SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB/A
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2001
Commission File Number 1-11454-03
VFINANCE, INC.
(f/k/a vFinance.com, Inc.)
(Name of Small Business Issuer in Its Charter)
Delaware 58-1974423
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(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
3010 North Military Trail, Suite 300
Boca Raton, FL 33431 (561) 981-1000
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(Address of Principal Executive Offices) (Issuer's Telephone Number,
Including Area Code)
Securities registered under Section 12(b) of the Act: NONE
Securities registered under Section 12(g) of the Act:
COMMON STOCK, PAR VALUE $0.01 PER SHARE
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Securities Exchange Act of 1934, as amended (the "Exchange
Act") during the past 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form and no disclosure will be contained, to
the best of registrant`s knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. [ ]
The issuer's revenues for the fiscal year ended December 31, 2001 were
$15,769,223.
The aggregate market value of the voting stock held by non-affiliates of the
issuer on March 27, 2002, based upon the average bid and ask prices of such
stock on that date was $6,974,163. The number of shares of Common Stock of the
issuer outstanding as of March 27, 2002 was 23,387,097.
DOCUMENTS INCORPORATED BY REFERENCE : NONE
TABLE OF CONTENTS
Page No.
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Forward-Looking Statements
PART I.
Item 1. Description of Business 4
Item 2. Description of Property 19
Item 3. Legal Proceedings 20
Item 4. Submission of Matters to a Vote of Security Holders 22
PART II.
Item 5. Market for Common Equity and Related Stockholder Matters 22
Item 6. Management's Discussion and Analysis or Plan of Operation 24
Item 7. Financial Statements 32
Item 8. Changes in and Disagreements With Accountants on Accounting
and Financial Disclosure 67
PART III.
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act 67
Item 10. Executive Compensation 69
Item 11. Security Ownership of Certain Beneficial Owners and Management
And Related Stockholder Matters 72
Item 12. Certain Relationships and Related Transactions 74
Item 13. Exhibits, List and Reports on Form 8-K 75
Signatures 80
FORWARD-LOOKING STATEMENTS
The following information provides cautionary statements under the safe harbor
provisions of the Private Securities Litigation Reform Act of 1995 (the Reform
Act). We identify important factors that could cause our actual results to
differ materially from those projected in forward-looking statements we make in
this report or in other documents that reference this report. All statements
that express, or involve discussions as to, expectations, beliefs, plans,
objectives, assumptions or future events or performance (often, but not always,
identified through the use of words or phrases such as we or our management
believes, expects, anticipates, hopes, words or phrases such as will result, are
expected to, will continue, is anticipated, estimated, projection and outlook,
and words of similar import) are not statements of historical facts and may be
forward-looking. These forward-looking statements are based largely on our
expectations and are subject to a number of risks and uncertainties including,
but not limited to, economic, competitive, regulatory, growth strategies,
available financing and other factors discussed elsewhere in this report and in
the documents filed by us with the Securities and Exchange Commission ("SEC").
Many of these factors are beyond our control. Actual results could differ
materially from the forward-looking statements we make in this report or in
other documents that reference this report. In light of these risks and
uncertainties, there can be no assurance that the results anticipated in the
forward-looking information contained in this report or other documents that
reference this report will, in fact, occur.
These forward-looking statements involve estimates, assumptions and
uncertainties, and, accordingly, actual results could differ materially from
those expressed in the forward-looking statements. These uncertainties include,
among others, the following: (i), the inability of our broker-dealer operations
to operate profitably in the face of intense competition from larger full
service and discount brokers; (ii) a general decrease in merger and acquisition
activities and our potential inability to receive success fees as a result of
transactions not being completed; (iii) increased competition from business
development portals; (iv) technological changes; (v) our potential inability to
implement our growth strategy through acquisitions or joint ventures; and (vi)
our potential inability to secure additional debt or equity financing.
Any forward-looking statement speaks only as of the date on which such statement
is made, and we undertake no obligation to update any forward-looking statement
or statements to reflect events or circumstances after the date on which such
statement is made or to reflect the occurrence of unanticipated events. New
factors emerge from time to time and it is not possible for our management to
predict all of such factors, nor can our management asses the impact of each
such factor on the business or the extent to which any factor, or combination of
factors, may cause actual results to differ materially from those contained in
any forward-looking statements.
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PART I
ITEM 1. DESCRIPTION OF BUSINESS.
BUSINESS DEVELOPMENT
We are a holding company engaged in retail and institutional securities
brokerage, investment banking and research services through our principal
operating subsidiary, vFinance Investments, Inc. We are committed to
establishing a significant presence in the financial services industry by
meeting the varying investment needs of our corporate, institutional and
individual clients.
OUR HISTORY. We were incorporated in the state of Delaware in February 1992
under the name Peachtree Fiberoptics, Inc., primarily to engage in the
production and sale of plastic optical fiber. On October 27, 1993, we ceased all
operations and subsequently sold certain assets relating to our machinery and
optical fiber operations.
On November 8, 1999, we acquired vFinance Holdings, Inc., a Florida corporation,
and Union Atlantic LC, a Florida limited liability company, through a Share
Exchange Agreement. We received all the outstanding capital stock of vFinance
Holdings, Inc. and all the outstanding membership interests of Union Atlantic LC
in exchange for a total of 6,955,000 shares of our common stock. vFinance
Holdings, Inc. has succeeded to the business of Union Atlantic LC and its
operating subsidiary, Union Atlantic Capital, L.C., is now operating under the
name vFinance Capital, Inc.
On January 4, 2001, we closed the merger of NW Holdings, Inc., a Florida
corporation, with and into us with us as the surviving corporation. On the
closing date of the merger, NW Holdings, Inc. was the parent company of and
wholly owned First Level Capital, Inc., a Florida corporation. First Level
Capital, Inc. is now known as vFinance Investments, Inc., an investment-banking
firm that is licensed to conduct activities as a broker-dealer in 49 states and
has offices in New York, New Jersey and Florida. vFinance Investments, Inc., our
wholly owned subsidiary, continues to provide investment-banking services to
small and medium sized companies and retail brokerage services to companies,
financial institutions and individual investors.
On January 4, 2001, we also completed the merger of Colonial Direct Financial
Group, Inc., a Delaware corporation, with and into Colonial Acquisition Corp.,
our wholly owned subsidiary, with Colonial Direct Financial Group, Inc. as the
surviving corporation and as our wholly owned subsidiary. At the time of the
merger, Colonial Direct Financial Group, Inc. was a holding company comprised of
two diversified financial services companies, including First Colonial
Securities Group, Inc. and Colonial Direct Retirement Services, Inc., and a
company that provides administrative support to these financial service
companies, Colonial Direct Capital Management, Inc. The Colonial group of
companies is now inactive but some of its personnel were absorbed into vFinance
Investments, Inc.
On August 20, 2001, we entered into a Securities Exchange Agreement by means of
which we acquired the membership interests in two related companies, Critical
Investments, LLC, a Delaware limited liability company ("Critical Investments"),
and Critical Advisors, L.L.C., a Virginia limited liability company ("Critical
Advisors"). Critical Investments manages Critical Infrastructure Fund, L.P.
("Critical Infrastructure LP"), a Delaware limited partnership. Critical
Advisors manages Critical Infrastructure Fund, Ltd. ("Critical Infrastructure
Ltd."), an international business company organized and existing under the laws
of the British Virgin Islands and receives (i) a management fee equal to 1% of
the net asset value of Critical Infrastructure Ltd. and (ii) a performance fee
equal to 20% of the increase in net asset value of Critical Infrastructure Ltd.
Critical Infrastructure LP and Critical Infrastructure Ltd. are the sole general
partners in, owning 96% and 4%, respectively, and conduct their investment and
trading activity through Critical Infrastructure Fund (BVI), LP, a limited
partnership organized and existing under the laws of the British Virgin Islands,
which holds a portfolio of securities. We are evaluating the continued
management of the funds. Critical Investments and Critical Advisors changed
their names to vFinance Investors, LLC and vFinance Advisors, LLC, respectively,
subsequent to the acquisition.
OUR COMPANY. We are a "new breed" financial services enterprise committed to
building a worldwide audience of individuals looking to create wealth through
equity investments in both their personal portfolios and their businesses. Our
website, www.vfinance.com, is one of the Internet's leading destinations for
entrepreneurs, owners of small and medium sized businesses, private (i.e. Angel)
and institutional investors looking for capital or equity investments in high
growth companies. It allows entrepreneurs, executives, private and institutional
investors, our brokerage clients and our employees to access a common portal
filled with business development - tools, information and investment management
products. Each month our website attracts an estimated 100,000 businesses from
over 75 countries and communicates to approximately 60,000 high net worth
individuals and institutional investors. Utilizing the Internet and other
traditional communication mediums, we generate income by providing our audience
with access to products and services that assist them in achieving their
financial goals. Our business model is scalable as the website provides sales
leads to our "bricks and mortar" businesses in the areas of investment banking,
management consulting, brokerage, trading and asset management.
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Our strategy is to continue to build the website into one of the world's leading
business development portals and thereby be positioned as a premier new media
enterprise leveraging the convergence of digital information with the other
traditional communication mediums to build a global brand that in turn generates
leads for other vFinance activities. Our website is typically listed by search
engines as one of the top ten sites for relevant content. In addition, over 3000
websites have links to our website including Microsoft Network, Dow Jones, THE
WALL STREET JOURNAL, ENTREPRENEUR MAGAZINE, INC. MAGAZINE, Stanford University,
and SNAP. The combination of relevant content and ease of use has resulted in
our website servicing over 100,000 user sessions and 1,200,000 page views each
month with the average user session length in excess of fifteen minutes.
RECENT FINANCINGS
We recently entered into two agreements with financial institutions to allow us
to better utilize our resources. The discussion below is qualified in its
entirety by reference to the copies of the agreements attached as exhibits to
this report.
On November 28, 2001, we entered into a Note Purchase Agreement, as amended by
letter agreements dated November 30, December 14 and December 28, 2001, February
13, 2002 and March 4, 2002 (collectively, the "Agreement"), with SBI Investments
(USA) Inc. ("SBI"). Under the terms of the Agreement, SBI provided a loan to us
in the amount of $975,000 in the form of a 48-month non-interest bearing,
convertible note and may provide an additional loan to us in the amount of
$525,000 by no later than June 30, 2002. The note, if fully funded by SBI, is
convertible at SBI's option into 5,263,158 shares of our common stock at $0.285
per share. If SBI funds the full amount of the loan, SBI will become a party to
an Investor Right Agreement and, as additional consideration we will issue to
SBI an option to purchase up to that number of shares of our common stock equal
to 1,500,000 divided by the average closing bid and ask price of our common
stock for the 20 consecutive trading days preceding the date of SBI's exercise
notice to us, but in no event will the number be more than .336 or less than
..23. The option may be exercised from time to time until June 30, 2002. At that
time, we will evaluate the embedded beneficial conversion feature present in
these convertible securities and make provision for those non-cash expenses if
any.
On January 25, 2002, we entered into a Credit Agreement, as amended on April 12,
2002, with UBS Americas, Inc. ("UBS"). Under the terms of the Credit Agreement,
UBS provided a revolving credit facility for up to $3,000,000 to us for the
purpose of supporting the expansion of our brokerage business or investments in
infrastructure to expand our operations or our broker-dealer operations. The
loan must be repaid in full by January 2005 and bears interest at LIBOR plus a
LIBOR margin of 2%. Among other covenants, we must maintain stockholders' equity
of at least $7 million; however, the Credit Agreement, as amended, provides that
we may exclude goodwill write-offs aggregating $8.5 million from stockholders'
equity. We must make early repayments under the Credit Agreement if we acquire a
new broker dealer firm, enter a new line of business, or hire more than four
brokers in a single or related transactions. This repayment will be made by
adding $1.00 to the cost of each incremental closing transaction we make through
CSC, an affiliate of UBS.
We borrowed $1,500,000 under the credit facility in January 2002. The amount of
the loan under the credit facility is not convertible into our equity
securities.
OUR BUSINESS
RETAIL BUSINESS. The largest portion of our revenues in 2001 (73% in 2001) (0%
in 2000) were attributable to commissions generated by our brokerage activities
through our wholly owned broker-dealer subsidiary, vFinance Investments.
vFinance Investments buys and sells securities for its customers from other
dealers on an agency basis, and charges its customers a commission for its
services. Such commission revenue is derived from brokerage transactions in
listed and over-the-counter securities and mutual fund securities. vFinance
Investments has agreements with numerous mutual fund management companies
pursuant to which it sells shares in a variety of mutual funds. Mutual fund
commissions are derived from standard dealers' discounts that are a small
percentage of the purchase price of the shares depending upon the terms of the
dealer agreement and the size of the transaction. In addition, most funds permit
vFinance Investments to receive additional periodic fees based upon the
customer's investment maintained in particular funds.
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INVESTMENT BANKING AND MERGERS AND ACQUISITIONS. A significant portion of our
revenues in our last fiscal year were derived from the success fees generated by
the investment-banking and the merger and acquisition activities (16% in 2001)
(54% in 2000) of the vFinance Capital division of vFinance Investments, Inc.
Through vFinance Capital, we offer capital raising and related services to (A)
emerging growth and middle market privately held companies worldwide by
assisting such companies in (i) developing sound strategic plans, (ii) obtaining
growth, mezzanine, bridge, or acquisition capital (including, but not limited
to, venture capital financing), (iii) pursuing strategically sound acquisitions
or divestiture strategies, (iv) transitioning into viable professional
corporations able to raise funds in the public markets, and (v) maximizing
shareholder value by conducting recapitalizations or other liquidity
transactions and (B) publicly held companies by arranging private equity
financing for such publicly held companies. As consideration for such services,
we are paid success fees which are agreed upon amounts based on the percentage
of the total value of a transaction and are contingent on the successful
completion of a specified transaction. As part of our success fees, we
periodically receive equity instruments and stock purchase warrants from
companies for which we perform services in addition to the cash paid for such
services. Primarily all of the equity instruments are in private companies or
small public companies. During our last fiscal year, the investment-banking and
merger and acquisition activities of vFinance Capital consisted of acting as a
placement agent for fourteen private placements, as an agent for one merger and
as a consultant for two public companies.
Since 1996, the principals of vFinance Capital and its predecessor, Union
Atlantic Capital, L.C., have structured private equity and debt placements
totaling in excess of $300 million. The great majority of these financings are
for companies with market capitalizations between $10 and $150 million.
In the corporate finance area, our subsidiaries have been active as underwriters
or selling group members in numerous public equity transactions. Participation
as a managing underwriter or in an underwriting syndicate involves both economic
and regulatory risks. An underwriter may incur losses if it is unable to resell
the securities it is committed to purchase. In addition, under the federal
securities laws, other laws and court decisions with respect to underwriters'
liabilities and limitations on the indemnification of underwriters by issuers,
an underwriter is subject to substantial potential liability for misstatements
or omissions of material facts in prospectuses and other communications with
respect to such offerings. Acting as a managing underwriter increases these
risks. Underwriting commitments constitute a charge against net capital and our
subsidiaries' ability to make underwriting commitments may be limited by the
requirement that they must at all times be in compliance with regulations
regarding their net capital.
MANAGEMENT CONSULTING. A portion of our revenues in our last fiscal year were
derived from consulting fees generated by the management consulting activities
of vFinance Holdings (5% in 2001 and 40% in 2000). Through vFinance Holdings we
provide management consulting services and related services to corporations and
high net worth individuals by working with the senior management of those
corporations and high net worth individuals to (i) assess market conditions and
evaluate their assets (tangible and intangible) and their operational
capabilities; (ii) identify alternative strategies, establish processes to build
consensus and create strategies for effectively implementing changes; and (iii)
prepare a report formalizing our findings that serves as a tactical tool to
ensure communication and consistency in planning and coordination of efforts. In
addition, through the executive search practice of vFinance Holdings, we assist
companies in identifying and recruiting talented individuals to help the
companies grow. vFinance Holdings specializes in senior executive and board
member searches for public companies as well as venture backed and private
equity companies. As consideration for these services, vFinance Holdings is paid
consulting fees that are based on a monthly retainer. As part of its consulting
fees, vFinance Holdings periodically receives equity instruments and warrants
from companies for which it performs services in addition to the cash paid for
such services.
MARKET-MAKING BUSINESS. In support of both of the firm's retail brokerage and
investment banking businesses, we offer our retail brokerage, corporate and
financial institutions wholesale market-making services. vFinance Investments
makes markets in over 900 Over-the-Counter Bulletin Board and NASDAQ Small Cap
stocks. We offer out clients professional execution of trades. This expertise
supports the firms investment banking strategy of servicing high growth public
companies that are looking for a financial services firm that is capable of
assisting them in building broad based market support for their securities.
Market makers use the firms own capital, research, retail and/or systems
resources to represent a stock and compete with each other market makers to buy
and sell the stocks or issues they represent. Operated primarily by electronic
execution, buyers and sellers meet via computer to make bids and offers. Each
market maker competes for "customer order flow" by displaying buy and sell
quotations for a guaranteed number of shares in a security. Once an order is
received, the market maker will immediately purchase for or sell from its own
inventory, or seek the other side of the trade until it is executed, often in a
matter of seconds. The market maker generates all of its revenue from the
difference between the price paid when a security is bought and price received
when that security is sold or the price received when the security is shorted
and the price received when the short is covered. The Company's target customers
are national and regional full-service broker-dealers, electronic discount
brokers and institutional investors that require fast and efficient executions
for each security.
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INTERNET STRATEGY (WWW.VFINANCE.COM). Through vFinance Holdings, Inc., we
operate a branded investment-banking channel on the Web located at
www.vfinance.com, offering visitors to our website convenient access to a
variety of financial services, proprietary business development tools,
searchable databases and daily news. We target a worldwide audience of
entrepreneurs, CEOs, private investors and investment firms, allowing them to
interconnect, transact and grow wealth. Our Venture Capital Resource Library of
information on the website offers current articles on venture capital and other
issues, information on initial public offerings, a searchable database of
investment opportunities, and links to EDGAR, the SEC's database of electronic
filings by public companies. Our website also provides directory listings for
venture capital firms, investment banks, lenders, so-called venture capital
angels (which provide first round financing for risky investments), accountants,
financial printers, public relations firms, transfer agents and other types of
companies providing business services. In addition, we offer through our website
to start-ups and other early-stage firms a Web-based search engine, vSearch, of
our proprietary database of venture capital firms by different criteria,
including geography, amount of funds required, industry, stage of corporate
development or keyword. Furthermore, we opened an online loan center on our
website where growing businesses can apply for loans of up to $20 million. Most
of the website provides information to the small business executive or
entrepreneur free of charge. However, we do charge nominal fees for the use of
proprietary search engines and premium services such as financial service
listings and business plan listings.
RESEARCH SERVICES. Our research departments focus on investigating investment
opportunities by utilizing fundamental, technical and quantitative methods to
conduct in-depth analysis. Our research departments:
- review and analyze general market conditions and other
industry groups;
- issue written reports on companies, with recommendations on
specific actions to buy, sell or hold;
- furnish information to retail and institutional customers; and
- respond to inquiries from customers and account executives.
Additionally, our research analysts interface regularly with industry leaders
and portfolio managers in order to produce actionable evaluations and decisions.
These recommendations are communicated to clients and the firm via company and
industry reports.
ADMINISTRATION, OPERATIONS, SECURITIES TRANSACTIONS PROCESSING AND CUSTOMER
ACCOUNTS
Our operating subsidiaries do not hold any funds or securities for their
customers. Instead, they use the services of clearing agents on a fully
disclosed basis. These clearing agents process all securities transactions and
maintain customer accounts on a fee basis. Customer accounts are protected
through the SIPC for up to $500,000, of which coverage for cash balances is
limited to $100,000. In addition, all customer accounts are fully protected by
an Excess Securities Bond providing protection for the account's entire net
equity (both cash and securities). The services of our subsidiaries' clearing
agents include billing, credit control, and receipt, custody and delivery of
securities. The clearing agents provide operational support necessary to
process, record, and maintain securities transactions for each of our
subsidiaries' brokerage activities. They provide these services to our
subsidiaries' customers at a total cost which we believe is less than it would
cost us to process such transactions on our own. The clearing agents also lend
funds to our subsidiaries' customers through the use of margin credit. These
loans are made to customers on a secured basis, with the clearing agents
maintaining collateral in the form of saleable securities, cash or cash
equivalents. vFinance Investments, Inc. has agreed to indemnify the clearing
brokers for losses they incur on these credit arrangements.
COMPETITION
Our subsidiaries encounter intense competition in all aspects of their business
and compete directly with many other securities firms for clients, as well as
registered representatives. Many of their competitors have significantly greater
financial, technical, marketing and other resources than they do. National
retail firms such as Merrill Lynch Pierce Fenner & Smith Incorporated, Salomon
Smith Barney, Inc. and Morgan Stanley/Dean Witter dominate the industry. Our
subsidiaries also compete with numerous regional and local firms. In addition, a
number of firms offer discount brokerage services to retail customers and
generally effect transactions at substantially lower commission rates on an
"execution only" basis, without offering other services such as investment
recommendations and research. Moreover, there is substantial commission
discounting by full-service broker-dealers competing for institutional and
retail brokerage business. The recent emergence of online trading has further
intensified the competition for brokerage customers. Our subsidiaries currently
do not offer any online trading services to their customers. The continued
expansion of discount brokerage firms and online trading could adversely effect
the retail business. Other financial institutions, notably commercial banks and
savings and loan associations, offer customers some of the same services and
products presently provided by securities firms. While it is not possible to
predict the type and extent of competing services which banks and other
institutions ultimately may offer to customers, our subsidiaries may be
adversely affected to the extent those services are offered on a large scale
basis. We try to compete through our advertising and recruiting programs for
registered representatives interested in potentially joining our Company.
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GOVERNMENT REGULATION
REGULATION OF THE SECURITIES INDUSTRY AND BROKER-DEALERS. Our business is
subject to extensive regulation applicable to the securities industry in the
United States and elsewhere. As a matter of public policy, regulatory bodies in
the United States and rest of the world are charged with safeguarding the
integrity of the securities and other financial markets and with protecting the
interests of customers participating in those markets. In the United States, the
SEC is the federal agency responsible for the administration of the federal
securities laws. In general, broker-dealers are required to register with the
SEC under the Securities Exchange Act of 1934, as amended (the "Exchange Act").
Under the Exchange Act, every registered broker-dealer that does business with
the public is required to be a member of and is subject to the rules of the
NASD. The NASD administers qualification testing for all securities principals
and registered representatives for its own account and on behalf of the state
securities authorities. VFinance Investments is a broker-dealer registered with
the SEC and is a member of the NASD. Our broker-dealer is also subject to
regulation under state law. vFinance Investments is currently registered as a
broker-dealer in all 50 states and the District of Columbia. The NASD approved
the change of ownership to us of (i) Union Atlantic Capital, L.C. from Pinnacle
Capital Group, L.C., (ii) First Level Capital, Inc. from NW Holdings, Inc. and
(iii) First Colonial Securities Group, Inc. A recent amendment to the federal
securities laws prohibits the states from imposing substantive requirements on
broker-dealers that exceed those imposed under federal law. The amendment,
however, does not preclude the states from imposing registration requirements on
broker-dealers that operate within their jurisdiction or from sanctioning these
broker-dealers who have engaged in misconduct.
The SEC, self-regulatory organizations such as the NASD and state securities
commissions may conduct administrative proceedings which can result in censure,
fine, the issuance of cease-and-desist orders, or the suspension or expulsion of
a broker-dealer, its officers, or its employees. The SEC and self-regulatory
organization rules cover many aspects of a broker-dealer's business, including
capital structure and withdrawals, sales methods, trade practices among
broker-dealers, use, and safekeeping of customers' funds and securities,
record-keeping, the financing of customers' purchases, broker-dealer and
employee registration, and the conduct of directors, officers, and employees.
Additional legislation, changes in rules promulgated by the Commission and
self-regulatory organizations, or changes in the interpretation or enforcement
of existing laws and rules, may directly affect the mode of operation and
profitability of broker-dealers.
The Uniform Net Capital Rule and NASD rules require prior notice to the SEC and
the NASD for certain withdrawals of capital and also provide that the SEC may
restrict for up to 20 business days any withdrawal of equity capital, or
unsecured loans or advances to shareholders, employees or affiliates if the
capital withdrawal, together with all other net capital withdrawals during a
30-day period, exceeds 30% of excess net capital and the SEC concludes that the
capital withdrawal may be detrimental to the financial integrity of the
broker-dealer.
In addition, the Uniform Net Capital Rule provides that the total outstanding
principal amount of a broker-dealer's indebtedness under certain subordination
agreements, the proceeds of which are included in its net capital, may not
exceed 70% of the sum of the outstanding principal amount of all subordinated
indebtedness included in net capital, par or stated value of capital stock, paid
in capital in excess of par, retained earnings and other capital accounts for a
period in excess of 90 days. A change in the Uniform Net Capital Rule, the
imposition of new rules or any unusually large charge against net capital could
limit those parts of our operations that require the intensive use of capital
and also could restrict our ability to pay dividends, repay debt and repurchase
shares of our outstanding stock.
As of December 31, 2001, the minimum amount of net capital required to be
maintained by vFinance Investments was $100,000. A significant operating loss or
any unusually large charge against net capital could adversely affect our
ability to expand or even maintain our present levels of business, which could
harm our business. vFinance Investments is a member of Securities Investor
Protection Corporation ("SIPC") which provides, in the event of the liquidation
of a broker-dealer, protection for clients' accounts up to $500,000, subject to
a limitation of $100,000 for claims for cash balances. Our clients' accounts are
carried on the books and records of CSC. CSC has obtained additional insurance
from a private insurer in an amount equal to $4,500,000 for the benefit of our
clients' accounts with vFinance Investments that is supplemental to SIPC
protection.
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APPLICATION OF LAWS AND RULES TO INTERNET BUSINESS AND OTHER ONLINE SERVICES.
Due to the increasing popularity and use of the Internet and other online
services, various regulatory authorities are considering laws and/or regulations
with respect to the Internet or other online services covering issues such as
user privacy, pricing, content copyrights, and quality of services. In addition,
the growth and development of the market for online commerce may prompt more
stringent consumer protection laws that may impose additional burdens on those
companies conducting business online. When the Securities Act of 1933, as
amended (the "Securities Act"), which governs the offer and sale of securities,
and the Exchange Act, which governs, among other things, the operation of the
securities markets and broker-dealers, were enacted, such acts did not
contemplate the conduct of a securities business through the Internet and other
online services. The recent increase in the number of complaints by online
traders could lead to more stringent regulations of online trading firms and
their practices by the SEC, NASD and other regulatory agencies. Although the
SEC, in releases and no-action letters, has provided guidance on various issues
related to the offer and sale of securities and the conduct of a securities
business through the Internet, the application of the laws to the conduct of a
securities business through the Internet continues to evolve. Furthermore, the
applicability to the Internet and other online services of existing laws in
various jurisdictions governing issues such as property ownership, sales and
other taxes and personal privacy is uncertain and may take years to resolve.
Uncertainty regarding these issues may adversely affect the viability and
profitability of our business.
As our services, through our subsidiaries, are available over the Internet in
multiple jurisdictions, and as we, through our subsidiaries, have numerous
clients residing in these jurisdictions, these jurisdictions may claim that our
subsidiaries are required to qualify to do business as a foreign corporation in
each such jurisdiction. While vFinance Investments is currently registered as a
broker-dealer in the jurisdictions described in this report, vFinance
Investments and our non-broker dealer subsidiaries are qualified to do business
as a foreign corporation in only a few jurisdictions; failure to qualify as an
out-of-state or foreign corporation in a jurisdiction where it is required to do
so could subject us to taxes and penalties for the failure to qualify.
INTELLECTUAL PROPERTY
We own the following federally registered marks: vFinance.com, Inc.(R),
AngelSearch(R)and First Colonial Securities Group, Inc.(R)In addition, we use
the following trademarks: Union Atlantic LCTM, Union Atlantic Capital, L.C. TM,
Colonial Direct Financial Group, Inc. TM, Colonial Direct Retirement Services,
Inc. TM and Colonial Direct Capital Management, Inc. TM We believe the Colonial
marks now have no value.
EMPLOYEES
At December 31, 2001, we employed the following personnel:
Position Salaried Contract Total
-------- -------- -------- -----
Officers 5 0 5
Clerical 35 0 35
Brokers 31 21 52
Traders 13 0 13
Investment Bankers 11 1 12
Website 4 0 4
Other 2 3 5
Totals
None of our personnel is covered by a collective bargaining agreement. We
consider our relationships with our employees to be good. Any future increase in
the number of employees will depend upon the growth of our business. Our
registered representatives are required to take examinations administered by the
NASD and state authorities in order to qualify to transact business and are
required to enter into agreements with us obligating them, among other things,
to adhere to industry rules and regulations, our supervisory procedures and not
to solicit customers in the event of termination of employment.
-9-
RESEARCH AND DEVELOPMENT AND ENVIRONMENTAL MATTERS
We did not incur any research and development expenses. We do not incur any
significant costs or experience any significant effects as a result of
compliance with federal, state and local environmental laws.
RISKS RELATED TO OUR COMPANY
WE HAVE A LIMITED OPERATING HISTORY. AS A RESULT, YOU MAY HAVE DIFFICULTY
EVALUATING OUR BUSINESS AND PROSPECTS.
We have a limited operating history. We only commenced our broker-dealer
operations in the middle of 2000. In addition, we completely restructured our
broker-dealer operations in 2001 through the acquisition of the two firms
mentioned above and their merger into a single operation. We purchased our hedge
fund management business in mid-2001 but have determined to liquidate such
operation. Our website has been in existence since 1995. Our business and
prospects must be considered in light of the risks, expenses and difficulties
frequently encountered by companies in the early stages of development. These
risks are particularly severe among companies in new and rapidly evolving
markets such as online business development services and those in regulated
industries such as the securities industry. It may be difficult or impossible to
accurately forecast our operating results and evaluate our business and
prospects based on our historical results.
WE HAVE HAD SUBSTANTIAL AND CONTINUING LOSSES SINCE INCEPTION
Since inception, we have sustained substantial losses. Although we showed a
profit for the quarter ending September 30, 2002, such losses continued through
June 30, 2002 due to ongoing operating expenses and a lack of revenues
sufficient to offset operating expenses. We have raised capital to fund ongoing
operations by private sales of our securities, some of which sales have been
highly dilutive and involve considerable expense.
We incurred net losses of $17,453,860 and $3,911,649 for the years ending
December 31, 2001 and December 31, 2000 respectively. As of December 31, 2001,
we had an accumulated deficit of $21,254,359.
We expect to spend significant amounts to enhance our products and technologies,
and to expand domestic and international sales and operations. As a result, we
will need to generate significant additional revenue to achieve profitability
based on such planned expenditures and expansion. Even if we do achieve
profitability, we may not be able to sustain or increase profitability on a
quarterly or annual basis. If we do not achieve and maintain profitability, the
market price for our common stock may further decline, perhaps substantially.
If we do not receive additional capital when and in the amounts needed in the
near future, our ability to continue as a going concern is in substantial doubt.
Obtaining future financing may be costly and will likely be dilutive to existing
stockholders. If we are not able to obtain financing when and in the amounts
needed, and on terms that are acceptable, our operations, financial condition
and prospects could be materially and adversely affected, and we could be forced
to curtail our operations or sell part or all of our assets.
WE WILL NEED TO RAISE ADDITIONAL FUNDS. THESE FUNDS MAY NOT BE AVAILABLE WHEN WE
NEED THEM.
Based on our current plans and the funding noted above, we believe that our cash
on hand and cash generated from our operations will be sufficient to fund our
operations for at least the next 12 months. However, the Company may look to
raise additional capital to operate the business, support expansion plans,
develop new or enhanced services and products, respond to competitive pressures,
acquire complementary businesses or technologies or respond to unanticipated
events. We can provide no assurances that additional financing will be available
when needed on favorable terms, or at all. If these funds are not available when
we need them, we may need to change our business strategy or reduce our
operations or investment activities. In addition, any issuance of additional
equity securities will dilute the ownership interest of our existing
stockholders and the issuance of additional debt securities may increase the
perceived risk of investing in us.
-10-
WE ARE SUBJECT TO VARIOUS RISKS ASSOCIATED WITH THE SECURITIES INDUSTRY.
As securities broker-dealers, we are subject to uncertainties that are common in
the securities industry. These uncertainties include:
- the volatility of domestic and international financial, bond and stock
markets, as demonstrated by recent disruptions in the financial markets;
- extensive governmental regulation;
- litigation;
- intense competition;
- substantial fluctuations in the volume and price level of securities; and
- dependence on the solvency of various third parties.
As a result, revenues and earnings may vary significantly from quarter to
quarter and from year to year. In periods of low volume, profitability is
impaired because certain expenses remain relatively fixed. We are much smaller
and have much less capital than many competitors in the securities industry. In
the event of a market downturn, our business could be adversely affected in many
ways, including those described below. Our revenues are likely to decline in
such circumstances and, if we are unable to reduce expenses at the same pace,
our profit margins would erode.
OUR BUSINESS COULD BE ADVERSELY AFFECTED BY A BREAKDOWN IN THE FINANCIAL
MARKETS.
As a securities broker-dealer, our business is materially affected by conditions
in the financial markets and economic conditions generally, both in the United
States and elsewhere around the world. Many factors or events could lead to a
breakdown in the financial markets including war, terrorism, natural
catastrophes and other types of disasters. These types of events could cause
people to begin to lose confidence in the financial markets and their ability to
function effectively. If the financial markets are unable to effectively prepare
for these types of events and ease public concern over their ability to
function, our revenues are likely to decline and our operations will be
adversely affected.
WE HAVE INCURRED, AND MAY IN THE FUTURE INCUR, SIGNIFICANT LOSSES FROM TRADING
AND INVESTMENT ACTIVITIES DUE TO MARKET FLUCTUATIONS AND VOLATILITY.
We generally maintain trading and investment positions in the equity markets. To
the extent that we own assets, i.e., have long positions, in those markets, a
downturn in those markets could result in losses from a decline in the value of
those long positions. Conversely, to the extent that we have sold assets that we
do not own, i.e., have short positions, in any of those markets, an upturn in
those markets could expose us to potentially unlimited losses as we attempt to
cover our short positions by acquiring assets in a rising market.
We may from time to time have a trading strategy consisting of holding a long
position in one asset and a short position in another from which we expect to
earn revenues based on changes in the relative value of the two assets. If,
however, the relative value of the two assets changes in a direction or manner
that we did not anticipate or against which we are not hedged, we might realize
a loss in those paired positions. In addition, we maintain trading positions
that can be adversely affected by the level of volatility in the financial
markets, i.e., the degree to which trading prices fluctuate over a particular
period, in a particular market, regardless of market levels.
OUR REVENUES MAY DECLINE IN ADVERSE MARKET OR ECONOMIC CONDITIONS.
Unfavorable financial or economic conditions may reduce the number and size of
the transactions in which we provide underwriting services, merger and
acquisition consulting and other services. Our investment banking revenues, in
the form of financial advisory and underwriting fees, are directly related to
the number and size of the transactions in which we participate and would
therefore be adversely affected by a sustained market downturn. Additionally, a
downturn in market conditions could lead to a decline in the volume of
transactions that we execute for our customers and, therefore, to a decline in
the revenues we receive from commissions and spreads.
-11-
OUR RISK MANAGEMENT POLICIES AND PROCEDURES MAY LEAVE US EXPOSED TO UNIDENTIFIED
RISKS OR AN UNANTICIPATED LEVEL OF RISK.
The policies and procedures we employ to identify, monitor and manage risks may
not be fully effective. Some methods of risk management are based on the use of
observed historical market behavior. As a result, these methods may not predict
future risk exposures, which could be significantly greater than the historical
measures indicate. Other risk management methods depend on evaluation of
information regarding markets, clients or other matters that are publicly
available or otherwise accessible by us. This information may not be accurate,
complete, up-to-date or properly evaluated. Management of operational, legal and
regulatory risk requires, among other things, policies and procedures to
properly record and verify a large number of transactions and events. We cannot
assure you that our policies and procedures will effectively and accurately
record and verify this information.
We seek to monitor and control our risk exposure through a variety of separate
but complementary financial, credit, operational and legal reporting systems. We
believe that we effectively evaluate and manage the market, credit and other
risks to which we are exposed. Nonetheless, the effectiveness of our ability to
manage risk exposure can never be completely or accurately predicted or fully
assured. For example, unexpectedly large or rapid movements or disruptions in
one or more markets or other unforeseen developments can have a material adverse
effect on our results of operations and financial condition. The consequences of
these developments can include losses due to adverse changes in inventory
values, decreases in the liquidity of trading positions, higher volatility in
earnings, increases in our credit risk to customers as well as to third parties
and increases in general systemic risk.
CREDIT RISK EXPOSES US TO LOSSES CAUSED BY FINANCIAL OR OTHER PROBLEMS
EXPERIENCED BY THIRD PARTIES.
We are exposed to the risk that third parties that owe us money, securities or
other assets will not perform their obligations. These parties include:
- trading counterparties;
- customers;
- clearing agents;
- exchanges;
- clearing houses; and
- other financial intermediaries as well as issuers whose securities we hold.
These parties may default on their obligations owed to us due to bankruptcy,
lack of liquidity, operational failure or other reasons. This risk may arise,
for example, from:
- holding securities of third parties;
- executing securities trades that fail to settle at the required time due to
non-delivery by the counterparty or systems failure by clearing agents,
exchanges, clearing houses or other financial intermediaries; and
- extending credit to clients through bridge or margin loans or other
arrangements.
Significant failures by third parties to perform their obligations owed to us
could adversely affect our revenues and perhaps our ability to borrow in the
credit markets.
-12-
WE MAY HAVE DIFFICULTY EFFECTIVELY MANAGING OUR GROWTH.
Over the past several years, we have experienced significant growth in our
business activities and the number of our employees through a variety of
transactions We expect our business to continue to grow. Growth of this nature
involves numerous risks such as:
- difficulties and expenses incurred in connection with the subsequent
assimilation of the operations and services or products of the acquired
company;
- the potential loss of key employees of the acquired company; and
- the diversion of management's attention from other business concerns.
If we are unable to effectively address these risks, we may be required to
restructure the acquired business or write off the value of some or all of the
assets of the acquired business. Further, this type of growth requires increased
investments in management personnel, financial and management systems and
controls, and facilities. We cannot assure you that we will experience parallel
growth in these areas. If these areas do not grow at the same time, our
operating margins may decline from current levels.
Additionally, as is common in the securities industry, we will continue to be
highly dependent on the effective and reliable operation of our communications
and information systems. We believe that our current and anticipated future
growth will require implementation of new and enhanced communications and
information systems and training of our personnel to operate such systems. Any
difficulty or significant delay in the implementation or operation of existing
or new systems or the training of personnel could adversely affect our ability
to manage our growth.
INTENSE COMPETITION FROM EXISTING AND NEW ENTITIES MAY ADVERSELY AFFECT OUR
REVENUES AND PROFITABILITY.
The securities industry is rapidly evolving, intensely competitive and has few
barriers to entry. We expect competition to continue and intensify in the
future. Many of our competitors have significantly greater financial, technical,
marketing and other resources than we do. Some of our competitors also offer a
wider range of services and financial products than we do and have greater name
recognition and a larger client base. These competitors may be able to respond
more quickly to new or changing opportunities, technologies and client
requirements. They may also be able to undertake more extensive promotional
activities, offer more attractive terms to clients, and adopt more aggressive
pricing policies. We may not be able to compete effectively with current or
future competitors and competitive pressures faced by us may harm our business.
THE PRECAUTIONS WE TAKE TO PREVENT AND DETECT EMPLOYEE MISCONDUCT MAY NOT BE
EFFECTIVE AND WE COULD BE EXPOSED TO UNKNOWN AND UNMANAGED RISKS OR LOSSES.
We run the risk that employee misconduct could occur. Misconduct by employees
could include:
- employees binding us to transactions that exceed authorized limits or
present unacceptable risks to us;
- employees hiding unauthorized or unsuccessful activities from us; or
- the improper use of confidential information.
These types of misconduct could result in unknown and unmanaged risks or losses
to us including regulatory sanctions and serious harm to our reputation. The
precautions we take to prevent and detect these activities may not be effective.
If employee misconduct does occur, our business operations could be materially
adversely affected.
-13-
RISK OF LOSSES ASSOCIATED WITH SECURITIES LAWS VIOLATIONS AND LITIGATION.
Many aspects of our business involve substantial risks of liability. An
underwriter is exposed to substantial liability under federal and state
securities laws, other federal and state laws, and court decisions, including
decisions with respect to underwriters' liability and limitations on
indemnification of underwriters by issuers. For example, a firm that acts as an
underwriter may be held liable for material misstatements or omissions of fact
in a prospectus used in connection with the securities being offered or for
statements made by its securities analysts or other personnel. In recent years,
there has been an increasing incidence of litigation involving the securities
industry, including class actions that seek substantial damages. Our
underwriting activities will usually involve offerings of the securities of
smaller companies, which often involve a higher degree of risk and are more
volatile than the securities of more established companies. In comparison with
more established companies, smaller companies are also more likely to be the
subject of securities class actions, to carry directors and officers liability
insurance policies with lower limits or not at all, and to become insolvent.
Each of these factors increases the likelihood that an underwriter of a smaller
companies' securities will be required to contribute to an adverse judgment or
settlement of a securities lawsuit.
In the normal course of business, our operating subsidiaries have been and
continue to be the subject of numerous civil actions and arbitrations arising
out of customer complaints relating to our activities as a broker-dealer, as an
employer and as a result of other business activities. In general, the cases
involve various allegations that our employees had mishandled customer accounts.
We believe that, based on our historical experience and the reserves established
by us, the resolution of the claims presently pending will not have a material
adverse effect on our financial condition. However, although we typically
reserve an amount we believe will be sufficient to cover any damages assessed
against us, we have in the past been assessed damages that exceeded our
reserves. If we misjudged the amount of damages that may be assessed against us
from pending or threatened claims, or if we are unable to adequately estimate
the amount of damages that will be assessed against us from claims that arise in
the future and reserve accordingly, our financial condition may be materially
adversely affected.
OUR DIRECTORS AND EXECUTIVE OFFICERS CONTROL APPROXIMATELY 34% OF OUR COMMON
STOCK AND MAY HAVE INTERESTS DIFFERING FROM THOSE OF OTHER STOCKHOLDERS.
At December 31, 2001, our directors and executive officers control approximately
34% of our outstanding common stock, directly as stockholders and indirectly
through control relationships with other stockholders. There is no supermajority
vote. These directors and executive officers, if acting together, would be able
significantly to influence all matters requiring approval by our stockholders,
including the election of directors and approval of significant corporate
transactions, including mergers, consolidations and the sale of substantially
all of our assets. This control could have the effect of delaying or preventing
a third party from acquiring or merging with us, which could hinder
shareholder's ability to receive a premium for their shares.
OUR VFINANCE BRAND MAY NOT ACHIEVE THE BROAD RECOGNITION NECESSARY TO SUCCEED.
We believe that broader recognition and positive perception of the "vFinance"
brand is essential to our future success. Accordingly, we intend to continue to
pursue an aggressive brand enhancement strategy, which will include multimedia
advertising, promotional programs and public relations activities. These
initiatives will require significant expenditures. If our brand enhancement
strategy is unsuccessful, these expenses may never be recovered and we may be
unable to increase future revenues. Successful positioning of our brand will
depend in large part on:
o The success of our advertising and promotional efforts;
o An increase in the number of users and page views of our website; and
o The ability to continue to provide a website and services useful to our
clients.
These expenditures may not result in sufficient increases in revenues to offset
these expenditures. In addition, even if brand recognition increases, the number
of new users or the number of page views of our website may not increase. Even
if the number of new users increases, those users may not regularly use our
website.
-14-
FAILURE TO MAINTAIN OR INCREASE THE FLOW OF TRAFFIC TO OUR WEBSITE COULD HARM
OUR BUSINESS.
Our business partially depends on our ability to maintain or increase traffic on
our website as well as our ability to have visitors to our website use our
services. The website is dependent on the flow of information for its validity.
It is important for our business development activities to increase the number
of daily visitors, repeat visitors and the amount of time visitors spend on our
website. Failure to do so could adversely affect our revenue and our ability to
raise additional funds.
IF WE DO NOT CONTINUE TO DEVELOP AND ENHANCE OUR SERVICES IN A TIMELY MANNER,
OUR BUSINESS MAY BE HARMED.
Our future success will depend on our ability to develop and enhance our
services and add new services. We operate in a very competitive industry in
which the ability to develop and deliver advanced services through the Internet
and other channels is a key competitive factor. There are significant risks in
the development of new or enhanced services, including the risks that we will be
unable to:
o Effectively use new technologies;
o Adapt our services to emerging industry or regulatory standards; or o Market
new or enhanced services.
If we are unable to develop and introduce new or enhanced services quickly
enough to respond to market or customer requirements or to comply with emerging
industry standards, or if these services do not achieve market acceptance, our
business could be seriously harmed.
INTERNET AND INTERNAL COMPUTER SYSTEM FAILURES OR COMPROMISES OF OUR SYSTEMS OR
SECURITY COULD DAMAGE OUR REPUTATION AND HARM OUR BUSINESS.
Although a significant portion of our business is conducted using traditional
methods of contact and communications such as face-to-face meetings, a portion
of our business is conducted through the Internet. We could experience future
system failures and degradations. We cannot assure you that we will be able to
prevent an extended systems failure if any of the following events occurs:
o Human error;
o Subsystem, component, or software failure;
o A power or telecommunications failure;
o An earthquake, fire, or other natural disaster;
o Hacker attacks or other intentional acts of vandalism; or
o An act of God or war.
Any such systems failure that interrupts our operations could seriously harm our
business. We currently have limited off-site data storage and disaster recovery
systems.
The Internet has experienced, and is expected to continue to experience,
significant growth in the number of users and amount of traffic. Our future
success will depend upon the development and maintenance of the Internet's
infrastructure to cope with this increased traffic. This will require a reliable
network backbone with the necessary speed, data capacity, and security, and the
timely development of complementary products, such as high-speed modems, for
providing reliable Internet access and services.
The secure transmission of confidential information over public networks is a
critical element of our operations. We rely on encryption and authentication
technology to provide the security and authentication necessary to effect secure
transmission of confidential information over the Internet. To the best of our
knowledge, to date, we have not experienced any security breaches in the
transmission of confidential information. Moreover, we continually evaluate
advanced encryption technology to ensure the continued integrity of our systems.
However, we cannot assure you that advances in computer capabilities, new
discoveries in the field of cryptography or other events or developments will
not result in a compromise of the technology or other algorithms used by our
vendors and us to protect client transaction and other data. Any compromise of
our systems or security could harm our business.
-15-
THERE ARE RISKS ASSOCIATED WITH OUR STOCK TRADING ON THE NASD OTC BULLETIN BOARD
RATHER THAN A NATIONAL EXCHANGE.
There are significant consequences associated with our stock trading on the NASD
OTC Bulletin Board rather than a national exchange. The effects of not being
able to list our securities on a national exchange include:
o Limited release of the market prices of our securities;
o Limited news coverage of us;
o Limited interest by investors in our securities;
o Volatility of our stock price due to low trading volume;
o Increased difficulty in selling our securities in certain states due to "blue
sky" restrictions; and o Limited ability to issue additional securities or to
secure additional financing.
IF OUR COMMON STOCK IS SUBJECT TO PENNY STOCK RULES, YOU MAY HAVE GREATER
DIFFICULTY SELLING YOUR SHARES.
The Securities Enforcement and Penny Stock Reform Act of 1990 applies to stock
characterized as "penny stocks," and requires additional disclosure relating to
the market for penny stocks in connection with trades in any stock defined as a
penny stock. The Securities and Exchange Commission has adopted regulations that
generally define a penny stock to be any equity security that has a market price
of less than $5.00 per share, subject to certain exceptions.
The exceptions include exchange-listed equity securities and any equity security
issued by an issuer that has:
- net tangible assets of at least $2,000,000, if the issuer has been in
continuous operation for at least three years; - net tangible assets of at least
$5,000,000, if the issuer has been in continuous operation for less than three
years; or - average annual revenue of at least $6,000,000 for the last three
years.
Unless an exception is available, the regulations require the delivery, prior to
any transaction involving a penny stock, of a disclosure schedule explaining the
penny stock market and the associated risks.
If our financial condition does not meet the above tests, then trading in the
common stock will be covered by Rules 15g-1 through 15g-6 and 15g-9 promulgated
under the Securities Exchange Act. Under those rules, broker-dealers who
recommend such securities to persons other than their established customers and
institutional accredited investors must make a special written suitability
determination for the purchaser and must have received the purchaser's written
agreement to a transaction prior to sale. These regulations would likely limit
the ability of broker-dealers to trade in our common stock and thus would make
it more difficult for purchasers of common stock to sell their securities in the
secondary market. The market liquidity for the common stock could be severely
affected.
WE DEPEND ON A LIMITED NUMBER OF KEY EXECUTIVES WHO WOULD BE DIFFICULT TO
REPLACE.
Our success depends significantly on the continued services of our senior
management, especially Leonard J. Sokolow, our Chief Executive Officer and
President. Losing Mr. Sokolow or any of our subsidiaries' other key executives,
including Timothy E. Mahoney, our Chairman and Chief Operating Officer; Robert
F. Williamson, Jr., our Chief Financial Officer; David A. Spector, one of our
Vice Presidents, and Marc N. Siegel, President of vFinance Investments, could
seriously harm our business. We cannot assure you that we will be able to retain
our key executives or that we would be able to replace any of our key executives
if we were to lose their services for any reason. Competition for these
executives is intense. If we had to replace any of these key executives, we
would not be able to replace the significant amount of knowledge that these key
executives have about our operations. We do not maintain "key person" insurance
policies on any of our executives.
-16-
WE RELY VERY HEAVILY ON CORRESPONDENT SERVICES CORP. ("CSC"), CLEARING BROKER
FOR VFINANCE INVESTMENTS, OUR OPERATING BROKER-DEALER SUBSIDIARY. THE
TERMINATION OF THE AGREEMENT BETWEEN THE CLEARING BROKER AND VFINANCE
INVESTMENTS COULD HARM OUR BUSINESS.
Either party upon 60 days prior written notice may terminate the clearing
agreement between CSC and us. According to the terms of the agreement, the
clearing broker, on a fee basis, processes all securities transactions for the
accounts of vFinance Investments and the accounts of its clients. CSC services
include billing and credit extension, control and receipt, custody and delivery
of securities, for which vFinance Investments pays a transaction charge. We are
dependent on the operational capacity and the ability of CSC for the orderly
processing of transactions. In addition, by engaging the processing services of
a clearing broker, vFinance Investments is exempt from certain capital reserve
requirements and other complex regulatory requirements imposed by federal and
state securities laws. Moreover, vFinance Investments has agreed to indemnify
and hold CSC harmless from certain liabilities or claims, including claims
arising from the transactions of its clients.
OUR OPERATING BROKER-DEALER SUBSIDIARY EXTENDS CREDIT TO ITS CLIENTS AND IS
SUBJECT TO RISKS AS A RESULT.
Our broker dealer clears all transactions for its customers on a fully disclosed
basis with its clearing broker, CSC, which carries and clears all customer
securities accounts. A limited portion of the customer securities activities of
vFinance Investments are transacted on a "margin" basis, pursuant to which
credit is extended to customers, which (a) is secured by cash and securities in
customer accounts, or (b) involve (i) "short sales" (i.e., the sale of
securities not yet purchased) or (ii) the purchase and sale of commodity futures
contracts, substantially all of which are transacted on a margin basis. These
risks are increased during periods of volatile markets in which the value of the
collateral vFinance Investments holds could fall below the amount borrowed by
its clients. If margin requirements are not sufficient to cover losses, vFinance
Investments may be required to sell or buy securities at prevailing market
prices and incur losses to satisfy its client obligations.
WE UNDERWRITE SECURITIES THROUGH VFINANCE INVESTMENTS AND ARE SUBJECT TO LOSSES
RELATING TO A DECLINE IN THE MARKET VALUE OF SECURITIES THAT WE HOLD IN
INVENTORY AND TO LIABILITY FOR ENGAGING IN UNDERWRITING ACTIVITIES.
The underwriting activities of vFinance Investments involve the purchase, sale
or short sale of securities as a principal. As an underwriter, vFinance
Investments agrees to purchase securities on a "firm commitment" basis and is
subject to risk that it may be unable to resell securities or be required to
dispose of securities at a loss. In connection with our investment-banking
activities in which vFinance Investments acts as a manager or co-manager of
public offerings of securities, we expect to make increased commitments through
vFinance Investments of capital to market making activities in securities of
those issuers. Any additional concentration of capital in the securities of
those issuers held in inventory will increase the risk of loss from possible
declines in the market price of those securities. In addition, under federal
securities laws, other laws and court decisions with respect to underwriters'
liabilities and limitations on the indemnification of underwriters by issuers,
an underwriter is subject to substantial potential liability for misstatements
or omissions of material facts in prospectuses and other communications with
respect to securities offerings. Our potential liability through vFinance
Investments as an underwriter is generally not covered by insurance. Moreover,
underwriting commitments constitute a charge against net capital and the ability
of vFinance Investments to make underwriting commitments may be limited by the
requirement that it must at all times be in compliance with the net capital
rule. For the twelve month period, the Company did not participate in any firm
commitment underwritings.
Our success and ability to compete depend to a significant degree on our
intellectual property. We rely on copyright and trademark law, as well as
confidentiality arrangements, to protect our intellectual property. Our company
owns the following federally registered marks: vFinance, Inc.(R), vFinance.com,
Inc.(R), AngelSearch(R), and First Colonial Securities Group, Inc.(R). In
addition, our company owns the following state registered marks: Union Atlantic
LC and Union Atlantic Capital, L.C. We currently do not have any patents. The
concepts and technologies we use may not be patentable. Our competitors or
others may adopt product or service names similar to "vFinance.com," thereby
impeding our ability to build brand identity and possibly leading to client
confusion. Our inability to adequately protect the name "vFinance.com" would
seriously harm our business. Policing unauthorized use of our intellectual
property is made especially difficult by the global nature of the Internet and
difficulty in controlling the ultimate destination or security of software or
other data transmitted on it.
-17-
The laws of other countries may afford us little or no effective protection for
our intellectual property. We cannot assure you that the steps we take will
prevent misappropriation of our intellectual property or that agreements entered
into for that purpose will be enforceable. In addition, litigation may be
necessary in the future to:
o Enforce our intellectual property rights;
o Determine the validity and scope of the proprietary rights of others; or
o Defend against claims of infringement or invalidity.
Such litigation, whether successful or unsuccessful, could result in substantial
costs and diversions of resources, either of which could seriously harm our
business.
OUR BOARD OF DIRECTORS CAN ISSUE SHARES OF "BLANK CHECK" PREFERRED STOCK WITHOUT
FURTHER ACTION BY OUR STOCKHOLDERS.
Our Board of Directors has the authority, without further action by the
stockholders, to issue up to 2,500,000 shares of preferred stock (of which,
122,500 shares are designated as Series A Convertible Preferred Stock and were
issued in connection with the merger with Colonial Direct Financial Group, Inc.,
and 50,000 shares are designated as Series B Convertible Preferred Stock and
were issued in connection with the merger with Colonial Direct Financial Group,
Inc.) in one or more series and to fix the rights, preferences, privileges and
restrictions in each series of the preferred stock, including:
o Dividend rights;
o Conversion rights;
o Voting rights, which may be greater or lesser than the voting rights of the
common stock;
o Rights and terms of redemption;
o Liquidation preferences; and
o Sinking fund terms.
The issuance of shares of preferred stock could adversely affect the voting
power of holders of our common stock and the likelihood that these holders will
receive dividends and payments upon liquidation of our company and could have
the effect of delaying, deferring or preventing a change in control of our
company. We do no plan to issue any additional preferred stock in the next
twelve months.
WE MAY HAVE LIABILITIES TO CERTAIN HOLDERS OF OUR COMMON STOCK, AND OPTIONS
WHICH ARE NOT INCLUDED IN THIS REGISTRATION STATEMENT.
In connection with the prior issuance of common stock and/or options to acquire
our common stock, the Company granted registration rights, including
"piggy-back" registration rights giving such holders the right to be included in
any registration statement filed by the Company subsequent to the date of
issuance of such stock or options. Additionally, certain employees have options
to acquire Company stock with registration rights. The Company expects to file a
registration statement on a Form S-8 for such employee shares and stock options.
Notwithstanding the existence of the piggy-back registration rights, the Company
has not elected to include in this Registration Statement any options whose
exercise price exceeds $0.31. The Company believes that all holders of
restricted common stock are free to sell such stock without restrictions
pursuant to the provisions of Rule 144(k) of the Securities Act of 1933. The
Company may incur liability to certain holders of such piggy-back registration
rights for the failure to include them in this Registration Statement.
ADDITIONAL DILUTION AS A RISK TO SHAREHOLDERS.
While we currently have outstanding 22,952,885 shares of common stock, options
to purchase a total of 9,687,050 shares of common stock, warrants to purchase a
total of 3,108,499 shares of common stock and senior convertible promissory
notes initially convertible into 3,421,052 shares of common stock, we are
authorized to issue up to 75,000,000 shares of common stock and are therefore
able to issue additional shares without being required to obtain shareholder
approval. If we issue additional shares, or if our existing shareholders
exercise or convert their outstanding options or notes, our other shareholders
may find their holdings drastically diluted, which if it occurs, means that they
will own a smaller percentage of our company.
-18-
ITEM 2. DESCRIPTION OF PROPERTY.
At December 31, 2000, our corporate headquarters was located at 6600 North
Andrews Avenue, Suite 304, Fort Lauderdale Florida 33309, where we leased
approximately 3,800 square feet of office space at a rental of $87,883 per
annum, under a lease that expires on April 30, 2002. On January 22, 2001, we
sublet this office space on the same terms for the remaining term of such lease.
On January 13, 2001, we relocated our corporate headquarters to 3010 North
Military Trail, Boca Raton, Florida 33431, where Colonial Direct Financial
Group, Inc., our wholly owned subsidiary, leased approximately 15,750 square
feet at a rental of $271,791 per annum, under a lease which expires in 2008.
This office space is also the corporate headquarters of all of our subsidiaries.
Beginning January 2000, we leased approximately 1600 square feet of office space
at 1215 Hightower Trail, Building B, Suite 220, Atlanta, Georgia 30350, at a
monthly rate of $2,317.66, which lease expires in February 2003. This office
space is a branch office of Union Atlantic Capital, L.C.
Colonial Direct Financial Group, Inc., which became our wholly-owned subsidiary
after December 31, 2000, subleases its prior corporate headquarters located at
1499 West Palmetto Park Road, Suite 312, Boca Raton, Florida 33486, where
Colonial Direct Financial Group, Inc. leased approximately 7,400 square feet of
space at a rental of $168,360 per annum, for the balance of the remaining term
of such lease which expires in April 30, 2002.
The following information relates to the branch offices of First Colonial
Securities Group, Inc.:
Approximate Annual
Office Locations Square Footage Lease Rental Exp. Date
---------------- ------------------ ------------ -----------------
New York, NY 11,165 $474,513 December 31, 2006
Paramus, NJ 2,578 $43,182 December 31, 2001
Marlton, NJ 6,130 $128,178 March 31, 2004
Colonial Direct Financial Group, Inc. remains liable on its prior New York
branch office lease that was for approximately 4,425 square feet, at an annual
rental rate of approximately $126,500, for a term that expires May 16, 2002.
Colonial Direct Financial Group, Inc. is actively seeking a subtenant or
assignee for this office space and remains primarily responsible until such time
as a subtenant or assignee is located and approved by the landlord.
Colonial Direct Financial Group, Inc. has entered into a sublease at its
Marlton, NJ office location for the balance of the lease term for approximately
6,130 of the total square footage, at an annual rental rate of $123,520.
The following information relates to the branch offices of First Level Capital,
Inc.:
Approximate Annual
Office Locations Square Footage Lease Rental Exp. Date
---------------- ------------------ ------------ -----------------
New York, NY 3,300 $105,036 March 1, 2006
Boca Raton, FL 1,171 $27,659 October 31, 2002
Sarasota, FL 1,058 $19,903 July 31, 2004
Red Bank, NJ 4,100 $75,000 October 31, 2003
-19-
Based on the terms of our merger with NW Holdings, Inc., NW Holdings, Inc.
assigned to us and we assumed all the obligations of NW Holdings, Inc. under the
lease at 50 Broadway, 24th Floor, New York, New York 10004, where NW Holdings,
Inc. leased approximately 3,300 square feet at a rental of $105,036 per annum,
under a lease which expires on March 1, 2006.
The leases for the Boca Raton, FL, Sarasota, FL and Red Bank, NJ branch office
locations of First Level Capital, Inc. were entered into by First Level Capital,
Inc.
We consider the facilities of our company and our subsidiaries (excluding the
branch offices of First Level Capital, Inc.) to be reasonably insured and
adequate for the foreseeable needs of our company and our subsidiaries and we
believe that similar facilities are available in the Atlanta, Georgia, South
Florida, New York, and metropolitan areas at comparable rental rates.
ITEM 3. LEGAL PROCEEDINGS.
From time to time a subsidiary of ours or we are named as a party to a lawsuit
that has arisen in the ordinary course of business. Although it is possible that
losses exceeding amounts already recorded may be incurred upon ultimate
resolution of these existing legal proceedings, we believe that such losses, if
any, will not have a material adverse effect on our business, results of
operations or financial position; however, unfavorable resolution of each matter
individually or in the aggregate could affect the consolidated results of
operations for the quarterly and annual periods in which they are resolved.
The business of vFinance Investments involves substantial risks of liability,
including exposure to liability under federal and state securities laws in
connection with the underwriting or distribution of securities and claims by
dissatisfied customers for fraud, unauthorized trading, churning, mismanagement
and breach of fiduciary duty. In recent years, there has been an increasing
incidence of litigation involving the securities industry, including class
actions that generally seek rescission and substantial damages.
In the ordinary course of business, our company and/or its subsidiaries may be
parties to other legal proceedings and regulatory inquiries, the outcome of
which, either singly or in the aggregate, is not expected to be material. There
can be no assurance however that any sanctions will not have a material adverse
effect on the financial condition or results of operations of our company and/or
its subsidiaries. What follows below is a brief summary of certain matters
pending against or involving our subsidiaries and us.
First Colonial Securities Group, Inc. ("First Colonial") is subject to
supervision and regulation by the NASD, the SEC and various state securities
commissions. As part of this regulatory oversight, First Colonial is subject to
periodic examination and inspections by these authorities. First Colonial has
been advised that as a result of an examination performed by the Philadelphia
office of the NASD for the years 1996 and 1997, the NASD identified several
possible material deficiencies. The NASD and our company settled the matter in
February 2002 with us paying a fine of $75,000.
On April 5, 2001 Fleet National Bank ("Fleet") filed a complaint against Michael
Golden ("Golden") , a former controlling shareholder of Colonial Direct
Financial Group, Inc., one of our wholly owned subsidiaries ("Colonial Direct"))
and Colonial Direct in the Superior Court of New Jersey in the amount of
$315,902.94 for amounts due under Lines of Credit issued prior to our January
2001 acquisition of Colonial Direct. In October 2001, the Superior Court entered
a summary judgment in favor of Fleet. The period for appeal of the summary
judgment expired on December 10, 2001. Despite our joint liability with Michael
Golden, we have fully accrued for and established reserves for this judgment.
- 20 -
On April 5, 2001 Fleet filed a complaint against First Colonial Securities,
Inc., a wholly owned subsidiary of Colonial Direct in the Superior Court of New
Jersey in the amount of $210,928.19 for a letter of credit issued prior to our
January 2001 acquisition of Colonial Direct. In October 2001, the Superior Court
entered a summary judgment in favor of Fleet. The period for appeal of the
summary judgment expired on December 10, 2001. We have fully accrued for and
established reserves (including reserves for net capital purposes) for this
judgment.
On or about May 17, 2001, Golden filed an initial complaint against us in the
Circuit Court of the 17th Judicial Circuit in and for Broward County, Florida,
alleging that we breached our January 5, 2001 employment agreement with Golden,
which was entered into as a result of the merger between Colonial Direct and us.
Mr. Golden claims that he terminated the agreement for "good reason," as defined
in the agreement, and that we have failed to pay him severance payments and
other benefits as well as accrued commissions and un-reimbursed expenses. In the
initial complaint, Golden sought monetary damages from us in excess of $50,000
together with interest, attorney's fees and costs.
On or about July 18, 2001, we filed our answer and affirmative defenses and
counterclaims with the Circuit Court against Golden and Ben Lichtenberg
("Lichtenberg"), Golden's partner in Colonial Direct, denying all material
allegations in the complaint, affirmatively alleging that Golden is not entitled
to any severance payments because he was terminated for cause for his
insubordination, failure to follow directives of our board of directors and for
breaches of fiduciary duty to us. We also alleged that both Golden and
Lichtenberg violated the merger agreement between Colonial Direct and us by
breaching certain of the representations and warranties set forth in the merger
agreement by, among other things, failing to advise us of certain loan agreement
defaults, improperly withdrawing approximately $400,000 of capital from Colonial
Direct, failing to deliver a closing balance sheet and failing to disclose
significant liabilities of Colonial Direct. Claiming that the activities of
Golden and Lichtenberg constituted violations of Florida's Securities Investor
Protection Act, common law fraud, breach of fiduciary duty, breach of contract,
intentional interference with advantageous business relationships, and breach of
the implied covenant of good faith and dealing, we are seeking indemnification
under the merger agreement and additional monetary damages against Golden and
Lichtenberg in excess of $15,000.
In response to our answer, affirmative defenses and counterclaims, on or about
September 1, 2001, Golden filed an amended complaint with the Court against us,
Leonard Sokolow ("Sokolow"), our President and Chief Executive Officer, and
Timothy Mahoney ("Mahoney"), the Chairman of our board of directors. In the
amended complaint, Golden alleges that Sokolow and Mahoney made various false
representations that induced Golden to enter into the merger agreement and his
employment agreement. Golden is seeking monetary damages from Sokolow, Mahoney
and us in excess of $4.6 million.
Lichtenberg filed an answer, affirmative defenses and counterclaims with the
Court in response to our filing with the Court on July 13, 2001. In addition to
denying all material allegations in our July 13, 2001 counterclaims against him,
Lichtenberg alleges that: (a) we breached our employment agreement with him, (b)
Sokolow and the company made various false representations that induced
Lichtenberg to enter into the merger agreement and (c) we materially breached
the Colonial Direct merger agreement. Lichtenberg is seeking delivery from us of
414,825 shares of our common stock and monetary damages of at least $488,000
from Sokolow and us, jointly and severally. On November 20, 2001 Sokolow and the
company filed an answer and affirmative defenses to these allegations denying
Lichtenberg's allegations. The parties are proceeding with discovery and the
matter has been placed on the Circuit Court's September 2002 trial docket.
PROCEEDINGS INVOLVING FIRST COLONIAL SECURITIES GROUP, INC.
On May 15, 2001, Louis D'Alessio filed a claim with the NASD against First
Colonial and Joel Kamphuis. His claim alleges compensatory damages in an amount
between $100,000 and $500,000 plus unspecified punitive damages. He alleges
unfair business practices, violation of the federal securities act, violation of
state securities statutes, and common law fraud. vFinance Investments believes
that their claim is without merit and is vigorously defending the action. We
anticipate that this matter will result in a settlement of approximately
$15,000.
On January 22, 2002, Josephine and Frank Oliveri filed a claim with the NASD
against First Colonial and Anthony Guglieri. Their claim alleges compensatory
damages of $192,286.50 plus interest and punitive damages of $100,000. They
allege unsuitable investments, unauthorized trading, excessive trading and lack
of supervision. vFinance Investments believes that their claim is without merit
and is vigorously defending the action. We anticipate that this matter will
result in a settlement of approximately $25,000.
-21-
On October 3, 2001, Sterling Financial Investment Group filed a claim with the
NASD against vFinance Investment, Michael Kraft, Mickey Dubberly and Jaret
Brietstein. Their claim alleges compensatory damages and punitive damages to not
exceed the sum of $500,000. They alleged vFinance Investments offered and made
significant cash payments to Sterling's employees, Kraft, Dubberly and
Brietstein to entice them to break their written employment agreements with
Sterling and work for vFinance Investments. vFinance Investments believes that
their claim is without merit and is vigorously defending the action.
On August 14, 2001, Rosario Catanzarite, Joann Catanzarite, Anna Piegaro, Brian
Catanzarite and Dina Catanzarite filed a claim with the NASD against First
Colonial, Rodney Strong, Glen Merendino, Michael Golden, Lewis Maniloff, and
Steven Schwartz. Their claim alleges compensatory damages in the amount of
$125,000 plus interest. They allege that Mr. Merendino completely abused their
trust, processed unsuitable trades, coupled with abusive use of margin. vFinance
Investments believes that their claim is without merit and is vigorously
defending the action. We anticipate that this matter will result in a settlement
of approximately $25,000.
We are engaged in a number of other legal proceedings incidental to the conduct
of our business. These claims aggregate a range of $684,800 to $1,919,000. In
the opinion of our management, our company is adequately insured against the
claims relating to such proceedings, and any ultimate liability arising out of
such proceedings will not have a material adverse effect on the financial
condition or results of operations of our company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of stockholders during the fourth quarter of
our 2001 fiscal year.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
MARKET INFORMATION
Our common stock, par value $0.01 per share, is traded on the OTC Bulletin Board
of the National Association of Securities Dealers, Inc. under the symbol "VFIN."
From October 8, 1992 through December 31, 1993, our common stock and warrants
were trading on the NASDAQ Small Cap Market under the symbols PFII and PFIIW,
respectively, and on the Boston Stock Exchange under the symbols PFI and PFIW,
respectively. In January 1994, our common stock and warrants were de-listed from
both exchanges. The warrants expired in October 1995. From January 1994 until
November 18, 1998, there was no public trading market for our common stock.
The following table sets forth the closing high and low bid information for our
common stock for the periods indicated below, as reported by the National
Quotation Bureau during such periods:
2000 High Low
1st Quarter $8.00 4.19
2nd Quarter 7.75 2.88
3rd Quarter 3.88 1.66
4th Quarter 1.88 0.63
2001
1st Quarter 0.97 0.31
2nd Quarter 0.21 0.50
3rd Quarter 0.46 0.22
4th Quarter 0.88 0.15
-22-
The foregoing quotations supplied by the National Quotations Bureau reflect
inter-dealer prices, without retail mark-up, markdown or commission and may not
represent actual transactions.
We are authorized to issue 75,000,000 shares of common stock, of which
23,387,097 shares were issued and outstanding as of March 27, 2002. We are
authorized to issue up to 2,500,000 shares of preferred stock, of which (i)
122,500 shares are designated as Series A Convertible Preferred Stock, par value
$0.01 per share, all of which are currently issued and outstanding, and (ii)
50,000 shares are designated as Series B Convertible Preferred Stock, par value
$0.01 per share, all of which are currently issued and outstanding. The number
of stockholders of record for the Common Stock as of March 27, 2002 was 60.
We have not paid any cash dividends since inception, and we do not anticipate
paying any cash dividend in the foreseeable future.
Our transfer agent is North American Transfer Co., Freeport, New York 11520.
RECENT SALES OF UNREGISTERED SECURITIES
PRIVATE PLACEMENTS. On June 1, 2000, we granted to each of Leonard J. Sokolow
and Timothy E. Mahoney an option to purchase up to 500,000 shares of our common
stock. On January 1, 2001, Messrs. Sokolow and Mahoney agreed to the
cancellation of these options. On January 5, 2001, each of Mr. Sokolow and Mr.
Mahoney received the right to be granted an option to purchase 500,000 shares of
our common stock if he remained employed by our company for at least six months
thereafter. These options were also cancelled on April 2, 2001.
On July 6, 2001, each of Mr. Sokolow and Mr. Mahoney received an option to
purchase 500,000 shares of our common stock that expires on July 6, 2006, 25% of
which vested upon grant and the remainder of which vests in three equal annual
installments beginning July 6, 2002. The option grants to Messrs. Sokolow and
Mahoney were exempt from registration pursuant to Section 4(2) of the Securities
Act.
We recently sold the following equity securities to unaffiliated entities. The
sales were exempt from registration pursuant to Section 4(2) of the Securities
Act and/or Regulation D promulgated under the Securities Act.
As of December 18, 2001, Critical Infrastructure Fund (BVI), LP, purchased
877,193 shares of our common stock for $250,000. See Item 101, "Description of
Business - Our History" above. Pursuant to the terms of the sale, Critical
Infrastructure Fund (BVI), LP, received registration rights incidental to a
company registration of securities with the SEC with respect to these shares.
Critical Infrastructure Fund (BVI), LP, subsequently sold some of these shares
to Messrs. Williamson, Sokolow and Mahoney and the Elliot J. Brody Revocable
Trust.
As of December 21, 2001, Innovex Partners purchased 980,392 shares and received
a warrant to purchase 1,000,000 shares of our common stock at $.35 per share for
a purchase price of $250,000. The warrant is immediately exercisable and expires
on December 21, 2006.
As of January 7, 2002, AMRO International, S.A. purchased 350,878 shares of our
common stock for $100,000. Pursuant to the investment, AMRO was granted
registration rights incidental to a company registration of securities with the
SEC with respect to the shares.
As of March 27, 2002, there were options and warrants to purchase up to
13,300,549 shares of our common stock held by our employees and consultants and
employees and consultants of our subsidiaries outstanding. Such options and
warrants vest over a one month to four-year period and expire between 2004 and
2005. The per share exercise price ranges from $0.28 to $7.20. These options and
warrants were exempt from registration pursuant to Section 4(2) of the
Securities Act.
- 23 -
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
CRITICAL ACCOUNTING POLICIES
Financial Reporting Release No. 60, which was recently released by the SEC,
requires all companies to include a discussion of critical accounting policies
or methods used in the preparation of financial statements. Note 2 to our
consolidated financial statements includes a summary of the significant
accounting policies and methods used in the preparation of our consolidated
financial statements. The following is a brief discussion of the more
significant accounting policies and methods used by us.
GENERAL. The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities,
disclosure of contingent assets and liabilities and the reported amounts of
revenues and expenses. Actual results could differ from those estimates.
REVENUE RECOGNITION. We earn revenue from brokerage and trading which are
recognized on the day of the trade. We also earn revenue from investment banking
and consulting. Monthly retainer fees for investment banking and consulting are
recognized as earned. Investment banking success fees are generally based on a
percentage of the total value of a transaction and are recognized upon
successful completion.
We do not require collateral from our customers. Revenues are not concentrated
in any particular region of the country or with any individual or group.
We periodically receive equity instruments which include stock purchase warrants
and common and preferred stock from companies as part of our compensation for
investment-banking services that are classified as investments in trading
securities on the balance sheet if still held at the financial reporting date.
These instruments are stated at fair value in accordance with SFAS #11
"Accounting for certain investments in debt and equity securities" and EITF 00-8
"Accounting by a grantee for an equity instrument to be received in conjunction
with providing goods or services." Primarily all of the equity instruments are
received from small public companies. The stock and stock purchase warrants
received are typically restricted as to re-sale. Though, the Company generally
receives a registration right within one year. Company policy is to sell these
securities in anticipation of short-term market movements. We recognize revenue
for these stock purchase warrants when received based on the Black Scholes
valuation model. On a monthly basis, we recognize unrealized gains or losses in
the statement of operations based on the changes in value in the stock purchase
warrants as determined by the Black Scholes valuation model. Realized gains or
losses are recognized in the statement of operations when the related stock
purchase warrant is exercised and sold. For the years ended December 31, 2001
and 2000 we recognized $1,756,411 and $1,501,654, respectively, of revenue in
connection with the receipt of equity instruments.
Occasionally, we receive equity instruments in private companies with no readily
available market value. Equity interests and warrants for which there is not a
public market are valued based on factors such as significant equity financing
by sophisticated, unrelated new investors, history of positive cash flow from
operations, the market value of comparable publicly traded companies (discounted
for liquidity) and other pertinent factors. Management also considers recent
offers to purchase a portfolio company's securities and the filings of
registration statements in connection with a portfolio company's initial public
offering when valuing warrants.
Our policy was to distribute equity instruments or proceeds from the sale of
equity instruments to our employees as compensation for their investment banking
successes. These distributions complied with compensation agreements which
varied on a "banker by banker" basis. Accordingly, unrealized gains or losses
recorded in the statement of operations related to securities held by us at each
period end which ultimately will be distributed to our employees, also impact
compensation expense and accrued compensation. At December 31, 2001 and 2000,
$28,813 and $0, respectively, of accrued payroll is owed to former employees of
our company in connection with equity investments held by us that have not yet
been distributed.
As of December 31, 2001, certain transactions in process may result in us
receiving equity instruments or stock purchase warrants in subsequent periods as
discussed above. In this event, we will recognize revenue related to the receipt
of such equity instruments consistent with the aforementioned policies. In
addition, we would also record compensation expense at fair value related to the
distribution of some or all of such equity instruments to employees or
independent contractors involved with the related transaction.
CLEARING ARRANGEMENT. We do not carry accounts for customers or perform
custodial functions related to customers' securities. We introduce all of their
customer transactions, which are not reflected in these financial statements, to
their respective clearing brokers, which maintain the customers' accounts and
clear such transactions. Additionally, our clearing firm provides the clearing
and depository operations for our proprietary securities transactions. These
activities may expose our broker dealer off-balance-sheet risk in the event that
customers do not fulfill their obligations with the clearing broker, as our
broker dealer has agreed to indemnify our clearing firm.
23A
CUSTOMER CLAIMS. In the normal course of business, our operating subsidiaries
have been and continue to be the subject of numerous civil actions and
arbitrations arising out of customer complaints relating to our activities as a
broker-dealer, as an employer and as a result of other business activities. In
general, the cases involve various allegations that our employees had mishandled
customer accounts. Based on our historical experience and consultation with
counsel, we typically reserve an amount we believe will be sufficient to cover
any damages assessed against us. However, we have in the past been assessed
damages that exceeded our reserves. If we misjudged the amount of damages that
may be assessed against us from pending or threatened claims, or if we are
unable to adequately estimate the amount of damages that will be assessed
against us from claims that arise in the future and reserve accordingly, our
operating income would be reduced.
FAIR VALUE. "Trading securities owned" and "Securities sold, not yet purchased"
on our consolidated statements of financial condition are carried at fair value
or amounts that approximate fair value, with related unrealized gains and losses
recognized in our results of operations. The determination of fair value is
fundamental to our financial condition and results of operations and, in certain
circumstances, it requires management to make complex judgments.
Fair values are based on listed market prices, where possible. If listed market
prices are not available or if the liquidation of our positions would reasonably
be expected to impact market prices, fair value is determined based on other
relevant factors, including dealer price quotations. Fair values for certain
derivative contracts are derived from pricing models that consider current
market and contractual prices for the underlying financial instruments or
commodities, as well as time value and yield curve or volatility factors
underlying the positions.
Pricing models and their underlying assumptions impact the amount and timing of
unrealized gains and losses recognized, and the use of different pricing models
or assumptions could produce different financial results. Changes in the fixed
income and equity markets will impact our estimates of fair value in the future,
potentially affecting principal trading revenues. The illiquid nature of certain
securities or debt instruments also requires a high degree of judgment in
determining fair value due to the lack of listed market prices and the potential
impact of the liquidation of our position on market prices, among other factors.
INVESTMENTS. Investments are classified as trading securities and are held for
resale in anticipation of short-term market movements or until such securities
are registered or are otherwise unrestricted. Any unregistered securities
received generally contain a registration right within one year. Trading account
assets, consisting of marketable equity securities and stock purchase warrants,
are stated at fair value. At December 31, 2001 and 2000, investments consisted
entirely of common and preferred stock held for resale. Realized gains or losses
are recognized in the statement of operations when the related stock purchase
warrant is exercised and the underlying shares are sold. Unrealized gains or
losses are recognized in the statement of operations on a monthly basis based on
changes in the fair value of the security as quoted on national or inter-dealer
stock exchanges. Net unrealized losses related to investments held for trading
and stock purchase warrants as of December 31, 2001 and 2000, aggregated
$1,443,878 and $424,041, respectively.
GOODWILL AND OTHER INTANGIBLE ASSETS ("FAS 142"). The provisions of FAS 141
eliminated the pooling-of-interests method of accounting for business
combinations consummated after June 30, 2001. We adopted FAS 141 on July 1, 2001
and it did not have a significant impact on our financial position or results of
operations. Under the provisions of FAS 142, goodwill and indefinite lived
intangible assets are no longer amortized, but are reviewed annually for
impairment. Separable intangible assets that are not deemed to have an
indefinite life will continue to be amortized over their useful lives. We are
required to adopt the new accounting rules beginning January 1, 2002. Management
is currently assessing the financial impact FAS 142 will have on the
consolidated financial statements, but they do not believe it will be material.
-24-
The value of the Company's goodwill is exposed to future adverse changes if the
Company experiences declines in operating results or experiences significant
negative industry or economic trends or if future performance is below
historical trends. The Company periodically reviews intangible assets and
goodwill for impairment using the guidance of applicable accounting literature.
We are subject to financial statement risk to the extent that the goodwill and
other intangible assets become impaired. During the year ended December 31,
2001, we did not record any impairment losses related to goodwill and other
intangible assets. It is expected that the adoption of FAS 142 may result in a
one-time, non cash charge.
NEW ACCOUNTING STANDARDS. In August 2001, the Financial Accounting Standards
Board issued Statement of Financial Accounting Standards No. 144, ACCOUNTING FOR
THE IMPAIRMENT OR DISPOSAL OF LONG-LIVED ASSETS ("FAS 144"), which addresses
financial accounting and reporting for the impairment or disposal of long-lived
assets and supersedes SFAS No. 121, ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED
ASSETS AND FOR LONG-LIVED ASSETS TO BE DISPOSED OF, and the accounting and
reporting provisions of APB Opinion No. 30, REPORTING THE RESULTS OF OPERATIONS
- REPORTING THE EFFECTS OF DISPOSAL OF A SEGMENT OF A BUSINESS ("APB 30"). We
are required to adopt the new accounting rules beginning January 1, 2002.
Management is currently assessing the financial impact FAS 144 will have on the
consolidated financial statements, but they do not believe it will be material.
YEAR ENDED DECEMBER 31, 2001 COMPARED TO THE YEAR ENDED DECEMBER 31, 2000
STATEMENTS OF OPERATIONS
Business Environment
The securities industry is highly competitive and sensitive to many factors and
is directly affected by general economic and market conditions, including the
volatility and price level of securities markets; the volume, size, and timing
of securities transactions; the demand for investment banking services and
changes in interest rates. All such conditions have an impact on commissions,
trading and investment income as well as on liquidity. In addition, a
significant portion of the Company's expenses are relatively fixed and do not
vary with market activity. Consequently, substantial fluctuations can occur in
the Company's revenues and net income from period to period due to these and
other factors.
In addition, the Company has faced increasing competition from commercial banks
and other sources as these institutions begin to offer more investment banking
and financial services traditionally only provided by securities firms. The
effect of the consolidation of the securities industry of recent years means
that a variety of financial services companies have merged to offer a broader
spectrum of investment products and such competitors have substantially greater
financial resources than the Company. The Company is also experiencing
increasing regulation in the securities industry, particularly affecting the
over-the-counter markets, making compliance with regulations more difficult and
costly. At present, the Company is unable to predict the extent of the changes,
or their potential effect on the Company's business.
Outlook
The Company's long-term plan is to continue to expand existing offices by hiring
experienced professionals, thus maximizing the potential of each office and
expanding the development of existing trading, investment banking, investment
advisory and other activities. Equally important is the search for viable
acquisition candidates. As opportunities are presented, it is the intention of
the Company to pursue growth by acquisition where a comfortable match can be
found in terms of corporate goals and personnel and at a price that would
provide the Company's shareholders with incremental value.
-25-
Results of Operations
Markets in fiscal 2001 were extremely volatile, and ended the year with a
substantial decline. Beginning in May 2000 declines in over-valued technology
and telecommunications stocks, the ensuing loss of wealth, concerns over
inflation and the slowing economy reduced investors participation in the equity
markets. On September 11, 2001, attacks by terrorists on the World Trade Center
and the Pentagon irretrievably damaged North America's sense of invulnerability
at home. The repercussions have had and will have far reaching consequences
beyond the personal losses experienced by many Americans and their families. An
economy, already in recession, saw consumers reduce expenditures, reduce travel
and brought business investment to a virtual halt. Despite continuing interest
rate reductions and calls to resume normal behavior, the economy continued to
limp along. Securities markets were negatively affected by issues surrounding
the bankruptcy of Enron Corp. as investors remained uncertain and both economic
and market conditions continue to be extremely volatile.
Company management believes that the impact of difficult business conditions
provides the opportunity for expansion of the Company's business. As a result
the Company made two acquisitions in early 2001. The Company intends to continue
to expand as opportunities occur.
The following table and discussion summarizes the changes in the major revenue
and expense categories for the past two years (in thousands of U.S. dollars).
Total revenues were $15,769,223 for the year ended December 31, 2001 as compared
to $5,517,480 for the year ended December 31, 2000, an increase of $10,251,743,
or 186%.
For the year ended December 31
----------------------------------------------------
2001 2000
------------------------ ------------------------
% of % of
Revenues Revenues
----------- -------- ---------- --------
Revenues:
Commissions - agency $6,799,700 43% $ - 0%
Commissions - principal 4,774,010 30% - 0%
Success fees 2,493,671 16% 2,965,135 54%
Consulting and retainers 761,061 5% 2,193,889 40%
Other brokerage related income 567,077 4% - 0%
Other 373,704 2% 358,456 6%
----------- ---- ---------- ----
Total Revenues $15,769,223 100% $5,517,480 100%
Cost of revenues:
Commissions 7,861,258 50% 3,051,257 55%
Clearing and transaction costs 1,754,446 11% 0%
Other 46,695 0% 0%
----------------------------------------------
Total cost of revenues 9,662,399 61% 3,051,257 55%
Gross profit 6,106,824 39% 2,466,223 45%
Other Expenses:
General and administrative 9,470,371 60% 3,665,063 66%
Write-off of goodwill 8,582,020 54% 0%
Net loss on trading securities 79,827 1% 236,006 4%
Professional fees 1,006,696 6% 478,841 9%
Provision for bad debts 349,049 2% 88,150 2%
Net unrealized loss on investments held
for trading and stock purchase warrants 1,443,878 9% 424,041 8%
Depreciation and amortization 958,711 6% 1,682,324 30%
Amounts forgiven under forgivable loans 956,543 6% 0%
Stock based compensation 372,596 2% 0%
Total other expenses 23,219,691 147% 6,574,425 119%
Loss from operations (17,112,867) -109% (4,108,202) -74%
Interest and dividend income (expense) (340,993) -2% 196,553 4%
Net loss $(17,453,860) -111% $(3,911,649) -71%
-26-
Investment banking and consulting was 21% of revenues or $3,254,732 for the year
ended December 31, 2001 as compared to 94% or $5,159,025 for the year ended
December 31, 2000, a decrease of 37% or $1,904,293. The decrease was primarily
due to a sharp decline in the stock market that in turn decreased demand for new
security offerings from all companies and especially the small and medium size
firm that we generally serve.
Cost of revenues was $9,662,399 for the year ended December 31, 2001 as compared
to $3,051,257 for the year ended December 31, 2000, an increase of $6,611,142.
The chart below compares each of the three segments of our business revenues,
cost of revenues, gross profit and gross profit margin for the years ended
December 31, 2001 and 2000.
Investment
Brokerage Banking
and Trading Consulting Other Total
----------- ----------- ----------- -----------
2000
Revenues $ -- $ 5,159,024 $ 358,456 $ 5,517,480
Cost of Revenues -- 3,051,257 -- 3,051,257
Gross Profit $ -- $ 2,107,767 $ 358,456 $ 2,466,223
=========== =========== =========== ===========
GROSS PROFIT MARGIN -- 40.9% 100.0% 44.7%
=========== =========== =========== ===========
2001
Revenues $12,140,787 $ 3,254,732 $ 373,704 $15,769,223
Cost of Revenues 8,655,602 960,102 46,695 9,662,399
----------- ----------- ----------- -----------
Gross Profit $ 3,485,185 $ 2,294,630 $ 327,009 $ 6,106,824
=========== =========== =========== ===========
GROSS PROFIT MARGIN 28.7% 70.5% 87.5% 38.7%
=========== =========== =========== ===========
Gross profit was $6,106,824 for the year ended December 31, 2001 as compared to
$2,466,223 for the year ended December 31, 2000, an increase of $3,640,601 or
148%. Gross profit margin for the year ended December 31, 2001 was 38.7% as
compared to 44.7% for the year ended December 31, 2000. The decrease in gross
profit margin was due to lower margin brokerage commissions partially offset by
increased investment banking and consulting gross profit margin.
General and administrative expenses were $9,110,274 or the year ended December
31, 2001 as compared to $1,355,537 for the year ended December 31, 2000, an
increase of $7,754,701 or 572%. The primary reason for the increase was the
addition of new personnel due to the three acquisitions made by us.
At December 31, 2001, we wrote off the unamortized goodwill of $8,582,020
remaining from the acquisition of First Level, Colonial and Critical.
-27-
We determined that, as of December 31, 2001, a write-down of the goodwill
related to the NWH acquisition was necessary as our projections of the future
operating results of First Level indicated impairment. Based on such projections
and other analysis, we took an impairment charge aggregating $876,000, related
to NWM goodwill. Goodwill remaining as of December 31, 2001 totaled $420,000.
The remaining $420,000 is a conservative estimate based on the following facts
considered by management; All 21 First Level Capital employees at acquisition
were with the company at December 31, 2001. First Level Capital operations were
very clean with no compliance issues so the company decided to merge the broker
dealer (BD) operations of vFinance Capital, Inc. and First Colonial Securities
Group, Inc. into First Level Capital and change the name to that of the parent -
vFinance Investments, Inc. Initial indications are that vFinance Investments,
Inc. will be profitable in the first quarter of 2002.
We determined that, as of December 31, 2001, a write-down of the goodwill
related to the Colonial acquisition was necessary as our projections of future
operating results indicated impairment. Further, because we closed the
operations formerly associated with Colonial and withdrawn its broker license,
there does not appear to be a significant opportunity for any future operations.
Therefore, we wrote off the entire remaining unamortized purchase goodwill of
approximately $7,400,000.
We determined that, as of December 31, 2001, a write-down of the goodwill
related to the to the acquisition of Critical. We recorded an impairment of
approximately $250,000 and no goodwill remains at December 31, 2001.
Professional fees were $1,006,696 for the year ended December 31, 2001 as
compared to $478,841 for the year ended December 31, 2000, an increase of
approximately $527,855. The increase was primarily due to increases in legal and
accounting fees in association with the preparation of various regulatory
filings and various legal and accounting issues, which arose from our growth.
Provision for bad debts was $349,049 for the year ended December 31, 2001 as
compared to $88,150 for the year ended December 31, 2000, an increase of
approximately $260,899 or 296%. The increase was primarily due to increases in
revenues and difficulties experienced collecting retainer fees in the difficult
investment banking climate mentioned above. Retainer fees are recognized as
services are provided. We provide for credit losses at the time we believe
accounts receivable may not be collectible. Our evaluation is made and recorded
on a monthly basis. Credit losses have not exceeded management's expectations.
At December 31, 2001 accounts receivable totaled $157,247; due to the
uncertainty of the collectibility management has set up a $63,528 reserve or 40%
allowance for doubtful accounts. Accounts receivable result from the recognition
of retainer fees as the service is provided on investment banking deals.
$289,000 of the provision for bad debts expense is directly related to retainer
fee income of $761,061 or 38%.
Net unrealized loss on investments held for trading and stock purchase warrants
was $1,443,878 for the year ended December 31, 2001 as compared to $424,041 for
the year ended December 31, 2000, an increase of approximately $1,019,837. The
increase was primarily due to the prolonged decrease in the stock market.
Depreciation and amortization was $958,711 for the year ended December 31, 2001
as compared to $49,324 for the year ended December 31, 2000, an increase of
$909,387. Most of the increase was due to amortization of goodwill. .
At December 31, 2001 the company had $307,452 currently due from employees and
$577,760 of long-term notes receivable from employees. These represent monies
advanced to employees as a condition of employment. These advances are forgiven
between 2-6 years as long as the employee remains with the Company. Management
has provided this benefit to attract qualified employees. Amounts forgiven under
forgivable loans of $956,543 at December 31, 2001 relate primarily to advances
given to new brokers. During its term, the loan ratably becomes income to the
broker and an expense for us. If the broker leaves before forgiveness of the
loan is completed, the remaining amount is immediately due and payable.
Stock based compensation was $517,675 for the year ended December 31, 2001 as
compared to $3,941,726 for the year-ended December 31, 2000 a decrease of
$3,424,051. This decrease was due to management entering into far fewer
agreements in 2001 involving payments in common stock (stock performance plans).
It should also be noted that due to a decline in the stock price most of the
compensation expense was picked up in the 1st year (2000). Stock based
compensation included the issuance of common stock and common stock options. The
common stock is valued at the fair value at the date of issuance. The fair value
of the options is estimated using the Black-Scholes valuation model.
Interest and dividend income aggregating $71,007 for the year ended December 31,
2001 and $196,553 for the year ended December 31, 2000 relates to income earned
on our cash balances. Our cash balance has decreased during the year.
We do not believe our operations are materially affected by inflation and or by
seasonal fluctuations. Our main lines of business are directly affected by
higher interest rates, the volatility of the stock market and capital markets,
and are reliant on the continuation of mergers and acquisitions and related
financings in the entrepreneurial marketplace.
-28-
LIQUIDITY AND CAPITAL RESOURCES
We had $1,826,474 and $5,454,071 of cash and cash equivalents at December 31,
2001 and December 31, 2000, respectively, a decrease of $3,627,597. The major
components of this change are discussed below.
OPERATING ACTIVITIES:
For the year ended December 31, 2001, net cash used in operating activities was
$3,987,415 as compared to net cash used by operating activities of $479,833 for
the year ended December 31, 2000. The main components of this change are
discussed below.
Write-off of goodwill for the year ended December 31, 2001 resulted in a
non-cash charge of $8,582,020.
Non-cash fees received (primarily stock and stock warrants) resulted in a cash
charge of $1,756,411 and $1,501,654 for the years ended December 31, 2001 and
December 31, 2000, respectively.
Depreciation and amortization resulted in a non-cash charge of $958,711 and
$49,324 for the years ended December 31, 2001 and December 31, 2000
respectively. Amortization of goodwill related to the acquisition of First Level
and Colonial accounted for approximately $550,000 for the year ended December
31, 2001. We no longer amortize goodwill.
Amortization of deferred compensation resulted in a non-cash charge of $68,549
and $1,682,234 for the years ended December 31, 2001 and December 31, 2000,
respectively.
Issuance of common stock and common stock options in conjunction with services
rendered resulted in a non-cash charge of $449,125 and $2,259,402 for the years
ended December 31, 2001 and December 31, 2000, respectively.
Unrealized loss on the sale of investments resulted in a non-cash charge of
$1,443,878 and $424,041 for the years ended December 31, 2001, and December 31,
2000, respectively.
Income taxes receivable increased $110,402 as a result of an overpayment from
the year ended December 31, 2000. As reflected in the cash flow statement, other
assets have decreased by $1,432,818 primarily as a result of the decrease in
forgivable loans and prepaid acquisition costs.
INVESTING ACTIVITIES
For the year ended December 31, 2001, net cash used in investing activities was
$1,084,892 as compared to $223,238 for the year ended December 31, 2000. The
main components of this change are discussed below.
Purchases of equipment resulted in a cash charge of $161,805 and $155,614 for
the years ended December 31, 2001 and December 31, 2000, respectively.
The acquisition of NW Holdings resulted in a cash charge of $940,037 for the
year ended December 31, 2001.
FINANCING ACTIVITIES
For the year ended December 31, 2001, net cash provided by financing activities
was $1,444,710 as compared to $5,928,658 for the year ended December 31, 2000.
The main components of this change are discussed below.
On November 28, 2001, we entered into a Note Purchase Agreement, as amended by
subsequent letter agreements dated November 30, 2001, December 14, 2001, and
December 28, 2001, February 13, 2002 and March 4, 2002 (collectively, the "Note
Purchase Agreement"), with SBI Investments (USA) Inc. ("SBI"). Under the terms
of the Note Purchase Agreement, SBI may provide a subordinated loan to us up to
$1,500,000 in the form of a 48-month non-interest bearing, convertible note. As
of December 31, 2001, we have received $975,000 under the Note Purchase
Agreement and may receive, at SBI's option alone, an additional $525,000 no
later than June 30, 2002.
Proceeds for the issuance of common stock related to private placement, net of
cash and stock issuance costs, resulted in cash increase of $534,999 and
$5,928,658 for the years ended December 31, 2001 and December 31, 2000
respectively.
-29-
FUTURE AND CONTINGENT LIABILITIES:
The following statements are made in consideration of Financial Reporting
Release (FR-61), LIQUIDITY AND OFF-BALANCE SHEET ARRANGEMENTS, CERTAIN TRADING
ACTIVITIES, & TRANSACTIONS WITH RELATED AND CERTAIN OTHER PARTIES. We do not
have "off-balance sheet arrangements."
We lease office space under the terms of operating leases. The following chart
shows lease obligations including rental of real property and equipment.
Year Amount
---- ----------
2002 $1,212,000
2003 1,129,000
2004 957,000
2005 917,000
2006 823,000
Thereafter 552,000
----------
Total $5,590,000
==========
Total rent expense under operating leases, including space rental, totaled
approximately $1,433,057 and $79,646 for the years ended December 31, 2001 and
2000. We have total non-cancelable leases of $2,446,177, included above, of
which we have entered into sublease agreements with payments aggregating
$117,048 for the year ending December 31, 2002 and $48,000 in each of the years
ending December 31, 2003 through 2006.
In lieu of a security deposit, we have obtained a letter-of-credit from a
commercial bank that is collateralized by a restricted cash deposit.
Litigation:
From time to time we are a party to various lawsuits that have arisen in the
ordinary course of business. The amounts asserted in these matters are material
to our financial statements. While any litigation contains an element of
uncertainty and although it is possible that losses exceeding amounts already
recorded may be incurred upon ultimate resolution of these existing legal
proceedings, management believes that such losses, if any, will not have a
material adverse effect on our business, results of operations or financial
position. However, unfavorable resolution of each matter individually or in the
aggregate could affect the consolidated results of operations for the quarterly
and annual periods in which they are resolved.
For a description of this litigation, see Part I, Item 3 of this Annual Report.
Subsequent Events:
On January 25, 2002, we entered into a Credit Agreement with UBS Americas, Inc.
("UBS"). Under the terms of the Credit Agreement, as amended on April 12, 2002,
UBS provided a revolving credit facility of $3,000,000 to us for the purpose of
supporting the expansion of our brokerage business or investments in
infrastructure to expand our operations or its broker-dealer operations. The
loan has a term of 4 years and must be repaid in full by January 2005 and bears
interest at LIBOR plus a LIBOR margin of 2%. We must make early repayments under
the Credit Agreement if we acquire a new broker dealer firm, enter a new line of
business, or hire more than 4 brokers in a single or related transaction. This
repayment is made by adding $1.00 to the cost of each incremental clearing
transaction we make through CSC, a wholly-owned subsidiary of Paine Webber which
is a wholly-owned subsidiary of UBS. We have not to date entered into a
transaction that would trigger any repayment. We borrowed $1,500,000 under the
credit facility in January 2002. The Credit Agreement does not provide for
conversion of the debt into our equity securities.
-30-
In April 2002, we entered into a non-binding letter of intent with Somerset
Financial Group, Inc. If the transaction is completed, for which there can be no
assurance, we will acquire certain assets relating to Somerset's retail and
insurance brokerage operations and will add to our operations approximately 45
registered representatives located in Connecticut, Long Island, New York, New
Jersey and Minnesota. If we complete this transaction, we will issue to certain
persons associated with Somerset warrants to purchase 500,000 shares of our
common stock and, subject to the revenues generated by the acquired assets, up
to 3,000,000 shares of our common stock. Because we are in the process of
negotiating definitive agreements, the terms of this transaction are subject to
change.
We anticipate that we will need additional debt or equity financing in order to
carry out its long-term business strategy. Such strategy may be financed by bank
borrowings, public offerings, private placements of equity or debt securities,
or a combination of the foregoing.
We do not have any material commitments for capital expenditures over the course
of the next fiscal year.
-31-
ITEM 7. FINANCIAL STATEMENTS.
vFinance, Inc.
Consolidated Financial Statements
Years ended December 31, 2001 and 2000
CONTENTS
Report of Independent Auditors........................................... 44
Audited Financial Statements
Consolidated Balance Sheet............................................... 45
Consolidated Statements of Operations ................................... 46
Consolidated Statements of Shareholders' Equity.......................... 47
Consolidated Statements of Cash Flows.................................... 48
Notes to Consolidated Financial Statements............................... 49
- 32 -
Report of Independent Auditors
Board of Directors
vFinance, Inc.
We have audited the accompanying consolidated balance sheet of vFinance, Inc.
(formerly vFinance.com, Inc.) as of December 31, 2001 and the related
consolidated statements of operations, shareholders' equity and cash flows for
the years ended December 31, 2001 and 2000. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of vFinance, Inc. at
December 31, 2001, and the results of its operations and its cash flows for the
years ended December 31, 2001 and 2000, in conformity with accounting principles
generally accepted in the United States.
/s/ Sherb & Co
New York, New York
- 33 -
vFINANCE, INC.
CONSOLIDATED BALANCE SHEET
Year ended December 31, 2001
Assets:
Cash and cash equivalents $ 1,826,474
Restricted cash 203,106
Due from clearing broker 588,222
Investments in trading securities 1,077,815
Accounts receivable, net of allowance for doubtful
accounts of $63,528 93,719
Forgivable loans - employees, current portion 307,452
Notes receivable - employees, net of allowance for 107,600
doubtful accounts of $60,550
Prepaid expenses and other current assets 133,085
------------
Total current assets 4,337,473
Furniture and equipment, at cost:
Furniture and equipment 940,537
Internal use software 146,835
------------
1,087,372
Less accumulated depreciation (403,970)
------------
Net furniture and equipment 683,402
Forgivable loans - employees 577,760
Goodwill, net of accumulated amortization
of $699,294 420,000
Other assets 387,177
------------
Total Assets $ 6,405,812
============
Liabilities and Shareholders' Equity:
Accounts payable $ 1,093,662
Accounts payable - employees 66,407
Accrued Payroll 1,264,081
Accrued Interest 239,469
Other Accrued liabilities 815,960
Securities sold, not yet purchased 53,981
Lines of credit 297,656
Subordinated promissory notes 650,000
Notes payable, current portion 1,162,429
Capital lease obligations, current portion 12,627
------------
Total current liabilities 5,656,272
Letter of credit and promissory note 268,500
Capital lease obligations 56,641
Series A Convertible Preferred Stock, $0.01 par value; 122,500 shares
authorized; 122,500 shares issued and outstanding (liquidation preference of
$1,225,000 at
December 31, 2001) 1,225
Series B Convertible Preferred stock, $0.01 par value; 50,000 shares
authorized; 50,000 issued and outstanding (liquidation preference of $500,000
at December 31, 2001) 500
Common stock, $0.01 par value, 75,000,000 shares
authorized; 25,964,395 shares issued, 22,952,885 outstanding 259,644
Additional paid-in-capital on preferred stock 1,565,775
Additional paid-in-capital on common stock 22,515,699
Deferred compensation (82,657)
Accumulated deficit (21,666,359)
------------
2,593,827
Less treasury stock, 3,011,510 shares (2,169,428)
------------
Total Shareholders' Equity 424,399
------------
Total Liabilities and Shareholders' Equity $ 6,405,812
============
See accompanying notes.
- 34 -
vFINANCE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended December 31,
-----------------------------------
2001 2000
------------ ------------
Revenues:
Commissions - agency $ 6,799,700 $ --
Commissions - principal 4,774,010 --
Success fees 2,493,671 2,965,135
Consulting and retainers 761,061 2,193,889
Other brokerage related income 567,077 --
Other 373,704 358,456
------------ ------------
TOTAL REVENUES 15,769,223 5,517,480
------------ ------------
COST OF REVENUES:
Commissions 6,901,156 --
Clearing and transaction costs 1,754,446 --
Success 715,608 2,397,804
Consulting and retainers 244,494 653,453
Other 46,695 --
------------ ------------
TOTAL COST OF REVENUES 9,662,399 3,051,257
------------ ------------
GROSS PROFIT 6,106,824 2,466,223
------------ ------------
OTHER EXPENSES:
General and administrative 9,110,274 1,355,537
Write-off of goodwill 8,582,020 --
Net loss on trading securities 79,827 236,006
Professional fees 1,006,696 478,841
Legal settlements 215,018 800
Provision for bad debts 349,049 88,150
Net unrealized loss on investments held
for trading and stock purchase warrants 1,443,878 424,041
Depreciation and amortization 958,711 49,324
Amounts forgiven under forgivable loans 956,543 --
Stock based compensation 517,675 3,941,726
------------ ------------
Total other expenses 23,219,691 6,574,425
------------ ------------
Loss from operations (17,112,867) (4,108,202)
Interest and dividend income (expense) (340,993) 196,553
------------ ------------
NET LOSS (17,453,860) (3,911,649)
Less: Preferred stock dividend 157,500 --
------------ ------------
LOSS AVAILABLE TO COMMON STOCKHOLDERS $(17,611,360) $ (3,911,649)
============ ============
Loss per share:
Basic $ (0.89) $ (0.39)
============ ============
Weighted average number of common
shares used in computing basic loss
per share 19,810,285 10,131,616
============ ============
Diluted $ (0.89) $ (0.39)
============ ============
Weighted average number of common
shares used in computing diluted loss
per share 19,810,285 10,131,616
============ ============
See accompanying notes.
- 35 -
vFINANCE, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Additional
Preferred Stock Common Stock Paid-in
------------------ ------------------- Capital
Shares Amount Shares Amount Common
------ ------ --------- -------- ------------
Balances at December 31, 1999 -- $ -- 9,099,400 $ 90,994 $ 5,097,410
Issuance of common shares in
connection with private
placement (net of cash
issuance costs of $1,071,342
and non cash issuance costs
of $361,333) -- -- 2,333,334 23,334 5,905,324
Purchase of treasury stock -- -- -- -- --
Issuance of common shares in
connection with services
rendered -- -- 538,333 5,383 2,539,361
Change in per share fair value
of common shares under
restricted stock performance
plan (First Tranche Shares) -- -- -- -- (3,740,872)
Amortization of deferred
compensation under restricted
stock performance plan
(First Tranche Shares) -- -- -- -- --
Issuance of common shares
under the restricted stock
performance plan
(Second Tranche Shares) -- -- 3,011,111 30,111 7,498,667
Change in per share fair value
of common shares under
restricted stock performance
plan (Second Tranche Shares) -- -- -- -- (4,987,665)
Rescission of common shares
under the restricted stock
performance plan
(Second Tranche Shares) -- -- -- -- --
Issuance of compensatory stock
options and stock purchase
warrants -- -- -- -- 128,783
Amortization of deferred
compensation (Second Tranche
Shares) -- -- -- -- --
Amortization of deferred
compensation -- -- -- -- --
Net loss -- -- -- -- --
------- ------ ---------- -------- ------------
Balances at December 31, 2000 -- -- 14,982,178 149,822 12,441,008
issuance of shares in
conjunction with merger
of NW Holdings, Inc. -- -- 1,700,000 17,000 1,697,750
Issuance of shares in
conjunction with merger
of Colonial 172,500 1,725 5,750,000 57,500 6,105,139
Accrued dividends payable on
preferred shares -- -- -- -- --
Issuance of common shares in
connection with legal
settlements -- -- 180,000 1,800 67,900
Amortization of deferred
compensation -- -- -- -- --
Purchase of treasury stock,
at cost -- -- -- -- --
Issuance of shares in
conjunction with acquisition
of Critical -- -- 400,000 4,000 320,000
Issuance of common shares in
connection with services
rendered -- -- 682,867 6,829 369,596
Issuance of shares in
conjunction with related
party share purchase
agreement -- -- 877,193 8,772 241,228
Issuance of shares to investors -- -- 1,392,157 13,921 271,078
Other grants of stock options
and stock purchase warrants -- -- -- -- 27,000
Sale of treasury stock,
at cost -- -- -- -- --
Beneficial conversion on
Softbank note purchase
agreement -- -- -- -- 975,000
Net loss -- -- -- -- --
------- ------ ---------- -------- ------------
Balances at December 31, 2001 172,500 $1,725 25,964,395 $259,644 $ 22,515,699
======= ====== ========== ======== ============
36A
Additional
Paid-in
Capital Deferred Accumulated Treasury Shareholders'
Preferred Compensation Deficit Stock Equity
---------- ------------ ------------ ----------- ------------
Balances at December 31, 1999 $ -- $ (4,760,452) $ (300,850) $ -- $ 127,102
Issuance of common shares in
connection with private
placement (net of cash
issuance costs of $1,071,342
and non cash issuance costs
of $361,333) -- -- -- -- 5,928,658
Purchase of treasury stock -- -- -- (6,822) (6,822)
Issuance of common shares in
connection with services
rendered -- (280,000) -- -- 2,264,744
Change in per share fair value
of common shares under
restricted stock performance
plan (First Tranche Shares) -- 3,740,872 -- -- --
Amortization of deferred
compensation under restricted
stock performance plan
(First Tranche Shares) -- 675,813 -- -- 675,813
Issuance of common shares
under the restricted stock
performance plan
(Second Tranche Shares) -- (7,528,778) -- -- --
Change in per share fair value
of common shares under
restricted stock performance
plan (Second Tranche Shares) -- 4,987,665 -- -- --
Rescission of common shares
under the restricted stock
performance plan
(Second Tranche Shares) -- 2,159,946 -- (2,159,946) --
Issuance of compensatory stock
options and stock purchase
warrants -- (128,783) -- -- --
Amortization of deferred
compensation (Second Tranche
Shares) -- 381,167 -- -- 381,167
Amortization of deferred
compensation -- 625,344 -- -- 625,344
Net loss -- -- (3,911,649) -- (3,911,649)
---------- ------------ ------------ ----------- ------------
Balances at December 31, 2000 -- (127,206) (4,212,499) (2,166,768) 6,084,357
issuance of shares in
conjunction with merger
of NW Holdings, Inc. -- -- -- -- 1,714,750
Issuance of shares in
conjunction with merger
of Colonial 1,723,275 -- -- -- 7,887,639
Accrued dividends payable on
preferred shares (157,500) -- -- -- (157,500)
Issuance of common shares in
connection with legal
settlements -- -- -- -- 69,700
Amortization of deferred
compensation -- 68,549 -- -- 68,549
Purchase of treasury stock,
at cost -- -- -- (10,392) (10,392)
Issuance of shares in
conjunction with acquisition
of Critical -- -- -- -- 324,000
Issuance of common shares in
connection with services
rendered -- -- -- -- 376,425
Issuance of shares in
conjunction with related
party share purchase
agreement -- -- -- -- 250,000
Issuance of shares to investors -- -- -- -- 284,999
Other grants of stock options
and stock purchase warrants -- (24,000) -- -- 3,000
Sale of treasury stock,
at cost -- -- -- 7,732 7,732
Beneficial conversion on
Softbank note purchase
agreement -- -- -- -- 975,000
Net loss -- -- (17,453,860) -- (17,453,860)
---------- ------------ ------------ ----------- ------------
Balances at December 31, 2001 $1,565,775 $ (82,657) $(21,666,359) $(2,169,428) $ 424,399
========== ============ ============ =========== ============
See accompanying notes.
- 36 -
vFinance, Inc.
Consolidated Statements of Cash Flows
Years Ended December 31
-----------------------------------
2001 2000
------------ ------------
OPERATING ACTIVITIES
Net loss $(17,453,860) $ (3,911,649)
Adjustments to reconcile net loss to net cash used in operating
activities:
Write-off of goodwill 8,582,020 --
Non-cash fees received (1,756,411) (1,501,654)
Depreciation and amortization 958,711 49,324
Amortization of deferred compensation 68,549 1,682,324
Issuance of common stock and common stock options in
conjunction with services rendered and legal settlements 449,125 2,259,402
Provision for doubtful accounts 20,621 --
Unrealized loss on sale of investments, net 1,443,878 424,041
Loss on sale of investments, net 79,827 236,006
Proceeds from sale of investments 405,056 491,533
Beneficial Conversion factor expense 412,000
Changes in operating assets and liabilities, net of businesses acquired:
Accounts receivable 207,677 (35,704)
Due from clearing broker 257,000 --
Notes and other receivable 426,641 --
Notes receivable from employees 61,774 (149,666)
Investments in trading securities 381,659 --
Income taxes receivable (110,402) --
Other assets 1,432,818 (70,365)
Accounts payable and accrued liabilities 134,475 46,575
Securities, sold not yet purchased 11,427 --
------------ ------------
Net cash used in operating activities (3,987,415) (479,833)
INVESTING ACTIVITIES
Purchase of equipment (161,805) (155,614)
Prepaid transaction costs -- (60,802)
Acquisition of NW Holdings, Inc., net of cash acquired (940,037) --
Acquisition of Colonial, net of cash acquired 12,024 --
Acquisition of Critical, net of cash acquired 7,586 --
------------ ------------
Net cash used in investing activities (1,082,232) (216,416)
FINANCING ACTIVITIES
Payments of capital leases (65,289) --
Proceeds from the note purchase agreement 975,000 --
Proceeds from issuance of common stock related to private placement,
net of cash and stock issuance costs 534,999 5,928,658
Purchase of treasury stock, net (2,660) (6,822)
------------ ------------
Net cash provided by financing activities 1,442,050 5,921,836
------------ ------------
(Decrease) increase in cash and cash equivalents (3,627,597) 5,225,587
Cash and cash equivalents at beginning of year 5,454,071 228,484
------------ ------------
Cash and cash equivalents at end of year $ 1,826,474 $ 5,454,071
============ ============
See accompanying notes.
- 37 -
vFinance, Inc.
Notes to the Consolidated Financial Statements
December 31, 2001
1. DESCRIPTION OF BUSINESS
vFinance, Inc. (the "Company") changed its name from vFinance.com, Inc.
effective December 28, 2001. The Company is a "new-breed" financial services
enterprise committed to building a worldwide audience of individuals looking to
create wealth through their equity investments and businesses and the name
change reflects the broader scope of services. The Company principally operates
in one business segment, investment management services, consisting primarily of
financial services, including retail brokerage and investment banking.
On January 4, 2001, the Company executed a merger agreement whereby it agreed to
acquire all of the capital stock of NW Holdings, Inc. (NWH"), a Florida
corporation. On the Closing Date of the merger, NWH was the parent company of
and wholly owned First Level Capital, Inc. ("First Level"), a Florida
corporation whose name was subsequently changed to vFinance Investments, Inc.
("VFI"). First Level contained the primary operations of NWH and was an
investment-banking firm that was licensed to conduct activities as a
broker-dealer in 49 states and had offices in New York, New Jersey and Florida.
VFI, as the Company's wholly owned subsidiary, continues to provide
investment-banking services to small and medium sized companies and retail
brokerage services to companies, financial institutions and individual
investors.
On January 4, 2001, the Company also executed a merger agreement whereby it
agreed to acquire all of the outstanding capital stock of Colonial Direct
Financial Group, Inc. ("Colonial") a Delaware corporation. At the time of the
merger, Colonial was a holding company comprised of two diversified financial
services companies, First Colonial Securities Group, Inc. and Colonial Direct
Retirement Services, Inc., and a company that provides administrative support to
these financial service companies. The Colonial group of companies is now
inactive.
- 38-
vFinance, Inc.
Notes to Consolidated Financial Statements (continued)
December 31, 2001
1. DESCRIPTION OF BUSINESS (CONTINUED)
On August 20, 2001, the Company entered into a Securities Exchange Agreement
acquiring all of the membership interests in two related companies, Critical
Investments, LLC, a Delaware limited liability company ("Critical Investments"),
and Critical Advisors, L.L.C., a Virginia limited liability company ("Critical
Advisors") (collectively "Critical"). Critical Investments manages and is the
sole general partner in Critical Infrastructure Fund, L.P. ("Critical
Infrastructure LP"), a Delaware limited partnership. Critical Advisors manages
Critical Infrastructure Fund, Ltd. ("Critical Infrastructure Ltd."), an
international business company organized and existing under the laws of the
British Virgin Islands and receives (i) a management fee equal to 1% of the net
asset value of Critical Infrastructure Ltd. and (ii) a performance fee equal to
20% of the increase in the net asset value of Critical Infrastructure Ltd.
Critical Infrastructure LP and Critical Infrastructure Ltd. are the sole
partners in, owning 96% and 4% respectively, and conduct their investment and
trading activities through Critical Infrastructure Fund (BVI), LP, a limited
partnership organized and existing under the laws of the British Virgin Islands
which holds a portfolio of securities. Critical Investments and Critical
Advisors changed their names to vFinance Investors, LLC and vFinance Advisors,
LLC, subsequent to the acquisition.
The Company now conducts its broker/dealer operations and investment banking and
consulting through VFI, a licensed broker dealer. It also operates its
vFinance.com website through vFinance Holdings, Inc. and manages Critical
Infrastructure Fund (BVI) LP through vFinance Advisors, LLC and vFinance
Investors, LLC.
2. SIGNIFICANT ACCOUNTING POLICIES AND OTHER MATTERS
Basis of Presentation
The consolidated financial statements include the accounts of the Company and
its wholly owned subsidiaries. All intercompany accounts have been eliminated in
consolidation. Certain amounts for the prior year financial statements have been
reclassified to conform to the current year presentation.
Revenue Recognition
The Company earns revenue (commissions) from brokerage and trading which are
recognized on the day of the trade - trade date basis. The Company also earns
revenue from investment banking and consulting. Monthly retainer fees for
investment banking and consulting are recognized as services are provided.
Investment banking success fees are generally based on a percentage of the total
value of a transaction and are recognized upon successful completion.
- 39 -
vFinance, Inc.
Notes to Consolidated Financial Statements (continued)
December 31, 2001
2. SIGNIFICANT ACCOUNTING POLICIES AND OTHER MATTERS (CONTINUED)
Revenue Recognition (continued)
The Company does not require collateral from its customers. Revenues are not
concentrated in any particular region of the country or with any individual or
group.
The Company may receive equity instruments which include stock purchase warrants
and common and preferred stock from companies as part of its compensation for
investment-banking services that are classified as investments in trading
securities on the balance sheet, if still held at the financial reporting date.
These instruments are stated at fair value in accordance with SFAS #115
"Accounting for certain investments in debt and equity securities" and EITF 00-8
"Accounting by a grantee for an equity instrument to be received in conjunction
with providing goods or services." Primarily all of the equity instruments are
received from small public companies. The stock and the stock purchase warrants
received are typically restricted as to resale. Though, the Company generally
receives a registration right within one year. Company policy is to resell these
securities in anticipation of short-term market movements. The Company
recognizes revenue for such stock purchase warrants when received based on the
Black Scholes valuation model. On a monthly basis the Company recognizes
unrealized gains or losses in the statement of operations based on the changes
in value in the stock purchase warrants as determined by the Black Scholes
valuation model.
Realized gains or losses are recognized in the statement of operations when the
related stock purchase warrant is exercised and sold. For the years ended
December 31, 2001 and 2000, the Company recognized $1,756,411 and $1,501,654 of
revenue in connection with the receipt of equity instruments.
Occasionally, the Company receives equity instruments in private companies with
no readily available market value. Equity interests and warrants for which there
is not a public market are valued based on factors such as significant equity
financing by sophisticated, unrelated new investors, history of positive cash
flow from operations, the market value of comparable publicly traded companies
(discounted for liquidity) and other pertinent factors. Management also
considers recent offers to purchase a portfolio company's securities and the
filings of registration statements in connection with a portfolio company's
initial public offering when valuing warrants.
- 40 -
vFinance, Inc.
Notes to Consolidated Financial Statements (continued)
December 31, 2001
2. SIGNIFICANT ACCOUNTING POLICIES AND OTHER MATTERS (CONTINUED)
Revenue Recognition (continued)
As of December 31, 2001, certain transactions in process may result in the
Company receiving equity instruments or stock purchase warrants in subsequent
periods as discussed above. In such event, the Company will recognize revenue
related to the receipt of such equity instruments consistent with the
aforementioned policies.
The Company sells two types of listings to its website: (i) perpetual listings
to venture capital vendors, who are interested in providing services to other
companies or individuals; and (ii) three-month listings to entrepreneurs who
have new business ideas to sell. Revenue related to the listings is generally
recognized over the terms of such listings. Website revenues are concentrated
primarily in the United States but are not concentrated in any particular region
of the country or with any individual or group. Fees related to such listings
are included in "other" in the statements of operations for the years ended
December 31, 2001 and 2000.
Use of Estimates
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the amounts reported in the accompanying financial
statements. Actual results may differ from those estimates, and such differences
may be material to the financial statements.
- 41 -
vFinance, Inc.
Notes to Consolidated Financial Statements (continued)
December 31, 2001
2. SIGNIFICANT ACCOUNTING POLICIES AND OTHER MATTERS (CONTINUED)
Cash and cash equivalents
Cash and cash equivalents include all highly liquid investments with maturities
of three months or less when purchased.
Accounts and Notes Receivable.
Accounts and note receivable balances are reviewed monthly to determine the
collectible of such receivables. The Company records both a specific and general
reserve on such balances as deemed appropriate. Notes receivable are generally
from employees and result from commission advances and deficits that made be
generated by trading adjustments or open customer balances.
Investments
Investments are classified as trading securities and are held for resale in
anticipation of short-term market movements or until such securities are
registered or are otherwise unrestricted. Any unregistered securities received
contain a registration right within one year. Trading account assets, consisting
of marketable equity securities and stock purchase warrants, are stated at fair
value. At December 31, 2001 and 2000, investments consisted of common and
preferred stock and stock purchase warrants held for resale. Realized gains or
losses are recognized in the statement of operations when the related stock
purchase warrant is exercised and the underlying shares are sold. Unrealized
gains or losses are recognized in the statement of operations on a monthly basis
based on changes in the fair value of the security as quoted on national or
inter-dealer stock exchanges. Net unrealized losses related to investments held
for trading and stock purchase warrants as of December 31, 2001 and 2000,
aggregated $1,443,878 and $424,041.
New Accounting Standards
In July 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No.'s 141, BUSINESS COMBINATIONS ("FAS 141") and
142, GOODWILL AND OTHER INTANGIBLE ASSETS ("FAS 142"). The provisions of FAS 141
eliminated the pooling-of-interests method of accounting for business
combinations consummated after June 30, 2001. The Company adopted FAS 141 on
July 1, 2001 and it did not have a significant impact on the Company's financial
position or results of operations. Under the provisions of FAS 142, goodwill and
indefinite lived intangible assets are no longer amortized, but are reviewed
annually for impairment. Separable intangible assets that are not deemed to have
an indefinite life will continue to be amortized over their useful lives. The
Company is required to adopt the new accounting rules beginning January 1, 2002.
Management is currently assessing the financial impact FAS 142 will have on the
consolidated financial statements, but it will not be material.
- 42 -
vFinance, Inc.
Notes to Consolidated Financial Statements (continued)
December 31, 2001
2. SIGNIFICANT ACCOUNTING POLICIES AND OTHER MATTERS (CONTINUED)
New Accounting Standards (continued)
In August 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 144, ACCOUNTING FOR THE IMPAIRMENT OR
DISPOSAL OF LONG-LIVED ASSETS ("FAS 144"), which addresses financial accounting
and reporting for the impairment or disposal of long-lived assets and supersedes
SFAS No. 121, ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS AND FOR
LONG-LIVED ASSETS TO BE DISPOSED OF, and the accounting and reporting provisions
of APB Opinion No. 30, REPORTING THE RESULTS OF OPERATIONS - REPORTING THE
EFFECTS OF DISPOSAL OF A SEGMENT OF A BUSINESS , AND EXTRAORDINARY, UNUSUAL AND
INFREQUENTLY OCCURRING EVENTS AND TRANSACTIONS ("APB 30"). The Company is
required to adopt the new accounting rules beginning January 1, 2002. Management
is currently assessing the financial impact FAS 144 will have on the
consolidated financial statements, but does not believe it will be material.
Stock Based Compensation
The Company has elected to follow Accounting Principles Board Opinion No. 25,
ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES ("APB 25"), and related interpretations
in accounting for its employee stock options and employee stock purchase
warrants because the alternative fair value accounting provided for under
Statement of Financial Accounting Standards No. 123, ACCOUNTING FOR STOCK BASED
COMPENSATION ("SFAS 123"), requires the use of option valuation models that were
not developed for use in valuing employee stock options. Under APB 25, if the
exercise price of the Company's employee stock options or stock purchase
warrants equals or exceeds the market price of the underlying stock on the date
of grant no compensation expense is recognized.
From time to time the Company may distribute equity instruments or proceeds from
the sale of equity instruments to its employees. At December 31, 2001, $28,811
of accrued payroll was owed to former employees of the Company in connection
with equity instruments held that have not yet been distributed. At December 31,
2001 and 2000, $254,625 and $227,548 of accrued payroll was owed to current
employees of the Company in connection with equity investments received as
compensation.
Fair Value of Financial Instruments
The fair values of the Company's financial instruments, which includes cash and
cash equivalents, accounts receivable, investments, accounts payable, and
accrued expenses approximate their carrying values.
The Company's financial instruments that are exposed to concentrations of credit
risk consist primarily of cash and cash equivalents and accounts receivable. The
Company places its cash with high quality FDIC-insured financial institutions.
- 43 -
vFinance, Inc.
Notes to Consolidated Financial Statements (continued)
December 31, 2001
2. SIGNIFICANT ACCOUNTING POLICIES AND OTHER MATTERS (CONTINUED)
Furniture and Equipment
Furniture and equipment are stated on the basis of cost less accumulated
depreciation and consists primarily of computer equipment. Depreciation is
computed using the straight-line method over the estimated useful lives of the
assets, 2-5 years, for financial reporting purposes. Depreciation expense for
the years ended December 31, 2001 and 2000, totaled $259,417 and $31,658,
respectively.
Goodwill
The carrying values of goodwill as well as other long-lived assets are reviewed
if the facts and circumstances suggest that they may be impaired. If this review
indicates that the assets will not be recoverable, as determined based on the
undiscounted estimated cash flows of the Company over the remaining amortization
period, the Company's carrying values of the assets would be reduced to their
estimated fair values in accordance with Statement of Financial Accounting
Standards No. 121, ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS AND FOR
LONG-LIVED ASSETS TO BE DISPOSED OF. See Note 4.
Income Taxes
The Company accounts for income taxes under the liability method in accordance
with Statement of Financial Accounting Standards No. 109, ACCOUNTING FOR INCOME
TAXES. Under this method, deferred income tax assets and liabilities are
determined based on differences between the financial reporting and tax bases of
assets and liabilities and are measured using the enacted tax rates and laws
that will be in effect when the differences are expected to reverse.
- 44 -
vFinance, Inc.
Notes to Consolidated Financial Statements (continued)
December 31, 2001
2. SIGNIFICANT ACCOUNTING POLICIES AND OTHER MATTERS (CONTINUED)
Statement of Cash Flows
Non-cash items affecting the statements of cash flows are as follows:
2001 2000
---------- ----------
Prepaid and accrued consulting and professional fees $ -- $ 147,395
Issuance of stock purchase warrants in connection with employment
agreements and asset acquisition with former Pinnacle partners -- 285,000
Issuance of common stock related to the Second Tranche of restricted
stock performance plan -- 7,528,778
Change in fair market value of stock issued in connection with Second
Tranche of restricted stock performance plan -- 4,987,665
Rescission of Second Tranche of restricted stock performance plan -- 2,159,946
Change in fair market value of stock issued in connection with First
Tranche of restricted stock performance plan -- 3,740,872
Beneficial conversion related to Softbank note payable 975,000 --
Accrual of Series A and B Preferred Stock dividends 157,500 --
Earnings per Share
The Company calculates earnings per share in accordance with Statement of
Financial Accounting Standards No. 128, EARNINGS PER SHARE ("SFAS No. 128"). In
accordance with SFAS No. 128, basic earnings per share is computed using the
weighted average number of shares of common stock outstanding and diluted
earnings per share is computed using the weighted average number of shares of
common stock and the dilutive effect of options and warrants outstanding, using
the "treasury stock" method. The Company had 4,181,927 and 0 options and
warrants that potentially are dilutive, respectively at December 31, 2001 and
2000, not included in diluted earnings per share because the options and
warrants would be anti-dilutive because the company had a net loss.
Accounts Payable, Employees
The amount reflected under this caption represents a total of reimbursable
expenses (ie. mileage costs, meals & entertainment, travel and other) that are
due to active employees of the company at the end of a reported period.
Forgivable Loans
At times management has advanced monies to employees as an inducement. These
advances are characterized on the balance sheet as Forgivable loans. These
advances are forgiven and recognized as compensation expense between 2-6 years
as long as the employee remains with the Company. If the broker leaves before
forgiveness of the loan is completed, the remaining amount is immediately due
back from the employee.
Due from Clearing Broker
Receivables from brokers and dealers consist primarily of amounts due from the
Company's clearing organization, which provides clearing and depository services
for brokerage transactions on a fully disclosed basis.
- 45-
vFinance, Inc.
Notes to Consolidated Financial Statements (continued)
December 31, 2001
3. ACQUISITIONS
As previously noted, on January 4, 2001, the Company closed on the merger of
Colonial, acquiring all of its outstanding capital stock. The acquisition was
accounted for under the purchase method of accounting. The results of operations
of Colonial for the period January 1, 2001 through January 3, 2001 were not
material. The purchase price consisted of the issuance of 5,750,000 common
shares of stock, the issuance of 625,000 stock options, the conversion of
490,000 stock options, the issuance of 585,000 common stock purchase warrants
and the issuance of 172,500 preferred shares of stock for total consideration of
approximately $7,400,000. The 5,750,000 common shares were valued at $0.81 per
share or ($4,657,500), which was the closing price on January 4, 2001. The
625,000 stock options were valued at $0.58 per share or ($362,500) as determined
by the Black-Scholes valuation model. The conversion of the 490,000 stock
options were valued at $0.58 per share or ($284,200) as determined by the
Black-Scholes valuation model. The 585,000 common stock purchase warrants were
valued at $0.58 per share or ($339,300) as determined by the Black-Scholes
valuation model. The 172,500 preferred shares were valued at the liquidation
preference value of $10 per share or ($1,725,000). The purchase price was
allocated to the assets acquired and the liabilities assumed with the excess of
such purchase price of approximately $8,100,000 allocated to goodwill, which was
being amortized over 15 years. (See Note 4.) The Colonial merger shares were
issued on a pro rata basis to shareholders based on their relative ownership of
Colonial common stock, except for twenty percent (20%) of the 5,750,000 common
shares of stock, totaling approximately 1,150,000 shares, which were withheld
from the Majority Shareholders and placed in escrow for a term of six months
subject to offset by the Company to cover losses or damages to the Company due
to breaches by the Majority Shareholders of their representations, warranties or
covenants contained in the Colonial merger agreement. The Company has made a
claim of offset seeking a return of all Colonial merger shares held in escrow to
cover certain losses or damages to the Company due to breaches by the Majority
Shareholders of their representations, warranties or covenants contained in the
Colonial merger agreement. Such claims have not been resolved and the shares
remain in escrow. See Note 10.
As previously noted, on January 4, 2001, the Company closed on the merger of NWH
acquiring all of its outstanding capital stock. The acquisition was accounted
for under the purchase method of accounting. The results of operations of NWH
for the period from January 1, 2001 through January 3, 2001, were not material.
The purchase price consisted of the issuance of 1,700,000 common shares of
stock, the issuance of 575,000 stock options and cash of $1,000,000 for total
consideration of $2,714,750. The 1,700,000 common shares were valued at $0.81
per share, or ($1,377,000) which was the closing price on January 4, 2001. The
575,000 stock options were valued at $0.58 per share, or ($333,500) as
determined by the Black-Scholes valuation model.The purchase price was allocated
to the assets acquired and the liabilities assumed with the excess of such
purchase price of approximately $1,300,000 allocated to goodwill, which was
being amortized over 15 years. (See Note 4.)
As previously noted on August 20, 2001, the Company closed on the acquisition of
all of the membership interests of Critical for total consideration of
approximately $325,000 and the results of operations of Critical are included in
the consolidated results of operations from August 20, 2001.The $325,000
consideration consists of 400,000 common shares valued at $0.36 per share
($144,000), which was the closing price on August 20, 2001, and 500,000 options
and warrants valued at $0.36 per share ($180,000) as determined by the
Black-Scholes valuation model. The Company recorded approximately $270,000 of
goodwill, related to the excess of the purchase price over the fair value which
was being amortized over 15 years (see Note 4). The acquisition is immaterial to
the consolidated financial statements taken as a whole.
- 46 -
vFinance, Inc.
Notes to Consolidated Financial Statements (continued)
December 31, 2001
3. ACQUISITIONS (CONTINUED)
The results of operations of Colonial and NWH are included in the Company's
consolidated results of operations for the year ended December 31, 2001 from
their respective acquisition dates (January 4, 2001), accordingly, no pro forma
results of operations are presented for the year ended December 31, 2001 as the
Company's consolidated results of operations include substantially all of each
company's actual results.
In accordance with Financial Interpretation No. 44 "Accounting for Certain
Transactions Involving Stock Compensation" we have included all vested stock
options issued by the company in exchange for outstanding awards held by
employees of the acquiree as part of the purchase price. In August 2001, the
Financial Accounting Standards Board issued Statement of Financial Accounting
Standards No. 144, ACCOUNTING FOR THE IMPAIRMENT OR DISPOSAL OF LONG-LIVED
ASSETS ("FAS 144"), which addresses financial accounting and reporting for the
impairment or disposal of long-lived assets and supersedes SFAS No. 121,
ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO
BE DISPOSED OF, and the accounting and reporting provisions of APB Opinion No.
30, REPORTING THE RESULTS OF OPERATIONS - REPORTING THE EFFECTS OF DISPOSAL OF A
SEGMENT OF A BUSINESS ("APB 30"). We are required to adopt the new accounting
rules beginning January 1, 2002. Management is currently assessing the financial
impact FAS 144 will have on the consolidated financial statements, but they do
not believe it will be material.
The following unaudited pro-forma condensed financial information reflects the
results of operations and assets of the Company, Colonial and NWH as if the
transactions had taken place on January 1, 2000, but does not purport to be
indicative of the consolidated results of operations or financial position of
the combined entities if the transactions had been consummated on January 1,
2000
Year ended
December 31, 2000
-----------------
Revenues $28,163,609
Net loss (8,267,009)
Loss per share (0.42)
Total assets 12,927,733
4. IMPAIRMENT OF GOODWILL
In connection with the aforementioned mergers and acquisition, the Company
recognized goodwill as follows: First Level, approximately $1,300,000; Colonial,
approximately $8,100,000; and Critical, approximately $270,000. See Note 3
above.
Management determined that, as of December 31, 2001, a write-down of the
goodwill related to the NWH acquisition was necessary as the Company's
projections of the future operating results of First Level indicated impairment.
Based on such projections and other analysis the Company took an impairment
charge aggregating $876,000 related to NWH goodwill. Goodwill remaining as of
December 31, 2001 totaled $420,000. The remaining $420,000 is a conservative
estimate based on the following facts considered by management; All 21 First
Level Capital employees still remained with the company at December 31, 2001.
The Company consolidated the operations of its various broker dealers for the
period ended December 31, 2001 and changed its operating name to vFinance
Investments, Inc.
- 47 -
vFinance, Inc.
Notes to Consolidated Financial Statements (continued)
December 31, 2001
4. IMPAIRMENT OF GOODWILL (CONTINUED)
Management determined that, as of December 31, 2001, a write-down of the
goodwill related to the Colonial acquisition was necessary as the Company's
projections of future operating results indicated impairment. Further, as the
Company has closed the operations formerly associated with Colonial and
withdrawn its broker license, there does not appear to be a significant
opportunity for any future operations. Therefore, the Company wrote off the
entire remaining unamortized purchase goodwill of approximately $7,400,000 which
is reflected in the Company's brokerage and trading business segment.
Management determined that, as of December 31, 2001, a write-down of the
goodwill related to the to the acquisition of Critical was necessary. Thus, the
Company recorded an impairment of approximately $250,000 and no goodwill remains
at December 31, 2001. Such write-down is reflected in the Company's other
business segment.
The Company reported approximately $8,500,000 of goodwill write-downs for the
year ended December 31, 2001 related to the three acquisitions. This amount is
included in the statement of operations under "write-off of goodwill."
5. RELATED PARTY TRANSACTIONS
On November 8, 1999, the Company entered into three year employment agreements
(the "Agreements") with the Company's Chief Executive Officer and Vice Chairman,
who is the beneficial owner of 16.1% and 21% of the total outstanding common
shares of the Company at December 31, 2001 and 2000, respectively, and the
Company's Chief Operating Officer and Chairman, who is the beneficial owner of
16.1% and 21% of the total outstanding common shares of the Company at December
31, 2001 and 2000, respectively (collectively the "Primary Shareholders"). Under
the terms of the Agreements, which are renewable as directed by a majority vote
of the board of directors, each individual shall receive (i) an initial base
salary of $150,000 per annum for the first year with a 5% increase per annum
beginning one year from the date of the Agreements (the Company's board of
directors may increase such salaries at their discretion); (ii) discretionary
bonuses as determined by the Company's board of directors primarily based on
each individuals performance; and (iii) incentive compensation paid monthly
equal to Available Cash, as defined, primarily based on performance of the
Company and its respective subsidiaries. The Agreements also contain provisions
related to severance and change of control upon the occurrence of such events.
Such Agreements were amended on January 5, 2001 and the salary was increased to
$208,000 per annum. The Company made payments to each of the Primary
Shareholders aggregating $326,789 and $282,000 for the years ended December 31,
2001 and 2000, respectively, in connection with these Agreements.
- 48 -
vFinance, Inc.
Notes to Consolidated Financial Statements (continued)
December 31, 2001
5. RELATED PARTY TRANSACTIONS (CONTINUED)
On June 1, 2000, the Company granted to each of its Primary Shareholders,
500,000 stock options in connection with certain stock option agreements that
were part of their respective employment agreements. The stock options were
granted at an exercise price that exceeded the stock price on the date of
issuance and were exercisable over a three-year period, beginning on June 1,
2000. On January 1, 2001, the Primary Shareholders forfeited the 1,000,000
options by signing an Options Cancellation Agreement with the Company. No
compensation expense was recognized related to these stock options in the year
ended December 31, 2000, as the grant price exceeded the quoted market price on
the date of the grant.
On January 5, 2001 the Company modified the Agreements with its Primary
Shareholders giving them the right to receive a grant of 500,000 stock options
to each at an exercise price that exceeded the stock price on the date of the
modification. These modified grants would not have taken effect until certain
conditions, including continued employment, were met. These grants were
cancelled before any of the conditions were met.
On July 6, 2001, the Company modified the Agreements with its Primary
Shareholders granting 500,000 stock options to each at an exercise price that
exceeded the stock price on the date of issuance and were exercisable over a
five-year period, beginning on July 6, 2001. No compensation expense was
recognized related to these stock options in the year ended December 31, 2001,
as the grant price exceeded the quoted market price on the date of the grant.
On October 6, 2000, the Company entered into promissory notes (the "Notes") with
the three Union Atlantic employees subject to the Employment Agreements, as
defined in Note 7. The Notes were for approximately $150,000 and bore interest
at a rate of 7%. The Notes, including interest, were due and payable within 30
days of the registration of common shares owned by the individuals and were
secured by such common shares. The Notes were repaid in full with the proceeds
from the sale of the commons shares in November 2001.
On December 18, 2001, Critical Infrastructure Fund (BVI), LP, purchased 877,193
shares of the Company's common stock for $250,000 and received registration
rights incidental to a Company registration of securities with the SEC with
respect to these shares. Critical Infrastructure Fund (BVI), LP, subsequent to
year end sold some of these shares to individual officers of the vFinance,
including its Chief Executive Officer and Vice-Chairman, at $0.285 per share,
the price at which the shares were sold.
- 49 -
vFinance, Inc.
Notes to Consolidated Financial Statements (continued)
December 31, 2001
6. INCOME TAXES
Deferred income taxes reflect the net income tax effect of temporary differences
between the carrying amounts of the assets and liabilities for financial
reporting purposes and amounts used for income taxes.
Deferred income taxes reflect the net income tax effect of temporary differences
between the carrying amounts of the assets and liabilities for financial
reporting purposes and amounts used for income taxes. The Company's deferred
income tax assets and liabilities consist of the following:
Year Ended December 31,
---------------------------------
2001 2000
----------- -----------
Net operating loss carryforwards $ 3,295,515 $ 121,665
Deferred compensation amortization 639,283 494,440
Unrealized losses 546,014 51,357
Goodwill impairment 3,027,949 --
Other 465,248 --
Allowance for doubtful accounts 47,150 8,227
----------- -----------
Gross deferred income tax assets 8,021,159 675,689
Depreciation (64,560) (26,201)
Other -- (41,483)
----------- -----------
Gross deferred income tax liabilities (64,560) (67,684)
Deferred income tax asset valuation allowance (7,956,599) (608,005)
----------- -----------
Net deferred income tax assets $ -- $ --
=========== ===========
Net operating loss carryforwards totaled $8,577,672 at December 31, 2001. The
net operating loss carryforwards will begin to expire in the year 2021 if not
utilized. After consideration of all the evidence, both positive and negative,
management has recorded a valuation allowance at December 31, 2001 and 2000, due
to the uncertainty of realizing the deferred income tax assets.
The Company has recorded an income tax receivable of $201,000 as a result of an
overpayment expected to be refunded in the subsequent year. This amount is
included in the other assets caption on the balance sheet.
- 50 -
vFinance, Inc.
Notes to Consolidated Financial Statements (continued)
December 31, 2001
7. EMPLOYMENT AGREEMENTS
On December 17, 1999, the Company entered into employment agreements with three
individuals (the "Employment Agreements"). In connection with the Employment
Agreements the Company issued 773,500 shares of its common stock (the "First
Tranche Shares"). However, the First Tranche Shares were subject to divestment
and return to the Company in the event and to the extent that certain
performance criteria and/or other employment conditions were not met. The First
Tranche Shares issued to employees were held in escrow until (i) cessation of
the employee's employment with the Company prior to December 31, 2000, in which
event all of the shares would be immediately returnable to the Company or (ii)
the employee failed to meet certain cash revenue goals by February 15, 2001, as
defined by the Employment Agreements, in which event such shares, or a
percentage of such shares, would be immediately returnable to the Company, based
on a formula contained in each Employment Agreement.
On August 18, 2000, the Company entered into amended and restated employment
agreements (the "Amended Employment Agreements") with the same three
individuals. The Amended Employment Agreements (i) modified the performance
criteria and employment conditions under the Employment Agreements to provide,
among other things, that the First Tranche Shares issued to the employees be
held in escrow until (a) cessation of the employee's employment with the Company
prior to October 6, 2000, in which event all of the First Tranche Shares would
be immediately returnable to the Company or (b) the employee failed to meet
certain cash revenue goals by February 15, 2001, as defined by the Employment
Agreements, in which event the First Tranche Shares, or a percentage of such
shares, would be immediately returnable to the Company, based on a formula
contained in each Employment Agreement, and (ii) provided for the Company to
issue an additional 3,011,111 shares of its common stock, which shares are
subject to divestment and similar performance criteria (the "Second Tranche
Shares"). The Second Tranche Shares issued to employees were split into two
equal pieces and were being held in escrow until (i) cessation of the employees
employment with the Company prior to December 31, 2001 (for one-half of the
Second Tranche Shares) and December 31, 2002 (for one-half of the Second Tranche
Shares), respectively, in which event all or a portion of such shares,
respectively, would be immediately returnable to the Company or (ii) the
employee fails to meet certain cash revenue goals by September 30, 2001 (for
one-half of the Second Tranche Shares) and September 30, 2002 (for one-half of
the Second Tranche Shares) respectively, as defined by the Amended Employment
Agreements, in which event such shares, or a percentage of such shares,
respectively, would be immediately returnable to the Company, based on a formula
contained in each Amended Employment Agreement.
- 51 -
vFinance, Inc.
Notes to Consolidated Financial Statements (continued)
December 31, 2001
7. EMPLOYMENT AGREEMENTS (CONTINUED)
The Amended Employment Agreements were accounted for as restricted stock
performance plans. In a restricted stock performance plan, the nature of the
restriction results in the compensation cost being measured at the date when the
number of shares to be awarded is known. Consequently, the measurement of
compensation at the date the performance criteria are met, measures the ultimate
compensation to be recognized by the Company. These employment agreements were
variable plans, therefore, interim estimates of compensation were required based
on the fair market value of the common stock as of the end of the reporting
period and the extent or degree of compliance with the performance criteria.
Accordingly, in connection with the First Tranche Shares, the Company initially
recorded deferred compensation aggregating $3,828,825, based on the fair market
value of the Company's common stock when the shares were issued. Based on the
change in the fair market value of the Company's stock and the attainment of the
required performance criteria, the Company recognized compensation expense of
$675,813 related to the First Tranche Shares during the year ended December 31,
2000. On November 10, 2000, the Company released the First Tranche Shares to the
individuals as they had met the required performance criteria.
In connection with the Second Tranche Shares, on August 18, 2000, the Company
initially recorded deferred compensation aggregating $7,528,778, based on the
fair market value of the Company's common stock when the shares were issued.
Compensation expense for the Second Tranche Shares of $381,167 was recognized
through December 23, 2000. On December 23, 2000, the Company further amended and
restated the Amended Employment Agreements to reduce the income tax consequences
for the employees. These amendments superseded the August 18, 2000 Amended
Employment Agreements, canceling and rescinding the Second Tranche Shares under
the restricted stock performance plan. Upon cancellation of the Second Tranche
Shares, the Company recorded the remaining unamortized deferred compensation of
$2,159,946 as treasury stock.
The Amended Employment Agreements provided for the Company to grant an
additional 3,011,111 stock options to the individuals on January 23, 2001 that
would have begun vesting on June 30, 2001. The employees resigned in June 2001
before any options had vested, and such options were forfeited.
- 52 -
vFinance, Inc.
Notes to Consolidated Financial Statements (continued)
December 31, 2001
8. SHAREHOLDER'S EQUITY
On January 3, 2000, the Company entered into an asset purchase agreement and
employment agreements with two individuals, who were former partners in Pinnacle
Capital Group, L.C. (now known as Union Atlantic Capital, L.C., a wholly owned
subsidiary), for a term of three years. The assets purchased were furniture and
fixtures owned individually by the key personnel. The acquisition was
consummated on the premise that the two individuals would be bringing a
significant amount of new business to the Company, hence the employment
agreements were a condition of the asset purchase agreement. The consideration
consisted of stock purchase warrants giving the two employees rights to purchase
190,000 shares of the Company's common stock at an exercise price of $2.50 per
warrant. The warrants are exercisable for a period of five years, at the
discretion of the holders and had a fair value, as determined by the Black
Scholes model of $285,000; the Company allocated $280,000 to deferred
compensation and $5,000 to furniture acquired. This $280,000 was being amortized
over the term of the respective employment agreements; however, during the year
ended December 31, 2000, the employees were separated from the Company, and
accordingly, the deferred compensation expense relating to the warrants was
fully amortized. The employment agreements also granted each individual 200,000
stock options, which were forfeited in connection with their separations.
In March 2000, the Company increased the number of authorized common shares from
20,000,000 to 25,000,000. In addition, the Company established Preferred Stock,
authorizing 2,500,000 shares, subject to the rights, preferences and privileges
as determined by the Board of Directors. Further, on December 28, 2001, the
Company increased the number of authorized common shares from 25,000,000 to
75,000,000.
As part of the Colonial transaction discussed in Note 1, the Company was
authorized to issue up to 2,500,000 shares of preferred stock, of which (i)
157,500 shares were designated as Series A Convertible Preferred Stock, par
value $0.01 per share, all of which are currently issued and outstanding, and
(ii) 50,000 shares were designated as Series B Convertible Preferred Stock, par
value $0.01 per share, all of which are currently issued and outstanding. All of
the Series A and Series B shares were delivered to Colonial shareholders. The
Series A and Series B Preferred Stock accrues annual dividends of 10% and 7%,
respectively, on a quarterly basis. Accrued but unpaid dividends earn no
interest. During the year ended December 31, 2001, $157,500 of such dividends
were accrued.
Series A and B Preferred Stock have the following rights, preferences,
privileges and restrictions:
LIQUIDATION PREFERENCE. In the event of any liquidation or winding up of the
Company, the holders of the Series A and B Preferred Stock will be entitled to
receive, in preference to the holders of Common Stock, an amount equal to $10
per share, plus unpaid dividends, if any. A consolidation or merger shall be
deemed a liquidation or winding up for purposes of the liquidation preference.
- 53 -
vFinance, Inc.
Notes to Consolidated Financial Statements (continued)
December 31, 2001
8. SHAREHOLDER'S EQUITY (CONTINUED)
DIVIDEND RIGHTS. The holders of Series A and B Preferred Stock will be entitled
to receive cumulative dividends in preference to holders of Common Stock at the
rate of $1 and $0.70 per share annum (10% and 7% of the liquidation preference
price) for Series A and B, respectively, whether or not earned or declared.
CONVERSION PRICE ADJUSTMENTS. The conversion price of the Series A and B
Preferred Stock will be subject to adjustments to prevent dilution, on the
weighted average basis, in the event the Company issues additional shares, at a
purchase price of $2.60 per share.
VOTING RIGHTS. The holders of Series A and B Preferred Stock have no voting
rights.
REDEMPTION RIGHTS. The Company, at its option, may redeem, in whole or in part,
the shares of Series A and B Preferred Stock outstanding, at any time, upon
notice given, at a redemption price of $11 and $10 per share, respectively. If
the Company receives proceeds from a single sale of its equity securities of at
least $500,000, the holders of Series A and B Preferred Stock may require the
Company to redeem all, but not less than all, the Series B Preferred Stock at a
redemption price equal to $10 per share.
In 2000, the Company closed on a $7 million round of private financing (the
"Private Placement"), $3,500,000 of which closed on March 31, 2000 and
$3,500,000 of which closed on August 17, 2000 (collectively the "Closing
Dates"), before cash registration and issuance costs of $1,071,342. As part of
the Private Placement, on the Closing Dates, the Company issued (i) to certain
banks and institutional investors 2,333,334 shares of the Company's common stock
and 1,866,667 stock purchase warrants at exercise prices ranging from $3.00-
$6.00 per share (ii) to other parties a total of 229,999 warrants, of which
83,333 warrants were issued to agents, 46,666 warrants were issued to employees
for placing the financing and 100,000 warrants were issued to a company for a
finder's fee. The warrants have exercise prices ranging from $2.50 to $7.20 and
are exercisable on the earlier of a) one year from the effective date of the
registration statement filed by the Company covering the securities issued and
to be issued to the investors or b) three or four years, as the case may be, as
defined in the agreements from the closing date. In conjunction with the 46,666
warrants, which were issued with prices below fair value, the Company recognized
$49,583 of compensation expense in the year ended December 31, 2000.
The warrants issued to non-employees in conjunction with the Private Placement
were for services related to the Private Placement and have a fair value of
$361,333 as determined by the Black Scholes valuation model. Such amounts have
been recorded as additional issuance costs.
- 54 -
vFinance, Inc.
Notes to Consolidated Financial Statements (continued)
December 31, 2001
8. SHAREHOLDER'S EQUITY (CONTINUED)
On May 2, 2000, the Company granted 20,000 options to a consultant. The stock
options were granted as consideration for future services at an exercise price
of $5.00 and are exercisable over a four-year period, beginning May 2, 2001. The
fair value of the options granted was estimated to be $79,200 at the date of
grant using the Black Scholes valuation model and will be ratably expensed over
the term services are to be provided. During 2001 the Company amortized $19,800.
On August 18, 2000, the Company entered into Amended Employment Agreements (see
Note 6 above) with three individuals. The Amended Employment Agreements provided
for the Company to grant an additional 400,000 stock options to individuals. The
stock options were granted at an exercise price of $3.15 and were exercisable
over a four-year period, beginning on August 18, 2001 and were canceled upon
their separation from the Company.
On August 30, 2001 and on October 16, 2001, the Company granted 673,500 stock
purchase warrants to certain individuals and 878,427 stock options to employees
in conjunction with the individuals purchase of common stock of the Company from
existing shareholders. One stock option was granted for each share of common
stock purchased by the individuals. The stock options were granted at above fair
market value an exercise price of $0.35 and vested on the date of grant.
On October 16, 2001, the Company granted 120,000 options to an individual in
conjunction for serving on the Board of Directors for fiscal 2002. The stock
options were granted as consideration for future services at an exercise price
of $0.35 and are exercisable on October 16, 2004. The fair value of the options
granted was estimated to be $24,000 at the date of grant using the Black Scholes
valuation model and will be ratably expensed over the term services are to be
provided. The remaining fair value of the shares is stated as deferred
compensation at December 31, 2001.
- 55 -
vFinance, Inc.
Notes to Consolidated Financial Statements (continued)
December 31, 2001
8. SHAREHOLDER'S EQUITY (CONTINUED)
On November 28, 2001, the Company entered into a Note Purchase Agreement, as
amended by subsequent letter agreements dated November 30, 2001, December 14,
2001, and December 28, 2001, February 13, 2002 and March 4, 2002 (collectively,
the "Note Purchase Agreement"), with SBI Investments (USA) Inc. ("SBI"). Under
the terms of the Note Purchase Agreement, SBI may provide a subordinated loan to
the Company of up to $1,500,000 in the form of a 48-month non-interest bearing,
convertible note. As of December 31, 2001, the Company had received $975,000
under the Note Purchase Agreement and may receive, at SBI's option alone, an
additional $525,000 no later than June 30, 2002. The note is convertible, at
SBI's option, into as many as 5,263,158 shares of our common stock at $0.285 per
share. The Company, at any time during the first three years of the agreement,
can call for redemption of the note for $1,750,000, canceling the option or
forcing the conversion of the note into shares of common stock.
Further, if SBI funds the full amount of the loan, SBI will become a party to an
Investor Right Agreement and, as additional consideration the Company will issue
to SBI an option to purchase up to that number of shares of its common stock
equal to 1,500,000 divided by the average closing bid and ask price of its
common stock for the 20 consecutive trading days preceding the date of SBI's
exercise notice to the Company, but in no event will the per share price be more
than $0.336 or less than $0.23. The Note Purchase Agreement was amended to
extended the expiration date of the option past June 30, 2002 as the date for
the funding of the third Tranche was extended.
In accordance with EITF Issue No. 00-27 (APPLICATION OF ISSUE NO. 98-5),
ACCOUNTING FOR CONVERTIBLE SECURITIES WITH BENEFICIAL CONVERSION FEATURES OF
CONTINGENTLY ADJUSTABLE CONVERSION RATIOS, TO CERTAIN CONVERTIBLE INSTRUMENTS,
and APB # 21 the Company recorded a beneficial conversion feature and an imputed
interest factor related to the Note Purchase Agreement of $563,000. The Company
fully expensed any beneficial conversion factor due to the fact that the SBI
Note was immediately convertible. The net one time charge to the financial
statements was $412,000. The imputed interest will be accreted ratably over the
term of the loan as additional interest expense.
As of December 31, 2001 the $975,000 note payable was netted against the
$563,000 corresponding asset (imputed interest), therefore $412,000 appears on
the face of the balance sheet. Amortization of the imputed interest will begin
in January 2002.
On December 21, 2001, the Company entered into an agreement whereby Innovex
Partners purchased 980,392 common shares at $0.255 per share and were granted a
warrant to purchase 1,000,000 shares of common stock at $0.35 per share. The
warrant is immediately exercisable and expires on December 21, 2006.
- 56 -
vFinance, Inc.
Notes to Consolidated Financial Statements (continued)
December 31, 2001
8. SHAREHOLDER'S EQUITY (CONTINUED)
The Company has elected to follow Accounting Principle Board Opinion No. 25,
Accounting for Stock Issued to Employees ("APB 25"), and related interpretations
in accounting for its employee stock options because the alternative fair value
accounting provided under FASB Statement No. 123, ACCOUNTING FOR STOCK-BASED
COMPENSATION, ("SFAS 123") requires the use of option valuation models that were
not developed for use in valuing employee stock options. As permitted, the
Company adopted the disclosure alternative of SFAS 123. Under APB 25, when the
exercise price of the Company's stock options equals or exceeds the fair value
of the underlying stock on the date of grant, no compensation expense is
recorded.
A summary of the stock option activity for the years ended December 31, 2000 and
2001 is as follows:
Weighted
Average
Exercise Number of Exercise Price
Price Shares Per Option
--------- ---------- ---------------
Outstanding Options at December 31, 1999 $4.19 1,065,000 $2.50 - $6.00
Granted 4.69 2,615,000 1.00 - 7.50
Forfeited 6.00 (520,000) 4.50 - 7.50
-----------
Outstanding Options at December 31, 2000 3,160,000
Granted 0.79 13,441,567 0.35 - 2.25
Forfeited 2.13 (6,914,517) 0.66 - 5.85
----------
Outstanding Options at December 31, 2001 0.98 9,687,050 0.35 - 6.00
==========
- 57 -
vFinance, Inc.
Notes to Consolidated Financial Statements (continued)
December 31, 2001
8. SHAREHOLDER'S EQUITY (CONTINUED)
The following table summarizes information concerning stock options outstanding
at December 31, 2001.
Weighted
Average
Exercise Number
Price Outstanding
-------- ----------
$0.35 3,508,427
0.63 3,920,000
1.00 822,000
2.25 471,623
3.00 210,000
3.25 100,000
4.00 220,000
4.13 30,000
4.25 75,000
4.50 5,000
5.00 260,000
5.63 50,000
6.00 15,000
---------
9,687,050
=========
A summary of the warrant activity for the years ended December 31, 2000 and 2001
is as follows:
Weighted
Average
Exercise Number of Exercise Price
Price Shares Per Option
-------- ---------- --------------
Outstanding Warrants at December 31, 1999 $2.50 10,000 $2.50
Granted 5.84 2,286,666 2.50 - 7.20
-----------
Outstanding Warrants at December 31, 2000 2,296,666
Granted 0.97 1,978,500 0.35 - 2.25
Forfeited 5.81 (1,166,667) 3.00 - 6.00
-----------
Outstanding Warrants at December 31, 2001 2.73 3,108,499 0.35 - 7.20
===========
- 58 -
vFinance, Inc.
Notes to Consolidated Financial Statements (continued)
December 31, 2001
8. SHAREHOLDER'S EQUITY (CONTINUED)
The following table summarizes information concerning warrants outstanding at
December 31, 2001.
Weighted
Average
Exercise Number
Price Outstanding
-------- -----------
0.35 993,500
0.63 400,000
2.25 585,000
2.50 300,000
6.00 129,999
7.20 700,000
---------
3,108,499
=========
The weighted average grant-date fair value of warrants granted during the year
equaled $2.73 and $5.84 for the years ended December 31, 2001 and 2000,
respectively. The weighted average grant-date fair value of options granted
during the year equaled $0.98 and $4.69 for the years ended December 31, 2001
and 2000, respectively. For purposes of pro forma disclosures, the estimated
fair value of the options and warrants is amortized to expense over their
respective vesting periods. The weighted average remaining contractual life for
warrants outstanding at December 31, 2001 and 2000, is 3.62 years and 3.50 years
respectively. The weighted average remaining contractual life for options
outstanding at December 31, 2001 and 2000, is 4.33 years and 4.50 years
respectively.
Options granted to employees are exercisable according to the terms of each
agreement, ranging from one month to four years. At December 31, 2001 and 2000,
3,452,760 and 1,168,000 options outstanding were exercisable with weighted
average exercise prices of $1.49 and $3.51, respectively. At December 31, 2001
and 2000, 12,795,549 and 5,456,666 total shares of the Company's common stock
are reserved for issuance related to stock options and stock purchase warrants
which were outstanding at December 31, 2001 and 2000, respectively.
- 59-
vFinance, Inc.
Notes to Consolidated Financial Statements (continued)
December 31, 2001
8. SHAREHOLDER'S EQUITY (CONTINUED)
Pro forma information regarding net loss is required by SFAS 123, which also
requires that the information be determined as if the Company has accounted for
its employee stock options under the fair value method. The fair value for
options and warrants granted was estimated at the date of grant using the Black
Scholes option pricing model with the following weighted-average assumptions:
for 2001 risk-free interest rates of 3.53%; no dividend yields; volatility
factor of the expected market price of the Company's common stock of 1.610 for
options and warrants and an expected life of the options and warrants of 4-5
years; for 2000: risk-free interest rates ranging from 5.52% to 6.57%; no
dividend yields; volatility factor of the expected market price of the Company's
common stock ranging from 0.771 to 1.92; and an expected life of the options and
warrants of 4-5 years. The Company's pro forma net loss for the years ended
December 31, 2001 and 2000 was $ 17,702,620 and $7,611,842, respectively. The
Company's pro forma basic and diluted net loss income per share for the years
ended December 31, 2001 and 2000 was $0.89 and $0.75, respectively. The impact
of the Company's pro-forma net loss and loss per share of the SFAS 123 pro forma
requirements are not likely to be representative of future pro forma results.
The Company recorded deferred compensation of $24,000 and $408,783 during the
years ended December 31, 2001 and 2000 respectively in connection with the
grants of employee stock options with exercise prices lower than the deemed fair
value per share of the Company's common stock on the date of the grant. Such
amounts are being amortized over the vesting period, and accordingly, $3,000 and
$116,250 of compensation expense was recognized in the years ended December 31,
2001 and 2000 relative to such options.
- 60 -
vFinance, Inc.
Notes to Consolidated Financial Statements (continued)
December 31, 2001
9. DEBT
Lines of credit
On April 5, 2001 Fleet National Bank ("Fleet") filed a complaint against Michael
Golden ("Golden"), a former controlling shareholder of Colonial, in the Superior
Court of New Jersey in the amount of $315,903 for Lines of Credit issued prior
to Company's January 2001 acquisition of Colonial. In October 2001, the Superior
Court entered a summary judgment in favor of Fleet and the line of credit became
due immediately. The period for appeal of the summary judgment expired on
December 10, 2001. The Company has established reserves for this judgment due to
the uncertainty surrounding the financial position of Golden. The reserves are
included on the balance sheet in the liabilities section under the caption,
Lines of Credit. The Company has accrued $297,656, which management believes is
adequate.
Subordinated promissory notes
Prior to its acquisition by the Company, Colonial entered into a $650,000 bridge
loan with three investors. The notes became due in November and December 2001.
Interest for these loans is being accrued at the stated rate, 10 percent.
Notes payable
Prior to its acquisition by the Company, Colonial entered into a loan agreement
with one of its principal shareholders. Its obligation under this loan, if any,
is subject to litigation. The Company cannot establish when or if it will be
required to repay this loan, carried at $500,000, that is the obligation of its
inactive Colonial subsidiary. Interest for this loan is being accrued at the
Company's weighted average interest rate, 10 percent.
On April 5, 2001, Fleet filed a complaint against First Colonial Securities,
Inc., a wholly owned subsidiary of Colonial in the Superior Court of New Jersey
in the amount of $210,928 for a letter of credit issued prior to the January
2001 acquisition of Colonial. In October 2001, the Superior Court entered a
summary judgment in favor of Fleet and the letter of credit became due
immediately. The period for appeal of the summary judgment expired on December
10, 2001. The Company has fully accrued for and established reserves for this
judgment. The accrual is included in the letter of credit and promissory note on
the face of the balance sheet.
- 61 -
vFinance, Inc.
Notes to Consolidated Financial Statements (continued)
December 31, 2001
10. COMMITMENTS AND CONTINGENCIES
The Company leases office space under the terms of operating leases. The
following chart shows lease obligations including rental of real property and
equipment.
Year Amount
---- ----------
2002 $1,212,000
2003 1,129,000
2004 957,000
2005 917,000
2006 823,000
Thereafter 552,000
----------
Total $5,590,000
==========
Total rent expense under operating leases, including space rental, totaled
approximately $1,433,057 and $79,646 for the years ended December 31, 2001 and
2000. The Company has total non-cancelable leases of $2,446,177, included above,
of which the Company has entered into sublease agreements with payments
aggregating $117,048 for the year ending December 31, 2002 and $48,000 in each
of the years ending December 31, 2003 through 2006.
In lieu of a security deposit, the Company has obtained a letter-of-credit from
a commercial bank which is collateralized by a restricted cash deposit.
From time to time the Company is a party to various lawsuits that have arisen in
the ordinary course of business. The amounts asserted in these matters are
material to the Company's financial statements. While any litigation contains an
element of uncertainty and although it is possible that losses exceeding amounts
already recorded may be incurred upon ultimate resolution of these existing
legal proceedings, management believes that such losses, if any, will not have a
material adverse effect on our the results of operations or financial position.
However, unfavorable resolution of each matter individually or in the aggregate
could affect the consolidated results of operations for the quarterly and annual
periods in which they are resolved.
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vFinance, Inc.
Notes to Consolidated Financial Statements (continued)
December 31, 2001
10. COMMITMENTS AND CONTINGENCIES (CONTINUED)
On or about May 17, 2001, Golden filed an initial complaint against the Company
in the Circuit Court of the 17th Judicial Circuit in and for Broward County,
Florida, alleging that the Company breached its January 5, 2001 employment
agreement with Golden, which was entered into as a result of the merger between
Colonial and the Company. Mr. Golden claims that he terminated the agreement for
"good reason," as defined in the agreement, and that the Company failed to pay
him severance payments and other benefits as well as accrued commissions and
un-reimbursed expenses. In the initial complaint, Golden sought monetary damages
from the Company in excess of $50,000 including interest, attorney's fees and
costs.
On or about July 18, 2001, the Company filed an answer and affirmative defenses
and counterclaims with the Circuit Court against Golden and Ben Lichtenberg
("Lichtenberg"), Golden's partner in Colonial, denying all material allegations
in the complaint, affirmatively alleging that Golden is not entitled to any
severance payments because he was terminated for cause for insubordination,
failure to follow directives of the board of directors and for breaches of
fiduciary duty. The Company also alleged that both Golden and Lichtenberg
violated the merger agreement between Colonial and the Company by breaching
certain of the representations and warranties set forth in the merger agreement
by, among other things, failing to advise the Company of certain loan agreement
defaults, improperly withdrawing approximately $400,000 of capital from
Colonial, failing to deliver a closing balance sheet and failing to disclose
significant liabilities of Colonial. The Company believes the activities of
Golden and Lichtenberg constituted violations of Florida's Securities Investor
Protection Act, common law fraud, breach of fiduciary duty, breach of contract,
intentional interference with advantageous business relationships, and breach of
the implied covenant of good faith and dealing, and the Company is seeking
indemnification under the merger agreement and additional monetary damages
against Golden and Lichtenberg in excess of $15,000.
In response to the Company's answer, affirmative defenses and counterclaims, on
or about September 1, 2001, Golden filed an amended complaint with the Court
against the Company and its Primary Shareholders. In the amended complaint,
Golden alleges the Primary Shareholders made various false representations that
induced Golden to enter into the merger agreement and his employment agreement.
Golden is seeking monetary damages from the Company and the Primary Shareholders
in excess of $4.6 million.
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vFinance, Inc.
Notes to Consolidated Financial Statements (continued)
December 31, 2001
10. COMMITMENTS AND CONTINGENCIES (CONTINUED)
Lichtenberg filed an answer, affirmative defenses and counterclaims with the
Court in response to the Company's filing with the Court on July 13, 2001. In
addition to denying all material allegations in the Company's July 13, 2001
counterclaims against him, Lichtenberg alleges that: (a) the Company breached
its employment agreement with him, (b) the Chief Executive Officer and
Vice-Chariman and the Company made various false representations that induced
Lichtenberg to enter into the merger agreement and (c) the Company materially
breached the Colonial merger agreement. Lichtenberg is seeking delivery from the
Company of 414,825 shares of the Company's common stock and monetary damages of
at least $488,000 from the Chief Executive Officer and Vice-Chariman and the
Company, jointly and severally. On November 20, 2001, the Chief Executive
Officer and Vice-Chariman and the Company filed an answer and affirmative
defenses to these allegations denying Lichtenberg's allegations. The parties are
proceeding with discovery and the matter has been placed on the Circuit Court's
September 2002 trial docket. As the Company intends to vigorously defend itself
and believes it has meritorious defenses against these claims, no amounts have
been accrued.
First Colonial Securities Group, Inc. ("First Colonial") was subject to
supervision and regulation by the NASD, the SEC and various state securities
commissions. As part of this regulatory oversight, First Colonial was subject to
periodic examination and inspections by these authorities. First Colonial was
advised that as a result of an examination performed by the Philadelphia office
of the NASD for the years 1996 and 1997, the NASD identified several possible
material deficiencies. The NASD and the Company settled the matter in February
2002 with the Company paying a $75,000 fine. Such fine was accrued in accounts
payable at December 31, 2001.
On May 15, 2001, Louis D'Alessio filed a claim with the NASD against First
Colonial and one of its employees. His claim alleges compensatory damages in an
amount between $100,000 and $500,000 plus unspecified punitive damages. He
alleges unfair business practices, violation of the federal securities act,
violation of state securities statutes and common law fraud. The Company
believes that the claim is without merit and is vigorously defending itself;
however, the Company anticipates that the outcome will result in settlement.
Thus, $15,000, the Company's estimate of the amount of the settlement , is
accrued as of December 31, 2001.
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vFinance, Inc.
Notes to Consolidated Financial Statements (continued)
December 31, 2001
10. COMMITMENTS AND CONTINGENCIES (CONTINUED)
On January 22, 2001, Josephine and Frank Oliveri filed a claim with the NASD
against First Colonial and one of its employees. Their claim alleges
compensatory damages of $192,287 plus interest and punitive damages of $100,000.
They allege unsuitable investments, unauthorized trading, excessive trading and
lack of supervision. The Company believes that the claim is without merit and is
vigorously defending itself; however, the Company anticipates that the outcome
will result in settlement. Thus, $25,000, the Company's estimate of the amount
of the ultimate settlement, is accrued as of December 31, 2001.
On October 3, 2001, Sterling Financial Investment Group filed a claim with the
NASD against the Company and several of its employees. Their claim alleges
compensatory damages and punitive damages to not exceed the sum of $500,000.
They alleged the Company offered and made significant cash payments to certain
of Sterling's employees, to entice them to break their written employment
agreements with Sterling and work for the Company. The Company believes that the
claim is without merit and is vigorously defending itself; thus, no amounts have
been accrued.
On August 14, 2001, Rosario Catanzarite, Joann Catanzarite, Anna Piegaro, Brian
Catanzarite and Dina Catanzarite filed a claim with the NASD against First
Colonial and several of its employees. Their claim alleges compensatory damages
in the amount of $125,000 plus interest. They allege that the employees abused
their trust, processed unsuitable trades, coupled with abusive use of margin.
The Company believes that the claim is without merit and is vigorously defending
itself; however, the Company anticipates that the outcome will result in
settlement. Thus, $25,000, the Company's estimate of the amount of the ultimate
settlement, is accrued as of December 31, 2001.
The Company is also engaged in a number of other legal proceedings incidental to
the conduct of its business. Such claims aggregate a range of $684,000 to
$1,919,000. In the opinion of management, the Company is adequately insured
against the claims relating to such proceedings or has adequate resources to
settle such claims, and any ultimate liability arising out of such proceedings
will not have a material adverse effect on the financial condition or results of
operations of the Company. The Company believes that the claims are without
merit and is vigorously defending itself; however, the Company anticipates that
the outcome of certain claims will result in certain settlements. Thus,
$112,000, the Company's estimate of the amount of the ultimate settlements, is
accrued as of December 31, 2001.
An estimated loss from legal proceedings (loss contingency) as mentioned above
has been accrued by a charge to income when both of the following conditions
were met: (1) information was available prior to the issuance of the financial
statements indicating that it is probable that a liability had been incurred at
the date of the financial statements, and, (2) the amount of loss was reasonably
estimated.
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vFinance, Inc.
Notes to Consolidated Financial Statements (continued)
December 31, 2001
11. DEFINED CONTRIBUTION PLAN
The Company maintains a defined contribution savings plan in which substantially
all employees are eligible to participate. The Company may match up to 25% of
the employee's salary. The Company made no contributions to the plan for the
years ended December 31, 2001 and 2000, respectively.
12. SUBSEQUENT EVENT
On January 25, 2002, the Company entered into a Credit Agreement with UBS
Americas, Inc. ("UBS"). Under the terms of the Credit Agreement, UBS will
provide a revolving credit facility of $3,000,000 to the Company for the purpose
of supporting the expansion of its brokerage business or investments in
infrastructure to expand its operations or its broker-dealer operations. The
loan has a term of 4 years, must be repaid in full by January 2005 and bears
interest at LIBOR plus a LIBOR margin of 2%. Among other covenants, the Company
must maintain shareholder's equity of at least $7,000,000; however, the Credit
Agreement, as amended, specifically provides that the Company may exclude
goodwill write-offs aggregating approximately $8,500,000 from shareholder's
equity. The Company is in compliance with all covenants as of the filing date
and expects to remain in compliance throughout 2002. The Company must make early
repayments under the Credit Agreement if it acquires a new broker dealer firm,
enters a new line of business, or hires more than 4 brokers in a single or
related transaction. This repayment is made by adding $1.00 to the cost of each
incremental clearing transaction the Company makes through CSC, a wholly owned
subsidiary of Paine Webber which is a wholly owned subsidiary of UBS. The
Company has not, to date, entered into a transaction that would trigger any
repayment. The Company borrowed $1,500,000 under the credit facility in January
2002. The Credit Agreement does not provide for conversion of the debt into
equity securities.
- 66 -
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE
WITH SECTION 16(a) OF THE EXCHANGE ACT.
The following table sets forth the names, ages and positions of our executive
officers and directors as of March 14, 2002. Under our bylaws, each director
holds office until the election and qualification of his successor or until his
earlier resignation or removal.
Name Age Position
---- --- --------
Leonard J. Sokolow 45 Director, Chief Executive Officer and President
Timothy E. Mahoney 45 Director, Chief Operating Officer and Chairman
Wong Sin Just 36 Director
Robert F. Williamson, Jr. 57 Vice President and Chief Financial Officer
David A. Spector 36 Vice President
Richard Campanella 51 Secretary
Marc N. Siegel 42 President of vFinance Investments, Inc.
LEONARD J. SOKOLOW has been a director since November 8, 1997, our Chief
Executive Officer since November 8, 1999, and our President since January 5,
2001. From November 8, 1999 through January 4, 2001, Mr. Sokolow was Vice
Chairman of the Board. Since September 1996, Mr. Sokolow has been President of
Union Atlantic LC, a merchant, banking and strategic consulting firm
specializing domestically and internationally in technology industries that is a
wholly owned subsidiary of our company. Since August 1993, Mr. Sokolow has been
President of Genesis Partners, Inc., a private financial business-consulting
firm. From August 1994 through December 1998, Mr. Sokolow was the Chairman and
Chief Executive Officer of the Americas Growth Fund, Inc., a public closed-end
management investment company. Mr. Sokolow presently serves as a director of
Advanced Electronics Support Products, Inc., a worldwide distributor and
manufacturer of active and passive networking components traded on Nasdaq. Mr.
Sokolow received a B.A. degree with majors in Economics and Accounting from the
University of Florida in 1977, a J.D. degree from the University of Florida
School of Law in 1980 and an LL.M. (Taxation) degree from the New York
University Graduate School of Law in 1982. Mr. Sokolow is a Certified Public
Accountant.
TIMOTHY E. MAHONEY has been a director since November 8, 1999 and since November
8, 1999, Chairman of the Board and our Chief Operating Officer. Since September
1996, Mr. Mahoney has been a partner of Union Atlantic LC. From 1994 through
1995, Mr. Mahoney was President of the Highlands Group. Mr. Mahoney was a
founder of the consumer products business for SyQuest Technology. In 1986, Mr.
Mahoney founded and was the President of Rodime Systems,
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a computer disk drive sub-system manufacturer. In addition, Mr. Mahoney was the
Vice President of Marketing and Sales for Tecmar, the first PC add-in board
company and spent eight years in marketing and sales management in the computer
timesharing business with Computer Sciences Corporation, Automatic Data
Processing and General Electric Information Services. Mr. Mahoney presently
serves as a director of FOCUS Enhancements, Inc., a developer and marketer of
advanced, proprietary video scan conversion products traded on the Nasdaq
SmallCap market. Mr. Mahoney received a B.A. degree with majors in Computer
Science and Business from the West Virginia University in 1978. Mr. Mahoney
received a Masters of Business Administration from George Washington University
in 1983.
WONG SIN JUST has been a director since March 18, 2002. Mr. Wong was appointed
as the Chief Executive Officer of E2-Capital (Holdings) limited ("E2-Capital")
on 20th April 2000, was made Executive Co-Chairman and Acting Chief Executive
Officer of E2-Capital on 3rd April 2001. Mr. Wong possesses over 11 years of
investment banking and finance experience and has held positions with a number
of premier international investment banks. From June 1996 to June 1998, Mr. Wong
was the Director and Head of Greater China Equity Capital Markets at ABN AMRO
Asia Corporate Finance Limited. Prior to establishing e2-Capital Limited
(subsequently renamed as OpenIBN (HK) Limited), from June 1998 to October 1999,
Mr. Wong was the Managing Director and the Head of Equity Capital Markets at BNP
Prime Peregrine Securities Limited. Mr. Wong holds a Bachelor Degree in
Engineering from Imperial College, University of London and is a member of the
Association of Chartered Accountants, England and Wales. Mr. Wong is also an
Executive Director and the Chief Executive Officer of Softbank Investment
International (Strategic) Limited, an Independent Non-executive Director of
hongkong.com Corporation and Capital Strategic Investment Limited.
ROBERT F. WILLIAMSON, JR. has been Chief Financial Officer and Vice President of
our company since February 8, 2002. From November 1999 through November 2001,
Mr. Williamson was Vice President, Finance and CFO of Equinox Systems Inc.,
which was acquired by Avocent Corporation in 2001. From 1985 through September
1999, Mr. Williamson was Vice President, Finance and CFO of Data Net
Corporation, which filed for Chapter 7 bankruptcy in November 1999.
DAVID A. SPECTOR has been a Vice President of our company since November 8,
1999. From 1995 through 1999, Mr. Spector served as Vice President and regional
creative director of Green Advertising, a division of London-based WPP Group plc
managing the creative efforts of the agency. Prior to that, Mr. Spector was a
copywriter with Greenstone Roberts Advertising, with responsibilities for Royal
Caribbean Cruise Lines and Radisson Hotels.
RICHARD CAMPANELLA has been Secretary of the Company since December 18, 2001.
Mr. Campanella currently serves as director and Chief Operating Officer of
vFinance Investments, Inc. From February 1994 until April 2001, Mr. Campanella
was a partner of Commonwealth Associates, a registered broker dealer where he
served as the Director of Compliance. He has a degree in Business Administration
from the College of Staten Island.
MARC N. SIEGEL has been President and Chief Executive Officer of vFinance
Investments since January 4, 2001. Mr. Siegel founded First Level Capital, Inc.
in 1998 and served as its President
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for three years. We acquired First Level Capital, Inc. in 2001 and it now
operates as vFinance Investments. From May 1997 until August 1998, Mr. Siegel
was a partner of Grady & Hatch & Co., Inc., where he served as President and
Managing Director. From September 1993 until June 1997, he was responsible for
sales and marketing and recruiting, motivating and leading an 80-person sales
force, which he directly supervised at Commonwealth Associates, a registered
broker dealer. From September 1985 until 1993, Mr. Siegel was with Lehman
Brothers, Inc., where he initially worked at Lehman's Atlanta office and served
as its sales manager. Subsequently, from 1990 to 1992, he served as
sales/manager of the Houston office and then became sales manager at Lehman
Brothers' largest national office in New York. Mr. Siegel received a B.A. degree
cum laude from Tulane University in 1981.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Exchange Act requires our directors and executive officers,
and persons who beneficially own more than ten percent (10%) of a registered
class of our company's equity securities, to file with the Securities and
Exchange Commission (SEC) initial reports of ownership and reports of changes in
ownership of Common Stock and the other equity securities of our company.
Officers, directors and persons who beneficially own more than ten percent (10%)
of a registered class of our company's equity securities are required by the
regulations of the SEC to furnish our company with copies of all Section 16(a)
forms they file.
To our knowledge, based solely on review of these filings and written
representations from the directors and officers, there are no transactions
during the fiscal year ended December 31, 2001 for which the officers, directors
and significant stockholders have not timely filed the appropriate form under
Section 16(a) of the Exchange Act, except that Messrs. Sokolow and Mahoney each
filed one late Form 4 reporting one transaction each. In addition, Messrs.
Sokolow and Mahoney each filed one late Form 4 reporting one transaction each
for the fiscal year ended December 31, 2000 and Mr. Mahoney filed a late Form 3.
ITEM 10. EXECUTIVE COMPENSATION.
The following table provides information concerning the annual and long term
compensation earned by our chief executive officer and each of the four other
most highly compensated executive officers of our company during the fiscal
years ended December 31, 2001, 2000 and 1999:
SUMMARY COMPENSATION TABLE
Securities
Annual Other Underlying
Name/position Year Salary Bonus Compensation Options
------------- ---- ------ ----- ------------ ----------
Leonard J. Sokolow 2001 $169,500 $150,000 $7,289 734,802 (4)
CEO, President (1)(2)(3) 2000 $150,000 $120,000 $12,000 500,000 (4)
1999 $24,200 $ 5,600 $2,000 0
Timothy E. Mahoney 2001 $169,500 $150,000 $7,289 734,802 (4)
COO, Chairman (1)(2)(3) 2000 $150,000 $120,000 $12,000 500,000 (4)
1999 $24,200 $ 5,600 $2,000 0
Marc Siegel 2001 $120,000 $92,000 565,000
President, vFinance 2000 0 0 0 0
Investments, Inc. 1999 0 0 0 0
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Richard Campanella 2001 $125,000 0 0 100,000
Chief Operating Officer 2000 0 0 0 0
vFinance Investments, Inc. 1999 0 0 0 0
David Spector 2001 $100,000 0 $1,902 25,000
Vice President 2000 $100,000 0 $3,180 300,000
(1) From October 1993 through November 1999, Leonard J. Sokolow rendered
supervisory and management services to us on behalf of our Managing Agent,
Genesis Partners, Inc. In this capacity, Mr. Sokolow did not receive any cash
compensation as noted in the table below but did receive 1,815 shares of common
stock. Also, Genesis Partners, Inc. was issued a total of 348,185 shares of
common stock in consideration for serving as our managing agent. Mr. Sokolow is
President and CEO and a controlling shareholder of Genesis Partners, Inc.
(2) Messrs. Sokolow and Mahoney each received $120,000 of annual incentive
compensation based on the performance of our company and our subsidiaries during
2000 which are reflected in the table below as bonuses.
(3) Messrs. Sokolow and Mahoney each received a $12,000 car allowance during
2000 which are reflected in the table above as other annual compensation.
(4) Cancellation in January 2001 and reissuance in July 2001.
OPTION GRANTS IN LAST FISCAL YEAR
The following table provides information with respect to the chief executive
officer and each of the other named executive officers listed in the Summary
Compensation Table concerning stock options granted on our common stock in
fiscal year 2001:
Number of Percent of Total
Securities Options Granted to
Underlying Options Employees in Fical Exercise or Base
Name Granted Year Price ($/Share) Expiration Date
---- ------------------ ------------------ --------------- ---------------
Leonard Sokolow 734,802 11.3% $0.35 - $0.625 August 30, 2006
Timothy Mahoney 734,802 11.3% $0.35 - $0.625 August 30, 2006
Marc Siegel 565,000 8.7% $0.35 - $0.625 August 30, 2006
Richard Campanella 100,000 1.5% $0.35 - $0.625 August 30, 2006
David Spector 25,000 0.4% $0.35 - $0.625 August 30, 2006
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AGGREGATED OPEN EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END VALUES
The following table provides information regarding stock option exercises during
2001 by the chief executive officer and each of the other named executive
officers listed in the Summary Compensation Table:
Number of Securities
Underlying Unexercisable Value of Unexercised In-the-Money
Shares Options at Fiscal Year-End Options at Fiscal Year-End
Acquired on Value ---------------------------- ---------------------------------
Name Exercise Realized Exercisable Unexercisable Exercisable Unexercisable
---- ----------- -------- ----------- ------------- ----------- -------------
Leonard Sokolow 0 0 359,802 375,000 $ 0 $ 0
Timothy Mahoney 0 0 359,802 375,000 $ 0 $ 0
Marc Siegel 0 0 215,000 350,000 $ 0 $ 0
Richard Campanella 0 0 0 100,000 $ 0 $ 0
David Spector 0 0 286,000 39,000 $ 0 $ 0
COMPENSATION OF DIRECTORS
Directors do not receive any compensation for serving on our Board of Directors.
EMPLOYMENT AGREEMENTS
On January 5, 2001, we entered into a three-year employment agreement, as
subsequently amended, with each of Mr. Sokolow, our Chief Executive Officer and
President, and Mr. Mahoney, our Chairman. Under the terms of these agreements,
which are automatically extended unless we have provided a non-renewal notice as
directed by a majority vote of the board of directors, each of Messrs. Sokolow
and Mahoney are entitled to receive:
o An initial base salary of $208,000 per annum for the first year with a 5%
increase per annum beginning one year from the date of the agreements (our board
of directors may increase such salaries at its discretion);
o Discretionary bonuses as determined by the board of directors primarily based
on each employee's performance;
o Four weeks paid vacation per annum and an automobile expense allowance of
$1,500 per month, which will increase 5% per annum beginning one year from July
6, 2001; and
o Incentive compensation paid quarterly from distributions of "Division
Available Income" and "Division Non-Cash consideration" as such terms are
defined in an exhibit to each of the employment agreements, primarily based on
the performance of our company and our operating divisions.
The employment agreements also contain severance and change of control
provisions.
Under the terms of the employment agreements, as of July 6, 2001, Leonard J.
Sokolow and Timothy Mahoney were each granted 500,000 stock options. These stock
options are exercisable for five years at an exercise price of $.625 per share.
Of the 500,000 stock options granted to each of Messrs. Sokolow and Mahoney,
125,000 options vested for each of them on July 6, 2001 and the balance of the
options vest for each of them at the rate of 125,000 per year thereafter. On the
date these options were granted, the
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closing per share sale price of our common stock was $.32 as reported by the OTC
Bulletin Board. Of the 500,000 stock options granted to each of Messrs. Sokolow
and Mahoney, 125,000 stock options vested on October 3, 2001, and the balance of
the stock options vest each year thereafter for each of them at the rate of
125,000 per year.
CANCELLATION AND REISSUANCE OF STOCK OPTIONS
The Board of Directors, comprised of Leonard Sololow and Timothy Mahoney,
initially issued 500,000 stock options to each of Messrs. Sololow and Mahoney on
June 1, 2000. These stock options had the same terms as the stock options
described above. However, the exercise price of the options was $5.85 per share.
On the date these options were granted, the closing sale price of our common
stock on the OTC Bulletin Board was $4.88 per share. These options were
cancelled on January 1, 2001 because as part of our company's merger with
Colonial Direct Financial Group, Inc., Michael Golden, a principal of Colonial
Direct Financial Group, Inc., entered into an employment agreement with our
company and was granted stock options. On January 5, 2001, Messrs. Sokolow and
Mahoney entered into new employment agreements with our company so that their
terms of employment were substantially the same as Mr. Golden's agreement.
In connection with employment agreements for each of Messrs. Sokolow and
Mahoney, the Board of Directors gave each of them the right to acquire 500,000
stock options on January 5, 2001. In order to receive a grant of these options,
certain conditions had to be met, including continued employment through July 1,
2001. The exercise price of the options would have been $2.25 per share. On the
date these rights were granted, the closing price of our common stock was $.8125
per share, as reported by the OTC Bulletin Board. These options were
subsequently cancelled on April 2, 2001, when the closing sale price of our
common stock on the OTC Bulletin Board was $.3125 per share.
At the time that the 500,000 stock options were granted to each of Messrs.
Sokolow and Mahoney, our company had just completed the merger with Colonial
Direct Financial Group, Inc. The Board of Directors expected this merger to
materially enhance the financial performance of our Company. Subsequent to the
merger, we learned of certain breaches of the representations and warranties in
the merger agreement which ultimately caused us to write-off $7 million of
goodwill associated with the transaction, and we have ceased operating Colonial
Direct Financial Group, Inc. and its subsidiaries. In addition, we are now suing
the principals of Colonial Direct Financial Group, Inc. for, among other things,
fraud. See Item 3. Legal Proceedings.
The Board of Directors had expected Colonial Direct Financial Group, Inc. and
its subsidiaries to generate significant profits for us. As a result, the Board
of Directors initially issued stock options to Messrs. Sokolow and Mahoney at an
exercise price of $2.25 per share. When the Board of Directors became aware of
the actual financial condition of Colonial Direct Financial Group, Inc. and its
subsidiaries, the Board of Directors decided it was in the best interests of our
company to provide Messrs. Sokolow and Mahoney with stock options having an
exercise price more closely tied to the financial condition of our company.
Accordingly, after the January 5, 2001 stock options granted to Messrs. Sokolow
and Mahoney were cancelled on April 2, 2001, the Board of Directors on July 6,
2001 granted new options to each of Messrs. Sokolow and Mahoney. These options
had an exercise price 95% higher than the closing sale price of our common stock
on the date of grant. The Board of Directors set the exercise price of the
options materially above the market price of the common stock on the date of the
grant in order to create an incentive for Messrs. Sokolow and Mahoney to improve
the financial performance of our company
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth common stock ownership information as of March
14, 2001 with respect to:
o Each person known to us to be the beneficial owner of more than 5% of our
common stock;
o Each of our officers and directors; and
o All directors and officers as a group.
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This information as to beneficial ownership was furnished to us by or on behalf
of the persons named. Unless otherwise indicated, the business address of each
person listed is 3010 North Military Trail, Suite 300, Boca Raton, Florida.
Information with respect to the percent of class is based on outstanding shares
of common stock as of March 27, 2002. Except as otherwise indicated, to our
knowledge, each stockholder has sole power to vote and dispose of all the shares
of common stock listed opposite his name.
For purposes of this table, each person is deemed to have beneficial ownership
of any shares of our common stock such person has the right to acquire on or
within 60 days after March 27, 2002.
Amount of Shares
Name of Beneficial Owner Beneficially Owned Percent of Class
------------------------ ------------------ ----------------
Genesis Partners, Inc. (1) 3,108,333 13.29%
Highlands Group Holdings, Inc. (2) 2,175,000 9.39%
CALP II Limited Partnership (3) 2,099,999 8.63%
Leonard J. Sokolow(4) 3,764,340 15.85%
Timothy E. Mahoney(5) 3,764,340 15.85%
Wong Sin Just 0 *
Robert F. Williamson, Jr. 150,000 *
David A. Spector (6) 286,000 1,20%
Richard Campanella 25,000 *
Marc N. Siegel (7) 302,500 1.28
All executive officers and directors
as a group (7 persons)(8) 8,292,180 33.75%
* Denotes less than 1% ownership.
(1) Genesis Partners, Inc., whose address is 2458 Provence Court, Weston,
Florida 33327, is a corporation controlled by Mr. Leonard Sokolow, Chief
Executive Officer and President. Mr. Sokolow is deemed the beneficial owner of
the 3,106,518 shares held by Genesis Partners, Inc.
(2) Highlands Group Holdings, Inc., whose address is 68 Cayman Place, Palm Beach
Gardens, Florida 33418, is wholly owned by Mr. Timothy Mahoney, Chairman and
Chief Operating Officer. Mr. Mahoney, as the owner of Highlands Group Holdings,
Inc., is deemed to beneficially own the 2,175,000 shares held by Highlands Group
Holdings, Inc.
(3) In accordance with the terms of a Common Stock and Warrants Purchase
Agreement among the Company, CALP II Limited Partnership, a Bermuda limited
partnership, and other investors, CALP II Limited Partnership has a warrant to
purchase an aggregate of 350,000 shares of Common Stock and rights to purchase
an aggregate of 583,333 shares of Common Stock. CALP II Limited Partnership's
address is c/o Thomson Kernaghan & Co. Limited, 365 Bay Street, Tenth Floor,
Toronto, Ontario, Canada.
(4) Includes 3,108,33 shares of common stock issued in the name of Genesis
Partners, Inc., 296,205 shares of common stock issued in the name of Mr. Sokolow
and 359,802 shares of common stock underlying stock options which have vested or
will vest within 60 days of March 27, 2002.
(5) Includes 2,175,000 shares of common stock issued in the name of Highlands
Group Holdings, Inc., 1,229,538 shares of common stock issued in the name of Mr.
Mahoney and 359,802 shares of common stock underlying stock options which have
vested or will vest within 60 days of March 27, 2002.
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(6) Includes 261,000 shares of common stock underlying stock options which have
vested or will vest within 60 days of March 27, 2002.
(7) Includes 202,500 shares of common stock underlying stock options which have
vested or will vest within 60 days of March 27, 2002.
(8) See footnotes (1) though (7) of this table.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
On December 18, 2001, Critical Infrastructure Fund (BVI), LP, a limited
partnership controlled by us, purchased 877,193 shares of our common stock from
us for $250,000 and received piggyback registration rights with respect to these
shares. In January 2002, Critical Infrastructure Fund (BVI), LP sold to Messrs.
Sokolow, Mahoney and Williamson, three executive officers of our company, 61,403
shares, 61,403 shares and 150,000 shares, respectively, of our common stock at a
price of $0.285 per share, the price at which the shares were purchased from us
by Critical Infrastructure Fund (BVI), LP.
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ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K.
(a) EXHIBITS
Number
of Exhibit Exhibit Description
---------- -------------------
2.1 Share Exchange Agreement among the Company, vFinance Holdings,
Inc., certain shareholders of vFinance Holdings, Inc. and
Union Atlantic LC, dated November 8, 1999 (incorporated by
reference to the Company's Current Report on Form 8-K filed
with the SEC on November 8, 1999).
2.2 Amendment to Share Exchange Agreement dated November 29, 1999
(incorporated by reference to the Company's Annual Report on
Form 10-KSB filed with the SEC on March 30, 2000).
2.3 Agreement and Plan of Merger, dated as of December 22, 2000,
by and among the Company, NW Holdings, Inc., and Alvin S.
Mirman, Ilene Mirman, Marc N. Siegel, Richard L. Galterio,
Vincent W. Labarbara, Eric M. Rand, and Mario Marsillo, Jr.
(incorporated by reference to the Company's Current Report on
Form 8-K filed with the SEC on January 17, 2001).
2.4 Agreement and Plan of Merger, dated as of January 3, 2001, by
and among the Company, Colonial Acquisition Corp., Colonial
Direct Financial Group, Inc., and Michael Golden and Ben
Lichtenberg (incorporated by reference to the Company's
Current Report on Form 8-K filed with the SEC on January 17,
2001).
3.1 Certificate of Incorporation as filed with the Delaware
Secretary of State on February 12, 1992 (incorporated by
reference to the Company's Registration Statement on Form S-18
filed with the SEC on July 24, 1992).
3.2 Certificate of Renewal and Revival of Certificate of
Incorporation as filed with the Delaware Secretary of State on
March 15, 1996 (incorporated by reference to the Company's
Annual Report on Form 10-KSB filed with the SEC on March 30,
2000).
3.3 Certificate of Amendment to the Certificate of Incorporation
as filed with the Delaware Secretary of State on April 28,
1999 (incorporated by reference to the Company's Annual Report
on Form 10-KSB filed with the SEC on March 30, 2000).
3.4 Certificate of Amendment to Certificate of Incorporation as
filed with the Delaware Secretary of State on March 13, 2000
(incorporated by reference to the Company's Annual Report on
Form 10-KSB filed with the SEC on March 30, 2000).
3.5 Certificate of Amendment to Certificate of Incorporation as
filed with the Delaware Secretary of State on November 28,
2001.
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3.6 Certificate of Designation of Series A Convertible Preferred
Stock of the Company as filed with the Delaware Secretary of
State on January 3, 2001 (incorporated by reference to the
Company's Current Report on Form 8-K filed with the SEC on
January 17, 2001).
3.7 Certificate of Designation of Series B Convertible Preferred
Stock of the Company as filed with the Delaware Secretary of
State on January 3, 2001 (incorporated by reference to the
Company's Current Report on Form 8-K filed with the SEC on
January 17, 2001).
3.8 Bylaws of the Company (incorporated by reference to the
Company's Registration Statement on Form S-18 filed with the
SEC on July 24, 1992).
3.9 Unanimous Written Consent of the Company's Board of Directors
dated January 24, 1994, amending the Bylaws (incorporated by
reference to the Company's Annual Report on Form 10-KSB filed
with the SEC on March 30, 2000).
3.10 Unanimous Written Consent of the Company's Board of Directors,
effective as of January 24, 1994, amending the Bylaws
(incorporated by reference to the Company's Annual Report on
Form 10-KSB filed with the SEC on March 30, 2000).
10.1 Purchase Agreement between the Company and Steven Jacobs and
Mauricio Borgonovo, dated December 24, 1999, for the purchase
of Pinnacle Capital Group, LLC (incorporated by reference to
the Company's Annual Report on Form 10-KSB filed with the SEC
on March 30, 2000).
10.2 Asset Purchase Agreement among the Company, Steven Jacobs and
Mauricio Borgonovo dated January 3, 2000 (incorporated by
reference to the Company's Annual Report on Form 10-KSB filed
with the SEC on March 30, 2000).
10.3 Stock Purchase Agreement between the Company and River Rapids
Ltd., dated September 27, 1999 (incorporated by reference to
the Company's Annual Report on Form 10-KSB filed with the SEC
on March 30, 2000).
10.4 Amendment to Stock Purchase Agreement between the Company and
River Rapids Ltd. dated December 22, 1999 (incorporated by
reference to the Company's Annual Report on Form 10-KSB filed
with the SEC on March 30, 2000).
10.5 Common Stock and Warrants Purchase Agreement among the
Company, AMRO International, S.A., CALP II Limited
Partnership, a Bermuda limited partnership, Celeste Trust Reg,
Balmore SA, Sallee Investments LLLP, worldVentures Fund I, LLC
and RBB Bank Aktiengesellschaft, dated March 31, 2000
(incorporated by reference to the Company's Current Report on
Form 8-K filed with the SEC on April 13, 2000).
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10.6 Registration Rights Agreement among the Company, AMRO
International, S.A., CALP II Limited Partnership, a Bermuda
limited partnership, Celeste Trust Reg, Balmore SA, Sallee
Investments LLLP, worldVentures Fund I, LLC, RBB Bank
Aktiengesellschaft and Thomas Kernaghan & Co., Ltd., dated
March 31, 2000 (incorporated by reference to the Company's
Current Report on Form 8-K filed with the SEC on April 13,
2000).
10.7 Form of Warrant issued to AMRO International, S.A. (to
purchase 100,000 shares), CALP II Limited Partnership, a
Bermuda limited partnership (to purchase 350,000 shares),
Celeste Trust Reg (to purchase 35,000 shares), Balmore SA (to
purchase 35,000 shares), Sallee Investments LLLP (to purchase
25,000 shares), worldVentures Fund I, LLC (to purchase 25,000
shares), RBB Bank Aktiengesellschaft (to purchase 130,000
shares) and Thomas Kernaghan & Co., Ltd. (to purchase 58,333
shares) (incorporated by reference to the Company's Current
Report on Form 8-K filed with the SEC on April 13, 2000).
10.8 Escrow Agreement among the Company, AMRO International, S.A.,
CALP II Limited Partnership, a Bermuda limited partnership,
Celeste Trust Reg, Balmore SA, Sallee Investments LLLP,
worldVentures Fund I, LLC, RBB Bank Aktiengesellschaft and
Epstein Becker & Green, P.C., dated March 31, 2000
(incorporated by reference to Amendment No. 1 to the Company's
Registration Statement on Form SB-2 filed with the SEC on July
14, 2000).
10.9 Amended and Restated Employment Letter Agreement dated
December 18, 2000, between the Company and David Spector.
(incorporated by reference to the Company's Annual Report on
Form 10-KSB filed with the SEC on March 20, 2001).
10.10 Employment Agreement dated as of January 5, 2001, between the
Company and Leonard J. Sokolow (incorporated by reference to
the Company's Annual Report on Form 10-KSB filed with the SEC
on March 20, 2001).
10.11 Employment Agreement dated as of January 5, 2001, between the
Company and Timothy Mahoney (incorporated by reference to the
Company's Annual Report on Form 10-KSB filed with the SEC on
March 20, 2001).
10.12 Options Cancellation Agreement dated January 1, 2001 by
Leonard J. Sokolow (incorporated by reference to the Company's
Annual Report on Form 10-KSB filed with the SEC on March 20,
2001).
10.13 Options Cancellation Agreement dated January 1, 2001 by
Timothy Mahoney (incorporated by reference to the Company's
Annual Report on Form 10-KSB filed with the SEC on March 20,
2001).
10.14 Securities Exchange Agreement, dated as of August 15, 2001,
among Kathleen Wallman, Steven Wallman, Joseph Daniel and
vFinance.com, Inc. (n/k/a vFinance, Inc.) (incorporated by
reference to the Company's Quarterly Report on Form 10-QSB
filed on August 14, 2001).
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10.15 Registration Rights Agreement, dated as of August 15, 2001,
among Kathleen Wallman, Joseph Daniel and vFinance.com, Inc.
(n/k/a vFinance, Inc.) (incorporated by reference to the
Company's Quarterly Report on Form 10-QSB filed on August 14,
2001).
10.16 Stock Purchase Warrant, dated August 15, 2001, issued to
Kathleen Wallman to purchase 400,000 shares of common stock of
vFinance, Inc. (incorporated by reference to the Company's
Quarterly Report on Form 10-QSB filed on August 14, 2001).
10.17 Letter Agreement, dated August 15, 2001, from vFinance.com,
Inc. to Joseph Daniel re employment of Joseph Daniel by
vFinance.com, Inc. (incorporated by reference to the Company's
Quarterly Report on Form 10-QSB filed on August 14, 2001).
10.18 Note Purchase Agreement by and between vFinance.com, Inc.
d/b/a vFinance, Inc. (n/k/a vFinance, Inc.) and Best Finance
Investments Limited (n/k/a SBI Investments (USA), Inc.) dated
November 28, 2001.
10.19 Letter Agreement dated November 30, 2001 amending Note
Purchase Agreement.
10.20 Letter Agreement dated December 14, 2001 amending Note
Purchase Agreement.
10.21 Letter Agreement dated December 28, 2001 amending Note
Purchase Agreement.
10.22 Letter Agreement dated February 13, 2002 amending Note
Purchase Agreement.
10.23 Letter Agreement dated March 4, 2002 amending Note Purchase
Agreement.
10.24 Credit Facility by and between vFinance, Inc. and UBS
Americas, Inc. dated as of January 25, 2002.
10.25 Subordination Agreement by and among vFinance, Inc., UBS
Americas, Inc., and SBI Investments (USA), Inc. dated as of
January 25, 2002.
10.26 Cancellation Agreement/Conditional Right to Option Grant
dated April 2, 2001 by Leonard J. Sokolow.
10.27 Employment Agreement Amendment dated as of July 2, 2001 by and
between vFinance.com, Inc. and Leonard J. Sokolow.
10.28 Stock Option Agreement dated as of July 6, 2001 by and
between Leonard J. Sokolow and vFinance.com, Inc.
10.29 Employment Agreement Amendment No. 3 dated as of January 7,
2002 by and between vFinance, Inc. and Leonard J. Sokolow.
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10.30 Cancellation Agreement/Conditional Right to Option Grant
dated April 2, 2001 by Timothy Mahoney
10.31 Employment Agreement Amendment dated as of July 2, 2001 by and
between vFinance.com, Inc. and Timothy Mahoney.
10.32 Stock Option Agreement dated as of July 6, 2001 by and between
Timothy Mahoney and vFinance.com, Inc.
10.33 Employment Agreement Amendment No. 3 dated as of January 7,
2002 by and between vFinance, Inc. and Timothy Mahoney.
10.34 Consulting Agreement effective as of August 20, 2001 by and
between vFinance.com, Inc. and Insight Capital Consultants
Corporation.
10.35 Letter Agreement dated February 5, 2002 executed by vFinance,
Inc. and Robert F. Williamson, Jr. containing terms and
conditions of Mr. Williamson's employment.
10.36 Amendment to Credit Agreement dated April 12, 2002 by and
between vFinance, Inc. and UBS Americas Inc.
21 List of Subsidiaries.
(b) REPORTS ON FORM 8-K
None.
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SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant has
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
vFinance, Inc.
By: /s/ Leonard J. Sokolow
-------------------------------------
LEONARD J. SOKOLOW, DIRECTOR,
CHIEF EXECUTIVE OFFICER AND PRESIDENT
Date: August 18, 2003
In accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
Signature Capacity Date
-------------------------------- --------- --------------------
/s/ Leonard J. Sokolow Director, Chief Executive Officer and
-------------------------------- President (Principal Executive Officer) August 18,2003
Leonard J. Sokolow
/s/ Timothy E. Mahoney Director, Chairman of the Board and August 18,2003
-------------------------------- Chief Operating Officer and acting
Timothy E. Mahoney Chief Financial Officer
INDEX OF DOCUMENTS FILED WITH THIS ANNUAL REPORT
Number of
Exhibit Exhibit Description
--------- --------------------------------------------------------------------
31.1 Rule 13a-14(a)/15d-14(a) Certification of Chief Executive
Officer of the Company.
31.2 Rule 13a-15(a)/15d-14(a) Certification of Chief Financial
Officer of the Company.
32.1 Section 1350 Certification by Chief Executive Officer of
the Company.
32.2 Section 1350 Certification by Chief Financial Officer of
the Company.
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