SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2004
Commission File Number 1-11454-03
VFINANCE, 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, 2004 were
$26,329,151
The aggregate market value of the voting stock held by non-affiliates of the
issuer on March 28, 2005, based upon the average bid and ask prices of such
stock on that date was $9,500,638. The number of shares of Common Stock of the
issuer outstanding as of March 28, 2005 was 40,126,133.
DOCUMENTS INCORPORATED BY
REFERENCE: NONE
TABLE OF CONTENTS
Page No.
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Forward-Looking Statements 3
PART I.
Item 1. Description of Business 4
Item 2. Description of Property 18
Item 3. Legal Proceedings 18
Item 4. Submission of Matters to a Vote of Security Holders 20
PART II.
Item 5. Market for Common Equity and Related Stockholder Matters 21
Item 6. Management's Discussion and Analysis of Financial Condition
or Plan of Operations 21
Item 7. Financial Statements 27
Item 8. Changes in and Disagreements With Accountants on Accounting
and Financial Disclosure 48
Item 8A. Controls and Procedures 48
Item 8B. Other Information 48
PART III.
Item 9. Directors and Executive Officers of the registrant 49
Item 10. Executive Compensation 50
Item 11. Security Ownership of Certain Beneficial Owners and Management
And Related Stockholder Matters 52
Item 12. Certain Relationships and Related Transactions 52
Item 13. Exhibits 53
Item 14. Principal Accountant Fees and Services 56
Signatures
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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 or hopes and 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 assess 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
vFinance, Inc. is a holding company engaged in the financial services business
where our strategic focus is on servicing the needs of high net-worth and
institutional investors and high growth companies. Through our principal
operating subsidiary, vFinance Investments, Inc., a licensed broker-dealer, we
provide investment banking, retail and institutional brokerage services in all
50 states and the District of Columbia. The Company also operates a second
broker-dealer, EquityStation, Inc. ("EquityStation") which offers institutional
traders, hedge funds and professional traders a suite of services designed to
enhance their trading by offering services such as trading technology, routing
software, hedge fund incubation, capital introduction and custodial services.
The Company, through its website www.vfinance.com, provides financial
information services to entrepreneurs and venture investors.
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.
On January 4, 2001, we closed the merger of NW Holdings, Inc. ("NWH"), a Florida
corporation, with and into us with us as the surviving corporation. On the
closing date of the merger, NWH 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. which has offices in New York, New Jersey
and Florida. In addition to these offices the Company has relationships with
certain independent contractors located throughout the United States.
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. On June 22, 2002, the
Company's Board of Directors approved a dividend to the Company's Series A
Preferred shareholders of all of the common stock of Colonial. Although Colonial
is no longer a subsidiary of the Company, the majority of its personnel remained
employed with 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. A determination has been made to
liquidate the funds. The SEC is conducting a non-public investigation relating
to Critical Infrastructure LP, Critical Investments and Critical Advisors. The
Company is cooperating with this investigation. Critical Investments and
Critical Advisors changed their names to vFinance Investors, LLC and vFinance
Advisors, LLC, respectively, subsequent to the acquisition.
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On May 29, 2002, the Company entered into a select asset purchase agreement (the
"Agreement"), as amended on June 17, 2002 (the "Amendment"), with Somerset
Financial Partners, Inc., ("Somerset") a Delaware corporation to acquire certain
of its assets. Through its subsidiaries, Somerset acted as a registered broker
dealer and was engaged in other financial services. Pursuant to the Agreement
the Company received the transfer of all agreed upon brokerage customers and
client accounts as well as the registration of approximately 25 registered
personnel of Somerset. As of June 17, 2002, the Company began reflecting in its
financial statements the applicable revenue production and other associated
costs. Under the escrow agreement signed in conjunction with the Agreement and
Amendment, the Company instructed its transfer agent to deliver to and in the
name of its escrow agent a total of 3,000,000 shares of the Company's common
stock (the "Escrowed Shares"). The Escrowed Shares were to be delivered to
Somerset when Somerset achieves all the closing conditions. In August 2002, all
of the closing conditions of the Agreement and Amendment were not met by
Somerset and the Company issued a default letter to Somerset (the "Default
Letter"). Among other things, the Default Letter provided formal notice to
Somerset of its default under the Agreement and Amendment. In October 2002, a
formal termination notice was executed by the Company and Somerset and the
Escrowed Shares were returned to the Company and cancelled.
The Company, as part of its strategic focus to operate its retail brokerage
business using an independent contractor (IC) model, on January 1, 2003, entered
into a Joint Venture Agreement with JSM Capital Holding Corp. ("JSM"), a retail
brokerage IC headquartered in New York and founded by John S. Matthews (who was
also, at the same time, named the President of vFinance's Retail Brokerage
Division). Effective May 1, 2003, vFinance merged its "company-owned" retail
branches into JSM, in exchange for a 19% equity position in JSM's common stock.
Effective upon such mergers JSM became an IC of the Company.
On November 2, 2004, vFinance, Inc.'s wholly-owned subsidiary, vFinance
Investments Holdings, Inc completed its acquisition of certain assets of Global
Partners Securities, Inc. ("Global") and 100% of the issued and outstanding
equity securities of EquityStation, Inc. ("EquityStation"), all of which were
owned by Level2.com, Inc. ("Level2"), a subsidiary of Global. These transactions
are subject to the approval of the National Association of Securities Dealers,
Inc.
The assets acquired from Global included certain intellectual property, customer
accounts, computer equipment, and certain clearance and trading agreements
relating to emerging market debt trading, wholesale market-making in selected
equities for institutional clients, and direct-access equity trading. vFinance
Investments Holdings assumed no liabilities in connection with the acquisition
of Global's assets. Two of the principals of Global and Equity each entered into
employment agreements with the Company which provided an annual base salary of
$144,000, certain incentive bonuses, and options to purchase 350,000 shares of
the Company's common stock, $0.01 par value (the "Common Stock"). The options
are exercisable at $0.19 per share, and vest ratably over a three year period.
In accordance with the terms of the acquisition agreements of Global and
EquityStation, the Company delivered into escrow 8,324,690 restricted shares
(the "Shares") of the Common Stock, and warrants (the "Warrants") to purchase
3,299,728 shares of the Common Stock at a price of $0.11 per share. All of the
shares of EquityStation were also delivered into escrow. Subject to (a) any
indemnification claims under the acquisition agreements and (b) the financial
performance of EquityStation and the business of Global acquired by vFinance
Investments over the periods specified in the escrow agreement, all or a portion
of the Shares and the Warrants will be distributed to Global and Level2. As
determined pursuant to the financial performance calculation in the escrow
agreement, 2,199,425 of the Shares and 871,805 of the Warrants are subject to
cancellation in accordance with the terms of the escrow agreement. This is
reflected in the purchase price and the associated goodwill recorded as of
December 31, 2004. When the escrow agreement is terminated, all of the shares of
EquityStation will be distributed to vFinance Investments Holdings, and the
holders of the Shares and Warrants will be entitled to certain piggyback
registration rights. The Company also entered into a standstill agreement with
each of Marcos Konig, Harry Konig and Salomon Konig, to provide restrictions on
certain actions for a defined time period.
EquityStation is a broker-dealer registered with the Securities and Exchange
Commission ("SEC") and is a member of the National Association of Securities
Dealers (NASD). The company is a Florida corporation incorporated on July 22,
1999. EquityStation offers institutional traders, hedge funds, and professional
traders a suite of services designed to advance their trading through
cutting-edge trading technologies and routing software, hedge fund incubation,
capital introduction and custodial services.
OUR COMPANY. We are a diversified financial services company committed to
meeting the financial needs of high net-worth investors, institutions focused on
portfolio growth and management strategies, and high growth emerging companies
seeking capital. The Company's principal activities are provided by four
business units: Retail Brokerage offers securities brokerage services including
the sale of equities, mutual funds and fixed income products. Investment Banking
assists emerging growth private and public companies develop sound strategic
plans and access capital. Wholesale Trading operation provides wholesale
market-making services for nearly 2000 Over-the-Counter Bulletin Board and
NASDAQ Small Cap stocks to national and regional full-service broker-dealers,
electronic discount brokers, and institutional investors. Institutional Services
provides investment, technology and research services to institutional fund
managers and other institutional investors.
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In the execution of our business strategy, the Company has created a Website,
www.vfinance.com, that reaches a worldwide audience of individuals looking to
create wealth through equity investments in both their personal portfolios and
their businesses. Our Website is a leading destination for entrepreneurs, owners
of small and medium businesses looking for capital, venture capitalists and
private (i.e. Angel) and institutional investors seeking equity investments in
high growth companies. Each month our Website attracts an estimated 80,000
business owners from over 100 countries and communicates to approximately 60,000
high net-worth individuals and institutional investors. Our Website is typically
listed by search engines as one of the top sites for relevant content. In
addition, over 5,000 Websites have links to our Website including Microsoft
Network, Dow Jones, THE WALL STREET JOURNAL, ENTREPRENEUR MAGAZINE, INC.,
Stanford University, and Yahoo!. Our business model is scalable as a) the
Website provides sales leads to our Retail Brokerage, Investment Banking, and
Institutional Services Divisions and b) the firm has structured its Banking and
Brokerage business to take advantage of an Independent Contractor model allowing
the firm to expand and contract without the costs and liabilities associated
with employees and offices. Due to the Website's large, global audience of
entrepreneurs and venture investors, the Company uses it to collect, measure and
analyze data on entrepreneurial activity. The Company uses its proprietary
research to publish reports on the entrepreneurial economy that provide the
firm's clients with proprietary insights to investment opportunities.
RECENT FINANCINGS
The Company entered into two agreements with financial institutions to increase
our resources. The discussion below is qualified in its entirety by reference to
the copies of the agreements attached as exhibits to this filed report.
On November 28, 2001, we entered into a Note Purchase Agreement, as amended on
November 30, December 14, December 28, 2001, February 13 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 (the SBI
Note"). The SBI Note is convertible at SBI's option into as many as 3,421,052
shares of our common stock at $0.285 per share. During year 2002, the SBI Note
was reduced by $225,000 as a portion of the SBI Note was converted into 789,474
shares of the Company's common stock. During February and March of 2004,
$721,500 of the SBI Note was converted into 3,344,298 shares of the Company's
common stock. Of this amount, $545,000 was converted into 2,725,000 shares of
the Company's common stock at a discounted rate of $0.20 per share under a
special arrangement offered by the Company to encourage further equity
participation by SBI, which resulted in a $231,625 conversion premium expense
during the first quarter of 2004. The remainder, $176,500, was converted into
619,298 shares at the stated conversion rate of $0.285 per share. In April of
2004, the remaining balance was converted into 100,000 shares of common stock of
the Company at the original stated conversion rate of $.285 per share. The
issuance of the common stock was exempt from registration pursuant to Section 4
(2) of the Securities Act of 1933, as amended, because the commons stock was
acquired in a privately negotiated transaction by sophisticated investors.
Accordingly, the balance due SBI at December 31, 2003 was $750,000 and 2004 was
$0.
On January 25, 2002, the Company 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 the Company with a revolving credit facility for up to
$3,000,000 for the purpose of supporting the expansion of our brokerage business
or investments in infrastructure to expand our operations and our broker-dealer
operations. The loan had a term of 4 years, was required to be repaid in full by
January 2005, and accrued interest at LIBOR plus a LIBOR margin of 2% if the
loan was repaid within a month or 5% if it was outstanding more than a month.
The Company borrowed $1,500,000 under the credit facility on January 28, 2002
leaving an additional $1,500,000 available. In June 2003, Fidelity Investments,
on behalf of its clearing division, National Financial Services LLC, Member
NYSE/SIPC, a Fidelity Investments company ("NFS"), announced that it had
acquired Correspondent Services Clearing ("CSC"), an affiliate of UBS and
vFinance Investments' clearing firm at the time. The credit facility stayed with
UBS subsequent to the acquisition giving rise to potential breaches under such
credit facility as well as precluding the Company from drawing an additional
$1,500,000 thereunder. During March 2004, NFS agreed to directly pay down the
UBS credit facility in the amount of $1,500,000 pursuant to a guaranty Fidelity
Investments made to UBS as part of their original acquisition of the CSC
clearing division. As a result, the Company was relieved from $1,500,000 in debt
but no longer had the ability to obtain an additional $1,500,000 under the
credit facility or assert any claims against UBS or NFS regarding this
transaction and credit facility. During March 2004, the Company entered into a
clearing agreement with NFS. The new clearing agreement required NFS to pay to
vFinance, over a five year period beginning January 2004, a monthly incentive
bonus not to exceed $25,000 per month up to $1,500,000, based on a formula that
the Company believes is very achievable. Accordingly, NFS has been paying
$25,000 per month related to this incentive calculation and such amount,
$300,000 through December 31, 2004, has been included in the attached statements
of operations as "other brokerage related income". The new clearing agreement
also required NFS to provide the Company with $200,000 to assist the Company
with transition costs related to the conversion from CSC to NFS. This amount was
paid to vFinance in March 2004 and was included in the first quarter's
statements of operations as a reduction to clearing and transaction costs. In
consideration for these incentives, NFS required a termination fee of $1,700,000
should vFinance discontinue using NFS' services. This fee is reduced, pro rata,
annually over the five year term of the agreement. The Company began clearing
through NFS during May 2004.
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OUR BUSINESS
RETAIL AND TRADING BUSINESS. The largest portion of our revenues 85% in 2004 and
82% in 2003 was attributable to commissions generated by our brokerage and
trading activities through our wholly owned broker-dealer subsidiary, vFinance
Investments. vFinance Investments' Retail Brokerage and Trading Divisions 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 investments maintained in
particular funds.
INVESTMENT BANKING. A significant portion of our revenues in our last fiscal
year were derived from the success fees generated by our vFinance Investments'
Investment Banking Division (12% in 2004) (14% in 2003). We assist emerging
growth private and public companies by (i) developing sound strategic plans,
(ii) obtaining equity, mezzanine, bridge, or acquisition capital, (iii)
executing strategically sound acquisitions or divestiture strategies, (iv)
raising capital in the public markets, and (v) maximizing shareholder value by
conducting recapitalizations or other liquidity transactions. As consideration
for such services, we are paid retainers and success fees, based on the
percentage of the total value of a transaction, which 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 cash paid for such
services.
In the area of corporate finance, vFinance Investments has 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.
WHOLESALE TRADING BUSINESS. In support of the firm's retail brokerage, banking
and institutional services businesses, we offer wholesale market-making
services. vFinance Investments makes markets in nearly 2000 Over-the-Counter
Bulletin Board and NASDAQ Small Cap stocks. The Company's customers are national
and regional full-service broker-dealers, electronic discount brokers and
institutional investors that require fast and efficient executions for each
security. This expertise supports the firm's 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 firm's capital, research, retail and
systems resources to represent a stock and compete with other market makers.
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.
INSTITUTIONAL SERVICES. A critical element of the Company's business strategy is
to identify institutional quality investments that offer high returns. The
Institutional Services Division ("ISD") supports that mission by providing
institutional investment managers, primarily hedge fund managers, a complete
array of services designed to enhance portfolio performance. Hedge funds
represent the fastest growing segment of the money management market and by
definition are focused on achieving positive returns for their investors while
controlling risk. ISD accomplishes its mission by offering fund managers access
to investment opportunities and independent research products that boost return
on investment. Additionally, we offer fund managers the ability to reduce their
transaction costs by offering them access to our trading desk for illiquid
securities and automated trading systems for their liquid transactions. ISD has
a mutually beneficial relationship with the Company's Investment Banking
Division ("IBD") as fund managers looking for investment opportunities fund
IBD's corporate clients and having relationships with fund managers creates
opportunities to increase the number and quality of IBD clients.
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INTERNET STRATEGY (www.vfinance.com). vFinance Holdings, Inc., operates a
financial services Website or "channel" on the World Wide Web located at
http://www.vfinance.com. With an estimated 3.4 million visitors annually, the
Website reaches a global audience of entrepreneurs, CEOs, and private and
institutional investors in over 150 countries. The Website provides sales leads
to our investment banking, brokerage and institutional services divisions. The
Website is the premier destination for search phrase "venture capital" and
"raising capital". Website visitors have convenient access to a variety of
financial services, proprietary business development tools, searchable
databases, and daily news. The website has over 80,000 "opted in" subscribers
that receive a daily newsletter on private funding. The Website features our
database of venture capital firms and angel investors accessible with vSearch,
our proprietary Web-based data mining tool that allows entrepreneurs to search
potential funding sources by different criteria, including, geography, amount of
funds required, industry, stage of corporate development, or keyword. Much of
the information on the website is provided free of charge, however, we do charge
nominal fees for the use of proprietary search engines and premium services such
as our business planning services.
ADMINISTRATION, OPERATIONS, SECURITIES TRANSACTIONS PROCESSING AND CUSTOMER
ACCOUNTS
Our operating subsidiaries, vFinance Investments and EquityStation, do not hold
any funds or securities for 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 of
vFinance Investments 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 and credit control
as well as receipt, custody and delivery of securities. The clearing agents
provide the operational support necessary to process, record, and maintain
securities transactions for our subsidiary's brokerage activities. They provide
these services to our subsidiary's 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 and Equity Station have agreed to indemnify
the clearing brokers for losses they incur on these credit arrangements.
COMPETITION
vFinance Investments and EquityStation, our subsidiaries, encounter competition
in all aspects of their business. Many of their competitors have significantly
greater financial, technical, marketing and other resources. 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 emergence of online trading has further
intensified the competition for brokerage customers. With the exception of
offering certain trading platforms to institutional clients and portfolio
managers, our subsidiaries do not offer online trading services to retail
customers. The continued expansion of discount brokerage firms and online
trading could adversely affect our 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 compete through our advertising
and recruiting programs for registered representatives interested in potentially
joining our Company.
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 the 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 and EquityStation are
broker-dealers registered with the SEC and members of the NASD.
-8-
Our broker-dealers are also subject to regulation under state law. vFinance
Investments and EquityStation are currently registered as broker-dealers 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, 2004, the minimum amount of net capital required to be
maintained by vFinance Investments was $1,000,000 and the minimum amount of net
capital required to be maintained by our wholly owned subsidiary, EquityStation
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 have a material adverse affect on our
business and operations. vFinance Investments and EquityStation are members 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.
vFinance Investments clients' accounts are carried on the books and records of
NFS and Jefferies. NFS 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. The client
accounts for Equity Station are carried on the books and records of Merrill
Lynch, Pierce, Fenner & Smith ("Merrill Lynch").
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.
-9-
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 and EquityStation are
currently registered as broker-dealers in the jurisdictions described in this
report, vFinance Investments, EquityStation 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, Inc.(R),
vFinance.com, Inc.(R), AngelSearch(R).
EMPLOYEES
At December 31, 2004, we employed the following personnel:
Position Salaried Contract Total
----------------------------------------------------------------
Officers 7 0 7
Administration 16 5 21
Brokers 6 128 134
Traders 17 4 21
Investment Bankers 10 4 14
Web Operations 2 0 2
----------------------------------------------------------------
Totals 58 141 199
================================================================
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.
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
In addition to other information in this report, the following risks should be
considered in evaluating our condition and prospects. These risks may have a
material effect on our operating results.
WE HAVE A LIMITED OPERATING HISTORY. AS A RESULT, IT MAY BE DIFFICULT
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 two firms and their
merger into a single operation. We purchased our hedge fund management business
in mid-2001, but we decided to liquidate such funds. Our website has been in
existence since 1995. In 2004, we acquired a second broker-dealer,
EquityStation, which has been in operation since mid 1999. 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 to evaluate our business and
prospects based on our historical results.
-10-
WE HAVE HAD SUBSTANTIAL LOSSES SINCE INCEPTION
Prior to 2003, the Company had sustained substantial losses in each year since
its inception due to ongoing operating expenses and a lack of revenues
sufficient to offset those 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 involved considerable expense. Although we had net
income of $2,774,435 for the year ended December 31, 2004 and net income of
$311,415 for the year ended December 31, 2003, we incurred a net loss of
$2,235,298 for the year ended December 31, 2002 and prior years had even larger
net losses. The profit generated in 2004, was largely the result of debt
forgiveness on our $1.5 million dollar loan which is non-recurring. As of
December 31, 2004, we had an accumulated deficit of $20,815,806.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 continue to generate significant additional revenue to maintain our
recent profitability and generate sufficient working capital to fund our planned
spending. Even if we do maintain profitability, we may not be able to increase
profitability on a quarterly or annual basis. If we do not increase our
profitability, the market price for our common stock may further decline.
Obtaining future financing may be costly and could 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 adversely affected, and we could be forced to
curtail our operations or sell part or all of our assets.
WE MAY NEED TO RAISE ADDITIONAL FUNDS. THESE FUNDS MAY NOT BE AVAILABLE WHEN WE
NEED THEM.
Based on our current spending plans and our projected working capital, 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 attempt 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, if 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.
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 past 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 of these risks, revenues and earnings may vary significantly from
quarter to quarter and from year to year. We are much smaller and have much less
capital than many of our competitors in the securities industry. Accordingly, we
could be impacted by these risks to a larger degree. In the event of a market
downturn our revenues would likely decline and, if we were unable to reduce
expenses at the same pace, our profit margins would quickly erode. Our business
could be adversely affected in many other ways, including those described below.
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 in general, 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 may decline and our operations could be adversely
affected.
-11-
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, a downturn in those
markets could result in losses from a decline in the value of such 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 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.
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
accurately 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 risks requires, among other things, policies and procedures
to properly record and verify a large number of transactions and events. We
cannot assure 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 are able to evaluate and manage the market, credit and other
risks to which we are exposed. Nonetheless, 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 which 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.
-12-
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.
WE MAY HAVE DIFFICULTY RETAINING OR RECRUITING OUR INDEPENDENT CONTRACTORS
vFinance Investments is dependent upon the independent contractor model for our
retail brokerage business. As such, approximately 90% of our retail registered
representatives are independent contractors. We are exposed to the risk that a
large group of independent contractors leave the firm or decide to affiliate
with another firm and that we are unable to recruit suitable replacements. A
loss of a large group of our independent contractors could have a material
adverse impact on our ability to generate revenue in the retail brokerage
business.
WE MAY HAVE DIFFICULTY EFFECTIVELY MANAGING OUR GROWTH.
Over the past several years, we have experienced significant growth in our
business activities through a variety of transactions. We expect our business to
continue to grow through similar transactions as well as organically. Future
growth through mergers, acquisitions and other such transactions 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 as well as facilities. We cannot assure 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 to intensify in the future.
Many of our competitors have significantly greater financial, technical,
marketing and other resources than we do. They may 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, not to carry directors and officer's
liability insurance or policies with lower limits, and to become insolvent. Each
of these factors increases the likelihood that an underwriter of 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 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 fail to appropriately reserve, our financial condition may be materially
adversely affected.
OUR DIRECTORS AND EXECUTIVE OFFICERS CONTROL APPROXIMATELY 30% OF OUR COMMON
STOCK AND MAY HAVE INTERESTS DIFFERING FROM THOSE OF OTHER STOCKHOLDERS.
At December 31, 2004, our directors and executive officers controlled
approximately 30% of our outstanding common stock, directly as stockholders and
indirectly through control relationships with other stockholders. There is no
supermajority vote in our Certificate of Incorporation. These directors and
executive officers, if acting together, would be able to significantly 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 shareholders' 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 a large part on:
- The success of our advertising and promotional efforts;
- An increase in the number of users and page views of our website; and
- The ability to continue to provide a website and services useful to our
clients.
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,
lead generation and data. 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.
-14-
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:
- Effectively use new technologies;
- Adapt our services to emerging industry or regulatory standards; or
- 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 occur:
- Human error;
- Subsystem, component, or software failure;
- A power or telecommunications failure;
- An earthquake, fire, or other natural disaster or other act of God;
- Hacker attacks or other intentional acts of vandalism; or
- Terrorists acts 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 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 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.
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:
- Limited release of the market prices of our securities;
- Limited news coverage;
- Limited interest by investors in our securities;
- Volatility of our stock price due to low trading volume;
- Increased difficulty in selling our securities in certain states due to "blue
sky" restrictions; and
- Limited ability to issue additional securities or to secure additional
financing.
-15-
IF OUR COMMON STOCK IS SUBJECT TO PENNY STOCK RULES, A STOCKHOLDER MAY HAVE
GREATER DIFFICULTY SELLING SHARES.
The Securities Enforcement and Penny Stock Reform Act of 1990 applies to stocks
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 and our subsidiaries' other key
executives, including Timothy E. Mahoney, our Chairman and Chief Operating
Officer, 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.
OUR OPERATING BROKER-DEALER SUBSIDIARIES EXTEND CREDIT TO THEIR CLIENTS AND ARE
SUBJECT TO RISKS AS A RESULT.
Our broker dealers, vFinance Investments and EquityStation clear all
transactions for customers on a fully disclosed basis with their clearing
brokers, NFS, Jefferies and Merrill Lynch, respectively. These clearing brokers
carry and clear all customer securities accounts. A limited portion of the
customer securities activities for both broker dealers 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 held could fall below the amount borrowed
by clients. If margin requirements are not sufficient to cover losses, the
broker dealers may be required to sell or buy securities at prevailing market
prices and incur losses to satisfy its client obligations.
-16-
WE MAY 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 POTENTIAL 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.
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. The Company owns the following federally
registered marks: vFinance, Inc.(R), vFinance.com, Inc.(R), and AngelSearch(R).
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 the inherent difficulty in controlling the ultimate
destination or security of software or other data transmitted on it.
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:
- Enforce our intellectual property rights;
- Determine the validity and scope of the proprietary rights of others; or
- 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 in one or more
series and to fix the rights, preferences, privileges and restrictions in each
series of the preferred stock, including:
- Dividend rights;
- Conversion rights;
- Voting rights, which may be greater or lesser than the voting rights of the
common stock;
- Rights and terms of redemption;
- Liquidation preferences; and
- Sinking fund terms.
In connection with the merger with Colonial Direct Financial Group, Inc., the
Company issued 122,500 shares of Series A Convertible Preferred Stock and 50,000
shares of Series B Convertible Preferred Stock which were, during 2002,
subsequently converted into shares of the Company's common stock.
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 the Company and could have
the effect of delaying, deferring or preventing a change in control of the
Company. We have no current plans to issue any additional preferred stock in the
next twelve months. Although the issuance of preferred stock may be necessary in
order to raise additional capital.
-17-
ADDITIONAL DILUTION AS A RISK TO STOCKHOLDERS.
As of December 31, 2004, the Company had 39,571,134 shares of common stock
outstanding, options to purchase a total of 10,538,214 shares of common stock
and warrants to purchase a total of 8,096,422 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 the Company.
ITEM 2. DESCRIPTION OF PROPERTY.
The Company leases office space in four locations. The following chart provides
information related to these lease obligations:
Office Location Approximate Expiration
Square Footage Lease Rental Date
--------------------------------------------------------------------------------
3010 N. Military, Boca Raton, FL 15,756 $ 501,130 2/28/2009
880 Third Ave., New York, NY 3,098 $ 182,520 6/30/2008
131 Gaither Drive, Mount Laurel, NJ 1,400 $ 19,600 7/31/2006
1 Revmont Drive, Shrewsbury, NJ 1,249 $ 27,659 10/31/2005
Our corporate headquarters are located at 3010 North Military Trail, Boca Raton,
Florida 33431, where Colonial Direct Financial Group, Inc. leased approximately
15,750 square feet. The Company terminated the original lease and entered into a
new lease in January 2003, as amended on October 31, 2003 and March 26, 2004.
The January 2003 lease reduced the size of the leased space to approximately
9,877 square feet. On November 12, 2004, the Company entered into a new
amendment in which the Company expanded the size of its premises to include an
additional 5,879 rentable square feet of space effective January 1, 2005 (the
"effective date").As of the effective date, the lease was amended such that the
premises shall be deemed to contain a total of 15,756 rentable square feet. The
lease expiration date was also extended to February 28, 2009.
On December 15, 2004, we entered into a new lease at 880 Third Avenue, New York,
New York to replace our two previous leases in the same building which expired
on December 31, 2004. We now have offices on the twelfth floor with an annual
rental of $188,520 for approximately 3,098 square feet. The lease expires on
June 30, 2008.
On August 1, 2004, the Company entered into a lease in Mt. Laurel , New Jersey.
The opening of this office was part of the Company's disaster recovery plan
implemented in order to be able to provide our clients with uninterrupted
service. The lease is for approximately 1,400 square feet with an annual rental
of $19,600 and expires on July 31, 2006.
On September 4, 2003, we entered into a lease for our Shrewsbury, New Jersey
office. The lease is for approximately 1,249 square feet with an annual rental
of $27,659 and expires October 31, 2005.
We consider the facilities of our company and our subsidiaries to be reasonably
insured and adequate for the foreseeable needs of our company and its
subsidiaries.
ITEM 3. LEGAL PROCEEDINGS.
From time to time the Company, and/or one of its subsidiaries, is 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 and EquityStation involve 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, the Company and/or its subsidiaries may be
parties to other legal proceedings and regulatory inquiries, the outcome of
which, either singularly 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 the
Company and/or its subsidiaries. The following is a brief summary of certain
matters pending against or involving the Company and its subsidiaries.
-18-
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. A determination has been made to
liquidate the funds. The SEC is conducting a non-public investigation relating
to Critical Infrastructure LP, Critical Investments and Critical Advisors. The
Company is cooperating with this investigation. Critical Investments and
Critical Advisors changed their names to vFinance Investors, LLC and vFinance
Advisors, LLC, respectively, subsequent to the acquisition.
On August 14, 2002, Henry S. Snow and Sandra L. Snow filed a complaint against
Colonial Direct and vFinance, Inc. in the Circuit Court of the 15th Judicial
Circuit in Palm Beach County, Florida. The claim alleges "Breach of Contract"
and "Unjust Enrichment" and seeks damages of $250,000 plus interest and court
costs. It is alleged that Colonial Direct defaulted on a Promissory Note in the
principal amount of $250,000. The Company believes their claim is without merit
and is vigorously defending the action.
On October 23, 2002, Henry Shoemaker, III, filed a claim with the NASD against
First Level Securities, now known as vFinance Investments, Inc., stating among
other things, that there was a breach of fiduciary duties resulting in a loss of
$570,000. This matter went to the arbitration panel during 2004 and Mr.
Shoemaker was awarded $15,000. Mr. Shoemaker filed an action in the Parish of
Orleans requesting that the arbitration be vacated. vFinance Investments filed a
motion to remove the matter to Federal Court. Federal Court denied his request
to vacate the arbitration. Mr. Shoemaker then appealed to Federal Courts ruling
to the United States Court of Appeal for the 5th Circuit. This matter is still
pending.
On January 12, 2003, MP 830 Third Avenue LLC ( the Landlord), filed a claim
against First Colonial, vFinance, Inc. and vFinance Investments Inc. in the
Supreme Court of the State of New York, alleging the abandonment of leased
facilities and seeking payment of the related rent. The lease was for a term of
seven years expiring on December 31, 2006. First Colonial allegedly ceased
paying rent as of July 1, 2002. After applying First Colonial's security deposit
of $200,000, the Landlord is seeking $59,868 plus any further rent due until
such time as they can successfully lease the premises at a similar rate. This
matter was settled on December 6, 2004 in the amount of $100,000.
On April 15, 2003, Ms. Madeline Moore filed a claim with the NASD against
vFinance Investments, Inc. in the amount of $150,527 claiming a breach of
fiduciary duties. This matter was settled on February 27, 2004 in the amount of
$125,000.
On October 17, 2003, we were advised by the staff of the SEC that it intended to
recommend that the SEC institute enforcement proceedings against vFinance
Investments and one of its former employees. The SEC claims that vFinance
Investments and its former employee failed reasonably to supervise the alleged
illegal trading activities over a period of approximately two months of one of
our broker/dealer's former securities traders with respect to one publicly
traded security that resulted in vFinance Investments earning $11,000 in
commissions related to that one security over the two month period. As of
December 31, 2004, the Company has included an accrual of $50,000 for estimated
expenses. On March 17,2005 we were advised by a member of the staff of the SEC
that the SEC had accepted our offer to settle the matter. Pursuant to the terms
of the settlement, vFinance Investments is required to make its first payment of
the $50,000 penalty ($16,667) within 30 days of the entry of the Order. In
addition, the Company will need to retain, within 60 days of the date of the
Order, an independent consultant to conduct a review of vFinance's existing
procedures regarding the supervision of traders to ensure that they are
adequate. The Company believes that this matter will not have a material adverse
affect on its business and operations.
On November 13, 2003, UBUY Holdings, Inc., f/k/a E-PAWN.COM, Inc., and Steven
Bazuly, for and on behalf of all of the shareholders of UBUY Holdings, Inc.
filed an amended complaint for damages and consequential damages against
vFinance Investments, Inc. and approximately 60 other defendants in the United
States District Court for the Southern District of Florida stating, among other
things, that there were violations of certain securities rules and regulations.
The Company has not yet been served with this complaint, but in the event it is,
the Company believes that their claim is without merit and will vigorously
defend this action.
On March 15, 2004 Joseph & Joan Barr filed a claim with the NASD against
Pittsford Capital Markets, vFinance Investments, Inc. and others, claiming that
VFIN was the successor firm to Pittsford Capital Markets and alleging, among
other things, that in 1998 he purchased Private Placements that were unsuitable.
The claim alleged damages of $700,000. The Company believes their claim is
without merit and is vigorously defending the action.
-19-
On or about February 28, 2005, Knight Equity Markets, L.P. ("Knight") commenced
an arbitration proceeding with the National Association of Securities Dealers
Inc. by filing a Statement of Claim against vFinance Investments, Inc., and one
of vFinance's registered representatives, Steven Soskin. The matter is titled
Knight Equity Markets, L.P. v. vFinance Investments, Inc., and Steven Soskin,
NASD Case No. 05-01069. Knight alleges that vFinance and Mr. Soskin were engaged
in a fraudulent scheme to buy various stocks at ex-dividend prices that vFinance
and Mr. Soskin knew were subject to dividends. Knight further alleges that
vFinance received $6.5 million in dividends that it was not otherwise entitled
to receive. Knight seeks a declaration that vFinance was not entitled to receive
the dividends, $6.5 million in damages, attorneys fees, costs and an unspecified
amount of punitive damages. The matter is currently in the pleadings phase. .
The primary customer involved in the subject stock purchases has now filed an
action in the Supreme Court for the State of New York against Knight seeking a
Declaratory Judgment and Equitable Relief with regard to the subject dividends.
This action seeks a declaratory judgment that the customer is the rightful owner
of the $5.8 million in dividends. The Company believes that Knight's claim is
without merit, and the Company will vigorously defend the action.
We are engaged in a number of other legal proceedings incidental to the conduct
of our business. These claims aggregate a range of $28,000 to $260,000.
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
fiscal year 2004.
-20-
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
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."
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:
High Low
2003
1st Quarter 0.17 0.05
2nd Quarter 0.26 0.06
3rd Quarter 0.20 0.11
4th Quarter 0.36 0.14
2004
1st Quarter 0.45 0.22
2nd Quarter 0.37 0.31
3rd Quarter 0.21 0.19
4th Quarter 0.34 0.17
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
40,126,133 shares were issued and outstanding as of March 28, 2005. We are
authorized to issue up to 2,500,000 shares of preferred stock, none of which are
currently issued or outstanding. The number of stockholders of record for the
common stock as of March 28, 2004 is 302.
We have not paid any cash dividends since inception, and we do not anticipate
paying any cash dividends in the foreseeable future.
Our transfer agent is North American Transfer Co., Freeport, New York 11520.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION OR PLAN OF
OPERATIONS
CRITICAL ACCOUNTING POLICIES
Financial Reporting Release No. 60, 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
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.
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.
-21-
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.
Primarily all of the equity instruments are received from small public
companies. 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, 2004 and 2003, the Company recognized
$419,365 and $777,669 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.
As of December 31, 2004, 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 through 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, 2004 and 2003.
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 firms provides the clearing
and depository operations for our proprietary securities transactions. These
activities may expose our broker dealer to off-balance-sheet risk in the event
that customers do not fulfill their obligations with the clearing broker; in
this event, our broker dealers have agreed to indemnify our clearing firms.
NET CAPITAL REQUIREMENT. As of December 31,2004, the minimum amount of net
capital required to be maintained by vFinance Investments was $1,000,000. The
minimum amount of capital required to be maintained by EquityStation was
$100,000 pursuant to NASD requirements. However, EquityStation has agreed to
maintain a minimum of $250,000 in net capital pursuant to its agreement with it
clearing agent, Merrill Lynch.
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.
STOCK BASED COMPENSATION. Upon the consummation of an advisory, consulting,
capital or other similar transactions the Company may distribute equity
instruments or proceeds from the sale of equity instruments to its employees.
These distributions are made at the Company's discretion on a case by case basis
as determined by the role of the employee and the nature of the transaction. At
December 31, 2004 and 2003, no amounts were owed to employees of the Company in
connection with equity investments received as compensation.
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.
-22-
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.
YEAR ENDED DECEMBER 31, 2004 COMPARED TO THE YEAR ENDED DECEMBER 31, 2003
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 trading 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 continues to face increasing competition from
commercial banks and other large financial services firms as they begin to offer
more investment banking and financial services traditionally 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
incurring additional expenses to comply with increased regulation from the
Sarbanes-Oxley Act and the securities industry, particularly in the
over-the-counter markets. 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 will continue executing its plan for growth and profitability by
investing in its core businesses and through merger and acquisition. Due to the
many complexities of purchasing companies, the Company cannot predict its
success in executing this strategy. The Company will leverage the substantial
investments in technology and infrastructure made in 2004 by adding independent
contractors to its retail brokerage and investment banking businesses. The
Company will expand its institutional sales business by focusing on providing a
full range of investment, research and trading services to the Hedge Fund
Industry. Furthermore, the Company plans to find opportunities to expand its
newly acquired emerging markets fixed income securities trading business.
Results of Operations
During 2004, the Company's revenues grew by 7.6% and continued its profitability
from 2003, compared to the significant net losses incurred in prior years. The
Company achieved operating profitability in each fiscal quarter even though the
financial markets in fiscal 2004 were volatile. During the first quarter, net
income was strong due to favorable market conditions, the recognition of a gain
of $1,500,000 for the forgiveness of indebtedness, the recognition of a tax
benefit in the amount of $400,000 and income received from its clearing agent in
the amount of $200,000 which reduced transaction costs; this was offset by a
one-time conversion premium expense in the amount of $231,625. Markets softened
during the second quarter but the Company achieved profitability. The results
for the third quarter were further impacted by continued unfavorable market
conditions. In the fourth quarter, market conditions strengthened in the retail
brokerage segment and the Company realized a gain of $775,489 on the sale of
securities; this was offset by the reversal of the $400,000 tax benefit realized
in the first quarter.
-23-
The following table and discussion summarizes the changes in the major revenue
and expense categories for the past two years.
Years ended December 31,
------------------------ ----------- ---------
2004 % of 2003 % of
Revenues Revenues
------------- ---------- ----------- ---------
Revenues:
Commissions - agency $ 14,571,878 55% $13,372,875 55%
Trading Profits 5,156,842 20% 4,533,933 19%
Success fees 3,224,973 12% 3,549,453 15%
Consulting and retainers 370,829 1% 468,168 2%
Other brokerage related
income 2,567,489 10% 2,085,313 9%
Other 437,140 2% 468,724 2%
------------- ---------- ----------- ---------
Total revenues 26,329,151 100% 24,478,466 100%
------------- ---------- ----------- ---------
Cost of revenues:
Commissions 14,624,914 55% 13,234,856 54%
Clearing and transaction
costs 1,030,114 4% 934,884 4%
Success 1,346,272 5% 1,792,760 7%
Consulting and retainers 224,916 1% 218,807 1%
Other 4,581 0% 16,138 0%
------------- ---------- ----------- ---------
Total cost of revenues 17,230,797 65% 16,197,445 66%
------------- ---------- ----------- ---------
Gross profit 9,098,354 35% 8,281,021 34%
------------- ---------- ----------- ---------
Other expenses:
General and administrative 6,686,372 25% 6,776,221 28%
Professional fees 157,370 1% 324,712 1%
Provision for bad debts 85,567 0% 148,672 1%
Legal litigation 399,647 2% 327,499 1%
Depreciation and
amortization 147,804 1% 118,619 0%
Amounts forgiven under
forgivable loans 80,161 0% 152,902 1%
Stock based compensation 5,294 0% 17,714 0%
------------- ---------- ----------- ---------
Total other expenses 7,562,215 29% 7,866,339 32%
------------- ---------- ----------- ---------
------------- ---------- ----------- ---------
Income from operations 1,536,139 6% 414,682 2%
------------- ---------- ----------- ---------
Gain on forgiveness of debt 1,500,000 6% - 0%
Interest and dividend income
(expense) (221,704) -1% (103,267) 0%
------------- ---------- ----------- ---------
Pre-Tax Net Income 2,814,435 11% 311,415 1%
------------- ---------- ----------- ---------
Federal Income Taxes (40,000) 0% - 0%
------------- ---------- ----------- ---------
Net Income $ 2,774,435 11% $ 311,415 1%
============= ========== =========== =========
Total revenues were $26,329,151 for the year ended December 31, 2004 as compared
to $24,478,466 for the year ended December 31, 2003, an increase of $1,850,685,
or 7.6 %. The increase in revenues was primarily related to Brokerage and
Trading which increased $2,304,088, or 11.52% from the prior year, partially
offset by a decrease in Investment Banking which decreased $421,819, or 10.50%,
from the prior year. Overall, the Company believes that the increase in its
operating revenues was a result of more favorable market conditions than in the
prior year, the Global acquisition and expense reductions.
Cost of revenues was $17,230,797 for the year ended December 31, 2004 as
compared to $16,197,445 for the year ended December 31, 2003, an increase of
$1,033,352, or 6.4%. The increase was primarily due to the increase in
commission expense corresponding to the increased revenues.
Gross profit was $9,098,354 for the year ended December 31, 2004 as compared to
$8,281,021 for the year ended December 31, 2003, an increase of $817,333, or
9.9%. Gross profit margin for the year ended December 31, 2004 was 35% as
compared to 34% for the year ended December 31, 2003. The increase in gross
profit margin was due to an increase of $602,440 in realized profits from the
sale of securities compared to the prior year with no corresponding expense and
the $200,000 provided by NFS to assist the Company with transition costs related
to the conversion from CSC to NFS.
General and administrative expenses were $6,686,372 for the year ended December
31, 2004 as compared to $6,776,221 for the year ended December 31, 2003, a
decrease of $89,849, or 1.3%. This decrease was primarily attributable to cost
saving measures that were implemented throughout the organization.
Professional fees were $157,370 for the year ended December 31, 2004 as compared
to $324,712 for the year ended December 31, 2003, a decrease of $167,342, or
51.5%. The decrease was primarily due to decreases in accounting, legal and
consulting fees largely attributable to the Company's increased utilization of
its internal professional staff.
-24-
Provision for bad debts was $85,567 for the year ended December 31, 2004 as
compared to $148,672 for the year ended December 31, 2003, a decrease of
approximately $63,105, or 42.4%. The decrease was primarily due to a significant
reduction in retainer fees, which often prove difficult to collect. 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.
Legal litigation was $399,647 for the year ended December 31, 2004 as compared
to $327,499 for the year ended December 31, 2003, an increase of $72,148, or
22%. As is typical in the industry, customers make claims regarding the
Company's actions and the Company defends itself vigorously against such claims.
The Company's cost of defending itself varies year-to-year depending on the
volume of claims which are in process at any given time.
Depreciation and amortization was $147,804 for the year ended December 31, 2004
as compared to $118,619 for the year ended December 31, 2003, an increase of
$29,185 or 25%. The increase is primarily due to the Company's investment in new
systems and technologies as a strategy to introduce new services that exceed
compliance requirements and offer a comprehensive business solution thereby
increasing productivity while reducing regulatory risk.
The amount forgiven under forgivable loans was $80,161 for the year ended
December 31, 2004 as compared to $152,902 for the year ended December 31, 2003,
a decrease of $72,741, or 48%. This decrease was attributable to the fact that
several years ago the Company discontinued its practice of providing forgivable
loans to brokers as part of its recruitment efforts. Accordingly, there have
been no additions to the outstanding balance and the remaining balance is simply
being amortized over time.
Stock based compensation was $5,294 for the year ended December 31, 2004 as
compared to $17,714 for the year ended December 31, 2003 a decrease of $12,420,
or 70%. This amount primarily represents the amortization of deferred
compensation to an outside consultant who was granted options from the Company
in return for his services. The amount related to this consultant was fully
recognized as of March 31, 2003. In addition, during January 2003, the Company
granted warrants to its landlord related to the renegotiation of its lease and
this amount is being amortized over the life of the lease.
Income from operations amounted to $1,536,139 for the year ended December 31,
2004 as compared to $414,682 for the year ended December 31, 2003, an increase
of $1,121,457. The increase was primarily due to the higher revenues and the
resulting gross profit and reduced operating expenses.
Income from forgiveness of indebtedness amounted to $1,500,000 for the year
ended December 31, 2004, which was the result of NFS agreeing to pay down the
UBS credit facility.
Interest expense, net of interest and dividend income, was $221,704 for the year
ended December 31, 2004 as compared to $103,267 for the year ended December 31,
2003, an increase in the amount of $118,437. This increase was primarily
attributable to the amount recorded as beneficial conversion premium on the SBI
note.
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 and volume of the stock market and the
capital markets.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities for the year ended December 31, 2004
was $1,678,281 compared to $1,484,387 for the year ended December 31, 2003 an
increase of $193,894. The increase in cash provided from operating activities
is primarily attributable to improvement in net income offset by changes in
working capital. The Company's net income for fiscal year 2004 was $2,774,435
versus $311,415 for fiscal year 2003. Net income in 2004 included a non-cash
gain of $1,500,000 for forgiveness of debt.
Net cash used in investing activities for the year ended December 31, 2004 was
$394,090 as opposed to $57,734 for the year ended December 31, 2003. The primary
reason for the increase is due to investments in technology the Company made to
introduce new services to our existing clients and our affiliates and to ensure
that the firm was positioned to continuously service in clients in the event of
either a manmade or natural disaster. As part of that investment, the Company
revamped its entire data and communications infrastructure. The Company has
implemented a fully operational disaster recovery plan that features fully
redundant data center in Mt. Laurel, New Jersey. In order to finance these
capital expenditures, the Company entered into lease agreements (discussed below
under cash provided by financing). The increase in cash used in investing
activities was offset by the cash received as part of the acquisition of
EquityStation.
Net cash provided by financing activities for the year ended December 31, 2004
was $188,303 as opposed to $130,000 for the year ended December 31, 2003. The
increase is primarily due to the Company entering into certain capital lease
agreements to finance its investment in information technology equipment.
The Company believes that its cash on hand is sufficient to meet its working
capital requirements over the next 12 months. However, the Company may seek
additional debt or equity financing in order to carry out its long-term business
strategy. Such funding may be a result of bank borrowings, public offerings,
private placements of equity or debt securities, or a combination thereof.
-25-
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
2005 $ 828,484
2006 797,233
2007 764,543
2008 599,654
2009 85,897
----------
TOTAL $3,075,811
==========
Total rent expense under operating leases, including space rental, totaled
approximately $690,414 and $700,464 for the years ended December 31, 2004 and
2003.
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
Subsequent to December 31, 2004, the Company came to an agreement in principle
with The Center for Innovative Entrepreneurship ("CIE"), a nonprofit
organization, to develop www.vfinance.com as a platform for academic-quality
research on entrepreneurial activities and to produce the Company's proprietary
vFinance Entrepreneurial Confidence Index ("VECI") and sector research reports,
and to provide educational and informational services to entrepreneurs with
start-ups and other early-stage firms. The Company also agreed to enter into a
management services agreement to provide management, administrative and
technical support services for CIE. It is anticipated that the Company and CIE
will enter into definitive documentation evidencing these agreements in April
2005.
-26-
ITEM 7. FINANCIAL STATEMENTS.
vFinance, Inc.
Consolidated Financial Statements
Years ended December 31, 2004 and 2003
CONTENTS
Report of Independent Registered Public Accounting Firm.................. F-1
Audited Financial Statements
Consolidated Balance Sheet............................................... F-2
Consolidated Statements of Operations .................................. F-3
Consolidated Statements of Shareholders' Equity.......................... F-4
Consolidated Statements of Cash Flows.................................... F-5
Notes to Consolidated Financial Statements............................... F-6
-27-
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders
vFinance Inc., & Subsidiaries
We have audited the accompanying balance sheet of vFinance Inc., & Subsidiaries,
as of December 31, 2004 and the related statements of operations, shareholders'
equity and cash flows for the years ended December 31, 2004 and 2003. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. 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 financial statements referred to above present fairly, in
all material respects, the financial position of vFinance Inc., & Subsidiaries,
at December 31, 2004, and the results of its operations and its cash flows for
the years ended December 31, 2004 and 2003, in conformity with accounting
principles generally accepted in the United States.
/s/ Sherb & Co., LLP
Certified Public Accountants
Boca Raton, Florida
March 29, 2005
F-1
vFINANCE, INC.
CONSOLIDATED BALANCE SHEET
December 31, 2004
----------------------
Assets:
Current Assest:
Cash and cash equivalents $ 5,256,308
Due from clearing broker 667,074
Investments in trading securities 916,365
Accounts receivable, net of allowance
for doubtful accounts of $6,014 89,545
Forgivable loans-employees 6,597
Notes receivable-employees 168,702
Prepaid expenses and other current assets 97,908
----------------------
Total current assets 7,202,499
Furniture and equipment, at cost:
Furniture and equipment 905,465
Internal use software 158,500
----------------------
1,063,965
Less accumulated depreciation (565,526)
----------------------
Net furniture and equipment 498,439
Goodwill 1,866,848
Other assets 264,605
----------------------
Total Assets $ 9,832,391
======================
Liabilities and Shareholders' Equity:
Current liabilities:
Accounts payable $ 1,134,148
Accrued payroll 1,568,086
Other accrued liabilities 526,233
Income tax payable 40,000
Securities sold, not yet purchased 67,470
Capital lease obligations 65,355
Other 34,097
----------------------
Total current liabilities 3,435,389
Capital lease obligations, long term 122,948
Shareholders' Equity:
Series A Convertible Preferred Stock $0.01 par
value, 122,500 shares authorized, 0 shares issued
and outstanding -
Series B Convertible Preferred Stock $0.01 par
value, 50,000 shares authorized, 0 shares issued
and outstanding -
Common stock $0.01 par value, 75,000,000 shares
authorized, 39,571,133 issued and outstanding 395,716
Additional paid-in-capital 26,713,557
Deferred compensation (19,411)
Accumulated deficit (20,815,808)
----------------------
Total Shareholders' Equity 6,274,054
----------------------
Total Liabilities and Shareholders' Equity $ 9,832,391
======================
See Accompanying Notes
F-2
vFINANCE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended December 31,
2004 2003
------------------- -------------------
Revenues:
Commissions - agency $ 14,571,878 $ 13,372,875
Trading profits 5,156,842 4,533,933
Success Fees 3,224,973 3,549,453
Consulting and retainers 370,829 468,168
Other brokerage related income 2,567,489 2,085,313
Other 437,140 468,724
------------------- -------------------
Total revenues 26,329,151 24,478,466
------------------- -------------------
Cost of revenues:
Commissions 14,624,914 13,234,856
Clearing and transaction costs 1,030,114 934,884
Success 1,346,272 1,792,760
Consulting and retainers 224,916 218,807
Other 4,581 16,138
------------------- -------------------
Total cost of revenues 17,230,797 16,197,445
------------------- -------------------
Gross profit 9,098,354 8,281,021
------------------- -------------------
Other expenses:
General and administrative 6,686,372 6,776,221
Professional fees 157,370 324,712
Provision for bad debt 85,567 148,672
Legal litigation 399,647 327,499
Depreciation and amortization 147,804 118,619
Amounts forgiven under
forgivable loans 80,161 152,902
Stock based compensation 5,294 17,714
------------------- -------------------
Total other expenses 7,562,215 7,866,339
------------------- -------------------
Income from operations 1,536,139 414,682
Gain on forgiveness of debt 1,500,000 -
Interest and dividend
income (expense) (221,704) (103,267)
------------------- -------------------
Pre-tax Net Income 2,814,435 311,415
Federal income tax (40,000) -
------------------- -------------------
Net Income available to
common shareholders $ 2,774,435 $ 311,415
=================== ===================
Net Income per share:
Basic $ 0.08 $ 0.01
=================== ===================
Weighted average number of common
shares used in computing basic net
income per share 33,773,336 29,609,104
=================== ===================
Diluted $ 0.08 $ 0.01
=================== ===================
Weighted average number of common
shares used in computing diluted net
income per share 35,840,248 29,963,446
=================== ===================
See Accompanying Notes
F-3
vFinance, Inc.
Consolidated Statements of Shareholders' Equity
Preferred Stock Common Stock Additional Paid Deferred Accumulated Shareholders'
in
Shares Amount Shares Amount Capital Common Compensation Deficit Equity
Balance at December 31, 2002 - - 28,351,570 $ 283,520 $ 24,151,798 $ (12,420) $ (23,901,658) $ 521,240
Issuance of shares in conjunction with
share purchase agreement 1,500,000 15,000 115,000 130,000
Amortization of Deferred Compensation 12,420 12,420
Acquisition of JSM 80,000 80,000
Issuance of stock purchase warrants in
conjunction with lease agreement - 30,000 (30,000) -
Amortization of Deferred Compensation 5,295 5,295
Net Income 311,415 311,415
------------------------------------------------------------------------------------------
Balance at December 31, 2003 - - 29,851,570 $ 298,520 $ 24,376,798 $ (24,705) $ (23,590,243) $1,060,370
Partial conversion of promissory note 3,344,298 33,443 688,057 721,500
Conversion Premium on promissory note 231,625 231,625
Imputed Interest write off (128,438) (128,438)
Amortization of Deferred Compensation 5,294 5,294
Partial conversion of promissory note 100,000 1,000 27,500 28,500
Issuance of shares in conjunction with
acquisition of EquityStation Inc. and
Global Partners 6,275,265 62,753 1,518,015 1,580,768
Net Income 2,774,435 2,774,435
------------------------------------------------------------------------------------------
Balance at December 31, 2004 - - 39,571,133 $ 395,716 $ 26,713,557 $ (19,411) $ (20,815,808) $6,274,054
==========================================================================================
See Accompanying Notes
F-4
vFINANCE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31,
-------------------------------------------
2004 2003
-------------------- --------------------
OPERATING ACTIVITIES
Net income $ 2,774,435 $ 311,415
Adjustments to reconcile net income to
net cash provided by operating activities:
Non-cash fees received (419,365) (777,669)
Gain on forgiveness of debt (1,500,000) -
Depreciation and amortization 147,804 118,619
Provision for doubtful accounts 79,817 146,672
Non-cash compensation 5,492 395,961
Conversion premium expense 231,625 -
Accretion of debt discount 18,349 73,393
Unrealized loss (gain) on investments, net 211,854 80,348
Unrealized loss (gain) on warrants (41,194) 43,292
Amount forgiven under forgivable loans 80,161 152,902
Stock based compensation 5,294 17,714
Changes in operating assets and liabilities:
Accounts receivable 26,196 (39,638)
Due from clearing broker (297,984) (72,995)
Notes receivable - employees 14,527 (17,365)
Investments in trading securities 328,880 497,932
Other assets and liabilities (39,440) (103,471)
Accounts payable and accrued liabilities 68,140 643,066
Securities, sold not yet purchased (16,310) 14,211
-------------------- --------------------
Net cash provided by operating activities 1,678,281 1,484,387
INVESTING ACTIVITIES
Cash acquired in acquisition 56,221
Purchase of capital lease equipment (204,583) -
Purchase of equipment (245,728) (57,734)
-------------------- --------------------
Net cash used in investing activities (394,090) (57,734)
FINANCING ACTIVITIES
Proceeds from capital lease 204,583 -
Payments of capital lease (16,280) -
Proceeds from issuance of common stock
related to private placement - 130,000
-------------------- --------------------
Net cash provided by financing activities 188,303 130,000
Increase in cash and cash equivalents 1,472,494 1,556,653
Cash and cash equivalents at beginning of year 3,783,814 2,227,161
-------------------- --------------------
Cash and cash equivalents at end of period $ 5,256,308 $ 3,783,814
==================== ====================
See Accompanying Notes
F-5
vFinance, Inc.
Notes to the Consolidated Financial Statements
1. DESCRIPTION OF BUSINESS
vFinance, Inc. is a holding company engaged in the financial services business
where our strategic focus is on servicing the needs of high net-worth and
institutional investors and high growth companies. Through our principal
operating subsidiary, vFinance Investments, Inc., a licensed broker-dealer, we
provide investment banking, retail and institutional brokerage services in all
50 states and the District of Columbia. The Company also operates a second
broker-dealer, EquityStation, Inc. ("EquityStation") which offers institutional
traders, hedge funds and professional traders a suite of services designed to
enhance their trading by offering services such as trading technology, routing
software, hedge fund incubation, capital introduction and custodial services.
The Company, through its website www.vfinance.com, provides financial
information services to entrepreneurs and venture investors.
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 inter-company accounts have been eliminated
in consolidation.
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.
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". Primarily
all of the equity instruments are received from small public companies. The
Company recognizes revenue for such stock purchase warrants, when received,
based on the Black Scholes valuation model. The revenue recognized related to
the other equity instruments is determined based on available market
information, discounted by a factor reflective of the expected holding period
for those particular equity instruments. For the years ended December 31, 2004
and 2003, the Company recognized $419,365 and $777,669, respectively, of revenue
in connection with the receipt of equity instruments. On a monthly basis the
Company recognizes unrealized gains or losses in its statement of operations
based on the changes in value of equity instruments. Realized gains or losses
are recognized in the statement of operations when the related equity instrument
is sold.
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 equity instruments received from a private
company.
Upon the consummation of an advisory, consulting, capital or other similar
transactions the Company may distribute equity instruments or proceeds from the
sale of equity instruments to its employees. These distributions are made at the
Company's discretion on a case by case basis as determined by the role of the
employee and the nature of the transaction. At December 31, 2004 and 2003, no
amounts were owed to current employees of the Company in connection with equity
investments received as compensation.
As of December 31, 2004, 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.
F-6
vFinance, Inc.
Notes to Consolidated Financial Statements (continued)
2. SIGNIFICANT ACCOUNTING POLICIES AND OTHER MATTERS (CONTINUED)
Revenue Recognition (continued)
The Company sells two types of listings through 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, 2004 and 2003.
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.
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 notes receivable balances are reviewed monthly to determine the
collectibility of such receivables. The Company records both a specific and
general reserve on such balances as deemed appropriate.
Investments
Investments are classified as investments in trading securities and are held for
resale in anticipation of short-term market movements or until such securities
are registered or are otherwise unrestricted. Investments in trading securities
include both trading account assets and equity instruments which the Company has
received as part of its compensation for investment banking services. At
December 31, 2004, investments consisted of common stock, corporate bonds and
common stock purchase warrants held for resale.
Trading account assets, consisting of marketable equity securities, are stated
at fair value. 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. Realized gains or losses
are recognized in the statement of operations as trading profits when the equity
instruments are sold.
As mentioned above, the Company periodically receives equity instruments which
include stock purchase warrants and common and preferred stock from companies as
part of its compensation for investment-banking services. 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, although, 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 equity instruments based on the fair value of the stock at the time
equity instruments are granted and for stock purchase warrants based on the
Black-Scholes valuation model. 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, discounted
by a factor to address the remaining period which the equity instrument is
restricted as to resale.
Net unrealized gains related to investments in trading securities as of December
31, 2004, and 2003, aggregated $170,660 and $123,640, respectively. Net realized
gains related to investments in trading securities as of December 31, 2004 and
2003 aggregated $1,087,741 and $485,302, respectively.
F-7
vFinance, Inc.
Notes to Consolidated Financial Statements (continued)
2. SIGNIFICANT ACCOUNTING POLICIES AND OTHER MATTERS (CONTINUED)
Investments in trading securities and securities sold, not yet purchased,
consist of trading and investment securities at market values at December 31,
2004, as follows:
Owned Sold, not yet purchased
---------------------------------------------------------------
Corporate Stocks $ 787,876 $ 67,470
Warrants 128,489
---------------------------------------------------------------
Total $ 916,365 $ 67,470
===============================================================
At December 31, 2004, restricted equity securities had an aggregate fair value
of $96,139.
Securities Transactions
Proprietary securities transactions in regular-way trades are accrued and
recorded on the trade date, as if they had settled. Profit and loss arising from
all securities and commodities transactions entered into for the account and
risk of the Company are recorded on a trade date basis. Customers' securities
and commodities transactions are reported on a settlement date basis with
related commission income and expense reported on a trade date basis.
Amounts receivable and payable for securities transactions that have not reached
their contractual settlement date are recorded net on the balance sheet.
Financial Instruments with Off-Balance Sheet Risk
The securities transactions of the Company's customers are introduced on a fully
disclosed basis with a clearing broker-dealer. The Company holds no customer
funds or securities. The clearing broker-dealer is responsible for execution,
collection of and payment of funds, and receipt and delivery of securities
relative to customer transactions. Off-balance sheet risk exists with respect to
these transactions due to the possibility that customers may be unable to
fulfill their contractual commitments wherein the clearing broker-dealer may
charge any related losses to the Company. The Company seeks to minimize this
risk through procedures designed to monitor the creditworthiness of its
customers and to ensure that customer transactions are executed properly by the
clearing broker-dealer.
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") and SFAS 148 ACCOUNTING FOR STOCK BASED COMPENSATION
TRANSITION AND DISCLOSURE, AN AMENDMENT OF 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.
Fair Value of Financial Instruments
The fair values of the Company's financial instruments, which includes cash and
cash equivalents, accounts and notes 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 insured financial institutions.
F-8
vFinance, Inc.
Notes to Consolidated Financial Statements (continued)
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, 2004 and 2003, totaled $147,804 and $118,619,
respectively. Included in Furniture and Equipment is approximately $200,000 of
equipment acquired under capital leases.
Goodwill
The carrying value 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. 144, ACCOUNTING FOR THE IMPAIRMENT OR DISPOSAL OF LONG-LIVED
ASSETS ("FAS 144"). Among other factors considered in such evaluation is the
historical and projected operating performance of business operations, the
operating environment and business strategy, competitive information and market
trends. As a result of the acquisition of EquityStation and certain assets of
Global in November 2, 2004, the Company recorded goodwill in the amount of
$1,446,848. The Company had goodwill of $1,866,848 and $420,000 as of December
31, 2004 and December 31, 2003, respectively, which constituted approximately
19% and 7%, respectively, of our total assets. Management evaluates this balance
on an ongoing basis and believes that there has not been an impairment of its
Goodwill or long-lived assets as of December 31, 2004.
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.
Statement of Cash Flows
Supplemental disclosure of cash flow information:
Non-cash items affecting the statement of cash flows are as follows:
2004 2003
------------------ ----------------
Cash paid for interest during the year $ 34,008 $ 125,717
Non-cash items affecting investing and
financing activities:
Conversion Premium expense $ 231,625 $ -
================== ================
Imputed Interest $ 18,349 $ -
================== ================
Common Stock issued for payment of Note $ 750,000 $ -
================== ================
Common Stock issued for Acquisition $ 1,580,768 $ -
================== ================
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.
Forgivable Loans
In order to remain competitive in the marketplace, the Company previously
granted forgivable loans to certain employees. The terms of the loans ranged
from two to five years with scheduled maturity dates from 2002 to 2005. For each
year the employee is in good standing with the Company, the Company forgives a
ratable portion of the loan and charges this amount to compensation expense. If
the employee is terminated, the principal balance is due and payable within 120
days. The loans do not bear interest and interest is not imputed as
collectibility of any such interest would not be probable. As of December 31,
2004, the balance of the forgivable loans was $6,597, which is scheduled for
forgiveness in 2005.
F-9
vFinance, Inc.
Notes to Consolidated Financial Statements (continued)
2. SIGNIFICANT ACCOUNTING POLICIES AND OTHER MATTERS (CONTINUED)
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.
3. ACQUISITIONS
On November 2, 2004, vFinance's wholly-owned subsidiary, vFinance Investments
completed its acquisition of certain assets of Global and 100% of the issued and
outstanding equity securities of EquityStation, all of which were owned by
Level2, a subsidiary of Global. These transactions are subject to the approval
of the National Association of Securities Dealers, Inc.
In accordance with the terms of the acquisition agreements, the Company
delivered into escrow 8,324,690 restricted shares of the Company's common stock,
and warrants to purchase 3,299,728 shares of the Common Stock at a price of
$0.11 per share. All of the shares of EquityStation were also delivered into
escrow. Subject to (a) any indemnification claims under the acquisition
agreements and (b) the financial performance of EquityStation and the business
of Global acquired by vFinance Investments over the periods specified in the
escrow agreement, all or a portion of the Shares and the Warrants will be
distributed to Global and Level2. As determined pursuant to the financial
performance calculation in the escrow agreement, 2,199,425 of the Shares and
871,805 of the Warrants are subject to cancellation in accordance with the terms
of the escrow agreement. When the escrow agreement is terminated, all of the
shares of EquityStation will be distributed to vFinance Investments, and the
holders of the Shares and Warrants will be entitled to certain piggyback
registration rights. The Company also entered into a standstill agreement with
each of Marcos Konig, Harry Konig and Salomon Konig, to provide restrictions on
certain actions for a defined time period.
As remuneration for providing advisory services to Global in connection with the
acquisitions, Scott J. Saunders ("Saunders") received 150,000 restricted shares
of the Common Stock. The shares received by Saunders are not subject to the
escrow agreement, registration rights agreement or standstill agreement.
Goodwill was determined as follows; 6,125,265 common shares issued to Global and
EquityStation, 150,000 common shares issued to Saunders valued at $1,192,300 or
$0.19 per share, 2,427,923 warrants valued at $0.16 per warrant or $388,468
using the Black-Scholes valuation model, and legal fees in the amount of $47,863
for a total purchase price of $1,628,631. The Company acquired net assets of
$181,783 and allocated the difference between the purchase price and the net
assets acquired of $1,446,848 as goodwill.
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 acquired company as part of the purchase price.
The following Pro Forma Combined Financial Statements of Global, EquityStation
and vFinance gives effect to the acquisition of certain assets of Global and
100% of the issued and outstanding equity securities of EquityStation, under the
purchase method of accounting prescribed by Accounting Principles Board Opinion
No. 16, Business Combinations. These pro forma statements are presented for
illustrative purposes only. The pro forma adjustments are based upon available
information and assumptions that management believes are reasonable.
F-10
vFinance, Inc.
Notes to Consolidated Financial Statements (continued)
3. ACQUISITIONS (CONTINUED)
VFINANCE, INC.
Pro Forma Combined Statement of Operations
For the Year Ended December 31, 2004
vFinance Global EquityStation Pro Forma Pro Forma
Partners Adjustments
REVENUE
Commissions $14,571,878 $ 186,402 $1,764,299 $ - $ 16,522,579
Trading Profits 5,156,842 2,868,675 2,489 - 8,028,006
Success Fees 3,224,973 - - - 3,224,973
Consulting and Retainers 370,829 - - - 370,829
Other Brokerage Related
Income 2,567,489 - - - 2,567,489
Other Income 437,140 388,714 2 - 825,856
------------ ------------ ----------- ------------ -------------
26,329,151 3,443,791 1,766,790 - 31,539,732
============ ============ =========== ============ =============
COST OF REVENUES
Commissions 14,624,914 1,675,493 456,037 - 16,756,444
Clearing and Transaction
Costs 1,030,114 674,469 665,853 - 2,370,436
Success 1,346,272 - - - 1,346,272
Consulting and Retainers 224,916 2,760 - - 227,676
Other 4,581 2,363 1,278 - 8,222
------------ ------------ ----------- ------------ -------------
17,230,797 2,355,085 1,123,168 - 20,709,050
============ ============ =========== ============ =============
GROSS PROFIT 9,098,354 1,088,707 643,621 - 10,830,682
------------ ------------ ----------- ------------ -------------
EXPENSES
General and Administrative 6,686,372 1,808,585 802,936 - 9,297,893
Professional Fees 157,370 6,635 260 - 164,265
Provision for Bad Debt 85,567 - - - 85,567
Legal litigation 399,647 94,921 18,414 - 512,982
Depreciation and
Amortization 147,804 18,869 - - 166,673
Amounts Forgiven under
Forgivable Loans 80,161 - - - 80,161
Stock Based Compensation 5,294 - - - 5,294
------------ ------------ ----------- ------------ -------------
7,562,215 1,929,010 821,610 - 10,312,834
------------ ------------ ----------- ------------ -------------
INCOME (LOSS) From Operations 1,536,139 (840,303) (177,988) - 517,848
------------ ------------ ----------- ------------ -------------
Gain on Forgiveness of
Debt 1,500,000 - - - 1,500,000
Interest and Dividend
Income (Expense) (221,704) 3,131 7,520 (211,053)
------------ ------------ ----------- ------------ -------------
PRE TAX NET INCOME (LOSS) 2,814,435 (837,172) (170,468) - 1,806,795
Federal Income Tax (40,000) - - - (40,000)
------------ ------------ ----------- ------------ -------------
NET INCOME (LOSS) Available
to Shareholders $ 2,774,435 $ (837,172) $ (170,469) $ - $ 1,766,795
============ ============ =========== ============ =============
4. NET CAPITAL REQUIREMENT
Both vFinance Investments and EquityStation are subject to the Securities and
Exchange Commission Uniform Net Capital Rule (rule 15c3-1), which requires the
maintenance of minimum net capital and requires that the ratio of aggregate
indebtedness to net capital, both as defined, shall not exceed 15 to 1 (and the
rule of the "applicable" exchange also provides that equity capital may not be
withdrawn or cash dividends paid if the resulting net capital ratio would exceed
10 to 1). At December 31, 2004, vFinance Investments had net capital of
$2,641,131, which was $1,641,131 in excess of its required net capital of
$1,000,000.EquitySation had net capital of $271,121 that was $171,121 in excess
of its required net capital of $100,000.
vFinance Investments' aggregate indebtedness to net capital ratio was to 0.9 to
1 in 2004.Equity Station's aggregate indebtedness to net capital ratio was 0.36
to 1. vFinance Investments and EquityStation qualify under the exemptive
provisions of Rule 15c3-3 under Section (k)(2)(ii) of the Rule, in that they do
not carry security accounts of customers or perform custodial functions related
to customer securities.
F-11
vFinance, Inc.
Notes to Consolidated Financial Statements (continued)
5. RELATED PARTY TRANSACTIONS
On November 16, 2004, the Company entered into new agreements ("Primary
Employment Agreements") to amend and restate certain employment agreements dated
November 8, 1999 between the Company's Chief Executive Officer and President,
who is the beneficial owner of 15% and 19.7% of the total outstanding common
shares of the Company at December 31, 2004 and 2003, respectively, and the
Company's Chief Operating Officer and Chairman, who is the beneficial owner of
15% and 19.7% of the total outstanding common shares of the Company at December
31, 2004 and 2003, respectively (collectively the "Primary Shareholders"), as
amended on January 5, 2001, July 2, 2001 and January 7, 2002 (the "Previous
Employment Agreement"). Under the terms of the Primary Employment Agreements,
which shall be for a three year period and shall automatically extend for a one
year period on each anniversary date thereafter unless the Company has provided
a non-renewal notice thirty (30) days prior to an anniversary date as directed
by a majority vote of the board of directors, each individual shall receive (i)
an initial base salary of $257,000 per annum which shall increase 5% per annum
beginning January 1, 2005 and each year thereafter and will be reviewed by the
Board at least annually and may be increased (but not decreased) from time to
time as Board may determine; (ii) discretionary bonuses and/or interim cash
bonuses and/or other bonuses when and in such amounts as may be determined by
the Company's board of directors based on each individuals performance, the
Company's performance and/or other factors; provided that the Board shall meet
at least annually to review employees' bonus entitlements; and (iii) incentive
compensation paid quarterly no later than the 45th day following the end of
quarter primarily based on performance of the Company and its respective
subsidiaries. The Primary Employment Agreements also contain provisions related
to change of control.
On December 2002, each of the Primary Shareholders forfeited a total of 734,802
outstanding options by signing an Options Cancellation Agreement. Accordingly,
at December 31, 2002 there were no stock options held by the Primary
Shareholders. On July 1, 2003, the Company granted the Primary Shareholders a
total of 734,802 options at a price of $0.21.
On January 1, 2003, the Company entered into a Joint Venture Agreement with JSM
Capital Holding Corp. ("JSM"), a retail brokerage operations headquartered in
New York and founded by John S. Matthews. The Company issued JSM 1,000,000
warrants to purchase its common stock at an exercise price of $0.20 in exchange
for a 19% equity position in JSM. The warrants were valued using the
Black-Scholes valuation method which calculated the value to be $0.08 per
warrant, or $80,000. The Company accounts for this investment using the cost
method. Effective May 1, 2003, vFinance merged its "company-owned" retail
branches into JSM. Effective upon such merger JSM became an independent
contractor of the Company.
F-12
vFinance, Inc.
Notes to Consolidated Financial Statements (continued)
6. INCOME TAXES
The components of the Company's tax provision for the years ended December 31,
2004 and 2003 were as follows:
Year Ended December 31, 2004
-------------------------------------
2004 2003
-------------- --------------
Current income tax expense $ 40,000 $ -
Deferred income tax (benefit) (40,000) -
-------------- --------------
$ - $ -
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, 2004
---------------------------------------------------
2004 2003
----------------------- ----------------------
Net operating loss carryforwards $ 3,282,787 $ 4,250,848
Unrealized losses 65,809 45,906
Goodwill impairment - 2,775,663
Allowance for doubtful accounts 2,319 74,522
Depreciation 11,573 (6,613)
----------------------- ----------------------
Gross deferred income tax assets 3,362,488 7,140,326
Deferred income tax asset valuation
allowance (3,322,488) (7,140,326)
----------------------- ----------------------
Net deferred income tax assets $ 40,000 $ -
Net operating loss carryforwards totaled approximately $8,575,000 at December
31, 2004. 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, 2004 and
2003, due to the uncertainty of realizing the deferred tax assets.
The company was subject to an approximate $40,000 alternative minimum tax for
the tax year ending December 31, 2004. Such amount may be carried forward as a
tax credit to offset regular tax in future years.
The reconciliation of the income tax computed at the U.S. Federal statutory rate
to income tax expense for the period ended December 31, 2004 and 2003:
Year Ended December 31, 2004
-------------------------------------------------
2004 2003
---------------------- ----------------------
Tax expense (benefit) at federal rate (35%) $ 971,052 $ 106,000
Nondeductible expenses 2,806,786 (116,665)
Alternative Minimum Tax 40,000 0
Change in valuation allowance (3,817,838) 10,665
---------------------- ----------------------
Net income tax (benefit) allowance $ - $ -
Utilization of the Company's net operating loss carryforwards are limited based
on changes in ownership as defined in Internal Revenue Code Section 382.
F-13
vFinance, Inc.
Notes to Consolidated Financial Statements (continued)
7. SHAREHOLDERS' EQUITY
The Company is authorized to issue up to 2,500,000 shares of Preferred Stock.
122,500 shares were designated as Series A Convertible Preferred Stock, par
value $0.01 per share, and 50,000 shares were designated as Series B Convertible
Preferred Stock, par value $0.01 per share. As of December 31, 2004 there are no
Preferred Stock outstanding.
Series A and B Preferred Stock had 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 were 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 would have
been deemed a liquidation or winding up for purposes of the liquidation
preference.
DIVIDEND RIGHTS. The holders of Series A and B Preferred Stock were 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 were subject to adjustments to prevent dilution, on the weighted
average basis, in the event the Company issued additional shares, at a purchase
price of $2.60 per share.
VOTING RIGHTS. The holders of Series A and B Preferred Stock had no voting
rights.
REDEMPTION RIGHTS. The Company, at its option, could have redeemed, 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 received proceeds from a single sale of its equity securities of
at least $500,000, the holders of Series A and B Preferred Stock could have
required the Company to redeem all, but not less than all, the Series B
Preferred Stock at a redemption price equal to $10 per share.
On November 28, 2001, we entered into a Note Purchase Agreement, as amended on
November 30, December 14 and December 28, 2001 and February 13 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 (the SBI
Note"). The SBI Note is convertible at SBI's option into as many as 3,421,052
shares of our common stock at $0.285 per share.
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, IN CERTAIN CONVERTIBLE INSTRUMENTS,
and APB # 21 (INTEREST ON RECEIVABLES AND PAYABLES) the Company recorded an
imputed interest factor related to the Note Purchase Agreement of $563,000. The
Company fully expensed the 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 was accreted ratably over the term of the loan as
additional interest expense. Amortization of the imputed interest began in
January 2002.
During year 2002, the SBI Note was reduced by $225,000 as a portion of the SBI
Note was converted into 789,474 shares of the Company's common stock.
As of December 31, 2003 the SBI note payable balance was $750,000 and was netted
against the $146,787 corresponding asset imputed interest.
During February and March of 2004, $721,500 of the SBI Note was converted into
3,344,298 shares of the Company's common stock. Of this amount, $545,000 was
converted into 2,725,000 shares of the Company's common stock at a discounted
rate of $0.20 per share under a special arrangement offered by the Company to
encourage further equity participation by SBI, which resulted in a $231,625
conversion premium expense during the first quarter of 2004. The remainder,
$176,500, was converted into 619,298 shares at the stated conversion rate of
$0.285 per share. In April of 2004, the remaining balance was converted into
100,000 shares of common stock of the Company at the original stated conversion
rate of $.285 per share. The issuance of the common stock was exempt from
registration pursuant to Section 4 (2) of the Securities Act of 1933, as
amended, because the common stock was acquired in a privately negotiated
transaction by sophisticated investors. Accordingly, the balance due SBI at
December 31, 2003 was $750,000 and 2004 was $0.
F-14
vFinance, Inc.
Notes to Consolidated Financial Statements (continued)
7. SHAREHOLDERS' EQUITY (CONTINUED)
On February 27, 2003, the Company entered into an agreement whereby Arend
Verweij and Hoss Bozorgzad, independent contractors of the Company, purchased
1,500,000 unregistered common shares at a price of $0.0867 for a total
consideration of $130,000.
The above noted securities issued to the investors were exempt from registration
pursuant to Section 4(2) of the Securities Act of 1933, as amended, and Rule 506
of Regulation D promulgated thereunder because the securities were acquired in a
privately negotiated transaction by sophisticated investors.
During the first quarter of 2004, the Company granted stock options to purchase
an aggregate of 1,625,000 shares of the Company 's common stock to certain
employees of the Company. The exercise prices of these options range from $.20
to $.28. During the second quarter of 2004, the Company granted stock options to
purchase an aggregate of 105,000 shares of the Company's common stock to two
employees of the Company. The exercise price of these options was $0.35. During
the third quarter of 2004, the Company granted stock options to purchase an
aggregate of 205,000 shares of the Company's common stock to certain employees
of the Company. The exercise prices of these options range from $0.19 to $0.36.
During the fourth quarter of 2004, the Company granted stock options to purchase
an aggregate of 2,202,502 shares of the Company 's common stock to certain
employees of the Company. The exercise prices of these options range from $0.19
to $0.28. The option grants were exempt from registration pursuant to Section
4(2) of the Securities Act of 1933, as amended, because the individuals
receiving the options are sophisticated investors who have knowledge of all
material information about the Company.
A summary of the stock option activity for the years ended December 31, 2004 and
2003 is as follows:
Weighted
Average
Exercise Number of Exercise Price
Price Shares Per Option
--------- ---------- --------------
Outstanding Options at December 31, 2002 0.50 4,471,664 0.15 - 6.00
Granted 0.20 7,635,349 0.15 - 0.22
Forfeited 0.49 (1,760,802) 0.21 - 4.13
-----------
Outstanding Options at December 31, 2003 0.29 10,346,211 0.15 - 6.00
Granted 0.21 4,137,502 0.19 - 0.36
Forfeited 0.23 (3,945,500) 0.15 - 0.35
-----------
Outstanding Options at December 31, 2004 0.28 10,538,213 0.15 - 2.25
===========
The following table summarizes information concerning stock options outstanding
at December 31, 2004
Weighted
Average
Exercise Number
Price Outstanding
-------- -----------
$0.15 350,000
0.19 1,860,002
0.20 1,280,000
0.21 3,700,497
0.22 50,000
0.23 2,500
0.25 5,000
0.28 200,000
0.32 890,000
0.35 1,554,215
0.36 120,000
0.50 100,000
0.55 69,000
0.63 142,500
0.70 39,000
1.00 18,000
2.25 157,499
-----------
10,538,213
===========
F-15
vFinance, Inc.
Notes to Consolidated Financial Statements (continued)
7. SHAREHOLDERS' EQUITY (CONTINUED)
A summary of the warrant activity for the years ended December 31, 2004 and 2003
is as follows:
Weighted
Average
Exercise Number of Exercise Price
Price Shares Per Option
-------- ----------- --------------
Outstanding Warrants at December 31, 2002 2.15 4,108,499 0.35 - 7.20
Granted 0.25 1,290,000 0.15 - 2.25
-----------
Outstanding Warrants at December 31, 2003 1.70 5,398,499 0.35 - 7.20
Granted 0.16 2,927,923 0.15 - 0.16
Forfeited 0.44 (230,000) 0.35 - 2.50
-----------
Outstanding Warrants at December 31, 2004 1.18 8,096,422 0.15 - 7.20
===========
The following table summarizes information concerning warrants outstanding at
December 31, 2004.
Weighted
Average
Exercise Number
Price Outstanding
-------- -----------
0.15 750,000
0.26 2,427,923
0.20 1,000,000
0.35 1,773,500
0.63 400,000
2.25 625,000
2.50 290,000
6.00 129,999
7.20 700,000
---------
8,096,422
=========
The weighted average grant-date fair value of warrants granted equaled $0.16 and
$0.25 for the years ended December 31, 2004 and 2003, respectively. The weighted
average grant-date fair value of options granted during the year equaled $0.21
and $0.20 for the years ended December 31, 2004 and 2003, 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.
Options granted to employees are exercisable according to the terms of each
agreement, ranging from one month to four years. At December 31, 2004 and 2003,
5,779,766 and 4,916,608 options outstanding were exercisable with weighted
average exercise prices of $.35 and $.37, respectively. At December 31, 2004 and
2003, 7,920,172 and 4,745,999 warrants outstanding were exercisable with
weighted average exercises prices of $1.15 and $1.75, respectively.
Pro forma information regarding net income (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 2004 risk-free interest rates of 3.31%; no dividend yields; volatility
factor of the expected market price of the Company's common stock of 1.12 for
options and warrants and an expected life of the options and warrants of 4-5
years; for 2003: risk-free interest of 3.28%; no dividend yields; volatility
factor of the expected market price of the Company's common stock of 2.131; and
an expected life of the options and warrants of 4-5 years. The Company's pro
forma net income for the year ended December 31, 2004 is $2,287,230 and the pro
forma net loss for the year ended December 31, 2003 is $128,971. The Company's
pro forma basic and diluted net income per share for the year ended December 31,
2004 is $0.07 and $0.06, respectively. Pro forma basic net loss per share for
the year ended December 31, 2003 is $0.00.
F-16
vFinance, Inc.
Notes to Consolidated Financial Statements (continued)
7. SHAREHOLDERS' EQUITY (CONTINUED)
The Company recorded deferred compensation of $5,294and $17,714 during the years
ended December 31, 2004 and 2003, respectively, in connection with the grants of
stock options, primarily to outside consultants, with exercise prices lower than
the deemed fair value per share of the Company's common stock on the date of the
grants. The Company had an unamortized balance of $ 12,420 at December 31, 2002
fully amortized during 2003. In addition, during 2003 the Company granted
250,000 warrants, valued at $30,000, to its landlord in relation to the
renegotiation of the lease on its headquarters. This balance is being amortized
over the term of the lease. At December 31, 2004 the remaining unamortized
balance was $19,409.
8. DEBT
On January 25, 2002, the Company 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 the Company with a revolving credit facility for up to
$3,000,000 for the purpose of supporting the expansion of our brokerage business
or investments in infrastructure to expand our operations and our broker-dealer
operations. The loan had a term of 4 years, was required to be repaid in full by
January 2005, and accrued interest at LIBOR plus a LIBOR margin of 2% if the
loan was repaid within a month or 5% if it was outstanding more than a month.
The Company borrowed $1,500,000 under the credit facility on January 28, 2002
leaving an additional $1,500,000 available. In June 2003, Fidelity Investments,
on behalf of its clearing division, National Financial Services LLC, Member
NYSE/SIPC, a Fidelity Investments company ("NFS"), announced that it had
acquired Correspondent Services Clearing ("CSC"), an affiliate of UBS and
vFinance Investments' clearing firm at the time. The credit facility stayed with
UBS subsequent to the acquisition giving rise to potential breaches under such
credit facility as well as precluding the Company from drawing an additional
$1,500,000 thereunder. During March 2004, NFS agreed to directly pay down the
UBS credit facility in the amount of $1,500,000 pursuant to a guaranty Fidelity
Investments made to UBS as part of their original acquisition of the CSC
clearing division. As a result, the Company was relieved from $1,500,000 in debt
but no longer had the ability to obtain an additional $1,500,000 under the
credit facility or assert any claims against UBS or NFS regarding this
transaction and credit facility. During March 2004, the Company entered into a
clearing agreement with NFS. The new clearing agreement required NFS to pay to
vFinance, over a five year period beginning January 2004, a monthly incentive
bonus not to exceed $25,000 per month up to $1,500,000, based on a formula that
the Company believes is very achievable. Accordingly, NFS has been paying
$25,000 per month related to this incentive calculation and such amount,
$300,000 through December 31, 2004, has been included in the attached statements
of operations as "other brokerage related income". The new clearing agreement
also required NFS to provide the Company with $200,000 to assist the company
with transition costs related to the conversion from CSC to NFS. This amount was
paid to vFinance in March 2004 and was included in the first quarter's
statements of operations as a reduction to clearing and transaction costs. In
consideration for these incentives, NFS required a termination fee of $1,700,000
should vFinance discontinue using NFS' services. This fee is reduced, pro rata,
annually over the five year term of the agreement. The Company began clearing
through NFS during May 2004.
As discussed in Note 7, the Company entered in to a Note Purchase Agreement with
SBI Investments (USA), Inc. ("SBI"). As of December 31, 2003 the SBI note
payable balance was $750,000. During 2004, the balance of the Note was converted
into 3,444,298 shares of the Company's common stock. Of this amount, $545,000
was converted into 2,725,000 shares of the Company's common stock at a
discounted rate of $0.20 per share under a special arrangement offered by the
Company to encourage further equity participation by SBI, which resulted in a
$231,625 conversion premium expense during the first quarter of 2004.
Accordingly, the balance due SBI at December 31, 2003 was $750,000 and 2004 was
$0.
F-17
vFinance, Inc.
Notes to Consolidated Financial Statements (continued)
9. 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
2005 $ 828,484
2006 797,233
2007 764,543
2008 599,654
2009 85,897
-----------
TOTAL $3,075,811
===========
Total rent expense under operating leases, including space rental, totaled
$690,415 and $700,464 for the years ended December 31, 2004 and 2003.
Capital lease obligations at December 31, 2004 consisted of the following:
2004
-------------------
Obligation under capital lease $ 188,303
Less current maturities (65,355)
-------------------
$ 122,948
===================
Future minimum lease payments for equipment under capital leases at December 31,
2004 are as follows:
2005 $ 74,417
2006 74,417
2007 55,049
-------------------
Total minimum lease payments 203,883
Less amount representing interest (15,580)
-------------------
Present value of net minimum lease 188,303
Less current portion (65,355)
-------------------
$ 122,948
===================
F-18
vFinance, Inc.
Notes to Consolidated Financial Statements (continued)
9. COMMITMENTS AND CONTINGENCIES (CONTINUED)
From time to time the Company, and/or one of its subsidiaries, is 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 and EquityStation involve 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, the Company and/or its subsidiaries may be
parties to other legal proceedings and regulatory inquiries, the outcome of
which, either singularly 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 the
Company and/or its subsidiaries. The following is a brief summary of certain
matters pending against or involving the Company and its subsidiaries.
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. A determination has been made to
liquidate the funds. The SEC is conducting a non-public investigation relating
to Critical Infrastructure LP, Critical Investments and Critical Advisors. The
Company is cooperating with this investigation. Critical Investments and
Critical Advisors changed their names to vFinance Investors, LLC and vFinance
Advisors, LLC, respectively, subsequent to the acquisition.
On August 14, 2002, Henry S. Snow and Sandra L. Snow filed a complaint against
Colonial Direct and vFinance, Inc. in the Circuit Court of the 15th Judicial
Circuit in Palm Beach County, Florida. The claim alleges "Breach of Contract"
and "Unjust Enrichment" and seeks damages of $250,000 plus interest and court
costs. It is alleged that Colonial Direct defaulted on a Promissory Note in the
principal amount of $250,000. The Company believes their claim is without merit
and is vigorously defending the action.
On October 23, 2002, Henry Shoemaker, III, filed a claim with the NASD against
First Level Securities, now known as vFinance Investments, Inc., stating among
other things, that there was a breach of fiduciary duties resulting in a loss of
$570,000. This matter went to the arbitration panel during 2004 and Mr.
Shoemaker was awarded $15,000. Mr. Shoemaker filed an action in the Parish of
Orleans requesting that the arbitration be vacated. vFinance Investments filed a
motion to remove the matter to Federal Court. Federal Court denied his request
to vacate the arbitration. Mr. Shoemaker then appealed to Federal Courts ruling
to the United States Court of Appeal for the 5th Circuit. This matter is still
pending.
On January 12, 2003, MP 830 Third Avenue LLC ( the Landlord), filed a claim
against First Colonial, vFinance, Inc. and vFinance Investments Inc. in the
Supreme Court of the State of New York, alleging the abandonment of leased
facilities and seeking payment of the related rent. The lease was for a term of
seven years expiring on December 31, 2006. First Colonial allegedly ceased
paying rent as of July 1, 2002. After applying First Colonial's security deposit
of $200,000, the Landlord is seeking $59,868 plus any further rent due until
such time as they can successfully lease the premises at a similar rate. This
matter was settled on December 6, 2004 in the amount of $100,000.
F-19
vFinance, Inc.
Notes to Consolidated Financial Statements (continued)
9. COMMITMENTS AND CONTINGENCIES (CONTINUED)
On April 15, 2003, Ms. Madeline Moore filed a claim with the NASD against
vFinance Investments, Inc. in the amount of $150,527 claiming a breach of
fiduciary duties. This matter was settled on February 27, 2004 in the amount of
$125,000.
On October 17, 2003, we were advised by the staff of the SEC that it intended to
recommend that the SEC institute enforcement proceedings against vFinance
Investments and one of its former employees. The SEC claims that vFinance
Investments and its former employee failed reasonably to supervise the alleged
illegal trading activities over a period of approximately two months of one of
our broker/dealer's former securities traders with respect to one publicly
traded security that resulted in vFinance Investments earning $11,000 in
commissions related to that one security over the two month period. As of
December 31, 2004, the Company has included an accrual of $50,000 for estimated
expenses. On March 17,2005 we were advised by a member of the staff of the SEC
that the SEC had accepted our offer to settle the matter. Pursuant to the terms
of the settlement, vFinance Investments is required to make its first payment of
the $50,000 penalty ($16,667) within 30 days of the entry of the Order. In
addition, the Company will need to retain, within 60 days of the date of the
Order, an independent consultant to conduct a review of vFinance's existing
procedures regarding the supervision of traders to ensure that they are
adequate. The Company believes that this matter will not have a material adverse
affect on its business and operations.
On November 13, 2003, UBUY Holdings, Inc., f/k/a E-PAWN.COM, Inc., and Steven
Bazuly, and for and on behalf of all of the shareholders of UBUY Holdings, Inc.
filed an amended complaint for damages and consequential damages against
vFinance Investments, Inc. and approximately 60 other defendants in the United
States District Court for the Southern District of Florida stating, among other
things, that there were violations of certain securities rules and regulations.
The Company has not yet been served with this complaint, but in the event it is,
the Company believes that their claim is without merit and will vigorously
defend this action.
On March 15, 2004 Joseph & Joan Barr filed a claim with the NASD against
Pittsford Capital Markets, vFinance Investments, Inc. and others, claiming that
vFinance Investments was the successor firm to Pittsford Capital Markets and
alleging, among other things, that in 1998 he purchased Private Placements that
were unsuitable. The claim alleges damages of $700,000. The Company believes
their claim is without merit and is vigorously defending the action.
On or about February 28, 2005, Knight Equity Markets, L.P. ("Knight") commenced
an arbitration proceeding with the National Association of Securities Dealers
Inc. by filing a Statement of Claim against vFinance Investments, Inc., and one
of vFinance's registered representatives, Steven Soskin. The matter is titled
Knight Equity Markets, L.P. v. vFinance Investments, Inc., and Steven Soskin,
NASD Case No. 05-01069. Knight alleges that vFinance and Mr. Soskin were engaged
in a fraudulent scheme to buy various stocks at ex-dividend prices that vFinance
and Mr. Soskin knew were subject to dividends. Knight further alleges that
vFinance received $6.5 million in dividends that it was not otherwise entitled
to receive. Knight seeks a declaration that vFinance was not entitled to receive
the dividends, $6.5 million in damages, attorneys fees, costs and an unspecified
amount of punitive damages. The matter is currently in the pleadings phase. .
The primary customer involved in the subject stock purchases has now filed an
action in the Supreme Court for the State of New York against Knight seeking a
Declaratory Judgment and Equitable Relief with regard to the subject dividends.
This action seeks a declaratory judgment that the customer is the rightful owner
of the $5.8 million in dividends. The Company believes that Knight's claim is
without merit, and the Company will vigorously defend the action.
We are engaged in a number of other legal proceedings incidental to the conduct
of our business. These claims aggregate a range of $28,000 to $260,000.
F-20
vFinance, Inc.
Notes to Consolidated Financial Statements (continued)
10. 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, 2004 and 2003, respectively.
11. SUBSEQUENT EVENTS
Subsequent to December 31, 2004, the Company came to an agreement in principle
with The Center for Innovative Entrepreneurship ("CIE"), a nonprofit
organization, to develop www.vfinance.com as a platform for academic-quality
research on entrepreneurial activities and to produce the Company's proprietary
vFinance Entrepreneurial Confidence Index ("VECI") and sector research reports,
and to provide educational and informational services to entrepreneurs with
start-ups and other early-stage firms. The Company also agreed to enter into a
management services agreement to provide management, administrative and
technical support services for CIE. It is anticipated that the Company and CIE
will enter into definitive documentation evidencing these agreements in April
2005.
On January 31, 2005, The Company issued 300,000 common shares in connection with
the exercise of options. The Company received $60,000. The exercise price of
these options was $0.20.
On March 14, 2005, The Company issued 255,000 common shares in connection with
the exercise of options. The Company received $53,550. The exercise price of
these options was $0.21.
F-21
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
ITEM 8A. CONTROLS AND PROCEDURES.
Our Chief Executive Officer and Chief Financial Officer (collectively, the
"Certifying Officers") are responsible for establishing and maintaining
disclosure controls and procedures for us. Such officers have concluded (based
upon such officers' evaluation of these controls and procedures as of the end of
the period covered by this report) that our disclosure controls and procedures
are effective to ensure that information required to be disclosed by us in this
report is accumulated and communicated to management, including our principal
executive officers as appropriate, to allow timely decisions regarding required
disclosure.
The Certifying Officers have also indicated that there were no significant
changes in our internal controls or other factors that could significantly
affect such controls subsequent to the date of their evaluation, and there were
no corrective actions with regard to significant deficiencies and material
weaknesses.
Our management, including each of the Certifying Officers, does not expect that
our disclosure controls or our internal controls will prevent all error and
fraud. A control system, no matter how well conceived and operated, can provide
only reasonable, not absolute, assurance that the objectives of the control
system are met. In addition, the design of a control system must reflect the
fact that there are resource constraints, and the benefits of controls must be
considered relative to their costs. Because of the inherent limitations in all
control systems, no evaluation of controls can provide absolute assurance that
all control issues and instances of fraud, if any, within a company have been
detected. These inherent limitations include the realities that judgments in
decision-making can be faulty, and that breakdowns can occur because of simple
error or mistake. Additionally, controls can be circumvented by the individual
acts of some persons, by collusion of two or more people or by management
override of the control. The design of any systems of controls also is based in
part upon certain assumptions about the likelihood of future events, and their
can be no assurance that any design will succeed in achieving its stated goals
under all potential future conditions. Because of these inherent limitations in
a cost-effective control system, misstatements due to error or fraud may occur
and not be detected.
ITEM 8B. OTHER INFORMATION.
On November 16, 2004, we amended and restated employment agreements with our
Chief Executive Officer and President and our Chief Operating Officer and
Chairman. The new employment agreements provide for a three year term with
automatic one year extensions unless we provide notice of non-renewal thirty
days prior to the anniversary date. The new employment agreements also provide
for initial base salaries of $257,000 per annum, which shall increase 5% per
annum beginning January 1, 2005, subject to periodic reviews by the Board of
Directors; discretionary bonuses, cash bonuses and other bonuses as may be
determined by the Board of Directors based on the Company's performance, the
individual's performance, and other factors; and incentive compensation paid
quarterly based on the Company's performance. The new agreements also contain
provisions related to change of control.
On January 12, 2005, the Company entered into an employment letter agreement
with Kathleen Kennedy to serve in the capacity of Executive Vice President,
Corporate Marketing of vFinance, Inc. Under the terms of this Agreement, Ms.
Kennedy will receive a base salary of $140,000 and annual incentive compensation
based on achievement of the Company's overall revenue, margin and profit
objectives. Ms. Kennedy's agreement also provided for her to provide services as
Executive Director for CIE and a portion of her incentive compensation is based
on her ability to accomplish certain income objectives for CIE. The letter
agreement includes an award of stock options subject to a specified vesting
period and also provides severance benefits upon change of control and upon the
occurrence of certain events.
-48-
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 28, 2005. 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 48 Director, Chief Executive Officer
and President
Timothy E. Mahoney 48 Director, Chief Operating Officer
and Chairman
Sheila C. Reinken 44 Chief Financial Officer and Chief
Administrative Officer
Richard Campanella 54 Secretary
Kathleen J. Kennedy 51 Executive Vice President, Corporate
Marketing
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. Genesis Partners, Inc. has been inactive since December 31, 2002. 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
AESP, Inc., a worldwide distributor and manufacturer of active and passive
networking components traded on the OTC BB. 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, 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 Master of
Business Administration from George Washington University in 1983.
SHEILA C. REINKEN has been the CFO of the Company since January 2005. Ms.
Reinken was vice president, finance for Burger King Corporation from March 2002
through November 2004. Prior to that Ms. Reinken was vice president, finance for
American Eagle Outfitters and from January 2001 until February 2002. Prior to
that Ms. Reinken was vice president, treasurer of Ames Department Stores, Inc.
from August 1999 until January 2001. She holds a Master of Business
Administration from Florida Atlantic University and a Bachelor of Science degree
from Florida State University.
RICHARD CAMPANELLA has been Secretary of the Company since December 18, 2001.
Mr. Campanella currently serves as the 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.
KATHLEEN J. KENNEDY has been EVP Corporate Marketing since January 19, 2005.
Prior to joining the Company, Ms. Kennedy held executive marketing and strategy
positions, including, Vice President, Marketing/Customer Development for Office
Depot, Inc. from July 2001 through November 2004, Senior Vice President of
Marketing for Infousa, Inc. from July 2000 until January 2001, and Vice
President Marketing for OfficeMax, Inc. from May 1999 until July 2000. Ms.
Kennedy also served as Group Director/Managing Partner with OgilvyOne, a
division of WPP Group plc., from May 1997 until May 1999. She has a Master of
Business Administration from University of Miami and a Bachelor of Arts from
University of Delaware.
-49-
AUDIT COMMITTEE
The Company's board of directors serves as the audit committee. Leonard J.
Sokolow has been designated as an "audit committee financial expert" as such
term is defined in the SEC's rules.
CODE OF ETHICS
The Company has adopted a Code of Ethics for the Chief Executive Officer and
Chief Financial Officer, which was filed as Exhibit 14 to the Annual Report on
Form 10-KSB for the fiscal year ended December 31, 2003, and is herein
incorporated by reference. If the Company makes any substantive amendments to
its code of ethics or grants any waiver, including any implicit waiver, from a
provision of the code to the Chief Executive Officer or Chief Financial Officer,
the Company will disclose the nature of such amendment or waiver in a report on
Form 8-K.
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 the 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 the 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, we believe that during the
fiscal year ended December 31, 2004, our officers, directors and significant
stockholders have timely filed the appropriate form under Section 16(a) of the
Exchange Act, except a Form 4 for Sheila C. Reinken (one filing).
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 other most
highly compensated executive officers of the Company (collectively, the "Named
Executive Officers") during the fiscal years ended December 31, 2004, 2003 and
2002:
SUMMARY COMPENSATION TABLE
Annual Long-Term
Compensation
----------------------------------------------- --------------
Securities
Other Underlying
Name/Position Year Salary Bonus Compensation Options
------------- ---- ------ ----- ------------ -------------
Leonard J. Sokolow 2004 $236,265 $180,000 $0 0
CEO, President (1)(2)(3) 2003 $230,265 $0 18,900 734,802 (3)
2002 $208,000 $0 18,000 0 (3)
Timothy E. Mahoney 2004 $236,265 $175,000 $0 0
COO, Chairman (1)(2)(3) 2003 $230,265 $0 $18,900 734,802 (3)
2002 $208,000 $0 $18,000 0 (3)
Richard Campanella 2004 $125,000 $10,000 0 0
Chief Operating Officer 2003 $125,000 0 0 75,000
vFinance Investments, Inc. 2002 $125,000 0 0 75,000
David Spector 2004 $100,000 $15,000 0 18,750 (4)
Vice President (4) 2003 $100,000 0 0 550,000
2002 $100,000 0 0 25,000
Mark Kacer 2003 $115,993 $10,000 0 0
Vice President (5) 2003 $115,993 $13,750 0 500,000
2002 $0 0 0 0
(1) Messrs. Sokolow and Mahoney received $180,000 and 175,000, respectively, in
2004, $0 in 2003, and $0 in 2002 of annual incentive compensation based on the
performance of the Company during the respective years. These amounts are
reflected in the corresponding table as bonuses.
(2) Messrs. Sokolow and Mahoney each received a $18,000 car allowance during
2002, $18,900 in 2003 and $0 in 2004, which are reflected in the corresponding
table as other annual compensation.
(3) Options that were issued in prior years were cancelled in 2002. During 2003,
they were each granted 734,802 options.
(4) Mr. Spector's employment with the Company was terminated in December 2004.
(5) Mr. Kacer's employment with the Company was terminated in December 2004.
-50-
OPTION GRANTS IN LAST FISCAL YEAR
No options were granted to the Chief Executive Officer or the other Named
Executive Officers of the Company. In addition, no options were exercised during
2004.
Fiscal Year-End Option Table
The following table provides information on the total number of exercisable and
unexercisable stock options held at December 31, 2004 by the Named Executive
Officers. None of the Named Executive Officers exercised any options during
fiscal year 2004.
Number of Securities Underlying Value of Unexercised In-the-Money
Unexercised Options at Fiscal Year-End Options at Fiscal Year-End (1)
-------------------------------------- --------------------------------------
Name Exercisable Unexercisable Exercisable Unexercisable
Leonard J. Sokolow 734,802 - $ 14,696 $ -
Timothy E. Mahoney 734,802 - 14,696 -
Richard Campanella 81,250 18,750 1,125 375
David Spector 381,250 - 7,625 -
Mark Kacer 300,000 - 9,000 -
(1) Base on the difference between the option's exercise price and a closing
price of $0.23 for the underlying common stock on December 30, 2004 (our last
business day of fiscal year 2004) as reported by the National Quotation Bureau.
COMPENSATION OF DIRECTORS
Directors do not receive any compensation for serving on our Board of Directors.
EMPLOYMENT AGREEMENTS
On November 16, 2004, the Company entered into new agreements ("Primary
Employment Agreements") to amend and restate certain employment agreements dated
November 8, 1999 between the Company's Chief Executive Officer and President,
who is the beneficial owner of 15% and 19.7% of the total outstanding common
shares of the Company at December 31, 2004 and 2003, respectively, and the
Company's Chief Operating Officer and Chairman, who is the beneficial owner of
15% and 19.7% of the total outstanding common shares of the Company at December
31, 2004 and 2003, respectively (collectively the "Primary Shareholders"), as
amended on January 5, 2001, July 2, 2001 and January 7, 2002 (the "Previous
Employment Agreement"). Under the terms of the Primary Employment Agreements,
which shall be for a three year period and shall automatically extended for a
one year period on each anniversary date thereafter unless the Company has
provided a non-renewal notice thirty (30) days prior to an anniversary date as
directed by a majority vote of the board of directors, each individual shall
receive (i) an initial base salary of $257,000 per annum which shall be increase
5% per annum beginning January 1, 2005 and each year thereafter and will be
reviewed by the Board at least annually and may be increased (but not decreased)
from time to time as Board may determine; (ii) discretionary bonuses and/or
interim cash bonuses and/or other bonuses when and in such amounts as may be
determined by the Company's board of directors based on each individuals
performance, the Company's performance and/or other factors; provided that the
Board shall meet at least annually to review employees' bonus entitlements; and
(iii) incentive compensation paid quarterly no later than the 45th day following
the end of quarter primarily based on performance of the Company and its
respective subsidiaries. The Primary Employment Agreements also contain
provisions related to change of control.
-51-
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth common stock ownership information as of March
28, 2005 with respect to:
- Each person known to us to be the beneficial owner of more than 5% of our
common stock;
- Each of our Named Executive Officers and directors; and
- All directors and officers as a group.
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 28, 2005. 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 28, 2005.
Amount of Shares
Name of Beneficial Owner Beneficially Owned Percent of Class
------------------------ ------------------ ----------------
Leonard J. Sokolow(1) 6,617,812 16.72%
Timothy E. Mahoney(2) 6,617,811 16.72%
Highlands Group Holdings, Inc. (3) 2,175,000 5.42%
David A. Spector (4) 125,000 *
Richard Campanella (5) 406,250 *
Mark Kacer 300,000 *
All executive officers and directors
as a group (5 persons) 13,941,873 34.70%
* Denotes less than 1% ownership.
(1) Includes 5,883,010 shares of common stock issued in the names of Mr. Sokolow
and his wife.
(2) Includes 2,175,000 shares of common stock issued in the name of Highlands
Group Holdings, Inc., 3,708,009 shares of common stock issued in the name of Mr.
Mahoney.
(3) 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.
(4) Includes 25,000 shares of common stock issued in the name of Mr. Spector.
(5) Includes 25,000 shares of common stock issued in the name of Mr. Campanella.
The following table sets forth certain information as of December 31, 2004, with
respect to compensation plans (including individual compensation arrangements)
under which our equity securities are authorized for issuance under:
- all compensation plans previously approved by our security holders; and
- all compensation plans not previously approved by our security holders.
Number of securities remaining available for
to be issued upon Weighted average future issuance under
exercise of exercise price of equity compensation plans
outstanding options, outstanding options, (excluding securities
warrants and rights and rights Plan category warrants
reflected in column (a))
(a) (b) (c)
Equity compensation
plans approved by
security holders - - -
Equity compensation
plans not approved by
security holders * 18,634,635 0.67 -
-----------------------------------------------------------------
Total 18,634,635 0.67 -
* For a description of the individual compensation arrangements in 2004 See Note
7 to the Consolidated Financial Statements included elsewhere herein.
ITEM 12. CERTAIN RELATIONSHIPSAND RELATED TRANSACTIONS.
None.
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ITEM 13. 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, 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.
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).
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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).
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 5,000 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 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 with the SEC on
August 14, 2001).
10.11 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 with the SEC on August 14,
2001).
10.12 Stock Purchase Warrant, dated August 15, 2001, issued to Kathleen
Wallman (incorporated by reference to the Company's Quarterly
Report on Form 10-QSB filed with the SEC on August 14, 2001).
10.13 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 (incorporated by reference to the Company's
Annual Report on Form 10-KSB filed with the SEC April 16, 2002).
10.14 Letter Agreement dated November 30, 2001 amending Note Purchase
Agreement (incorporated by reference to the Company's Annual
Report on Form 10-KSB filed with the SEC April 16, 2002).
10.15 Letter Agreement dated December 14, 2001 amending Note Purchase
Agreement (incorporated by reference to the Company's Annual
Report on Form 10-KSB filed with the SEC April 16, 2002).
10.16 Letter Agreement dated December 28, 2001 amending Note Purchase
Agreement (incorporated by reference to the Company's Annual
Report on Form 10-KSB filed with the SEC April 16, 2002).
10.17 Letter Agreement dated February 13, 2002 amending Note Purchase
Agreement (incorporated by reference to the Company's Annual
Report on Form 10-KSB filed with the SEC April 16, 2002).
10.18 Letter Agreement dated March 4, 2002 amending Note Purchase
Agreement (incorporated by reference to the Company's Annual
Report on Form 10-KSB filed with the SEC April 16, 2002).
10.19 Credit Facility by and between the Company and UBS Americas, Inc.
dated as of January 25, 2002 (incorporated by reference to the
Company's Annual Report on Form 10-KSB filed with the SEC April
16, 2002).
10.20 Subordination Agreement by and among the Company, UBS Americas,
Inc., and SBI Investments (USA), Inc. dated as of January 25,
2002 (incorporated by reference to the Company's Annual Report on
Form 10-KSB filed with the SEC April 16, 2002).
10.21 Consulting Agreement effective as of August 20, 2001 by and
between vFinance.com, Inc. and Insight Capital Consultants
Corporation (incorporated by reference to the Company's Annual
Report on Form 10- KSB filed with the SEC April 16, 2002).
10.22 Amendment to Credit Agreement dated April 12, 2002 by and between
the Company and UBS Americas Inc. (incorporated by reference to
the Company's Annual Report on Form 10-KSB filed with the SEC
April 16, 2002).
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10.23 Selected Asset Purchase Agreement dated as of May 29, 2002 among
vFinance Investments, Inc., Somerset Financial Partners, Inc.,
Somerset Financial Group, Inc., Douglas Toth and Nicholas
Thompson (the "Select Asset Purchase Agreement") (incorporated by
reference to the Company's Quarterly Report on Form 10-QSB filed
with the SEC August 14, 2002).
10.24 Amendment to Select Asset Purchase Agreement dated June 17, 2002
(the "Amendment") (incorporated by reference to the Company's
Quarterly Report on Form 10-QSB filed with the SEC August 14,
2002).
10.25 Escrow Agreement executed in conjunction with the Amendment
(incorporated by reference to the Company's Quarterly Report on
Form 10-QSB filed with the SEC August 14, 2002).
10.26 Termination Agreement (incorporated by reference to the Company's
Quarterly Report on Form 10-QSB/A filed with the SEC November 14,
2002).
10.27 Branch Agreement between the Company and JSM Holding Corp
(incorporated by reference to the Company's Annual Report on Form
10-KSB filed with the SEC March 31, 2003).
10.28 Lease agreement on the Company's headquarters in Boca Raton, FL.
dated January 1, 2003 between the Company and Zenith Professional
Center, LTD. (incorporated by reference to the Company's Annual
Report on Form 10-KSB filed with the SEC March 30, 2004).
10.29 Stock warrant agreement between the Company and Zenith
Professional Center, LTD. (incorporated by reference to the
Company's Annual Report on Form 10-KSB filed with the SEC March
30, 2004).
10.30 Asset Purchase Agreement, dated November 2, 2004, by and between
vFinance Investments Holdings, Inc. and Global Partners
Securities, Inc. (incorporated by reference to the Company's
Current Report on Form 8-K filed with the SEC November 8, 2004).
10.31 Stock Purchase Agreement, dated November 2, 2004, by and between
vFinance Investments Holdings, Inc. and Level2.com, Inc.
(incorporated by reference to the Company's Current Report on
Form 8-K filed with the SEC November 8, 2004).
10.32 Registration Rights Agreement, dated November 2, 2004, by and
among vFinance, Inc., Global Partners Securities, Inc. and
Level2.com, Inc. (incorporated by reference to the Company's
Current Report on Form 8-K filed with the SEC November 8, 2004).
10.33 Form of Common Stock Purchase Warrant (incorporated by reference
to the Company's Current Report on Form 8-K filed with the SEC
November 8, 2004).
10.34 Stock Escrow Agreement, dated November 2, 2004, by and among
vFinance Investments Holdings, Inc., the Company, Global Partners
Securities, Inc., Level2.com, Inc., and Edwards & Angell, LLP
(incorporated by reference to the Company's Current Report on
Form 8-K filed with the SEC November 8, 2004).
10.35 Standstill Agreement, dated November 2, 2004, by and among
vFinance, Inc. and each of Marcus Konig, Harry Konig and Salomon
Konig (incorporated by reference to the Company's Current Report
on Form 8-K filed with the SEC November 8, 2004).
10.36* Amended and Restated Employment Agreement dated November 16, 2004
between the Company and Leonard J. Sokolow.
10.37* Amended and Restated Employment Agreement dated November 16, 2004
between the Company and Timothy Mahoney.
10.38* Amended and Restated Letter Agreement dated January 14, 2005
between the Company and Sheila C. Reinken (incorporated by
reference to the Company's Current Report on Form 8-K filed with
the SEC January 21, 2005).
10.39* Employment Agreement dated January 12, 2005 between the Company
and Kathleen J. Kennedy.
14 Code of Ethics (incorporated by reference to the Company's Annual
Report on Form 10-KSB filed with the SEC March 30, 2004).
21 List of Subsidiaries
31.1 Certification by Chief Executive Officer pursuant to Section 302
of the Sarbanes-Oxley Act of 2002.
31.2 Certification by Chief Financial Officer pursuant to Section 1350
of the Sarbanes-Oxley Act of 2002.
32.1 Certification by Chief Executive Officer pursuant to Section 906
of the Sarbanes-Oxley Act of 2002.
32.2 Certification by Chief Financial Officer pursuant to Section 906
of the Sarbanes-Oxley act of 2002.
* Management contract or compensatory plan or arrangement
-55-
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
During 2004 and 2003, the Company incurred the following fees for professional
services rendered by our principal accountant Sherb & Co., LLP:
2004 2003
Audit Fees (1) $ 101,000 $ 90,000
Audit-related Fees - -
Tax Fees $ 10,000 $ 5,000
All Other Fees - -
(1) Audit Services for 2004 included the annual audit, the reviews of the
Company's quarterly reports on Form 10-QSB, fees related to filings with the
Securities and Exchange Commission ("SEC") and accounting consultations. Before
any audit or non-audit services are performed by any independent accountant,
such services must be approved in advance by the Company's board of directors.
-56-
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: March 31, 2005
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) March 31, 2005
Leonard J. Sokolow
/s/ Sheila C. Reinken Chief Financial Officer and (Principal
-------------------------------- Financial and Accounting Officer) March 31, 2005
Sheila C. Reinken
/s/ Timothy E. Mahoney Director, Chairman of the Board and March 31, 2005
-------------------------------- Chief Operating Officer
Timothy E. Mahoney
INDEX OF DOCEMENTS FILED WITH THIS ANNUAL REPORT
Number of Exhibit Exhibit Description
----------------- -------------------
10.36 Amended and Restated Employment Agreement dated
November 16, 2004 between the Company and Leonard J.
Sokolow.
10.37 Amended and Restated Employment Agreement dated November
16, 2004 between the Company and Timothy Mahoney.
10.39 Employment Agreement dated January 12, 2005 between the
Company and Kathleen J. Kennedy.
21 List of Subsidiaries
31.1 Certification by Chief Executive Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
31.2 Certification by Chief Financial Officer pursuant to
Section 1350 of the Sarbanes-Oxley Act of 2002.
32.1 Certification by Chief Executive Officer pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
32.2 Certification by Chief Financial Officer pursuant to
Section 906 of the Sarbanes-Oxley act of 2002.