execution or delivery of any agreement with respect to the purchase by AEFC-IC of all or any of the 3,300,308 shares of common stock owned by the Okun Parties; (vii) the public or other announcement of the Note Purchase Agreement or any of the transactions contemplated thereby, or the purchase by AEFC-IC of all or any of the 3,300,308 shares of common stock owned by the Okun Parties; or (viii) the consummation of the Note Purchase Agreement and any other transactions contemplated by the Note Purchase Agreement or any agreement to purchase all or any of the 3,300,308 shares of common stock owned by the Okun Parties. The foregoing description of the First Amendment to the Rights Agreement is qualified in its entirety by reference to the full text of the First Amendment to the Rights Agreement which is filed on Exhibit 10.2 to the Company's Report on Form 8-K filed on December 13, 2007. See also Note 8. NOTE 10 - REPURCHASE OF SHARES On October 20, 2008, the Company entered into a stock repurchase agreement ("Stock Repurchase Agreement") with FMFG Ownership Inc. by Gerard A. McHale, Jr. as Chapter 11 Bankruptcy Trustee of The 1031 Tax Group LLC et al., as Chapter 11 Debtors (the "Selling Stockholder") to purchase 3,300,308 shares of the Company's common stock, no par value, owned by the Selling Stockholder for $100,000. The purchase is being completed in escrow and is subject to the approval of the sale by the U.S. Bankruptcy Court within 40 calendar days of the date of execution of the stock repurchase agreement. The foregoing description of the Stock Repurchase Agreement is qualified in its entirety by reference to the full text of the Stock Repurchase Agreement, which is filed as Exhibit 10.1 hereto. NOTE 11 - COMMITMENTS AND CONTINGENCIES Operating Leases: The Company leases office facilities and equipment under operating leases expiring at various dates through 2012. Certain leases require the Company to pay increases in real estate taxes, operating costs and repairs over certain base year amounts. Future minimum rental commitments under all non-cancelable leases with terms greater than one year are as follows: Year ending December 31, 2008 $ 263,224 2009 751,574 2010 118,958 2011 36,645 2012 7,983 --------------------- $ 1,178,384 ===================== Master Services Agreement: Effective November 2006, the Company entered into a master services agreement with an outside vendor for development of certain software, data integration and business processing improvement consulting services. Under the terms of the agreement, the Company made payments totaling $400,000 to the 9 vendor for software development, none of which has been amortized or expensed and has been included as security deposits in other assets on the Consolidated Statements of Financial Condition. On April 28, 2008, the Company signed a new agreement amending the master services agreement with an outside vendor in exchange for a reimbursement of a portion of the system development costs paid by the Company. As part of this new Agreement, the vendor will provide a one-time electronic data feed and commission collection services to the Company through February 2010, which will be amortized over a twenty-three (23) month period, beginning April 2008. The balance of the amount related to the collection of commissions is reflected in prepaid expenses. Legal Matters: FMSC, the Company's wholly owned subsidiary, is a respondent or co-respondent in various legal proceedings, including customer arbitrations and regulatory investigations. Management is contesting these claims and believes that there are meritorious defenses in each case. However, litigation is subject to many uncertainties, and some of these actions and proceedings may result in an adverse judgment. Further, the availability of insurance coverage is determined on a case-by-case basis by the insurance carrier, and is limited to the coverage limits within the policy for any individual claim and in the aggregate. As of September 30, 2008, the Company has accrued litigation costs that are probable and can be reasonably estimated based on a review of existing claims, arbitrations and unpaid settlements. Management cannot give assurance that this amount will be adequate to cover actual costs that may be subsequently incurred. Further, it is not possible to predict the outcome of other matters pending against us. All such cases will continue to be vigorously defended. Civil Lawsuit The Company and certain of its principals are defendants in a lawsuit filed in the Superior Court of New Jersey, Monmouth County Law Division, which was filed in October 2008. The complaint, brought by two former clients of FMSC, alleges fraud, negligent misrepresentation, breaches of duty of care and violations of the New Jersey Securities Act in connection with the Plaintiffs' participation in a 1031 tax-free exchange real estate investment. This action is similar to one which was brought against the Company and many of the same individually named Defendants in July 2008 which was filed in the United States District Court for the Eastern District of North Carolina, which was first reported by the Company in its Form 10-Q for the period ending June 30, 2008. The Company has advised its Broker/Dealer professional liability insurance carrier, as well as its directors and officers liability insurance company of these claims and is seeking coverage under both policies. The Company intends to vigorously defend both of these cases and believes it has meritorious defenses to each claim. NOTE 12 - AMENDED AND RESTATED EMPLOYMENT AGREEMENT WITH ACTING CHIEF FINANCIAL OFFICER As of November 13, 2008, the Company and the Acting Chief Financial Officer and Senior Vice President of the Company ("CFO") executed an Amended and Restated Employment Agreement ("Amended Employment Agreement"). The Amended Employment Agreement was executed to ensure that the CFO would be available to provide her services and experience to the Company for up to an additional three months from February 1 to April 30, 2009 ("Secondary Period"). Under the terms of the CFO's original employment agreement, her employment by the Company was scheduled to expire on January 31, 2009 at which time she would be entitled to severance pay in the amount of $140,000 if her employment were not renewed. Under the terms of the Amended Employment Agreement, the CFO will continue her duties as Senior Vice President and Acting Chief Financial Officer of the Company through January 31, 2009 and will receive her base salary and other benefits. During the Secondary Period, the CFO will continue to serve as the Company's Acting Chief Financial Officer. She will not, however, receive any salary but will be provided with an 10 office and facilities commensurate with the performance of her duties as well as certain other fringe benefits provided to other executive officers. In lieu of any annual salary or severance pay under her original employment agreement and in consideration of the duties and services to be provided by the CFO during the Secondary Period, she will receive on November 14, 2009, a lump sum payment in the amount of $140,000. The Amended Employment Agreement contains non-solicitation and non-competition obligations that end on the first anniversary of the date of cessation of the CFO's employment. The foregoing description of the Amended Employment Agreement is qualified in its entirety by reference to the full text of the Amended Employment Agreement, which is filed as Exhibit 10.2 hereto. NOTE 13 - FRAUDULENT ACTIVITY LOSS On January 24, 2008, a series of fraudulent purchase order transactions were executed over the order entry system of National Financial Services ("NFS"), the Company's clearing broker, through an Internet protocol ("IP") address over the Internet, which reflected the user identification and password information of one of FMSC's registered representatives. These transactions were purchased without authorization in several customer accounts of the registered representative. After these transactions were executed, NFS contacted the appropriate regulatory authorities to report the fraudulent activities, which the regulatory authorities determined to let stand. Thereafter, FMSC took market action to liquidate the securities fraudulently purchased in order to mitigate the loss to the Company. These transactions resulted in a net loss to the Company of approximately $338,000 in the quarter ended March 31, 2008, which is reflected in other expenses in the Condensed Consolidated Statements of Operation for the nine months ended September 30, 2008. The Company filed a claim on its fidelity bond and business insurance carrier, in an attempt to recoup the loss sustained and other expenses related to this matter. On August 15, 2008, FMSC received written notification that its fidelity bond carrier, National Union Fire Insurance Co. of Pittsburgh. PA. ("National Union"), will pay to FMSC the sum of $288,000 in settlement of the Company's fidelity bond claim arising out of fraudulent stock purchases. On September 17, 2008, FMSC received payment in full. NOTE 14 - LOSS PER SHARE Basic loss per share for the nine and three months ended September 30, 2008 and 2007 is based on the weighted average number of shares of common stock outstanding. The following table sets forth the weighted average number of shares of common stock and dilutive securities outstanding used in the computation of basic and diluted loss per share: Nine months ended September 30, Three months ended September 30, 2008 2007 2008 2007 (unaudited) (unaudited) (unaudited) (unaudited) Numerator - basic and diluted: Net loss $(1,271,155) $(1,903,446) $ (331,376) $ (796,242) Deduct: dividends paid during the year (5,014) (122,294) (1,671) (36,490) --------------------- ------------------- ----------------------- ------------------- Numerator for basic and diluted loss per share $(1,276,169) $(2,025,740) $(333,047) $(832,732) ===================== =================== ======================= =================== Denominator: Denominator for basic and diluted loss per share 13,248,477 16,439,992 13,248,477 13,245,477
11 The following securities have been excluded from the dilutive per share computation, as they are antidilutive: ---------------------- ------------------------------------ --------------------------------------- Nine months ended September 30, Three months ended September 30, ---------------------- ----------------- ------------------ ------------------ -------------------- 2008 2007 2008 2007 ---- ---- ---- ---- ---------------------- ----------------- ------------------ ------------------ -------------------- Stock options 1,549,800 1,941,800 1,661,800 1,730,400 ---------------------- ----------------- ------------------ ------------------ -------------------- ---------------------- ----------------- ------------------ ------------------ -------------------- Warrants 283,518 407,518 283,518 407,518 ---------------------- ----------------- ------------------ ------------------ -------------------- ---------------------- ----------------- ------------------ ------------------ -------------------- Convertible 2,857,143 50,000 2,857,143 50,000 debentures ---------------------- ----------------- ------------------ ------------------ -------------------- ---------------------- ----------------- ------------------ ------------------ -------------------- Convertible preferred stock 44,564 44,564 44,564 44,564 ---------------------- ----------------- ------------------ ------------------ --------------------
As required by FAS 128, "Earnings per Share", cumulative preferred stock dividends for the nine and three months ended September 30, 2008 and 2007 were deducted from net loss to arrive at the numerator for basic and diluted loss per share. NOTE 15 - NET CAPITAL REQUIREMENTS FMSC is subject to the SEC Uniform Net Capital Rule (Rule 15c3-1), which requires FMSC to maintain minimum net capital, as defined. At September 30, 2008, FMSC had net capital of $804,152, which was $554,152 in excess of its required net capital of $250,000. FMSC's ratio of aggregate indebtedness to net capital was 2.59 to 1. NOTE 16 - FAIR VALUE MEASUREMENTS The Company adopted Statement of Financial Accounting Standards ("SFAS") No. 157, "Fair Value Measurements" ("SFAS 157") as of January 1, 2008. SFAS 157 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date, not adjusted for transaction costs. SFAS 157 also establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three broad levels giving the highest priority to quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3) as described below: Level 1 Inputs -- Unadjusted quoted prices in active markets for identical assets or liabilities that is accessible by the Company; Level 2 Inputs -- Quoted prices in markets that are not active or financial instruments for which all significant inputs are observable, either directly or indirectly; Level 3 Inputs -- Unobservable inputs for the asset or liability including significant assumptions of the Company and other market participants. 12 The Company determines fair values for the following assets and liabilities: Long-term investments, at fair value. The Company's long-term investments, at fair value, consist of marketable equity securities and investment securities, marked to market. The Company's marketable equity securities are classified within Level 1 of the fair value hierarchy, as they are valued using quoted market prices from an exchange. Investment securities, marked to market consists of warrants and equity securities received in connection with certain capital raising transactions. Warrants are generally exercisable at the respective offering price of the transaction. Such investments are classified within Level 3 of the fair value hierarchy as the value is determined by management based on valuation models and enterprise value, taking into consideration the financial performance of the companies relative to projections, trends within sectors, underlying business models and expected exit timing and strategy. Trading securities and trading account securities sold but not yet purchased, at fair value. The Company's trading securities and trading account securities sold but not yet purchased, at fair value, are securities owned or sold by the Company's broker-dealer subsidiaries and consist of marketable and non-public equity and debt securities. The Company classifies marketable equity and debt securities within Level 1 of the fair value hierarchy because quoted market prices are used to value the securities. Non-public equity and debt securities are classified within Level 3 of the fair value hierarchy if enterprise values are used to value the securities. In determining the enterprise value, the Company analyzes various financial, performance and market factors to estimate the value, including where applicable market trading activity, which may be reported by The PORTAL MarketSM, a subsidiary of The NASDAQ Stock Market, Inc. The following tables present our assets and liabilities that are measured at fair value on a recurring basis and are categorized using the fair value hierarchy. The fair value hierarchy has three levels based on the reliability of the inputs used to determine fair value. Fair Value Measurements at Reporting Date Using ---------------------------------------------------------------- Quoted Prices in Significant Active Markets for Significant Other Unobservable Identical Assets Observable Inputs Inputs Description September 30, 2008 (Level 1) (Level 2) (Level 3) -------------------------------------------- ----------------------- --------------------- ------------------ Assets: Securities Owned $220,587 $220,587 $-- $-- --------------------- ----------------------- --------------------- ------------------ Total Assets $220,587 $220,587 $-- $-- ===================== ======================= ===================== ================== Liabilities: $ -- $ -- $-- $-- --------------------- ----------------------- --------------------- ------------------ Total Liabilities $ -- $ -- $-- $-- ===================== ======================= ===================== ==================
13 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Factors Affecting "Forward-Looking Statements" From time to time, we may publish "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities and Exchange Act of 1934, as amended (the "Exchange Act"), or make oral statements that constitute forward-looking statements. These forward-looking statements may relate to such matters as anticipated financial performance, future revenues or earnings, business prospects, projected ventures, new products, anticipated market performance, and similar matters. The Private Securities Litigation Reform Act of 1995 (the "1995 Reform Act) provides a "safe harbor" for forward-looking statements. In order to comply with the terms of the safe harbor, we caution readers that a variety of factors could cause our actual results to differ materially from the anticipated results or other expectations expressed in our forward-looking statements. The Company desires to avail itself of these "safe harbor" provisions of the 1995 Reform Act and is therefore including this special note to enable the Company to do so. Forward-looking statements are identified by words such as "believes," "anticipates," "expect," "intend," "plan," "will," "may" and other similar expressions. In addition, any statements that refer to expectations, projections or other characterizations of future events or circumstances are forward-looking statements. Forward-looking statements in this Quarterly Report involve known and unknown risks, uncertainties and other factors which could cause the Company's actual results, performance (financial or operating) or achievements to differ from future results, performance (financial or operating) or achievements express or implied by such forward-looking statements. These risks and uncertainties, many of which are beyond our control, include, but are not limited to: (i) transaction volume in the securities markets, (ii) the volatility of the securities markets, (iii) fluctuations in interest rates, (iv) changes in regulatory requirements which could affect the cost of doing business, (v) fluctuations in currency rates, (vi) general economic conditions, both domestic and international, (vii) changes in the rate of inflation and related impact on securities markets, (viii) competition from existing financial institutions and other new participants in the securities markets, (ix) legal developments affecting the litigation experience of the securities industry, (x) the timely completion of the acquisition of the Company by a private investor, and (xi) changes in federal and state tax laws which could affect the popularity of products sold by us. We do not undertake any obligation to publicly update or revise any forward-looking statements. The reader is referred to our previous filings with the SEC, including our Form 10-K/A for the year ended December 31, 2007. Overview We are a New Jersey-based financial services holding company whose wholly owned subsidiary, First Montauk Securities Corp., ("FMSC") has operated as a full service retail and institutional securities brokerage firm since 1987. Since July 2000, FMSC has operated under the trade name "Montauk Financial Group" and provides a broad range of securities brokerage and investment services to a diverse retail and institutional clientele, as well as corporate finance and investment banking services to corporations and businesses. We also sell insurance products through our subsidiary, Montauk Insurance Services, Inc. Montauk Financial Group has approximately 124 registered representatives that service both retail and institutional customers. All of our branch office and satellite locations are owned and operated by affiliates; who are independent representatives who maintain all appropriate licenses and are responsible for all office overhead and expenses. Montauk Financial Group also employs registered representatives directly at its corporate headquarters. 14 Montauk Financial Group is registered as a broker-dealer with the SEC, Financial Industry Regulatory Authority ("FINRA"), the Municipal Securities Rule Making Board, the National Futures Association, and the Securities Investor Protection Corporation and is licensed to conduct its brokerage activities in all 50 states, the District of Columbia, and the Commonwealth of Puerto Rico, and registered as an International broker-dealer to conduct business with institutional clients in the province of Ontario, Canada. Securities transactions are cleared through National Financial Services LLC ("NFS") of Boston, MA, and Penson Financial Services Inc of Dallas, TX, with various floor brokerage and specialist firms also providing execution services. These arrangements provide Montauk Financial Group with back office support and transaction processing services on all principal, national and international securities exchanges, and access to many other financial services and products which allows Montauk Financial Group to offer products and services comparable to larger brokerage firms. On July 9, 2008, we signed a definitive asset purchase agreement with First Allied Securities, Inc. ("First Allied"), an Advanced Equities Financial Corp. company, providing for the sale of certain assets of FMSC to Buyer. Under the Purchase Agreement, our independent registered representatives will be given the opportunity to join First Allied, and First Allied will acquire the right to service the customer accounts of those registered representatives that join First Allied. The aggregate purchase price for the purchased assets is equal to 30% of the aggregate commission and fee income for the trailing twelve (12) month period ended on June 30, 2008, which was generated by the Closing Date Representatives and credited to the Closing Date Representatives for the purpose of computing their commission payout. The Purchase Agreement is subject to usual and customary conditions for transactions of this nature, including, among other things, the regulatory consent of FINRA, the acceptance and transfer of customer accounts accepted by First Allied to their clearing firm, and the estimated aggregate production of the Closing Date Representatives greater than $12,250,000. The Purchase Agreement also contains customary representations, warranties, covenants and indemnities for breach. On October 17, 2008, at our annual meeting of shareholders, a majority of voting common shareholders and Series A Preferred Shareholders voted to approve the Purchase Agreement. The transaction is currently scheduled to close on or about December 12, 2008 and is contingent upon receiving FINRA approval, as well as other conditions set forth in the Purchase Agreement. As a result of the foregoing uncertainties, there can be no assurances that the transaction will be completed. The accompanying condensed consolidated financial statements have been prepared assuming that the Company will continue as a going concern, which contemplates, among other things, the realization of assets and satisfaction of liabilities in the normal course of business. As of September 30, 2008, the Company had an accumulated deficit, and working capital of $922,000, which does not include the repayment of the $1,000,000 "AEFC-IC Note" (as defined in Note 9 - - "Convertible Note Purchase Agreement" in the Notes to Condensed Consolidated Financial Statements). For the nine months ended September 30, 2008, the Company incurred a net loss of $1,271,155. To date, the Company has been able to finance its operations through cash generated from operations and proceeds from the issuance of the AEFC-IC Note. If the transaction with First Allied is not consummated, the Company will be required to raise additional financing and/or renegotiate the repayment terms of the AEFC-IC Note in order to fund operational expenditures and/or repay the AEFC-IC Note. There is no assurance that the Company will be successful in consummating the Purchase Agreement or in obtaining alternative funding or debt renegotiation on terms satisfactory to the Company. If the Company cannot raise additional financing and/or renegotiate the repayment terms of the AEFC-IC Note, the Company may not be able to continue as a going concern. 15 RESULTS OF OPERATIONS Three Months Ended September 30, 2008 Compared to Three Months Ended September 30, 2007 Revenues by Source The following provides a breakdown of total revenues by source for the three-month periods ended September 30, 2008 and 2007 (in thousands of dollars). Three Months Ended --------------------------------------------------------------- September 30, 2008 September 30, 2007 ---------------------------- ------------------------------ Commissions Amount % of Total Amount % of Total Revenues Revenues Equities $1,776 28% $ 2,932 31% Mutual Funds 956 15% 1,437 15% Insurance 655 10% 1,268 13% Alternative Products 385 6% 965 10% Asset Management Fees 1,139 18% 1,010 11% Fixed Income 53 1% 96 1% ------------ --------------- -------------- --------------- Total 4,964 78% 7,708 81% Principal Transactions 587 9% 307 3% Investment Banking 184 3% 961 10% Interest and Other Interest 342 5% 456 5% Other 335 5% 90 1% ------------ --------------- -------------- --------------- Total 677 10% 546 6% ------------ --------------- -------------- --------------- Total revenues 6,412 100% $ 9,522 100% ============ =============== ============== ===============
Overview Total revenues decreased $3.11 million, or 33%, for the three months ended September 30, 2008 (the "2008 quarter"), to $6.41 million from $9.52 million for the three months ended September 20, 2007 (the "2007 quarter"). The decline in the number of producing registered representatives coupled with the market conditions and slow down in the economy contributed to the decrease in revenues in almost every category of revenue. Expenses decreased in the 2008 quarter by $3.58 million, or 35%, compared to the 2007 quarter. Commissions, employee compensation and benefits decreased by $3.1 million, from $8.3 million in the 2007 quarter to $5.2 million in the 2008 quarter. Of the $3.1 million decrease, $2.7 million was attributable to the reduction in commission expense, which is directly related to the decrease in revenues for the 2008 quarter. 16 The net loss applicable to common stockholders for the 2008 quarter was $333,000, or ($0.03) per basic and diluted shares compared to a net loss applicable to common stockholders for the 2007 quarter of $833,000, or ($0.06) per basic and diluted shares. Commission Revenue Commissions are comprised of revenues from transactions related to equities, fixed income, mutual funds, insurance, alternative investment products and asset management fees. Commission revenue for the 2008 quarter was $4.96 million compared to $7.71 million for the 2007 quarter, a decrease of approximately $2.75 million. There were decreases in almost every category of commissions. Decreases in commissions from equity transactions of $1.16 million, alternative investment products of $580,000, mutual funds of $481,000 and insurance of $613,000, accounted for the majority of the reduction in commission revenues when compared to the 2007 quarter. These decreases highlight the result of the reduction in producing registered representatives from the 2007 quarter to the 2008 quarter, as well as adverse market conditions quarter over quarter. Principal Transactions Principal transactions, which include mark-ups/mark-downs on customer transactions in which we act as principal, proprietary trading, and the sale of fixed income securities, increased $280,000, from $307,000 for the 2007 quarter to $587,000 for the 2008 quarter. The increase is primarily due to unrealized gains in restricted stock that the Company received during 2008 as a result of investment banking and fixed income transactions. Investment Banking Investment banking revenues for the 2008 quarter decreased $777,000 from $961,000 in the 2007 quarter, to $184,000 in the 2008 quarter, a decrease of approximately 81%. The decrease in investment banking revenues is attributable to the Company having completed a smaller number of investment banking transactions, primarily in PIPE (private investments in public equities) deals, during the third quarter of 2008 when compared to the same quarter in 2007. The PIPE business slowed considerably in 2008. Almost three-fourths of overall PIPE transactions that were completed in 2007 had resulted in losses in 2008, at least in mark-to-market terms (or in terms of the present value of their investments). Therefore, institutions and private equity firms were much more conservative when considering investments in PIPEs during 2008 limiting the number of new PIPE transactions. This category also includes new issues of equity and preferred stock offerings of securities in which we participate as a selling group or syndicate member. In addition, the Company receives fees for providing financial advice to various companies pertaining to their business affairs. Interest and Other Income Interest and other income for the 2008 quarter increased by approximately $131,000 when compared to the 2007 quarter. Included in interest and other income for the 2008 quarter, is $288,000 received from our fidelity bond carrier resulting from a claim filed arising out of fraudulent stock purchases in the first quarter of 2008 (See Note 13 to the consolidated financial statements). Interest income decreased by approximately $114,000 when compared to the 2007 quarter. This decrease was directly related to the amount of margin debit carried by customers, along with the reduction in interest charged on these accounts. Commissions, Employee Compensation and Benefits Commission expense, consistently the largest expense category and directly related to commission revenue, decreased 39%, or $2.67 million, from $6.87 million for the 2007 quarter to $4.21 million for the 2008 quarter. Compensation and benefits expense for management, operations and clerical personnel, which include salaries, severance payments, payroll taxes, health insurance premiums, and bonus accruals, decreased for the 2008 quarter, to $959,000 from $1.39 million, a decrease of approximately $431,000, or 31%, over the 2007 quarter. Salaries for the 2008 quarter were down $357,000 due to reductions in personnel quarter over quarter. In addition, insurance costs and bonus accruals for the 2008 quarter were reduced by $57,000 and $77,000, respectively, when compared with the 2007 quarter. In contrast, severance payments increased $76,000 when compared with the 2007 quarter, due to contractual obligations. Clearing and Floor Brokerage Clearing and floor brokerage costs which are greatly affected by volume and type of transactions, decreased $16,000 in the 2008 quarter when compared to the 2007 quarter. Clearing costs, as a percentage of gross revenues, fluctuate depending upon the product mix. 17 Communications and Occupancy Communications and occupancy costs decreased $46,000 during the 2008 quarter, from $427,000 in the 2007 quarter to $381,000 in the 2008 quarter. Legal Matters and Related Costs Legal matters and related settlement costs increased $146,000, from $237,000 during the 2007 quarter, to $383,000 for the 2008 quarter, most of which was related to legal settlement costs for arbitrations. During the 2008 quarter, we settled or accrued for five arbitration claims totaling $129,000. Other Operating Expenses Other operating expenses decreased approximately $586,000, from $1,048,000 during the 2007 quarter to $462,000 for the 2008 quarter. During the 2007 period, the Company settled two regulatory inquiries; one with the SEC and one with FINRA. The total fines related to these two investigations were $275,000 and were accrued for by the Company in August and September 2007. Other reductions in this category include consulting & professional fees of $139,000, postage of $51,000, business insurance of $38,000 and office expense of $31,000. Nine Months Ended September 30, 2008 Compared to Nine Months Ended September 30, 2007 Revenues by Source The following provides a breakdown of total revenues by source for the nine-month periods ended September 30, 2008 and 2007 (in thousands of dollars). Nine Months Ended ----------------------------------------------------------------- September 30, 2008 September 30, 2007 ------------------------------- ------------------------------ % of Total % of Total Commissions Amount Revenues Amount Revenues ----------- ------ ---------- ------ ----------- Equities $6,766 33% $ 9,801 31% Mutual Funds 3,085 15% 4,729 15% Insurance 2,339 11% 3,582 11% Alternative Products 1,271 6% 3,579 11% Asset Management Fees 3,142 15% 3,080 10% Fixed Income 224 1% 171 1% -------------- ---------------- -------------- --------------- Total 16,827 81% 24,942 79% Principal Transactions 1,568 8% 1,261 4% Investment Banking 671 3% 3,440 11% Interest and Other Interest 1,126 6% 1,631 5% Other 504 2% 437 1% -------------- ---------------- -------------- --------------- Total 1,630 8% 2,068 6% -------------- ---------------- -------------- --------------- Total revenues $20,696 100% $ 31,711 100% ============== ================ ============== ===============
18 Overview Overall, revenues decreased $11 million for the nine months ended September 30, 2008 (the "2008 period"), to $20.7 million, compared to $31.7 million, for the nine months ended September 30, 2007 (the "2007 period"). Commission revenues decreased by $8.1 million while revenues from investment banking decreased by $2.8 million. The decline in the number of producing registered representatives coupled with the market conditions and slow down in the economy contributed to the decrease in revenues in almost every category of revenue. Investment banking revenues decreased due to the Company having completed a smaller number of investment banking transactions during the first nine months of 2008 compared to the same period in 2007. Expenses in the 2008 period decreased by approximately $11.6 million, or 35%, compared to the 2007 period. Commissions, employee compensation and benefits accounted for the largest decrease of $10.5 million, from $27.5 million in the 2007 period compared to $17.0 million in the 2008 period. The net loss applicable to common stockholders for the 2008 period was $1,271,000, or ($0.10) per basic and diluted shares compared to a net loss applicable to common stockholders for the 2007 period of $1,903,000, or ($0.12) per basic and diluted shares. Commission Revenue Commissions are comprised of revenues from transactions related to equities, fixed income, mutual funds, insurance, alternative investment products and asset management fees. Commission revenue for the 2008 period decreased $8.1 million to $16.8, from $24.9 million in the 2007 period. There were decreases in every category of commission revenue. The largest decreases were in equity transactions of $ 3.04 million, alternative investment products of $2.31 million each and mutual funds of $1.64 million. These decreases highlight the result of the reduction in producing registered representatives from the 2007 period to the 2008 period, as well as adverse market conditions towards the latter part of the 2008 period. Principal Transactions Principal transactions, which include mark-ups/mark-downs on customer transactions in which we act as principal, proprietary trading, and the sale of fixed income securities, increased $306,000 during the 2008 period when compared to the 2007 period. The increase is primarily due to unrealized gains in restricted stock that the Company received during 2008 as compensation for investment banking activities. Investment Banking Investment banking revenues for the 2008 period decreased $2.77 million, from $3.44 million in the 2007 period, to $671,000 in the 2008 period, a decrease of approximately 80%. The decrease in investment banking revenues is attributable to the Company having completed a smaller number of investment banking transactions, primarily PIPE deals, during the 2008 period when compared to the 2007 period. The PIPE (private investments in public equities) business slowed considerably in 2008. Almost three-fourths of overall PIPE transactions that were completed in 2007 had resulted in losses in 2008, at least in mark-to-market terms (or in terms of the present value of their investments). Therefore, institutions and private equity firms were much more conservative when considering investments in PIPEs during 2008. This category also includes new issues of equity and preferred stock offerings of securities in which we participate as a selling group or syndicate member. In addition, the Company receives fees for providing financial advice to various companies pertaining to their business affairs. 19 Interest and Other Income Interest and other income for the 2008 period decreased by approximately $438,000 when compared to the 2007 period. Included in interest and other income for the 2008 period, is $288,000 received from our fidelity bond carrier resulting from a claim filed arising out of fraudulent stock purchases in the first quarter of 2008 (See Note 13-"Fraudulent Activity Loss" in the Notes to the Condensed Consolidated Financial Statements). Of the net decrease, $503,000 was from the reduction in interest income. This decrease was directly related to the amount of margin debit carried by customers, along with the reduction in interest charged on these accounts. Commissions, Employee Compensation and Benefits Commission expense, consistently the largest expense category and directly related to commission revenue, decreased 38%, or $8.7 million, from $22.7 million for the 2007 period, to $14.0 million for the 2008 period. Compensation and benefits expense for management, operations and clerical personnel, which include salaries, severance payments, payroll taxes, health insurance premiums, and bonus accruals, decreased for the 2008 period, to $2.97 million from $4.81 million, a decrease of approximately $1.84 million, or 38%, over the 2007 period. Salaries and payroll taxes for the 2008 period were down $1.32 million due to reductions in personnel period over period. In addition, insurance costs, severance payments and bonus accruals for the 2008 period were reduced by $133,000, $130,000 and $274,000, respectively, when compared with the 2007 period. Clearing and Floor Brokerage Clearing and floor brokerage costs, which are greatly affected by volume and type of transactions, decreased $150,000 during the 2008 period when compared to the 2007 period. Clearing costs, as a percentage of gross revenues, fluctuate depending upon the product mix. Communications and Occupancy Communications and occupancy costs decreased $14,000 during the 2008 period, to $1,248,000, from $1,262,000 during the 2007 period. Legal Matters and Related Costs Legal matters and related settlement costs decreased $455,000, from $1,222,000 during the 2007 period, to $767,000 for the 2008 period. In 2007, we incurred $407,000 related to various lawsuits involving a proposed merger that was terminated in December 2006. The amount for the 2007 period was net of a $600,000 reimbursement from our insurance carrier, which was received in August 2007. There were no legal fees related to this matter during the 2008 period. Other Operating Expenses Other operating expenses decreased $570,000, from $2,470,000 during the 2007 period to $1,900,000 for the 2008 period. Included in this category, during the first quarter of 2008, is approximately $338,000 of losses as a result of fraudulent trading activity. (See Note 13 - "Fraudulent Activity Loss" in the Notes to the Condensed Consolidated Financial Statements for more details). Absent this loss, other operating expenses would have decreased by approximately $908,000. During the 2007 period, the Company settled two regulatory inquiries; one with the SEC and one with FINRA (see Note 11 -"Commitments and Contingencies - - Legal Matters" in the Notes to the Condensed Consolidated Financial Statements). The total fines related to these two investigations were $275,000 and were accrued for by the Company in August and September 2007. Reductions in this category include consulting & professional fees of $212,000, travel & entertainment of $38,000, office expenses of $75,000 and training related to the Company's continuing education seminars. 20 Liquidity and Capital Resources Approximately 79% of our assets consist of cash, securities owned, and receivables from our clearing firm and other product sponsors. The balances in these accounts can and do fluctuate significantly from day to day, depending on general economic and market conditions, volume of activity, and investment opportunities. These accounts are monitored on a daily basis in order to ensure compliance with regulatory capital requirements and to preserve liquidity. Overall, cash and cash equivalents decreased during the nine months ended September 30, 2008 by $222,000. Net cash used in operating activities during the 2008 period was $191,000, which consists of a net loss of $1,271,000, increased by non-cash charges including depreciation of $51,000, amortization of stock compensation and deferred costs of $27,000. Cash was reduced by increases in securities owned and prepaid expenses of $61,000 and $270,000, respectively, and decreases in commissions' payable of $508,000. Cash was increased by a decrease in the amount due from clearing firm, employee and broker receivables and other assets of $250,000, $170,000 and $739,000, respectively, and increases in account payable, accrued expenses, securities sold and other liabilities of $368,000, $52,000, $42,000 and $226,000, respectively. Additions to property and equipment of $25,000 accounted for the use of cash from investing activities during the nine months ended September 30, 2008. Financing activities used net cash of $5,000 due to the payment of preferred stock dividends during the first nine months of 2008. A financing agreement with AICCO Inc. for the renewal of our errors and omissions insurance policy had a balance at September 30, 2008 of approximately $75,000, payable in one remaining monthly installment of approximately $75,000, including interest at the rate of 4.22% per annum. Future Cash Requirements and Uncertainties Regarding Our Liquidity Future Cash Requirements Our primary future cash requirements will be to repay the convertible secured note payable and fund general operating costs of the Company, including commissions and employee costs: Other than funding our general operating costs, we specifically expect our primary cash requirements for the remainder of 2008 to be impacted by the following specific use of cash: o Convertible secured note payments -- In accordance with the terms of the AEFC-IC Note Purchase Agreement with AEFC-IC, the Company will be required to repay any outstanding principal balance and unpaid interest on December 31, 2008. It is anticipated that the loan will be repaid out of the proceeds of the asset purchase transaction which is currently scheduled to close prior to December 31, 2008. At September 30, 2008, the AEFC-IC Note had a $1,000,000 principal balance outstanding. Uncertainties Regarding Our Liquidity To date, the Company has been able to finance its operations through cash generated from operations and proceeds from the issuance of the AEFC-IC Note. On July 9, 2008, the Company entered into the Purchase Agreement with First Allied, a related company of AEFC-IC (See Note 8 - Material Definitive Purchase Agreement in the Notes to the Condensed Consolidated Financial Statements). On October 17, 2008 at our annual meeting of shareholders, a majority of voting common shareholders and Series A Preferred Shareholders voted 21 to approve the Purchase Agreement. The transaction is currently scheduled to close on or about December 12, 2008 and is contingent upon receiving FINRA approval, as well as other conditions set forth in the Purchase Agreement. As a result of the foregoing uncertainties, there can be no assurances that the transaction will be completed. If the terms of the Purchase Agreement are not consummated for any other reason, the Company will be required to raise additional financing and/or renegotiate the repayment terms of the AEFC-IC Note in order to fund operational expenditures and/or repay the AEFC-IC Note. There is no assurance that the Company will be successful in consummating the Purchase Agreement or in obtaining alternative funding or debt renegotiation on terms satisfactory to the Company. If the Company cannot raise additional financing and/or renegotiate the repayment terms of the AEFC-IC Note, the Company may not be able to continue as a going concern. Recent Accounting Pronouncements See Note 3 "Recent Accounting Pronouncements" in the Notes to the Condensed Consolidated Financial Statements in Item 1 for a full description of recent accounting pronouncements, including the expected dates of adoption and estimated effects on results of operations and financial condition, which is incorporated herein. Net Capital At September 30, 2008, Montauk Financial Group had net capital of $804,152, which was $554,152 in excess of its required net capital of $250,000, and the ratio of aggregate indebtedness to net capital was 2.59 to 1. Series A Convertible Preferred Stock In 1999, we issued 349,511 shares of Series A Convertible Preferred Stock in an exchange offering related to a settlement with holders of certain leases. Each share of the Preferred Stock is convertible into two shares of Common Stock and pays a quarterly dividend of 6%. As of September 30, 2008, we have 22,282 Series A preferred shares issued and outstanding. Quarterly dividends of $1,671 and $19,601 were paid during the three months ended September 30, 2008 and 2007, respectively. Series C Participating Cumulative Preferred Stock The Board of Directors of the Company adopted a shareholder rights plan as of August 8, 2007 and in connection therewith designated a Series C Participating Cumulative Preferred Stock, $.10 par value per share ("Series C Stock"). The rights were declared as a dividend of one preferred share purchase right for each outstanding share of the common stock of the Company. The dividend distribution was payable on August 8, 2007 to shareholders of record on that date. When exercisable, each right will entitle its holder to purchase from the Company one one-hundredth of a share of the Company's new Series C Stock, at a price of $2.00 per one one-hundredth of a share of Series C Stock, subject to adjustment. The Company has created a series of 200,000 shares of authorized but not issued preferred stock for the Series C Stock authorized in this shareholder rights plan. No shares of Series C Stock are currently issued and outstanding. The rights will become exercisable on the tenth business day (unless further extended by a resolution adopted by a majority of the "continuing directors" of our Board of Directors as of the close of business on August 9, 2007 (the date of our 2007 annual meeting of shareholders) following public announcement that a person or group of affiliated or associated persons has acquired or obtained the right to acquire beneficial ownership of 10% or more of the common stock without approval of a majority of the Board of Directors of the Company. The rights expire on August 8, 2017 unless earlier redeemed or exchanged by the Company. In the event the Company is acquired in a merger or other business combination transaction after the rights become exercisable, each holder of a right would be entitled to receive that number of shares of the acquiring company's common stock equal to the result obtained by multiplying the then current purchase price by the number one one-hundredths of a share of Series C Stock for which a right is then exercisable and dividing that product by 50% of the then current market price per share of the acquiring company. 22 Application of Critical Accounting Policies Generally accepted accounting principles are complex and require management to apply significant judgments to various accounting, reporting and disclosure matters. Our management must use assumptions and estimates to apply these principles where actual measurement is not possible or practical. For a complete discussion of our significant accounting policies, see "Management Discussion and Analysis" and "Notes to the Condensed Consolidated Financial Statements" in our 2007 Annual Report filed on Form 10-K/A. Certain policies are considered critical because they are highly dependent upon subjective or complex judgments, assumptions and estimates. Changes in such estimates may have a significant impact on the financial statements. Off-Balance Sheet Arrangements We execute securities transactions on behalf of our customers. If either the customer or counter-party fails to perform, we, by agreement with our clearing broker may be required to discharge the obligations of the non-performing party. In such circumstances, we may sustain a loss if the market value of the security is different from the contract value of the transaction. We seek to control off-balance-sheet risk by monitoring the market value of securities held or given as collateral in compliance with regulatory and internal guidelines. Pursuant to such guidelines, our clearing firm requires additional collateral or reduction of positions, when necessary. We also complete credit evaluations where there is thought to be credit risk. Item 3. Quantitative and Qualitative Disclosures About Market Risk Business Risk. Our business is subject to significant risk from a decline in revenues due to the loss of registered representatives, expenses related to legal matters associated with our terminated merger plans and regulatory exposure. We may incur further losses in the future and such losses would necessarily affect the nature, scope and level of our future business. To date, we have been able to finance our operations through cash generated from operations and proceeds from the AEFC-IC Note. On July 9, 2008, we entered into the Purchase Agreement with First Allied (see Note 9-"Convertible Note Purchase Agreement" in the Notes to the Condensed Consolidated Financial Statements). If the terms of the Purchase Agreement are not consummated for any reason, we will be required to raise additional financing and/or renegotiate the repayment terms of the AEFC-IC Note in order to fund operational expenditures and/or repay such Note. There is no assurance that we will be successful in consummating the Purchase Agreement or in obtaining alternative funding or debt renegotiation on terms satisfactory to us. If we cannot raise additional financing and/or renegotiate the repayment terms of the AEFC-IC Note, the Company may not be able to continue as a going concern. Our ability to obtain additional financing from other sources depends on many factors, some of which are beyond our control, including the state of the capital markets and the uncertainties that are common in the securities industry. The necessary additional financing may not be available to us or may be available only on terms that would result in dilution to the current owners of our common stock. If additional funding cannot be obtained, we will review alternative courses of action to conserve our cash flow. 23 As a securities broker-dealer, we are subject to uncertainties that are common in the securities industry. These uncertainties include: o the volatility of capital markets; o governmental regulation; o litigation; o intense competition; o substantial fluctuations in the volume and price level of securities; and o dependence on third parties. As a result, revenues and earnings may vary significantly from period to period. In periods of low volume, profitability is impaired because certain expenses remain relatively fixed. In the event of a substantial change in market conditions or a loss of a substantial number of registered representatives from whom our revenues are derived, our financial condition and results of operations would be adversely affected. Market Risk. Market risk is the risk of loss to the Company resulting from changes in interest rates and equity prices. The Company has exposure to market risk primarily through FMSC, its broker-dealer subsidiary. FMSC carries debt obligations on behalf of its customers and occasionally acts as a market maker in over-the-counter equity securities. In connection with these activities, the Company maintains inventories to facilitate client transactions. Occasionally, the Company invests for its own proprietary equity investment accounts. The following table represents the fair value of trading inventories associated with the Company's broker-dealer client facilitation, market-making activities and proprietary trading activities. September 30, 2008 December 31, 2007 ------------------------------- ----------------------------------- ------------------------------------ Securities Sold Securities Sold but not yet Securities but not yet Securities Owned Purchased Owned Purchased ------------------------------- ----------------- ----------------- ---------------- ------------------- Marketable: Government $ 1,616 $ 0 $ 6,756 $ 0 Corporate 0 0 0 0 Municipal 0 0 0 0 Certificates of deposit 0 0 0 0 ------------------------------- ----------------- ----------------- ---------------- ------------------- Total debt securities 1,616 0 6,756 Equity securities 218,971 41,828 71,019 0 Mutual funds 0 0 9,463 201 Options 0 0 0 0 Warrants 0 0 72,535 0 ------------------------------- ----------------- ----------------- ---------------- ------------------- Total $220,587 $41,828 $ 159,773 $ 201 =============================== ================= ================= ================ ===================
24 Changes in value of the Company's inventory may result from fluctuations in interest rates, credit ratings of the issuer, equity prices and the correlation among these factors. The Company's primary method of controlling risk is through the establishment and monitoring of limits on the dollar amount of securities positions that can be entered into. Position limits in inventory accounts are monitored on a daily basis. Management also monitors inventory levels and trading results, as well as inventory aging, pricing, concentration and securities ratings. Since the inventory accounts are used primarily to facilitate customer transactions the number of positions and absolute dollar amounts are maintained well within Company limits and therefore represents minimal market risk to the Company. Our policy is to hold securities pending customer transactions and therefore we generally do not maintain positions longer than one year. Credit Risk. Credit risk represents the loss that we would incur if a client, counterparty or issuer of securities or other instruments that we hold fails to perform its contractual obligations. Client activities involve the execution, settlement, and financial of various transactions on behalf of its clients. Client activities are transacted on either a cash or margin basis. Client activities may expose us to off-balance sheet credit risk. We may have to purchase or sell financial instruments at the prevailing market price in the event of the failure of a client to settle a trade on its original terms or in the event that cash and securities in the client margin accounts are not sufficient to fully cover the client losses. We seek to control the risks associated with client activities by requiring clients to maintain collateral in compliance with various regulations and company policies. Operational Risk. Operational risk generally refers to the risk of loss resulting from our operations, including, but not limited to, improper or unauthorized execution and processing of transactions, deficiencies in our operating systems, business disruptions and inadequacies or breaches in our internal control processes. We operate in diverse markets and rely on the ability of our employees and systems to process high numbers of transactions often within short time frames. In the event of a breakdown or improper operation of systems, human error or improper action by employees, we could suffer financial loss, regulatory sanctions or damage to our reputation. In order to mitigate and control operational risk, we have developed and continue to enhance policies and procedures that are designed to identify and manage operational risk at appropriate levels. Included in our operational risk management practice is disaster recovery for our critical systems. We believe that our disaster recovery program, including off-site back-up technology and operational facilities, is adequate to handle a reasonable business disruption. However, there can be no assurances that a disaster directly affecting our headquarters or operations center would not have a material adverse impact. Insurance and other safeguards might only partially reimburse us for our losses. Legal Risk. Legal risk includes the risk of non-compliance with applicable legal and regulatory requirements. We are subject to extensive regulation in the different jurisdictions in which we conduct our business. We have various procedures addressing issues such as regulatory capital requirements, sales and trading practices, use of and safekeeping of customer funds, credit granting, collection activities, anti money-laundering and record keeping. 25 Item 4T. Controls and Procedures We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and our Acting Chief Financial Officer as appropriate, to allow timely decisions regarding required disclosure under Rules 13a-15(e) and 15d-15(e). Disclosure controls and procedures, no matter how well designed and operated, can provide only reasonable, rather than absolute, assurance of achieving the desired control objectives. As of September 30, 2008, we carried out an evaluation under the supervision and with the participation of our Chief Executive Office and our Acting Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures. Based on the foregoing, our Chief Executive Officer and Acting Chief Financial Officer concluded that our disclosure controls and procedures were effective at the reasonable assurance level to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC's rules and forms and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, to allow timely decisions required disclosure. There have been no changes in internal controls over financial reporting that occurred during the current quarter that have materially affected, or are reasonably likely to materially affect our internal controls over financial reporting. 26 PART II OTHER INFORMATION Item 1. Legal proceedings Civil Lawsuit The Company and certain of its principals are defendants in a lawsuit filed in the Superior Court of New Jersey, Monmouth County Law Division that was filed in October 2008. The complaint, brought by two former clients of FMSC, alleges fraud, negligent misrepresentation, breaches of duty of care and violations of the New Jersey Securities Act in connection with the Plaintiffs' participation in a 1031 tax-free exchange real estate investment. This action is similar to one which was brought against the Company and many of the same individually named Defendants in July 2008 which was filed in the United States District Court for the Eastern District of North Carolina, which was first reported by the Company in its Form 10-Q for the period ending June 30, 2008. The Company has advised its Broker/Dealer professional liability insurance carrier, as well as its directors and officers liability insurance company of these claims and is seeking coverage under both policies. The Company intends to vigorously defend both of these cases and believes it has meritorious defenses to each claim. Item 1A. Risk Factors As provided for under the Private Securities Litigation Reform Act of 1995, we wish to caution shareholders and investors that the important factors, among others discussed throughout this Report on Form 10-Q and previously disclosed in Part I, Item 1A ("Risk Factors") of our Annual Report on Form 10-K/A for the fiscal year ended December 31, 2007, should be read carefully. Our operating results and financial condition have varied in the past and may in the future vary significantly depending on a number of factors. Except for the historical information in this report, the matters contained in this report include forward-looking statements that involve risks and uncertainties. These risk factors, among others, could cause actual results to differ materially from those contained in forward-looking statements made in this report and presented elsewhere by management from time to time. You are referred to Item 1A ("Risk Factors") of our Annual Report on Form 10-K/A for the fiscal year ended December 31, 2007 for a discussion of the risks associated with our business, financial condition and results of operations. Such factors, among others, may have a material adverse effect upon our business, results of operations and financial condition. Item 2. Unregistered Sales of Equity Securities and Use of Proceeds (a) Not applicable. (b) Not applicable. (c) Not applicable. Item 3. Defaults Upon Senior Securities. None. 27 Item 4. Submission of Matters to a Vote of Security Holders. We held our annual meeting of shareholders on October 17, 2008. As of the record date of August 25, 2008, there were 13,257,248 shares of common stock outstanding and eligible to vote and 22,282 shares of Series A preferred stock outstanding and eligible to vote at the Annual Meeting. A total of 11,231,364 shares of our common stock were present or represented by proxy at the meeting. A total of 16,895 shares of our Series A preferred stock were present or represented by proxy at the meeting. At the annual meeting, shareholders were requested to vote on the approval and adoption of the Asset Purchase Agreement, dated as of October 17, 2008, by and among First Allied, FMSC and the Company (Proposal 1). The results were as follows: ----------------------- ----------------------- --------------------------- ----------------------- --------------------- Votes Cast for Adoption of Votes Cast Against Proposal I Proposal I Votes Abstaining Not Voted ----------------------- ----------------------- --------------------------- ----------------------- --------------------- Common Stock 5,239,181 4,003,141 5,631 1,983,411 ----------------------- ----------------------- --------------------------- ----------------------- --------------------- Series A Preferred 16,895 0 0 0 Stock ----------------------- ----------------------- --------------------------- ----------------------- ---------------------
Also at the annual meeting, shareholders were requested to vote on the election of the following Class I Director, who was re-elected as Class I Director by the shareholders for a three-year term: ------------------------------- ---------------------------- -------------------------------- Name of Nominee Votes Cast In Favor Votes Withheld ------------------------------- ---------------------------- -------------------------------- Celeste Leonard 7,105,351 4,126,013 ------------------------------- ---------------------------- --------------------------------
Victor K. Kurylak, Ward R. Jones, Jr., Barry Shapiro and David Portman all continue as directors of First Montauk. Item 5. Other Information Not applicable. 28 Item 6. Exhibits The exhibits designated with an asterisk (*) are filed herewith. All other exhibits have been previously filed with the Commission and, pursuant to 17 C.F.R. ss. 230.411, are incorporated by reference to the document referenced in brackets following the description of such exhibits. - ----------------- ---------------------------------------------------------------------------------------------------- *10.1 Stock Repurchase Agreement, dated as of October 20, 2008 by and between Gerard A. McHale, Jr., as Chapter 11 Trustee of The 1031 Tax Group LLC and First Montauk Financial Corp. - ----------------- ---------------------------------------------------------------------------------------------------- - ----------------- ---------------------------------------------------------------------------------------------------- *10.2 Amended and Restated Employment Agreement, dated as of November 13, 2008 by and between First Montauk Financial Corp. and Mindy A. Horowitz - ----------------- ---------------------------------------------------------------------------------------------------- - ----------------- ---------------------------------------------------------------------------------------------------- *31.1 Certification of President and Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 - ----------------- ---------------------------------------------------------------------------------------------------- - ----------------- ---------------------------------------------------------------------------------------------------- *31.2 Certification of Acting Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 - ----------------- ---------------------------------------------------------------------------------------------------- - ----------------- ---------------------------------------------------------------------------------------------------- *32.1 Certification of President and Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 - ----------------- ---------------------------------------------------------------------------------------------------- - ----------------- ---------------------------------------------------------------------------------------------------- *32.2 Certification of Acting Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 - ----------------- ---------------------------------------------------------------------------------------------------- - ----------------- ----------------------------------------------------------------------------------------------------
SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. FIRST MONTAUK FINANCIAL CORP. (Registrant) Dated: November 19, 2008 /s/ Mindy A. Horowitz ------------------------------------- Mindy A. Horowitz Acting Chief Financial Officer Dated: November 19, 2008 /s/ Victor K. Kurylak ------------------------------------- Victor K. Kurylak President and Chief Executive Officer 29 EX-10 2 ex1.txt EXHIBIT 10.1 Exhibit 10.1 FIRST MONTAUK FINANCIAL CORP. STOCK REPURCHASE AGREEMENT THIS STOCK REPURCHASE AGREEMENT (this "Agreement") is made and entered into as of October 20, 2008 by and between FMFG OWNERSHIP INC. BY GERARD A. McHALE, JR., AS CHAPTER 11 BANKRUPTCY TRUSTEE OF THE 1031 TAX GROUP LLC ET AL, AS CHAPTER 11 DEBTORS (the "Selling Stockholder") and FIRST MONTAUK FINANCIAL CORP., a New Jersey corporation (the "Company"). WHEREAS, the Selling Stockholder owns 3,300,308 shares (the "Shares") of common stock of the Company, no par value (the "Common Stock"), as evidenced by stock certificates nos. U2005303, U2005306, U2005309 and U5475 (the "Certificates"); and WHEREAS, on the terms and subject to the conditions set forth in this Agreement, the Selling Stockholder desires to sell to the Company, and the Company desires to purchase from the Selling Stockholder, the Shares. NOW, THEREFORE, IN CONSIDERATION of the mutual covenants contained in this Agreement, and for other good and valuable consideration the receipt and adequacy of which are hereby acknowledged, the Company and the Company agree as follows: 1. Repurchase and Sale of Common Stock. 1.1 Sale and Purchase of Common Stock. (a) Upon the terms and subject to the conditions of this Agreement, (i) the Company agrees to repurchase the Shares, and (ii) the Selling Stockholder agrees to sell the Shares. The repurchase price of the Shares to be paid by the Company under this Agreement shall be $100,000 in the aggregate (the "Purchase Price") which shall be payable in cash by wire transfer or delivery of other immediately available funds. 1.2 Closing; Deliveries. (a) The repurchase and sale of the Shares (the "Closing") shall take place at the offices of Golenbock Eiseman Asser Bell & Peskoe LLP ("Golenbock Eiseman"), 437 Madison Avenue, New York, New York 10022, or such other location mutually agreeable to the parties hereto, at 9:00 a.m. on the date hereof provided further that in no event shall the Closing take place later than four (4) business days after satisfaction or (subject to applicable law) waiver of the conditions set forth in Section 4 and Section 5 (excluding conditions that, by their terms, cannot be satisfied until the Closing). (b) Upon execution of this Agreement, the Selling Stockholder shall deliver to Jonathan Flaxer,\ Esq. of Golenbock Eiseman as custodian (the "Custodian"), the Certificates for the number of Shares to be sold by the Selling Stockholder pursuant to this Agreement. (c) At the Closing: (i) the Custodian on behalf of the Selling Stockholder shall deliver the Certificates to the Company against payment of the Purchase Price by the Company; and (ii) the Company shall deliver or cause to be delivered the Purchase Price by wire transfer in immediately available funds to the account of the Custodian against delivery of the shares by the Custodian on behalf of the Selling Shareholder. 1.3 Condition Subsequent; Approval of the United States Bankruptcy Court. Notwithstanding the provisions of Section 1.2(c), in the event that the United States Bankruptcy Court (the "Bankruptcy Court") has not entered an order approving the sale of the Shares by the Selling Stockholder to the Company (the "Order") as of the date of Closing, the parties agree that the Certificates and the Purchase Price shall be held in escrow by the Custodian pending approval of the transactions contemplated by this Agreement by the Bankruptcy Court and the entry of the Order to such effect. Upon the execution of this Agreement, the Selling Stockholder and the Company shall each make best efforts and shall cooperate to obtain approval of the Bankruptcy Court and the entry of the Order. In the event the Bankruptcy Court has approved the sale of the Shares and entered the Order on or before the 40th calendar day after the Closing, on the next business day following the entry of the order the Custodian shall deliver the Certificates to the Company and the Purchase Price to the Selling Stockholder. In the event that the Bankruptcy Court has not entered the Order on or before the 40th calendar day after the Closing, upon the written demand by the Company delivered to the Selling Stockholder and the Custodian, the Custodian shall return the Purchase Price to the Company on the next business day and the Certificates to the Selling Stockholder. 2. Representations and Warranties of the Selling Stockholder. The Selling Stockholder represents and warrants to the Company as of the date hereof and as of the closing as follows: 2.1 Authorization; Enforcement. The Selling Stockholder has the full right, power and authority to enter into this Agreement and to sell, transfer and deliver the Shares to be sold by the Selling Stockholder hereunder. This Agreement when executed and delivered by the Selling Stockholder, will constitute a valid and legally binding obligation of the Selling Stockholder, enforceable against the Selling Stockholder in accordance with its terms except (A) as limited by applicable bankruptcy, insolvency, reorganization, moratorium, fraudulent conveyance, and other laws of general application affecting enforcement of creditors' rights generally; and (B) as limited by laws relating to the availability of specific performance, injunctive relief or other equitable remedies. The execution and delivery of this Agreement and the sale and delivery of the Shares to be sold by the Selling Stockholder and the consummation of the transactions contemplated herein have been authorized by the Selling Stockholder and do not and will not, whether with or without the giving of notice or passage of time or both, conflict with or constitute a breach of, default under, or result in the creation or imposition of any tax, lien, charge or encumbrance upon the Shares to be sold by the Selling Stockholder or any property or assets of the Selling Stockholder pursuant to any contract, indenture, mortgage, deed of trust, loan or credit agreement, note, license, lease or other agreement or instrument to which the Selling Stockholder is a party or by which the Selling Stockholder may be bound, or to which any of the property or assets of the Selling Stockholder is subject, nor will such action result in any violation of the provisions of the charter or bylaws or other organization instrument of the Selling Stockholder, if applicable, or any law, statute, rule, regulation, judgment, order, writ or decree of any government, government instrumentality or court, domestic or foreign, having jurisdiction over the Selling Stockholder or any of its properties. 2.2 Filing, Consents and Approvals. The Selling Stockholder is not required to obtain any consent, waiver, authorization or order of, give any notice to, or make any filing or registration with, any court or other federal, state, local or other governmental authority or other person, in connection with the execution, delivery and performance by the Company of this Agreement, including the sale and purchase of the Shares, other than (A) filings required pursuant to this Agreement, and (B) those made or obtained prior to the date hereof. Notwithstanding the foregoing sentence, the Selling Stockholder will be required to obtain the entry of an order of the Bankruptcy Court approving the sale of the Shares as provided in Section 1.3 hereof. 2.3 Valid Title. The Selling Stockholder has and will at the Closing have valid title to, or a valid security entitlement with the meaning of Section 8-501 of the New York Uniform Commercial Code in respect of, the Shares to be sold by the Selling Stockholder hereunder, free and clear of any security interest, mortgage, pledge, lien, charge, claim, equity or encumbrance of any kind. 2.4 Certificates Suitable for Transfer. Certificates for all of the Shares to be sold by the Selling Stockholder pursuant to this Agreement are accompanied by duly executed instruments of transfer or assignment in blank with signatures guaranteed have been placed in custody with the Custodian with irrevocable conditional instructions to deliver such Shares to the Company pursuant to this Agreement. 2 2.5 Access to Data. The Selling Stockholder has not been furnished with nor relied upon any representations or other information (whether oral or written) relating to the business or financial condition of the Company or its representatives or agents other as described set forth in the Company's publicly available documents. 3. Representations and Warranties of the Company. The Company represents and warrants to each Selling Stockholder as of the date hereof and as of the Closing as follows: 3.1 Authorization; Enforcement. The Company has the full right, power and authority to enter into and deliver this Agreement, and this Agreement when executed and delivered by the Company, and assuming this Agreement, is a valid and legally binding obligation of the Selling Stockholder, this Agreement, constitutes a valid and legally binding obligation of the Company, enforceable against the Company in accordance with its terms except (A) as limited by applicable bankruptcy, insolvency, reorganization, moratorium, fraudulent conveyance, and other laws of general application affecting enforcement of creditors; rights generally; and (B) as limited by laws relating to the availability of specific performance, injunctive relief, or other equitable remedies. The Company has the full legal right and power and all authority and approval required to execute and deliver, or authorize execution and delivery of, this Agreement, and all other instruments executed and delivered by or on behalf of the Company in connection with the repurchase of the Shares to be repurchased by the Company from the Selling Stockholder hereunder. 3.2 Compliance with Other Instruments. The execution, delivery and performance of this Agreement by the Company and the consummation of the transactions contemplated hereby and thereby will not result in any violation or be in conflict with or constitute, with or without the passage of time and giving of notice, either a default under any provision of the governing documents of the Company or any instrument, judgment, order, writ, decree or contract to which the Company or any of its subsidiaries is a party or by which it is bound, or any provision of any federal or state statute, rule or regulation applicable to the Company or any of its subsidiaries. 3.3 Sufficient Funds. The Company has funds sufficient to pay the Purchase Price at the Closing. 4. Conditions of the Company's Obligations at Closing. The obligations of the Company to the Selling Stockholder under this Agreement are subject to the fulfillment, on or before the closing, of each of the following conditions, unless otherwise waived by the Company: 4.1 Delivery of Certificates. The Selling Stockholder (or the Custodian on behalf of the Selling Stockholder) shall have presented and delivered the Certificates representing the Shares to the Company. 5. Conditions of the Selling Stockholders' Obligations at Closing. The obligations of the Selling Stockholder to the Company under this Agreement are not subject to the fulfillment, on or before the Closing, of each of the following any conditions, unless otherwise waived by the Selling Stockholder: 5.1 Delivery of the Purchase Price. The Company shall have sufficient funds to pay the Purchase Price and shall pay the Purchase Price at the Closing. 6. Miscellaneous. 6.1 Survival of Representations and Warranties. The representations and warranties of the Selling Stockholder and the Company contained herein shall terminate on the first anniversary of the Closing and thereafter shall expire and have no further force and effect. 6.2 Transfer, No Third-Party Beneficiaries. This Agreement shall not be assigned without the prior written consent of the Company and the Selling Stockholder; provided, that either party may transfer its rights hereunder to a third party, so long as such third party agrees in writing to be bound by all obligations under this Agreement and confirms in writing the representations and warranties set forth in Section 3 as if made by such third party which writing shall be delivered to the non-transferring party prior to the transfer becoming effective. Nothing in this Agreement, express or implied, is intended to confer upon any party other than the parties hereto or their respective successors and assigns any rights, remedies, obligations, or liabilities under or by reason of this Agreement. 6.3 Governing Law. This Agreement and all acts and transactions pursuant hereto and the rights and obligations of the parties hereto shall be governed by and construed in accordance with the laws of the State of New York, without giving effect to principles of conflicts of laws. 3 6.4 Counterparts. This Agreement may be executed in two or more counterparts, including by facsimile, each of which shall be deemed an original and all of which together shall constitute one and the same instrument and shall become effective when counterparts have been signed by each of the parties and delivered to the other party; it being understood that all parties need not sign the same counterpart. 6.5 Titles and Subtitles. The titles and subtitles used in this Agreement are used for convenience only and are not to be considered in construing or interpreting this Agreement. 6.6 Notices. Any notice required or permitted by this Agreement shall be in writing and shall be deemed sufficient upon delivery, when delivered personally or by overnight courier or sent by telegram or fax, or four (4) business days after being deposited in the U.S. mail, as certified or registered mail, with postage prepaid, addressed to the party to be notified at such party's address as set forth on the signature page hereto, or as subsequently modified by written notice, and if to the Selling Stockholder c/o Gerard A. McHale, Jr. P.A., 1601 Jackson Street, Suite 200, Fort Myers, FL, Facsimile: (239) 337-1178, with a copy to Jonathan Flaxer, Esq., Golenbock Eiseman Assor Bell & Peskoe LLP, 437 Madison Avenue, New York, NY 10022-7302, Facsimile: (212) 754-0330, and if to the Company, Parkway 109 Office Center, 328 Newman Springs Road, Red Bank, NJ 07701, Attn.: Victor K. Kurylak, President & CEO, with a copy to Victor J. DiGioia, Esq., Becker & Poliakoff, LLP, 45 Broadway, New York, NY 10006, Facsimile: (212) 557-0295. 6.7 Finder's Fee. Each party represent that it neither is nor will be obligated for any finder's fee or commission in connection with this transaction. 6.8 Fees and Expenses. Each of the Selling Stockholder and the Company shall pay their respective fees and all other associated expenses incurred by such party in connection with the negotiation, execution, delivery and performance of the Agreement. The Company shall pay all transfer agent fees, stamp taxes and other taxes and duties levied in connection with the delivery of the Shares to the Company. 6.9 Amendments, Modifications and Waivers. No amendment, modification or waiver in respect of this Agreement shall be effective against any party unless it shall be in writing and signed by the Selling Stockholder and the Company. 6.10 Entire Agreement. This Agreement constitutes the entire agreement among the parties hereto with respect to the subject matter hereof and supersedes all other prior agreements and understandings, both written and oral, among or between any of the parties with respect to the subject matter hereof and thereof. 6.11 Consent to Jurisdiction; Venue. Regardless of any conflict of law or choice of law principles that might otherwise apply, the parties agree that this Agreement shall be governed by and construed in all respects in accordance with the laws of the State of New York. The parties all expressly agree and acknowledge that the State of New York has a reasonable relationship to the parties and/or this Agreement. As to any dispute, claim or litigation arising out of or relating in any way to this Agreement or the transaction contemplated hereby, the parties hereto hereby agree and consent to be subject to the exclusive jurisdiction of any New York state court, or federal court of the United States of America sitting in New York, and any appellate court from any thereof. Each party hereto hereby irrevocably waives, to the fullest extent permitted by law, (a) any objection that it may now or hereafter have to laying venue of any suit, action or proceeding brought in such court, (b) any claim that any suit, action or proceeding brought in such court has been brought in an inconvenient forum, and (c) any defense that it may now or hereafter have based on lack of personal jurisdiction in such forum. 6.12 WAIVER OF JURY TRIAL. EACH OF THE PARTIES IRREVOCABLY WAIVES ANY AND ALL RIGHTS TO TRIAL BY JURY IN ANY ACTION OR PROCEEDING BETWEEN THE PARTIES ARISING OUT OF OR RELATING TO THIS AGREEMENT AND THE TRANSACTIONS CONTEMPLATED BY THIS AGREEMENT. 6.13 Cooperation. Each of the Selling Stockholder and the Company agrees to reasonably cooperate with the other party and to execute and deliver such further documents, certificates, agreements and instruments and to take such other actions as may be reasonably requested by such party to evidence or reflect the transactions contemplated by this Agreement and to carry out the intent and purpose of this Agreement. 4 6.14 Severability. If any term or other provision of this Agreement is held invalid or unenforceable by any court of competent jurisdiction, the other provisions of this Agreement will remain in full force and effect so long as the economic or legal substance of this Agreement is not affected in any manner materially adverse to any party. Upon such determination that any term or other provision is invalid, illegal or incapable of being enforced, the parties hereto shall negotiate in good faith to modify this Agreement so as to effect the original intent of the parties as closely as possible in a mutually acceptable manner in order that the terms of this Agreement remain as originally contemplated to the fullest extent possible. 6.15 Specific Performance; Injunctive Relief. The parties hereto acknowledge that the parties shall be irreparably harmed and that there shall be no adequate remedy at law for a violation of any of the covenants or agreements of the other parties set forth in this Agreement. Therefore, each party hereby agrees that, in addition to any other remedies that may be available to the Selling Stockholder or the Company, as applicable upon any such violation, such party shall have the right to enforce such covenants and agreements by specific performance, injunctive relief or by any other means to which they are entitled at law or in equity. 6.16 Legal Representation. This Agreement was negotiated by the parties with the benefit of legal representation and any rule of construction or interpretation otherwise requiring this Agreement to be construed or interpreted against any party shall not apply to any construction or interpretation thereof. (Signature Pages Follow) 5 IN WITNESS WHEREOF, the parties have executed this Stock Repurchase Agreement as of the date first written above. COMPANY: FIRST MONTAUK FINANCIAL CORP. A New Jersey corporation By: /s/ Victor K. Kurylak --------------------------------- Name: Victor K. Kurylak Title: Chief Executive Officer (Signature Page of the Selling Stockholder Follows on Next Page) 6 SELLING STOCKHOLDER FMFG OWNERSHIP INC. BY GERARD A. MCHALE, JR. AS THE CHAPTER 11 BANRUPTCY TRUSTEE FOR THE 1031 TAX GROUP, LLC, et al. AS CHAPTER 11 DEBTORS By: /s/ Gerard A. McHale, Jr. --------------------------------- Name: Gerard A. McHale, Jr. Title: Chapter 11 Bankruptcy Trustee 7 EX-10 3 ex2.txt EXHIBIT 10.2 Exhibit 10.2 AMENDED AND RESTATED EMPLOYMENT AGREEMENT \ THIS AMENDED AND RESTATED EMPLOYMENT AGREEMENT ("Agreement") dated as of the 13th day of November 2008 (the "Effective Date"), by and between First Montauk Financial Corp., a New Jersey corporation with its principal address at Parkway 109 Office Center, 328 Newman Springs Road, Red Bank New Jersey 07701 (the "Company") and Mindy A. Horowitz, with her residence at 208 Buttermere Avenue, Interlaken, New Jersey 07712 ("Executive"). WHEREAS, the Company, through its wholly owned subsidiary, First Montauk Securities Corp. ("FMSC"), is engaged in the investment banking and general securities business as a registered broker-dealer; WHEREAS, the Company has employed the Executive since February 1, 2005 pursuant to an Employment Agreement dated as of February 8, 2005 ("Original Agreement"); WHEREAS, the Board of Directors of the Company (the "Board") wishes Executive to continue to serve as Senior Vice President of the Company and Chief Financial Officer of the Company's Broker Dealer Subsidiary, First Montauk Securities Corp.; and WHEREAS, Executive is willing to provide her services and experience to the Company and its subsidiaries in such capacities upon the terms, conditions and provisions hereinafter set forth in this Agreement. NOW, THEREFORE, in consideration of the promises and mutual representations, covenants and agreements set forth herein, and for other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties hereto agree as follows: 1. TERM: Subject to the terms and conditions of Section 7 hereof and for the compensation hereinafter set forth, the Company hereby agrees to employ Executive for term commencing effective as of the date hereof and ending April 30, 2009 (such period in its entirety being herein referred to as the "Term"). The portion of the Term from the date hereof through and including January 31, 2009 shall sometimes be referred to as the "Initial Period" and the portion of the Term from February 1, 2009 through and including April 30, 2009 shall sometimes be referred to as the "Secondary Period" 2. EMPLOYMENT: (A) Executive shall serve as Senior Vice President and Chief Financial Officer of the Company's Broker Dealer Subsidiary, First Montauk Securities Corp. ("Broker Dealer Subsidiary"). Executive's powers and duties shall be those of an executive nature (including those responsibilities specified in Section 2(B)) below, which are appropriate for a Senior Vice President and Chief Financial Officer. Executive shall report to the Chief Executive Officer of the Company or the Board of Directors. (B) Executive does hereby accept such employment and agrees during the Initial Period to devote substantially all of her business time, attention, knowledge and skills faithfully, diligently and to the best of her ability, in furtherance of the business and activities of the Company. During the Secondary Period, Executive shall devote such amount of her business time, attention, knowledge and skills faithfully, diligently and to the best of her ability, in furtherance of the business and activities of the Company in order to (i) assist the Company's management and its outside auditors and legal counsel in the preparation of any and all filings with the Securities and Exchange Commission, including, without limitation, the Company's Annual Report on Form 10-K, the Company's federal, state and local income tax returns, and any and all reports that the Company and/or the Broker Dealer Subsidiary may be required to file with the Financial Industry Regulatory Authority ("FINRA")(formerly the National Association of Securities Dealers, Inc.), the Municipal Securities Rule Making Board, the National Futures Association and the Securities Investor Protection Corporation, and any other applicable regulatory agencies or governmental bodies having jurisdiction over the Company or the Broker Dealer Subsidiary; and (ii) in the winding down of the business operations of the Company and/or the Broker Dealer Subsidiary. (C) The Company shall not require Executive to be employed in any location other than the Red Bank, New Jersey area unless she consents in writing to such location provided, however, the Executive understands and agrees that her position with the Company may include travel to the Company's other offices and branch locations. (D) During the Term, Executive shall be furnished with office space and facilities commensurate with her position and adequate for the performance of her duties; Executive also shall be provided with the perquisites customarily associated with the position as Senior Vice President and Chief Financial Officer. (E) Executive shall be allowed, to the extent such activities do not substantially interfere with the performance of her duties and responsibilities hereunder, (i) to manage her personal, financial and legal affairs, (ii) to be engaged in civic, charitable, religious and educational activities, and (iii) to serve on other corporate boards with the prior written approval of the Board. 3. COMPENSATION: (A) SALARY: 1. During the Initial Period of this Agreement, the Company agrees to pay Executive, and Executive agrees to accept, an annual salary of not less than One Hundred Sixty Thousand Dollars ($160,000) per year (the "Initial Base Salary"), payable in accordance with the Company's policies, for services rendered by Executive hereunder. 2. During the Secondary Period of this Agreement, Executive will not receive any annual salary. In lieu of any annual salary or severance pay payable under the Original Agreement and in consideration of the duties and services to be provided by Executive during the Secondary Period, Executive will receive on November 15, 2008 a lump sum payment in the amount of One Hundred Forty Thousand Dollars ($140,000) ("Lump Sum Amount"). 3. In the event that Executive voluntarily terminates her employment with the Company other than for Reason (as defined in Section 7(D) below) prior to February 1, 2009 (the commencement date of the Secondary Period), Executive shall reimburse the Lump Sum Amount in its entirety to the Company. 4. In the event that Executive voluntarily terminates her employment with the Company other than for Reason on February 1, 2009, Executive shall reimburse $40,000 to the Company. 5. In the event that Executive voluntarily terminates her employment with the Company other than for Reason during the Secondary Period after February 1, 2009 and prior to April 30, 2009, Executive shall reimburse to the Company an amount equal to the product of (a) $40,000 and (b) a fraction, the 2 numerator of which is the number of calendar days remaining in the Secondary Period following Executive's date of termination and the denominator of which is 89 representing the total number of calendar days in the Secondary Period; provided that in the event that Executive terminates her employment after March 31, 2009, Executive will not be required to make any reimbursement to the Company if Executive, in the reasonable judgment of the Board of Directors, makes herself available on a reasonable basis to assist the Company's Board of Directors, management and auditors in the preparation of the Company's income tax returns and the winding down of the business of the Company and/or the Broker Dealer Subsidiary. (B) AUTOMOBILE ALLOWANCE AND CELL PHONE: The Company shall provide the Executive with an automobile allowance of $500 per month, cellular telephone, and reimburse reasonable automobile expenses including auto insurance, repairs, maintenance, gasoline charges, etc. via receipted expense reports. (C) CORPORATE CREDIT CARD: Executive shall have continued use of a corporate credit card to be used for all reasonable business expenses incurred by Executive on behalf of the Company upon presentation of suitable documentation. 4. EXPENSES: The Company shall reimburse Executive for all reasonable and actual business expenses incurred by her in connection with her service to the Company, Broker Dealer Subsidiary and/or any direct and/or indirect subsidiaries of such entities upon submission by her of appropriate vouchers and expense account reports and otherwise in compliance with the policies and procedures of the Company. 5. BENEFITS: (A) INSURANCE: 1. The Company shall maintain family medical insurance for Executive. In addition, Executive and her dependents shall be entitled to participate in such other benefits as may be extended to active executive employees of the Company and/or Broker Dealer Subsidiary and their dependents including but not limited to pension, retirement, profit-sharing, 401(k), stock option, bonus and incentive plans, life insurance, hospitalization, medical, disability or other benefits made available by the Company to its employees generally. 2. The Company shall maintain Broker/Dealer Professional Liability Insurance (E&O), Directors and Officers Liability Insurance (D&O) and a Broker Dealer Fidelity Blanket Bond, each of which shall cover Executive as an insured or covered person, at no charge to Executive, provided the Company is able to obtain such coverage. (B) LICENSES AND REGISTRATIONS: During the Term, Executive shall maintain in good standing all required licenses and registrations required for the proper performance of her duties and functions. During the Term, the Company shall pay the cost of maintaining such licenses and registrations on Executive's behalf, including but not limited to Executive's accounting licenses and continuing educations costs, and securities licenses and registrations. 3 (C) INDEMNIFICATION: Executive shall be entitled to the benefits of all provisions of the Certificate of Incorporation of the Company, as amended, and the Bylaws of the Company, as amended, that provide for indemnification of officers and directors of the Company. In addition, without limiting the indemnification provisions of the Certificate of Incorporation or Bylaws, to the fullest extent permitted by law, the Company shall indemnify and save and hold harmless Executive from and against any and all claims, demands, liabilities, costs and expenses, including judgments, fines or amounts paid on account thereof (whether in settlement or otherwise), and reasonable expenses, including attorneys' fees actually and reasonably incurred (except only if and to the extent that such amounts shall be finally adjudged to have been caused by Executive's willful misconduct or gross negligence, including the willful breach of the provisions of this Agreement) to the extent that Executive is made a party to or witness in any action, suit or proceeding, or if a claim or liability is asserted against Executive (whether or not in the right of the Company), by reason of the fact that she was or is a director or officer, or acted in such capacity on behalf of the Company, or the rendering of services by Executive pursuant to her Agreement, whether or not the same shall proceed to judgment or be settled or otherwise brought to a conclusion. The Company shall, at no cost to Executive, include Executive during the Term and for a period of not less than two (2) years thereafter, as an insured under the directors and officers liability insurance policy maintained by the Company, unless (despite best efforts of the Company) due to some unforeseeable reason it is not possible for Executive to be so included, in which event the Company shall immediately notify Executive. 6. RESTRICTIVE COVENANTS: (A) Executive recognizes and acknowledges that the Company, Broker Dealer Subsidiary and their subsidiaries, through the expenditure of considerable time and money, have developed and will continue to develop in the future information concerning customers, clients, marketing, business and operational methods of the Company, Broker Dealer Subsidiary and their subsidiaries and their customers or clients, contracts, financial or other data, technical data or any other confidential or proprietary information possessed, owned or used by the Company, Broker Dealer Subsidiary and their subsidiaries, and that the same are confidential and proprietary, and are "confidential information" of the Company, Broker Dealer Subsidiary and their subsidiaries. In consideration of her continued employment by the Company hereunder, Executive agrees that she will not, during or for a period of one year after termination of employment, directly or indirectly, make any disclosure of confidential information now or hereafter possessed by the Company, Broker Dealer Subsidiary, and/or any of their current or future, direct or indirect subsidiaries (collectively, the "Group"), to any person, partnership, corporation or entity either during or after the term hereunder, except to employees of the Group and to others within or without the Group, as Executive may deem necessary in order to conduct the Group's business and except as may be required pursuant to any court order, judgment or decision from any court of competent jurisdiction. The foregoing shall not apply to information which is in the public domain on the date hereof; which, after it is disclosed to Executive by the Group, is published or becomes part of the public domain through no fault of Executive; which is known to Executive prior to disclosure thereof to her by the Group as evidenced by her written records; or, after Executive is no longer employed by the Group, which is thereafter disclosed to Executive in good faith by a third party which is not under any obligation of confidence or secrecy to the Group with respect to such information at the time of disclosure to her. The provisions of this Section 6 shall continue in full force and effect notwithstanding termination of Executive's employment under this Agreement or otherwise. (B) Executive agrees that if the Company has made and is continuing to make all required payments to her upon and after termination of her employment, then for a period commencing on the date of termination of Executive's employment pursuant to this Agreement and ending twelve (12) months thereafter, Executive shall neither directly and/or indirectly solicit or hire any then current employee of the Company 4 and/or Broker Dealer Subsidiary nor any of their respective direct and/or indirect subsidiaries (collectively, the "Applicable Entities"), nor (b) solicit any business with any prior (within twelve (12) months of termination) or then current customer and/or client of the Applicable Entities, unless Executive had a pre-existing relationship with the customer. (C) Executive acknowledges that the restrictive covenants (the "Restrictive Covenants") contained in her Section 6 are a condition of her continued employment and are reasonable and valid in geographical and temporal scope and in all other respects. If any court determines that any of the Restrictive Covenants, or any part of any of the Restrictive Covenants, is invalid or unenforceable, the remainder of the Restrictive Covenants and parts thereof shall not thereby be affected and shall be given full effect, without regard to the invalid portion. If any court determines that any of the Restrictive Covenants, or any part thereof, is invalid or unenforceable because of the geographic or temporal scope of such provision, such court shall have the power to reduce the geographic or temporal scope of such provision, as the case may be, and, in its reduced form, such provision shall then be enforceable. (D) If Executive breaches, or threatens to breach, any of the Restrictive Covenants, the Company, in addition to and not in lieu of any other rights and remedies it may have at law or in equity, shall have the right to injunctive relief; it being acknowledged and agreed to by Executive that any such breach or threatened breach would cause irreparable and continuing injury to the Company and that money damages would not provide an adequate remedy to the Company. 7. TERMINATION: (A) DEATH: In the event of Executive's death ("Death") during the Term of her employment, Executive's designated beneficiary, or in the absence of such beneficiary designation, her estate, shall be entitled to the Accrued Obligations, and to the payment of Executive's salary with respect to the Initial Period, through the date of Death. For purposes of this Agreement, "Accrued Obligations" shall mean (i) all accrued but unpaid salary through the date of termination of Executive's employment, (ii) any unpaid or unreimbursed expenses incurred in accordance with this Agreement, and (iii) all compensation or benefits due to Executive under the terms and rules of any Company or Broker Dealer Subsidiary compensation or benefit plan in which Executive participates, including without limitation, any Company option plans, or otherwise required by applicable law. (B) DISABILITY: (i) In the event Executive, by reason of physical or mental incapacity, shall be disabled for a period of at least a period of 90 consecutive days ("Disability"), the Company shall have the option at any time thereafter to terminate Executive's employment hereunder for Disability. Such termination will be effective ten (10) days after the Board gives written notice of such termination to Executive, unless Executive shall have returned to the performance of her duties prior to the effective date of the notice. Upon such termination, Executive shall be entitled to the Accrued Obligations and such benefits to which he and her dependents are entitled by law, and except as otherwise expressly provided herein, all obligations of the Company hereunder shall cease upon the effectiveness of such termination other than payment of salary earned through the date of Disability, provided that such termination shall not affect or impair any rights Executive may have under any policy of long term disability insurance or benefits then maintained on her behalf by the Company. (ii) "Incapacity" as used herein shall mean the inability of Executive due to physical or mental illness, injury or disease substantially to perform her normal duties as Senior Vice President and Chief Financial Officer. Executive's salary as provided for hereunder shall continue to be paid during any period of incapacity prior to and including the date on which Executive's employment is terminated for Disability. 5 (C) BY THE COMPANY FOR CAUSE: (i) The Company shall have the right, before the expiration of the term of this Agreement, to terminate Executive's employment hereunder and to discharge Executive for cause (hereinafter "Cause"), and all compensation to Executive shall cease to accrue upon discharge of Executive for Cause. For the purposes of this Agreement, the term "Cause" shall mean (a) Executive's conviction of a felony; (b) the alcoholism or drug addiction of Executive which impairs her ability to perform her duties in the determination of the Chief Executive Officer; (c) the continued and willful failure by Executive to substantially and materially perform her material duties hereunder or the refusal or failure by Employee to adhere to the Company's employment policies, including, without limitation, policies regarding sexual harassment, discrimination or the federal and state securities laws, after a reasonable notice and an opportunity to cure same if such refusal or failure may be cured; (d) an act or acts of personal dishonesty by Executive intended to result in personal enrichment of Executive at the expense of the Company, the Company or any of their subsidiaries or affiliates or any other material breach or violation of Executive's fiduciary duty owed to the Company, Broker Dealer Subsidiary or any of their subsidiaries or affiliates; (e) any grossly negligent act or omission or any willful and deliberate misconduct by Executive that results, or is likely to result, in material economic, or other harm, to the Company, Broker Dealer Subsidiary or any of their subsidiaries or affiliates; (f) an action taken by a governmental, regulatory body or self regulatory organization that substantially impairs the Executive from performing her duties; or (g) refusal by Executive to assist the Company, at the request of the Board of Directors, in any investigation or other proceeding (whether formal or informal) which is commenced by the Board of Directors, or any governmental, regulatory body or self regulatory organization. (ii) If the Company elects to terminate Executive's employment for Cause under 7(C)(i) above, such termination shall be effective five (5) days after the Company gives written notice of such termination to Executive. In the event of a termination of Executive's employment for Cause in accordance with the provisions of 7(C)(i), the Company shall have no further obligation to Executive, except for the payment of the Accrued Obligations and such benefits to which he and her dependents are entitled by law. (D) RESIGNATION FOR REASON. Executive shall have the right to terminate her employment at any time for "good reason" (herein designated and referred to as "Reason"). The term Reason shall mean (i) the Company's failure or refusal to perform any obligations required to be performed in accordance with this Agreement after a reasonable notice and an opportunity to cure same, (ii) a material diminution in Executive's title, duties, responsibilities, reporting relationship or positions, (iii) the relocation of Executive's principal office location more than fifty (50) miles from its current location, and (iv) the failure of the Company or Broker Dealer Subsidiary to obtain the assumption in writing of its obligation to perform this Agreement by any successor to all or substantially all of the assets of the Company. Notwithstanding the occurrence of any such event or circumstance above, such occurrence shall not be deemed to constitute Reason hereunder if, within the thirty-day notice period, the event or circumstance giving rise to Reason has been fully corrected by the Company. (E) NON-RENEWAL: This Agreement shall not be renewed ("Non-Renewal), after the expiration of the Secondary Period except as otherwise agreed in writing by the Company and Executive. (F) SEVERANCE: Except as provided in Section 3(A), Executive shall not be entitled to any pay upon termination of her employment with the Company. Notwithstanding the foregoing sentence, in the event Executive's employment 6 hereunder shall be terminated by the Company for other than Cause, Death or Disability, or Non-Renewal, or if terminated by Executive for Reason: (i) Executive's (and her dependents') participation in any and all life, disability, medical and dental insurance plans shall be continued, or equivalent benefits provided to her or them by the Company, at no cost to her or them, for a period of 12 months from the termination and (ii) Executive shall be entitled to the Accrued Obligations and such benefits to which he and her dependents are entitled by law. (G) RESIGNATION WITHOUT REASON: Executive may voluntarily resign her employment with the Company upon ten (10) days' written notice to the Company without any liability to Executive except that if Executive voluntarily resigns prior to February 1, 2009, the commencement date of the Secondary Period, Executive shall reimburse the Lump Sum Amount in its entirety to the Company on her date of termination of employment as provided in Section 3(A)(iii). In the event Executive resigns without reason prior to the expiration of this Agreement, she shall receive only the Accrued Obligations and such benefits to which she and her dependents are entitled by law. 8. WAIVER: No delay or omission to exercise any right, power or remedy accruing to either party hereto shall impair any such right, power or remedy or shall be construed to be a waiver of or an acquiescence to any breach hereof. No waiver of any breach hereof shall be deemed to be a waiver of any other breach hereof theretofore or thereafter occurring. Any waiver of any provision hereof shall be effective only to the extent specifically set forth in the applicable writing. All remedies afforded to either party under this Agreement, by law or otherwise, shall be cumulative and not alternative and shall not preclude assertion by either party of any other rights or the seeking of any other rights or remedies against the other party. 9. GOVERNING LAW: The validity of this Agreement or of any of the provisions hereof shall be determined under and according to the laws of the State of New Jersey, and this Agreement and its provisions shall be construed according to the laws of the State of New Jersey, without regard to the principles of conflicts of law and the actual domiciles of the parties hereto. 10. NOTICES: All notices, demands or other communications required or permitted to be given in connection with this Agreement shall be given in writing, shall be transmitted to the appropriate party by hand delivery, by certified mail, return receipt requested, postage prepaid or by overnight carrier and shall be addressed to a party at such party's address shown on the signature page hereof. A party may designate by written notice given to the other parties a new address to which any notice, demand or other communication hereunder shall thereafter be given. Each notice, demand or other communication transmitted in the manner described in this Section 10 shall be deemed to have been given and received for all purposes at the time it shall have been (i) delivered to the addressee as indicated by the return receipt (if transmitted by mail) or the affidavit of the messenger (if transmitted by hand delivery or overnight carrier) or (ii) presented for delivery during normal business hours, if such delivery shall not have been accepted for any reason. 11. ASSIGNMENT: This Agreement shall be binding upon and inure to the benefit of the parties hereto and each of their respective successors, assigns, heirs and legal representatives; provided, however, that Executive may not assign or delegate her obligations, responsibilities and duties hereunder except as may otherwise be expressly agreed to in writing by the parties hereto. The Company and Broker Dealer Subsidiary will require any such purchaser, successor or assignee to expressly assume and agree to perform this Agreement in the same manner and to the same extent that the Company and Broker Dealer Subsidiary would be required to perform it if no such purchase, succession or assignment had taken place. If Executive shall die, all amounts then payable to Executive hereunder shall be paid in accordance with the terms of this Agreement to Executive's devisee, legatee or other designee or, if there be no such designee, the Executive's estate. 12. MISCELLANEOUS: This Agreement contains the entire understanding between the parties hereto and supersedes all other oral and written agreements or understandings between them with respect to the subject matter hereof. No modification or addition hereto or waiver or cancellation of any provision shall be valid except by a writing signed by the party to be charged therewith. 7 13. SEVERABILITY: The parties agree that if any of the covenants, agreements or restrictions contained herein are held to be invalid by any court of competent jurisdiction, the remainder of the other covenants, agreements, restrictions and parts thereof herein contained shall be severable so not to invalidate any others and such other covenants, agreements, restrictions and parts thereof shall be given full effect without regard to the invalid portion. 14. ARBITRATION: Any and all disputes, controversies, or differences, whether arising or commenced during or subsequent to the term hereof, which may arise between the parties directly and/or indirectly out of or in relation to or in connection with this Agreement, or for the breach of this Agreement, shall be settled by arbitration in New York City, New York before three arbitrators under the arbitration rules of the Financial Industry Regulatory Authority ("FINRA") then in effect. Each of the arbitrators shall be appointed in accordance with the rules of FINRA. Such arbitration shall be final and binding and shall be limited to an interpretation and application of the provisions of this Agreement and any related agreements or documents. Any arbitral award shall be enforceable in any court, wherever located, having jurisdiction over the party against whom the award was rendered and may include an award of attorneys' fees and expenses, proceeding costs, and all other costs and expenses reasonably associated with such arbitration or enforcement proceedings (i.e., travel, lodging, telecommunications charges). 15. SURVIVAL OF OPERATIVE SECTIONS: The respective rights and obligations of the parties hereto, including, without limitation, the rights and obligations set forth in Sections 3(A), 5(C), 6 through 14 of this Agreement, shall survive any termination of this Agreement to the extent necessary to preserve all such rights and obligations until discharged in full. 16. COUNTERPARTS: This Agreement may be executed in two or more counterparts, each of which shall be deemed to be an original but all of which together shall constitute one and the same instrument. The execution of this Agreement may be by actual or facsimile signature. 17. SEPARATE COUNSEL. Executive hereby expressly acknowledge that she has been advised that she has not been represented by Becker & Poliakoff, LLP, the Company's attorney in connection with this Agreement and has been advised and urged to seek separate legal counsel for advice in this matter. IN WITNESS WHEREOF, the parties have duly executed this Agreement as of the day and year first above written. FIRST MONTAUK FINANCIAL CORP. MINDY A. HOROWITZ /s/ Victor K. Kurylak /s/ Mindy A. Horowitz - --------------------------------- --------------------------- Victor K. Kurylak, Mindy A. Horowitz Title: President and C.E.O. Executive 8 EX-31 4 ex3.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 quarterly 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 quarterly 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)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15 (f) 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) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; 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 19, 2008 /s/ Victor K. Kurylak - ------------------------------------ VICTOR K. KURYLAK CHIEF EXECUTIVE OFFICER EX-31 5 ex4.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 annual 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 annual 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)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15 (f) 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) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; 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 19, 2008 /s/ Mindy A. Horowitz - -------------------------------------------- MINDY A. HOROWITZ ACTING CHIEF FINANCIAL OFFICER EX-32 6 ex5.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, 2008 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 19, 2008 EX-32 7 ex6.txt EXHIBIT 32.2 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, 2008 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 19, 2008 -----END PRIVACY-ENHANCED MESSAGE-----