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, 2002
Commission File Number 1-11454-03
VFINANCE, INC.
(f/k/a vFinance.com, Inc.)
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(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. [X]
The issuer's revenues for the fiscal year ended December 31, 2002 were
$19,378,619.
The aggregate market value of the voting stock held by non-affiliates of the
issuer on March 27, 2003, based upon the average bid and ask prices of such
stock on that date was $1,128,616. The number of shares of Common Stock of the
issuer outstanding as of March 27, 2003 was 29,851,570.
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 or Plan of Operation 22
Item 7. Financial Statements 29
Item 8. Changes in and Disagreements With Accountants on Accounting
and Financial Disclosure 30
PART III.
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act 31
Item 10. Executive Compensation 32
Item 11. Security Ownership of Certain Beneficial Owners and Management
And Related Stockholder Matters 35
Item 12. Certain Relationships and Related Transactions 36
Item 13. Exhibits, List and Reports on Form 8-K 37
Item 14. Controls and Procedures 41
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, hopes, words or phrases such as will result, are
expected to, will continue, is anticipated, estimated, projection and outlook,
and words of similar import) are not statements of historical facts and may be
forward-looking. These forward-looking statements are based largely on our
expectations and are subject to a number of risks and uncertainties including,
but not limited to, economic, competitive, regulatory, growth strategies,
available financing and other factors discussed elsewhere in this report and in
the documents filed by us with the Securities and Exchange Commission ("SEC").
Many of these factors are beyond our control. Actual results could differ
materially from the forward-looking statements we make in this report or in
other documents that reference this report. In light of these risks and
uncertainties, there can be no assurance that the results anticipated in the
forward-looking information contained in this report or other documents that
reference this report will, in fact, occur.
These forward-looking statements involve estimates, assumptions and
uncertainties, and, accordingly, actual results could differ materially from
those expressed in the forward-looking statements. These uncertainties include,
among others, the following: (i), the inability of our broker-dealer operations
to operate profitably in the face of intense competition from larger full
service and discount brokers; (ii) a general decrease in merger and acquisition
activities and our potential inability to receive success fees as a result of
transactions not being completed; (iii) increased competition from business
development portals; (iv) technological changes; (v) our potential inability to
implement our growth strategy through acquisitions or joint ventures; and (vi)
our potential inability to secure additional debt or equity financing.
Any forward-looking statement speaks only as of the date on which such statement
is made, and we undertake no obligation to update any forward-looking statement
or statements to reflect events or circumstances after the date on which such
statement is made or to reflect the occurrence of unanticipated events. New
factors emerge from time to time and it is not possible for our management to
predict all of such factors, nor can our management 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
We are a holding company engaged in retail and institutional securities
brokerage, investment banking and research services through our principal
operating subsidiary, vFinance Investment, Inc. We are committed to establishing
a significant presence in the financial services industry by meeting the varying
investment needs of our corporate, institutional and individual clients.
OUR HISTORY. We were incorporated in the state of Delaware in February 1992
under the name Peachtree Fiberoptics, Inc., primarily to engage in the
production and sale of plastic optical fiber. On October 27, 1993, we ceased all
operations and subsequently sold certain assets relating to our machinery and
optical fiber operations.
On November 8, 1999, we acquired vFinance Holdings, Inc., a Florida corporation,
and Union Atlantic LC, a Florida limited liability company, through a Share
Exchange Agreement. We received all the outstanding capital stock of vFinance
Holdings, Inc. and all the outstanding membership interests of Union Atlantic LC
in exchange for a total of 6,955,000 shares of our common stock. vFinance
Holdings, Inc. has succeeded to the business of Union Atlantic LC and its
operating subsidiary, Union Atlantic Capital, L.C., is now operating under the
name vFinance Capital, Inc.
On January 4, 2001, we closed the merger of NW Holdings, Inc. ("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., an investment-banking firm that is licensed
to conduct activities as a broker-dealer in 49 states and has offices in New
York, New Jersey and Florida. In addition to these offices the Company has
relationships with certain independent contractors located throughout the United
States. vFinance Investments, Inc., as our wholly owned subsidiary, continues to
provide investment-banking services to small and medium sized companies and
retail brokerage services to companies, financial institutions and individual
investors.
On January 4, 2001, we also completed the merger of Colonial Direct Financial
Group, Inc., a Delaware corporation, with and into Colonial Acquisition Corp.,
our wholly owned subsidiary, with Colonial Direct Financial Group, Inc. as the
surviving corporation and as our wholly owned subsidiary. At the time of the
merger, Colonial Direct Financial Group, Inc. was a holding company comprised of
two diversified financial services companies, including First Colonial
Securities Group, Inc. and Colonial Direct Retirement Services, Inc., and a
company that provides administrative support to these financial service
companies, Colonial Direct Capital Management, Inc. 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
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 has commenced 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"), which was subsequently 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 including
financial planning, insurance and mortgage brokerage. Pursuant to the Agreement
and Amendment, effective June 17, 2002 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. Furthermore, as of such
date, 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 will only be delivered to Somerset when Somerset achieves all
the closing conditions. In August 2002, as all closing conditions of the
Agreement and Amendment were not met as of the Amended Closing Date, 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.
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 (who was also, at the same time, named
the President of vFinance's Retail Brokerage Division). In exchange for a 19%
equity position in JSM, vFinance will merge its "company-owned" retail branches
into JSM. It is anticipated that the merger will take place effective April 15,
2003. Effective upon such merger JSM will become an independent contractor of
the Company.
OUR COMPANY. We are a "new breed" financial services enterprise committed to
building a worldwide audience of individuals looking to create wealth through
equity investments in both their personal portfolios and their businesses. Our
website, www.vfinance.com, is one of the Internet's leading destinations for
entrepreneurs, owners of small and medium sized businesses, private (i.e. Angel)
and institutional investors looking for capital or equity investments in high
growth companies. It allows entrepreneurs, executives, private and institutional
investors, our brokerage clients and our employees to access a common portal
filled with business development - tools, information and investment management
products. Each month our website attracts an estimated 100,000 businesses from
over 75 countries and communicates to approximately 60,000 high net worth
individuals and institutional investors. Utilizing the Internet and other
traditional communication mediums, we generate income by providing our audience
with access to products and services that assist them in achieving their
financial goals. Our business model is scalable as the website provides sales
leads to our "bricks and mortar" businesses in the areas of investment banking,
management consulting, brokerage, trading and asset management.
Our strategy is to continue to build the website into one of the world's leading
business development portals and thereby be positioned as a premier new media
enterprise leveraging the convergence of digital information with the other
traditional communication mediums to build a global brand that in turn generates
leads for other vFinance activities. Our website is typically listed by search
engines as one of the top ten sites for relevant content. In addition, over 3000
websites have links to our website including Microsoft Network, Dow Jones, THE
WALL STREET JOURNAL, ENTREPRENEUR MAGAZINE, INC. MAGAZINE, Stanford University,
and Yahoo!. The combination of relevant content and ease of use has resulted in
our website servicing over 100,000 user sessions and 1,200,000 page views each
month with the average user session length in excess of six minutes. While our
website continues to attract interest, the revenue generated directly from the
website fees is insignificant to the Company.
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RECENT FINANCINGS
The Company entered into two agreements with finance 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 report.
On November 28, 2001, we entered into a Note Purchase Agreement, as amended by
letter agreements dated November 30, December 14 and December 28, 2001, February
13, 2002 and March 4, 2002 (collectively, the "Agreement"), with SBI Investments
(USA) Inc. ("SBI"). Under the terms of the Agreement, SBI provided a loan to us
in the amount of $975,000 in the form of a 48-month non-interest bearing,
convertible note. The note is convertible at SBI's option into as many as
3,421,052 shares of our common stock at $0.285 per share.
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 a revolving credit facility for up to $3,000,000 to us
for the purpose of supporting the expansion of our brokerage business or
investments in infrastructure to expand our operations or our broker-dealer
operations. The loan must be repaid in full by January 2005 and bears interest
at LIBOR plus a LIBOR margin of 2%. Among other covenants, we must maintain
stockholders' equity of at least $7 million; however, the Credit Agreement, as
amended, provides that we may exclude goodwill write-offs aggregating $8.5
million from stockholders' equity. We must make early repayments under the
Credit Agreement if we acquire a new broker dealer firm, enter a new line of
business, or hire more than four brokers in a single or related transactions.
This repayment will be made by adding $1.00 to the cost of each incremental
closing transaction we make through CSC, an affiliate of UBS.
We borrowed $1,500,000 under the credit facility in January 2002. The amount of
the loan under the credit facility is not convertible into our equity
securities.
OUR BUSINESS
RETAIL AND TRADING BUSINESS. The largest portion of our revenues in 2002 (73% in
2002) (77% in 2001) were attributable to commissions generated by our brokerage
and trading activities through our wholly owned broker-dealer subsidiary,
vFinance Investments. vFinance Investments buys and sells securities for its
customers from other dealers on an agency basis, and charges its customers a
commission for its services. Such commission revenue is derived from brokerage
transactions in listed and over-the-counter securities and mutual fund
securities. vFinance Investments has agreements with numerous mutual fund
management companies pursuant to which it sells shares in a variety of mutual
funds. Mutual fund commissions are derived from standard dealers' discounts that
are a small percentage of the purchase price of the shares depending upon the
terms of the dealer agreement and the size of the transaction. In addition, most
funds permit vFinance Investments to receive additional periodic fees based upon
the customer's investments maintained in particular funds.
INVESTMENT BANKING AND MERGERS AND ACQUISITIONS. A significant portion of our
revenues in our last fiscal year were derived from the success fees generated by
the investment-banking and the merger and acquisition activities (17% in 2002)
(16% in 2001). Through vFinance Investments, we offer capital raising and
related services to (A) emerging growth and middle market privately held
companies worldwide by assisting such companies in (i) developing sound
strategic plans, (ii) obtaining growth, mezzanine, bridge, or acquisition
capital (including, but not limited to, venture capital financing), (iii)
pursuing strategically sound acquisitions or divestiture strategies, (iv)
transitioning into viable professional corporations able to raise funds in the
public markets, and (v) maximizing shareholder value by conducting
recapitalizations or other liquidity transactions and (B) publicly held
companies by arranging private equity financing for such publicly held
companies. As consideration for such services, we are paid retainers and success
fees which are agreed upon amounts based on the percentage of the total value of
a transaction and are contingent on the successful completion of a specified
transaction. As part of our success fees, we periodically receive equity
instruments and stock purchase warrants from companies for which we perform
services in addition to the cash paid for such services. Primarily all of the
equity instruments are in private companies or small public companies.
In the corporate finance area, 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
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underwriters' liabilities and limitations on the indemnification of underwriters
by issuers, an underwriter is subject to substantial potential liability for
misstatements or omissions of material facts in prospectuses and other
communications with respect to such offerings. Acting as a managing underwriter
increases these risks. Underwriting commitments constitute a charge against net
capital and our subsidiaries' ability to make underwriting commitments may be
limited by the requirement that they must at all times be in compliance with
regulations regarding their net capital.
MANAGEMENT CONSULTING. A portion of our revenues in our last fiscal year were
derived from consulting fees generated by the management consulting activities
of vFinance Holdings (8% in 2002 and 5% in 2001). Through vFinance Holdings we
provide management consulting services and related services to corporations and
high net worth individuals by working with the senior management of those
corporations and high net worth individuals to (i) assess market conditions and
evaluate their assets (tangible and intangible) and their operational
capabilities; (ii) identify alternative strategies, establish processes to build
consensus and create strategies for effectively implementing changes; and (iii)
prepare a report formalizing our findings that serves as a tactical tool to
ensure communication and consistency in planning and coordination of efforts. In
addition, through the executive search practice of vFinance Holdings, we assist
companies in identifying and recruiting talented individuals to help the
companies grow. vFinance Holdings specializes in senior executive and board
member searches for public companies as well as venture backed and private
equity companies. As consideration for these services, vFinance Holdings is paid
consulting fees that are based on a monthly retainer. As part of its consulting
fees, vFinance Holdings periodically receives equity instruments and warrants
from companies for which it performs services in addition to the cash paid for
such services.
MARKET-MAKING BUSINESS. In support of both of the firm's retail brokerage and
investment banking businesses, we offer our retail brokerage, corporate and
financial institutions wholesale market-making services. vFinance Investments
makes markets in greater than 800 Over-the-Counter Bulletin Board and NASDAQ
Small Cap stocks. We offer our clients professional execution of trades. 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 own capital, research, retail and/or
systems resources to represent a stock and compete with other market makers to
buy and sell the stocks or issues they represent. Operated primarily by
electronic execution, buyers and sellers meet via computer to make bids and
offers. Each market maker competes for "customer order flow" by displaying buy
and sell quotations for a guaranteed number of shares in a security. Once an
order is received, the market maker will immediately purchase for or sell from
its own inventory, or seek the other side of the trade until it is executed,
often in a matter of seconds. The market maker generates all of its revenue from
the difference between the price paid when a security is bought and price
received when that security is sold or the price received when the security is
shorted and the price received when the short is covered. The Company's target
customers are national and regional full-service broker-dealers, electronic
discount brokers and institutional investors that require fast and efficient
executions for each security.
INTERNET STRATEGY (WWW.VFINANCE.COM). Through vFinance Holdings, Inc., we
operate a branded investment-banking channel on the Web located at
www.vfinance.com, offering visitors to our website convenient access to a
variety of financial services, proprietary business development tools,
searchable databases and daily news. We target a worldwide audience of
entrepreneurs, CEOs, private investors and investment firms, allowing them to
interconnect, transact and grow wealth. Our Venture Capital Resource Library of
information on the website offers current articles on venture capital and other
issues, information on initial public offerings, a searchable database of
investment opportunities, and links to EDGAR, the SEC's database of electronic
filings by public companies. Our website also provides directory listings for
venture capital firms, investment banks, lenders, so-called venture capital
angels (which provide first round financing for risky investments), accountants,
financial printers, public relations firms, transfer agents and other types of
companies providing business services. In addition, our website offers to
start-ups and other early-stage firms a Web-based search engine, vSearch, which
provides our proprietary database of venture capital firms by different
criteria, including geography, amount of funds required, industry, stage of
corporate development or keyword. Furthermore, we opened an online loan center
on our website where growing businesses can apply for loans of up to $20
million. Most of the website provides information to the small business
executive or entrepreneur free of charge. However, we do charge nominal fees for
the use of proprietary search engines and premium services such as financial
service listings and business plan listings.
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RESEARCH SERVICES. Our research department focuses on investigating investment
opportunities by utilizing fundamental, technical and quantitative methods to
conduct in-depth analysis. Our research department:
- reviews and analyzes general market conditions and other industry
groups;
- issues written reports on companies, with recommendations on
specific actions to buy, sell or hold;
- furnishes information to retail and institutional customers; and
- responds to inquiries from customers and account executives.
Additionally, our research analysts interface regularly with industry leaders
and portfolio managers in order to produce actionable evaluations and decisions.
These recommendations are communicated to clients and the firm via company and
industry reports.
ADMINISTRATION, OPERATIONS, SECURITIES TRANSACTIONS PROCESSING AND CUSTOMER
ACCOUNTS
Our operating subsidiary does not hold any funds or securities for its
customers. Instead, it uses the services of clearing agents on a fully disclosed
basis. These clearing agents process all securities transactions and maintain
customer accounts on a fee basis. Customer accounts are protected through the
SIPC for up to $500,000, of which coverage for cash balances is limited to
$100,000. In addition, all customer accounts are fully protected by an Excess
Securities Bond providing protection for the account's entire net equity (both
cash and securities). The services of our subsidiary's clearing agents include
billing, credit control, and 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 subsidiary's customers through
the use of margin credit. These loans are made to customers on a secured basis,
with the clearing agents maintaining collateral in the form of saleable
securities, cash or cash equivalents. vFinance Investments, Inc., our
subsidiary, has agreed to indemnify the clearing brokers for losses they incur
on these credit arrangements.
COMPETITION
Our subsidiary encounters intense competition in all aspects of its business and
competes directly with many other securities firms for clients, as well as
registered representatives. Many of its competitors have significantly greater
financial, technical, marketing and other resources than our subsidiary.
National retail firms such as Merrill Lynch Pierce Fenner & Smith Incorporated,
Salomon Smith Barney, Inc. and Morgan Stanley/Dean Witter dominate the industry.
vFinance Investments, also competes with numerous regional and local firms. In
addition, a number of firms offer discount brokerage services to retail
customers and generally effect transactions at substantially lower commission
rates on an "execution only" basis, without offering other services such as
investment recommendations and research. Moreover, there is substantial
commission discounting by full-service broker-dealers competing for
institutional and retail brokerage business. The recent emergence of online
trading has further intensified the competition for brokerage customers. Our
subsidiary currently does not offer any online trading services to its
customers. The continued expansion of discount brokerage firms and online
trading could adversely affect the retail business. Other financial
institutions, notably commercial banks and savings and loan associations, offer
customers some of the same services and products presently provided by
securities firms. While it is not possible to predict the type and extent of
competing services, which banks and other institutions ultimately may offer to
customers, our subsidiary may be adversely affected to the extent those services
are offered on a large-scale basis. We try to compete through our advertising
and recruiting programs for registered representatives interested in potentially
joining our Company.
GOVERNMENT REGULATION
REGULATION OF THE SECURITIES INDUSTRY AND BROKER-DEALERS. Our business is
subject to extensive regulation applicable to the securities industry in the
United States and elsewhere. As a matter of public policy, regulatory bodies in
the United States and rest of the world are charged with safeguarding the
integrity of the securities and other financial markets and with protecting the
interests of customers participating in those markets. In the United States, the
SEC is the federal agency responsible for the administration of the federal
securities laws. In general, broker-dealers are required to register with the
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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, Inc., our subsidiary, is a
broker-dealer registered with the SEC and is a member of the NASD. Our
broker-dealer is also subject to regulation under state law. vFinance
Investments is currently registered as a broker-dealer in all 50 states and the
District of Columbia. The NASD approved the change of ownership to us of (i)
Union Atlantic Capital, L.C. from Pinnacle Capital Group, L.C., (ii) First Level
Capital, Inc. from NW Holdings, Inc. and (iii) First Colonial Securities Group,
Inc. A recent amendment to the federal securities laws prohibits the states from
imposing substantive requirements on broker-dealers that exceed those imposed
under federal law. The amendment, however, does not preclude the states from
imposing registration requirements on broker-dealers that operate within their
jurisdiction or from sanctioning these broker-dealers who have engaged in
misconduct.
The SEC, self-regulatory organizations such as the NASD and state securities
commissions may conduct administrative proceedings which can result in censure,
fine, the issuance of cease-and-desist orders, or the suspension or expulsion of
a broker-dealer, its officers, or its employees. The SEC and self-regulatory
organization rules cover many aspects of a broker-dealer's business, including
capital structure and withdrawals, sales methods, trade practices among
broker-dealers, use, and safekeeping of customers' funds and securities,
record-keeping, the financing of customers' purchases, broker-dealer and
employee registration, and the conduct of directors, officers, and employees.
Additional legislation, changes in rules promulgated by the Commission and
self-regulatory organizations, or changes in the interpretation or enforcement
of existing laws and rules, may directly affect the mode of operation and
profitability of broker-dealers.
The Uniform Net Capital Rule and NASD rules require prior notice to the SEC and
the NASD for certain withdrawals of capital and also provide that the SEC may
restrict for up to 20 business days any withdrawal of equity capital, or
unsecured loans or advances to shareholders, employees or affiliates if the
capital withdrawal, together with all other net capital withdrawals during a
30-day period, exceeds 30% of excess net capital and the SEC concludes that the
capital withdrawal may be detrimental to the financial integrity of the
broker-dealer.
In addition, the Uniform Net Capital Rule provides that the total outstanding
principal amount of a broker-dealer's indebtedness under certain subordination
agreements, the proceeds of which are included in its net capital, may not
exceed 70% of the sum of the outstanding principal amount of all subordinated
indebtedness included in net capital, par or stated value of capital stock, paid
in capital in excess of par, retained earnings and other capital accounts for a
period in excess of 90 days. A change in the Uniform Net Capital Rule, the
imposition of new rules or any unusually large charge against net capital could
limit those parts of our operations that require the intensive use of capital
and also could restrict our ability to pay dividends, repay debt and repurchase
shares of our outstanding stock.
As of December 31, 2002, the minimum amount of net capital required to be
maintained by vFinance Investments was $1,000,000. A significant operating loss
or any unusually large charge against net capital could adversely affect our
ability to expand or even maintain our present levels of business, which could
harm our business. vFinance Investments is a member of Securities Investor
Protection Corporation ("SIPC") which provides, in the event of the liquidation
of a broker-dealer, protection for clients' accounts up to $500,000, subject to
a limitation of $100,000 for claims for cash balances. Our clients' accounts are
carried on the books and records of CSC. CSC has obtained additional insurance
from a private insurer in an amount equal to $4,500,000 for the benefit of our
clients' accounts with vFinance Investments that is supplemental to SIPC
protection.
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 is currently registered as a
broker-dealer in the jurisdictions described in this report, vFinance
Investments and our non-broker dealer subsidiaries are qualified to do business
as a foreign corporation in only a few jurisdictions. Failure to qualify as an
out-of-state or foreign corporation in a jurisdiction where it is required to do
so could subject us to taxes and penalties for the failure to qualify.
INTELLECTUAL PROPERTY
We own the following federally registered marks: vFinance.com, Inc.(R),
AngelSearch(R). In addition, we use the following trademarks: Union Atlantic,
L.C. TM, Union Atlantic Capital, L.C. TM.
EMPLOYEES
At December 31, 2002, we employed the following personnel:
Position Salaried Contract Total
-------- -------- -------- -----
Officers 3 0 3
Clerical 25 0 25
Brokers 23 29 52
Traders 12 0 12
Investment Bankers 10 1 11
Website 3 0 3
Other 0 0 0
-------- -------- -----
Totals 76 30 106
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
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 the two firms
mentioned above and their merger into a single operation. We purchased our hedge
fund management business in mid-2001 but it has been determined to liquidate
such funds. Our website has been in existence since 1995. Our business and
prospects must be considered in light of the risks, expenses and difficulties
frequently encountered by companies in the early stages of development. These
risks are particularly severe among companies in new and rapidly evolving
markets such as online business development services and those in regulated
industries such as the securities industry. It may be difficult or impossible
to accurately forecast our operating results and evaluate our business and
prospects based on our historical results.
-10-
WE HAVE HAD SUBSTANTIAL AND CONTINUING LOSSES SINCE INCEPTION
Since inception, we have sustained substantial losses. Although we showed a
profit for the quarter ending September 30, 2002, such losses continued through
June 30, 2002 due to ongoing operating expenses and a lack of revenues
sufficient to offset operating expenses. We have raised capital to fund ongoing
operations by private sales of our securities, some of which sales have been
highly dilutive and involve considerable expense.
We incurred net losses of $2,235,298 and $17,453,860 for the years ending
December 31, 2002 and December 31, 2001 respectively. As of December 31, 2002,
we had an accumulated deficit of $23,901,658.
We expect to spend significant amounts to enhance our products and technologies,
and to expand domestic and international sales and operations. As a result, we
will need to generate significant additional revenue to achieve profitability
based on such planned expenditures and expansion. Even if we do achieve
profitability, we may not be able to sustain or increase profitability on a
quarterly or annual basis. If we do not achieve and maintain profitability, the
market price for our common stock may further decline.
If we do not receive additional capital when and in the amounts needed in the
near future, our ability to continue as a going concern is in substantial doubt.
Obtaining future financing may be costly and will likely be dilutive to existing
stockholders. If we are not able to obtain financing when and in the amounts
needed, and on terms that are acceptable, our operations, financial condition
and prospects could be materially and adversely affected, and we could be forced
to curtail our operations or sell part or all of our assets.
WE WILL NEED TO RAISE ADDITIONAL FUNDS. THESE FUNDS MAY NOT BE AVAILABLE WHEN WE
NEED THEM.
Based on our current plans and the funding noted above, we believe that our cash
on hand and cash generated from our operations will be sufficient to fund our
operations for at least the next 12 months. However, the Company may look to
raise additional capital to operate the business, support expansion plans,
develop new or enhanced services and products, respond to competitive pressures,
acquire complementary businesses or technologies or respond to unanticipated
events. We can provide no assurances that additional financing will be available
when needed on favorable terms, or at all. If these funds are not available when
we need them, we may need to change our business strategy or reduce our
operations or investment activities. In addition, any issuance of additional
equity securities will dilute the ownership interest of our existing
stockholders and the issuance of additional debt securities may increase the
perceived risk of investing in us.
WE ARE SUBJECT TO VARIOUS RISKS ASSOCIATED WITH THE SECURITIES INDUSTRY.
As securities broker-dealers, we are subject to uncertainties that are common in
the securities industry. These uncertainties include:
- the volatility of domestic and international financial, bond and stock
markets,as demonstrated by recent disruptions in the financial markets;
- extensive governmental regulation;
- litigation;
- intense competition;
- substantial fluctuations in the volume and price level of securities;
and
- dependence on the solvency of various third parties.
As a result, revenues and earnings may vary significantly from quarter to
quarter and from year to year. In periods of low volume, profitability is
impaired because certain expenses remain relatively fixed. We are much smaller
and have much less capital than many competitors in the securities industry. In
the event of a market downturn, our business could be adversely affected in many
ways, including those described below. Our revenues are likely to decline in
such circumstances and, if we are unable to reduce expenses at the same pace,
our profit margins would erode.
OUR BUSINESS COULD BE ADVERSELY AFFECTED BY A BREAKDOWN IN THE FINANCIAL MARKETS
As a securities broker-dealer, our business is materially affected by conditions
in the financial markets and economic conditions generally, both in the United
States and elsewhere around the world. Many factors or events could lead to a
breakdown in the financial markets including war, terrorism, natural
catastrophes and other types of disasters. These types of events could cause
people to begin to lose confidence in the financial markets and their ability to
function effectively. If the financial markets are unable to effectively prepare
for these types of events and ease public concern over their ability to
function, our revenues are likely to decline and our operations will be
adversely affected.
-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, in those markets, a
downturn in those markets could result in losses from a decline in the value of
those long positions. Conversely, to the extent that we have sold assets that we
do not own, i.e., have short positions, in any of those markets, an upturn in
those markets could expose us to potentially unlimited losses as we attempt to
cover our short positions by acquiring assets in a rising market.
We may, from time to time, have a trading strategy consisting of holding a long
position in one asset and a short position in another from which we expect to
earn revenues based on changes in the relative value of the two assets. If,
however, the relative value of the two assets changes in a direction or manner
that we did not anticipate or against which we are not hedged, we might realize
a loss in those paired positions. In addition, we maintain trading positions
that can be adversely affected by the level of volatility in the financial
markets, i.e., the degree to which trading prices fluctuate over a particular
period, in a particular market, regardless of market levels.
OUR REVENUES MAY DECLINE IN ADVERSE MARKET OR ECONOMIC CONDITIONS.
Unfavorable financial or economic conditions may reduce the number and size of
the transactions in which we provide underwriting services, merger and
acquisition consulting and other services. Our investment banking revenues, in
the form of financial advisory and underwriting fees, are directly related to
the number and size of the transactions in which we participate and would
therefore be adversely affected by a sustained market downturn. Additionally, a
downturn in market conditions could lead to a decline in the volume of
transactions that we execute for our customers and, therefore, to a decline in
the revenues we receive from commissions and spreads.
OUR RISK MANAGEMENT POLICIES AND PROCEDURES MAY LEAVE US EXPOSED TO UNIDENTIFIED
RISKS OR AN UNANTICIPATED LEVEL OF RISK.
The policies and procedures we employ to identify, monitor and manage risks may
not be fully effective. Some methods of risk management are based on the use of
observed historical market behavior. As a result, these methods may not predict
future risk exposures, which could be significantly greater than the historical
measures indicate. Other risk management methods depend on evaluation of
information regarding markets, clients or other matters that are publicly
available or otherwise accessible by us. This information may not be accurate,
complete, up-to-date or properly evaluated. Management of operational, legal and
regulatory risk requires, among other things, policies and procedures to
properly record and verify a large number of transactions and events. We cannot
assure you that our policies and procedures will effectively and accurately
record and verify this information.
We seek to monitor and control our risk exposure through a variety of separate
but complementary financial, credit, operational and legal reporting systems. We
believe that we effectively evaluate and manage the market, credit and other
risks to which we are exposed. Nonetheless, the effectiveness of our ability to
manage risk exposure can never be completely or accurately predicted or fully
assured. For example, unexpectedly large or rapid movements or disruptions in
one or more markets or other unforeseen developments can have a material adverse
effect on our results of operations and financial condition. The consequences of
these developments can include losses due to adverse changes in inventory
values, decreases in the liquidity of trading positions, higher volatility in
earnings, increases in our credit risk to customers as well as to third parties
and increases in general systemic risk.
CREDIT RISK EXPOSES US TO LOSSES CAUSED BY FINANCIAL OR OTHER PROBLEMS
EXPERIENCED BY THIRD PARTIES.
We are exposed to the risk that third parties 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 EFFECTIVELY MANAGING OUR GROWTH.
Over the past several years, we have experienced significant growth in our
business activities and the number of our employees through a variety of
transactions. We expect our business to continue to grow. Growth of this nature
involves numerous risks such as:
- difficulties and expenses incurred in connection with the
subsequent assimilation of the operations and services or
products of the acquired company;
- the potential loss of key employees of the acquired company;
and
- the diversion of management's attention from other business
concerns.
If we are unable to effectively address these risks, we may be required to
restructure the acquired business or write off the value of some or all of the
assets of the acquired business. Further, this type of growth requires increased
investments in management personnel, financial and management systems and
controls, and facilities. We cannot assure you that we will experience parallel
growth in these areas. If these areas do not grow at the same time, our
operating margins may decline from current levels.
Additionally, as is common in the securities industry, we will continue to be
highly dependent on the effective and reliable operation of our communications
and information systems. We believe that our current and anticipated future
growth will require implementation of new and enhanced communications and
information systems and training of our personnel to operate such systems. Any
difficulty or significant delay in the implementation or operation of existing
or new systems or the training of personnel could adversely affect our ability
to manage our growth.
INTENSE COMPETITION FROM EXISTING AND NEW ENTITIES MAY ADVERSELY AFFECT OUR
REVENUES AND PROFITABILITY.
The securities industry is rapidly evolving, intensely competitive and has few
barriers to entry. We expect competition to continue and intensify in the
future. Many of our competitors have significantly greater financial, technical,
marketing and other resources than we do. Some of our competitors also offer a
wider range of services and financial products than we do and have greater name
recognition and a larger client base. These competitors may be able to respond
more quickly to new or changing opportunities, technologies and client
requirements. They may also be able to undertake more extensive promotional
activities, offer more attractive terms to clients, and adopt more aggressive
pricing policies. We may not be able to compete effectively with current or
future competitors and competitive pressures faced by us may harm our business.
THE PRECAUTIONS WE TAKE TO PREVENT AND DETECT EMPLOYEE MISCONDUCT MAY NOT BE
EFFECTIVE AND WE COULD BE EXPOSED TO UNKNOWN AND UNMANAGED RISKS OR LOSSES.
We run the risk that employee misconduct could occur. Misconduct by employees
could include:
- employees binding us to transactions that exceed authorized limits or
present unacceptable risks to us;
- employees hiding unauthorized or unsuccessful activities from us; or
- the improper use of confidential information.
These types of misconduct could result in unknown and unmanaged risks or losses
to us including regulatory sanctions and serious harm to our reputation. The
precautions we take to prevent and detect these activities may not be effective.
If employee misconduct does occur, our business operations could be materially
adversely affected.
-13-
RISK OF LOSSES ASSOCIATED WITH SECURITIES LAWS VIOLATIONS AND LITIGATION.
Many aspects of our business involve substantial risks of liability. An
underwriter is exposed to substantial liability under federal and state
securities laws, other federal and state laws, and court decisions, including
decisions with respect to underwriters' liability and limitations on
indemnification of underwriters by issuers. For example, a firm that acts as an
underwriter may be held liable for material misstatements or omissions of fact
in a prospectus used in connection with the securities being offered or for
statements made by its securities analysts or other personnel. In recent years,
there has been an increasing incidence of litigation involving the securities
industry, including class actions that seek substantial damages. Our
underwriting activities will usually involve offerings of the securities of
smaller companies, which often involve a higher degree of risk and are more
volatile than the securities of more established companies. In comparison with
more established companies, smaller companies are also more likely to be the
subject of securities class actions, to carry directors and officers liability
insurance policies with lower limits or none at all, and to become insolvent.
Each of these factors increases the likelihood that an underwriter of a smaller
companies' securities will be required to contribute to an adverse judgment or
settlement of a securities lawsuit.
In the normal course of business, our operating subsidiaries have been and
continue to be the subject of numerous civil actions and arbitrations arising
out of customer complaints relating to our activities as a broker-dealer, as an
employer and as a result of other business activities. In general, the cases
involve various allegations that our employees had mishandled customer accounts.
We believe that, based on our historical experience and the reserves established
by us, the resolution of the claims presently pending will not have a material
adverse effect on our financial condition. However, although we typically
reserve an amount we believe will be sufficient to cover any damages assessed
against us, we have in the past been assessed damages that exceeded our
reserves. If we misjudged the amount of damages that may be assessed against us
from pending or threatened claims, or if we are unable to adequately estimate
the amount of damages that will be assessed against us from claims that arise in
the future and reserve accordingly, our financial condition may be materially
adversely affected.
OUR DIRECTORS AND EXECUTIVE OFFICERS CONTROL APPROXIMATELY 41.6% OF OUR COMMON
STOCK AND MAY HAVE INTERESTS DIFFERING FROM THOSE OF OTHER STOCKHOLDERS.
At December 31, 2002, our directors and executive officers control approximately
41.6% of our outstanding common stock, directly as stockholders and indirectly
through control relationships with other stockholders. There is no supermajority
vote. These directors and executive officers, if acting together, would be able
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 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.
These expenditures may not result in sufficient increases in revenues to offset
these expenditures. In addition, even if brand recognition increases, the number
of new users or the number of page views of our website may not increase. Even
if the number of new users increases, those users may not regularly use our
website.
FAILURE TO MAINTAIN OR INCREASE THE FLOW OF TRAFFIC TO OUR WEBSITE COULD HARM
OUR BUSINESS.
Our business partially depends on our ability to maintain or increase traffic on
our website as well as our ability to have visitors to our website use our
services. The website is dependent on the flow of information for its validity.
It is important for our business development activities to increase the number
of daily visitors, repeat visitors and the amount of time visitors spend on our
website. Failure to do so could adversely affect our revenue and our ability to
raise additional funds.
-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 occurs:
- Human error;
- Subsystem, component, or software failure;
- A power or telecommunications failure;
- An earthquake, fire, or other natural disaster;
- Hacker attacks or other intentional acts of vandalism; or
- An act of God or war.
Any such systems failure that interrupts our operations could seriously harm our
business. We currently have limited off-site data storage and disaster recovery
systems.
The Internet has experienced, and is expected to continue to experience,
significant growth in the number of users and amount of traffic. Our future
success will depend upon the development and maintenance of the Internet's
infrastructure to cope with this increased traffic. This will require a reliable
network backbone with the necessary speed, data capacity, security, and the
timely development of complementary products, such as high-speed modems, for
providing reliable Internet access and services.
The secure transmission of confidential information over public networks is a
critical element of our operations. We rely on encryption and authentication
technology to provide the security and authentication necessary to effect secure
transmission of confidential information over the Internet. To the best of our
knowledge, to date, we have not experienced any security breaches in the
transmission of confidential information. Moreover, we continually evaluate
advanced encryption technology to ensure the continued integrity of our systems.
However, we cannot assure you that advances in computer capabilities, new
discoveries in the field of cryptography or other events or developments will
not result in a compromise of the technology or other algorithms used by our
vendors and us to protect client transaction and other data. Any compromise of
our systems or security could harm our business.
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 of us;
- 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, YOU MAY HAVE GREATER
DIFFICULTY SELLING YOUR 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.
WE RELY VERY HEAVILY ON CORRESPONDENT SERVICES CORP. ("CSC"), CLEARING BROKER
FOR VFINANCE INVESTMENTS, OUR OPERATING BROKER-DEALER SUBSIDIARY. THE
TERMINATION OF THE AGREEMENT BETWEEN THE CLEARING BROKER AND VFINANCE
INVESTMENTS COULD HARM OUR BUSINESS.
Either party, upon 60 days prior written notice, may terminate the clearing
agreement between the Company and CSC. According to the terms of the agreement,
the clearing broker, on a fee basis, processes all securities transactions for
the accounts of vFinance Investments and the accounts of its clients. CSC
services include billing and credit extension, control and receipt, custody and
delivery of securities, for which vFinance Investments pays a transaction
charge. We are dependent on the operational capacity and the ability of CSC for
the orderly processing of transactions. In addition, by engaging the processing
services of a clearing broker, vFinance Investments is exempt from certain
capital reserve requirements and other complex regulatory requirements imposed
by federal and state securities laws. Moreover, vFinance Investments has agreed
to indemnify and hold CSC harmless from certain liabilities or claims, including
claims arising from the transactions of its clients.
OUR OPERATING BROKER-DEALER SUBSIDIARY EXTENDS CREDIT TO ITS CLIENTS AND IS
SUBJECT TO RISKS AS A RESULT.
Our broker dealer clears all transactions for its customers on a fully disclosed
basis with its clearing broker, CSC, which carries and clears all customer
securities accounts. A limited portion of the customer securities activities of
vFinance Investments are transacted on a "margin" basis, pursuant to which
credit is extended to customers, which (a) is secured by cash and securities in
customer accounts, or (b) involve (i) "short sales" (i.e., the sale of
securities not yet purchased) or (ii) the purchase and sale of commodity futures
contracts, substantially all of which are transacted on a margin basis. These
risks are increased during periods of volatile markets in which the value of the
collateral vFinance Investments holds could fall below the amount borrowed by
its clients. If margin requirements are not sufficient to cover losses, vFinance
Investments may be required to sell or buy securities at prevailing market
prices and incur losses to satisfy its client obligations.
-16-
WE UNDERWRITE SECURITIES THROUGH VFINANCE INVESTMENTS AND ARE SUBJECT TO LOSSES
RELATING TO A DECLINE IN THE MARKET VALUE OF SECURITIES THAT WE HOLD IN
INVENTORY AND TO LIABILITY FOR ENGAGING IN UNDERWRITING ACTIVITIES.
The underwriting activities of vFinance Investments involve the purchase, sale
or short sale of securities as a principal. As an underwriter, vFinance
Investments agrees to purchase securities on a "firm commitment" basis and is
subject to risk that it may be unable to resell securities or be required to
dispose of securities at a loss. In connection with our investment-banking
activities in which vFinance Investments acts as a manager or co-manager of
public offerings of securities, we expect to make increased commitments through
vFinance Investments of capital to market making activities in securities of
those issuers. Any additional concentration of capital in the securities of
those issuers held in inventory will increase the risk of loss from possible
declines in the market price of those securities. In addition, under federal
securities laws, other laws and court decisions with respect to underwriters'
liabilities and limitations on the indemnification of underwriters by issuers,
an underwriter is subject to substantial potential liability for misstatements
or omissions of material facts in prospectuses and other communications with
respect to securities offerings. Our potential liability through vFinance
Investments as an underwriter is generally not covered by insurance. Moreover,
underwriting commitments constitute a charge against net capital and the ability
of vFinance Investments to make underwriting commitments may be limited by the
requirement that it must at all times be in compliance with the net capital
rule. For the twelve month period the Company has not participated in any firm
commitment underwritings.
Our success and ability to compete depend to a significant degree on our
intellectual property. We rely on copyright and trademark law, as well as
confidentiality arrangements, to protect our intellectual property. The Company
owns the following federally registered marks: vFinance, Inc.(R), vFinance.com,
Inc.(R), and AngelSearch(R). In addition, our company owns the following state
registered marks: Union Atlantic LC and Union Atlantic Capital, L.C. We
currently do not have any patents. The concepts and technologies we use may not
be patentable. Our competitors or others may adopt product or service names
similar to "vFinance.com," thereby impeding our ability to build brand identity
and possibly leading to client confusion. Our inability to adequately protect
the name "vFinance.com" would seriously harm our business. Policing unauthorized
use of our intellectual property is made especially difficult by the global
nature of the Internet and difficulty in controlling the ultimate destination or
security of software or other data transmitted on it.
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 our company and could have
the effect of delaying, deferring or preventing a change in control of our
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 SHAREHOLDERS.
As of December 31, 2002, the Company had 28, 351,570 shares of common stock
outstanding, options to purchase a total of 4,471,664 shares of common stock,
warrants to purchase a total of 4,108,499 shares of common stock and
subordinated convertible promissory notes convertible into 2,631,578 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 three locations. The following chart provides
information related to these lease obligations:
Approximate Lease Expiration
Office Location Square Footage Rental Date
---------------------------------------------------------------------------
3010 N. Military, Boca Raton FL 9,282 $ 309,926 08/01/08
Red Bank, NJ 4,100 $ 75,000 10/31/03
880 Third Ave., NY 6,102 $ 199,928 12/31/04
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. The new lease is for approximately 9,282 square feet
at a rental of $309,926 per annum.
During the year 2002, three of our property leases expired, two leases were
successfully negotiated out of, and two other leases were terminated. Of the two
leases, which were terminated, the Company is currently in legal proceedings
regarding one of them (830 Third Ave. NY, see Item 3, Legal Proceedings). In
addition to the leased locations listed herein, the Company has relationships
with certain independent contractors located in their own leased facilities
throughout the country.
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 we, or a subsidiary of ours, are named as a party to a lawsuit
that has arisen in the ordinary course of business. Although it is possible that
losses exceeding amounts already recorded may be incurred upon ultimate
resolution of these existing legal proceedings, we believe that such losses, if
any, will not have a material adverse effect on our business, results of
operations or financial position; however, unfavorable resolution of each matter
individually or in the aggregate could affect the consolidated results of
operations for the quarterly and annual periods in which they are resolved.
-18-
The business of vFinance Investments involves substantial risks of liability,
including exposure to liability under federal and state securities laws in
connection with the underwriting or distribution of securities and claims by
dissatisfied customers for fraud, unauthorized trading, churning, mismanagement
and breach of fiduciary duty. In recent years, there has been an increasing
incidence of litigation involving the securities industry, including class
actions that generally seek rescission and substantial damages.
In the ordinary course of business, 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. What follows below is a brief summary of
certain matters pending against or involving the Company and its subsidiaries.
First Colonial Securities Group, Inc. ("First Colonial") is subject to
supervision and regulation by the NASD, the SEC and various state securities
commissions. As part of this regulatory oversight, First Colonial is subject to
periodic examination and inspections by these authorities. First Colonial has
been advised that as a result of an examination performed by the Philadelphia
office of the NASD for the years 1996 and 1997, the NASD identified several
possible material deficiencies. The NASD and the Company settled the matter in
February 2002 with the Company paying a fine of $75,000.
On or about May 17, 2001, Michael Golden ("Golden"), (a former Director of the
Company and former President of the Company's broker dealer and the controlling
shareholder of Colonial Direct Financial ("Colonial Direct"), a former
wholly-owned subsidiary of the Company) filed an initial complaint against the
Company in the Circuit Court of the 17th Judicial Circuit in and for Broward
County, Florida, alleging that the Company breached its January 5, 2001
employment agreement with Golden, which was entered into as a result of the
merger between Colonial Direct and the Company. Mr. Golden claims that he
terminated the agreement for "good reason," as defined in the agreement, and
that we have failed to pay him severance payments and other benefits as well as
accrued commissions and un-reimbursed expenses. In the initial complaint, Golden
sought monetary damages from the Company in excess of $50,000 together with
interest, attorney's fees and costs. On or about July 18, 2001, the Company
filed its answer and affirmative defenses and counterclaims with the Circuit
Court against Golden and Ben Lichtenberg ("Lichtenberg"), Golden's partner in
Colonial Direct, denying all material allegations in the complaint,
affirmatively alleging that Golden is not entitled to any severance payments
because he was terminated for cause for his insubordination, failure to follow
directives of our board of directors and for breaches of fiduciary duty to the
Company. The Company also alleged certain other breaches.
As of October 23, 2002 the Company has settled its dispute with Lichtenberg, and
as of December 30, 2002, the Company entered into a definitive settlement
agreement with Golden. Under the terms of the settlement with Lichtenberg, a
full mutual general release and covenant not to sue was entered into with no
payments to or by the Company. The settlement agreement with Golden brings to
closure all lawsuits between the parties. Specifically, under the terms of the
agreement, Golden and the Company have entered into a full general release of
any and all outstanding obligations between the parties, and in consideration,
the Company redeemed 50,000 Shares of Series B Preferred Stock having an
aggregate par value of $500,000 in exchange for 3,000,000 unregistered common
shares of the Company subject to a one year lock-up. In addition, Golden will
receive from the Company $7,000 per month for 12 months and thereafter, $5,000
per month for approximately 34 months. In a separate settlement agreement,
Leonard Sokolow, the Company's President and Chief Executive Officer, and
Timothy Mahoney, the Company's Chief Operating Officer and Chairman, privately
purchased 4,500,000 shares of Golden's vFinance, Inc. Common Stock.
-19-
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 has commenced 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 Promissary Note in the
principal amount of $250,000. The Company believes their claim is without merit
and will vigorously defend the action.
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 relet the premises at a similar rate. The
Company (s) believe that their claim is without merit and will vigorously defend
the action.
PROCEEDINGS INVOLVING FIRST COLONIAL SECURITIES GROUP, INC.
On May 15, 2001, Louis D'Alessio filed a claim with the NASD against First
Colonial and Joel Kamphuis. His claim alleges compensatory damages in an amount
between $100,000 and $500,000 plus unspecified punitive damages. He alleges
unfair business practices, violation of the federal securities act, violation of
state securities statutes, and common law fraud. vFinance Investments believes
that their claim is without merit and is vigorously defending the action. This
matter was settled on June 24, 2002 in the amount of $16,250.
On January 22, 2002, Josephine and Frank Oliveri filed a claim with the NASD
against First Colonial and Anthony Guglieri. Their claim alleges compensatory
damages of $192,286.50 plus interest and punitive damages of $100,000. They
allege unsuitable investments, unauthorized trading, excessive trading and lack
of supervision. vFinance Investments believes that their claim is without merit
and is vigorously defending the action. We anticipate that this matter will
result in a settlement of approximately $35,000.
On October 3, 2001, Sterling Financial Investment Group filed a claim with the
NASD against vFinance Investment, Michael Kraft, Mickey Dubberly and Jaret
Brietstein. Their claim alleges compensatory damages and punitive damages to not
exceed the sum of $500,000. They alleged vFinance Investments offered and made
significant cash payments to Sterling's employees, Kraft, Dubberly and
Brietstein to entice them to break their written employment agreements with
Sterling and work for vFinance Investments. This matter was settled on September
6, 2002 in the amount of $500.
On August 14, 2001, Rosario Catanzarite, Joann Catanzarite, Anna Piegaro, Brian
Catanzarite and Dina Catanzarite filed a claim with the NASD against First
Colonial, Rodney Strong, Glen Merendino, Michael Golden, Lewis Maniloff, and
Steven Schwartz. Their claim alleges compensatory damages in the amount of
$125,000 plus interest. They allege that Mr. Merendino completely abused their
trust, processed unsuitable trades, coupled with abusive use of margin. This
matter was settled on November 27, 2002 in the amount of $30,000.
We are engaged in a number of other legal proceedings incidental to the conduct
of our business. These claims aggregate a range of $140,000 to $1,395,000. In
the opinion of our management, our company is adequately insured against the
claims relating to such proceedings, and any ultimate liability arising out of
such proceedings will not have a material adverse effect on the financial
condition or results of operations of our company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of stockholders during the fourth quarter of
our 2002 fiscal year.
-20-
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
MARKET INFORMATION
Our common stock, par value $0.01 per share, is traded on the OTC Bulletin Board
of the National Association of Securities Dealers, Inc. under the symbol "VFIN."
From October 8, 1992 through December 31, 1993, our common stock and warrants
were trading on the NASDAQ SmallCap Market under the symbols PFII and PFIIW,
respectively, and on the Boston Stock Exchange under the symbols PFI and PFIW,
respectively. In January 1994, our common stock and warrants were de-listed from
both exchanges. The warrants expired in October 1995. From January 1994 until
November 18, 1998, there was no public trading market for our common stock.
The following table sets forth the closing high and low bid information for our
common stock for the periods indicated below, as reported by the National
Quotation Bureau during such periods:
High Low
2001
1st Quarter 0.97 0.31
2nd Quarter 0.21 0.50
3rd Quarter 0.46 0.22
4th Quarter 0.88 0.15
2002
1st Quarter 0.60 0.30
2nd Quarter 0.51 0.25
3rd Quarter 0.27 0.11
4th Quarter 0.20 0.06
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
29,851,570 shares were issued and outstanding as of March 27, 2003. 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 27, 2003 is 312.
We have not paid any cash dividends since inception, and we do not anticipate
paying any cash dividend in the foreseeable future.
Our transfer agent is North American Transfer Co., Freeport, New York 11520.
RECENT SALES OF UNREGISTERED SECURITIES
On November 8, 2002 the Company sold 100,000 unregistered shares at a price of
$0.11 per share for a total consideration of $11,000 to Pittsford Capital
Warrant Partners, LLC.
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.
-21-
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS
CRITICAL ACCOUNTING POLICIES
Financial Reporting Release No. 60, which was recently released by the SEC,
requires all companies to include a discussion of critical accounting policies
or methods used in the preparation of financial statements. Note 2 to our
consolidated financial statements includes a summary of the significant
accounting policies and methods used in the preparation of our consolidated
financial statements. The following is a brief discussion of the more
significant accounting policies and methods used by us.
GENERAL. The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities,
disclosure of contingent assets and liabilities and the reported amounts of
revenues and expenses. Actual results could differ from those estimates.
REVENUE RECOGNITION
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.
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, 2002 and 2001, the Company recognized $1,233,687 and $1,756,411 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, 2002, certain transactions in process may result in the
Company receiving equity instruments or stock purchase warrants in subsequent
periods as discussed above. In such event, the Company will recognize revenue
related to the receipt of such equity instruments consistent with the
aforementioned policies.
The Company sells two types of listings to its website: (i) perpetual listings
to venture capital vendors, who are interested in providing services to other
companies or individuals; and (ii) three-month listings to entrepreneurs who
have new business ideas to sell. Revenue related to the listings is generally
recognized over the terms of such listings. Website revenues are concentrated
primarily in the United States but are not concentrated in any particular region
of the country or with any individual or group. Fees related to such listings
are included in "other" in the statements of operations for the years ended
December 31, 2002 and 2001.
CLEARING ARRANGEMENT. We do not carry accounts for customers or perform
custodial functions related to customers' securities. We introduce all of their
customer transactions, which are not reflected in these financial statements, to
their respective clearing brokers, which maintain the customers' accounts and
clear such transactions. Additionally, our clearing firm provides the clearing
and depository operations for our proprietary securities transactions. These
activities may expose our broker dealer off-balance-sheet risk in the event that
customers do not fulfill their obligations with the clearing broker, as our
broker dealer has agreed to indemnify our clearing firm.
-22-
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, 2002 and 2001, accrued payroll of $221,447 and $254,625,
respectively, was owed to current 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.
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.
GOODWILL AND OTHER INTANGIBLE ASSETS ("FAS 142"). The provisions of FAS 141
eliminated the pooling-of-interests method of accounting for business
combinations consummated after June 30, 2001. We adopted FAS 141 on July 1, 2001
and it did not have a significant impact on our financial position or results of
operations. Under the provisions of FAS 142, goodwill and indefinite lived
intangible assets are no longer amortized, but are reviewed annually for
impairment. Separable intangible assets that are not deemed to have an
indefinite life will continue to be amortized over their useful lives. We
adopted the new accounting rules beginning January 1, 2002. Management
is currently assessing the financial impact FAS 142 will have on the
consolidated financial statements, but they do not believe it will be material.
-23-
The value of the Company's goodwill is exposed to future adverse changes if the
Company experiences declines in operating results or experiences significant
negative industry or economic trends or if future performance is below
historical trends. The Company periodically reviews intangible assets and
goodwill for impairment using the guidance of applicable accounting literature.
We are subject to financial statement risk to the extent that the goodwill and
other intangible assets become impaired. During the year ended December 31,
2002, we did not record any impairment losses related to goodwill and other
intangible assets. It is expected that the adoption of FAS 142 may result in a
one-time, non-cash charge.
In August 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 144, ACCOUNTING FOR THE IMPAIRMENT OR
DISPOSAL OF LONG-LIVED ASSETS ("FAS 144"), which addresses financial accounting
and reporting for the impairment or disposal of long-lived assets and supersedes
SFAS No. 121, ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS AND FOR
LONG-LIVED ASSETS TO BE DISPOSED OF, and the accounting and reporting provisions
of APB Opinion No. 30, REPORTING THE RESULTS OF OPERATIONS - REPORTING THE
EFFECTS OF DISPOSAL OF A SEGMENT OF A BUSINESS ("APB 30"). We are required to
adopt the new accounting rules beginning January 1, 2002. Management is
currently assessing the financial impact FAS 144 will have on the consolidated
financial statements, but they do not believe it will be material.
YEAR ENDED DECEMBER 31, 2002 COMPARED TO THE YEAR ENDED DECEMBER 31, 2001
STATEMENTS OF OPERATIONS
Business Environment
The securities industry is highly competitive and sensitive to many factors and
is directly affected by general economic and market conditions, including the
volatility and price level of securities markets; the volume, size, and timing
of securities transactions; the demand for investment banking services and
changes in interest rates. All such conditions have an impact on commissions,
trading and investment income as well as on liquidity. In addition, a
significant portion of the Company's expenses are relatively fixed and do not
vary with market activity. Consequently, substantial fluctuations can occur in
the Company's revenues and net income from period to period due to these and
other factors.
In addition, the Company has faced increasing competition from commercial banks
and other sources as these institutions begin to offer more investment banking
and financial services traditionally only provided by securities firms. The
effect of the consolidation of the securities industry of recent years means
that a variety of financial services companies have merged to offer a broader
spectrum of investment products and such competitors have substantially greater
financial resources than the Company. The Company is also experiencing
increasing regulation in the securities industry, particularly affecting the
over-the-counter markets, making compliance with regulations more difficult and
costly. At present, the Company is unable to predict the extent of the changes,
or their potential effect on the Company's business.
Outlook
The Company's long-term plan is to continue to add independent contractors and
expand existing offices by hiring experienced professionals, thus maximizing the
potential of each office and expanding the development of existing retail
brokerage, trading, investment banking, investment advisory and other
activities. Equally important is the search for viable acquisition and merger
candidates. As opportunities are presented, it is the intention of the Company
to pursue growth by acquisition or merger where a comfortable match can be found
in terms of corporate goals and personnel and at a price or valuation that would
provide the Company's shareholders with incremental value.
Results of Operations
Markets in fiscal 2002 continued to be both volatile and repressed. The ongoing
ramifications from the rapid devaluation of technology stocks in 2000 followed
closely by the terrorist attacks of September 11, 2001 and more recently the
discovery of fraudulent accounting practices and subsequent bankruptcies at
several major corporations, provides slim hope for a significant rebound in the
securities markets. The securities markets may also be affected by the fact that
the war in Iraq will cost greater than $70 billion.
Despite the gloomy economic outlook, the Company remains guardedly optimistic.
During 2002, its revenues grew by close to 25% and its net loss was reduced
dramatically. In the upcoming fiscal year, the Company will continue with its
operating plan focused on efficiencies. Cost saving measures have been, and
will continue to be, implemented throughout the organization. Acquisitions or
mergers may still present growth opportunities as the valuations of synergistic
companies continue to be depressed.
-24-
The following table and discussion summarizes the changes in the major revenue
and expense categories for the past two years.
Years ended December 31,
----------------------------------------------------------
2002 2001
--------------------------- -----------------------------
Revenues % of Revenues Revenues % of Revenues
Revenues:
Commissions - agency $ 9,736,476 50% $ 6,799,700 43%
Trading Profits 3,861,068 20% 4,774,010 30%
Success fees 3,255,587 17% 2,493,671 16%
Consulting and retainers 1,481,453 8% 761,061 5%
Other brokerage related
income 633,849 3% 567,077 4%
Other 410,186 2% 373,704 2%
---------- ------ ---------- -------
Total revenues 19,378,619 100% 15,769,223 100%
---------- ------ ---------- -------
Cost of revenues:
Commissions 9,955,324 51% 7,861,258 50%
Clearing and
transaction costs 833,784 4% 1,754,446 11%
Other 35,002 1% 46,695 0%
---------- ------ ---------- -------
Total cost of revenues 10,824,110 56% 9,662,399 61%
---------- ------ ---------- -------
Gross profit 8,554,509 44% 6,106,824 39%
---------- ------ ---------- -------
Other expenses:
General and
administrative 8,317,561 44% 9,110,274 58%
Write-off of goodwill - 0% 8,582,020 55%
Net loss on trading
securities (22,682) 0% 79,827 1%
Professional fees 725,003 4% 1,006,696 7%
Provision for bad debts 593,121 3% 349,049 2%
Legal litigation 212,490 1% 215,018 1%
Net unrealized loss on
investments held for
trading and stock
purchase warrants 91,810 0% 1,443,878 9%
Depreciation and
amortization 203,897 1% 958,711 6%
Amounts forgiven under
forgivable loans 229,597 1% 956,543 6%
Stock based compensation 70,560 0% 517,675 3%
Write-off of refundable
income taxes 139,513 1% - 0%
---------- ------ ---------- -------
Total other expenses 10,560,870 55% 23,219,691 148%
---------- ------ ---------- -------
Loss from operations (2,006,361) (11)% (17,112,867) (109)%
Interest and dividend
income (expense) (228,937) (1)% (340,993) (2)%
---------- ------ ---------- -------
Net Loss $(2,235,298) -12% $(17,453,860) -111%
========== ==========
Total revenues were $19,378,619 for the year ended December 31, 2002 as compared
to $15,769,223 for the year ended December 31, 2001, an increase of $3,609,396,
or 23%. The increase in revenues was in all categories; Brokerage and Trading
increased $2,090,606, or 17% from the prior year, and Investment
Banking/Consulting increased $1,482,308, or 47%, from the prior year. The
revenue increase was primarily a result of ongoing recruiting efforts to attract
seasoned professionals with high profile clientele and relationships.
Cost of revenues was $10,824,110 for the year ended December 31, 2002 as
compared to $9,662,399 for the year ended December 31, 2001, an increase of
$1,161,711, or 12%. The chart below compares each of the three segments of our
business revenues, cost of revenues, gross profit and gross profit margin for
the years ended December 31, 2002 and 2001.
-25-
Investment
Brokerage Banking
and Trading Consulting Other Total
----------- ----------- ----------- -----------
2001
Revenues $12,140,787 $ 3,254,732 $ 373,704 $15,769,223
Cost of Revenues 8,655,602 960,102 46,695 9,662,399
----------- ----------- ----------- -----------
Gross Profit $ 3,485,185 $ 2,294,630 $ 327,009 $ 6,106,824
=========== =========== =========== ===========
GROSS PROFIT MARGIN 28.7% 70.5% 87.5% 38.7%
=========== =========== =========== ===========
2002
Revenues $14,231,393 $ 4,737,040 $ 410,186 $19,378,619
Cost of Revenues 8,542,809 2,246,299 35,002 10,824,110
----------- ----------- ----------- -----------
Gross Profit $ 5,688,584 $ 2,490,741 $ 375,184 $ 8,554,509
=========== =========== =========== ===========
GROSS PROFIT MARGIN 39.9% 52.5% 91.4% 44.1%
=========== =========== =========== ===========
Gross profit was $8,554,509 for the year ended December 31, 2002 as compared to
$6,106,824 for the year ended December 31, 2001, an increase of $2,447,685, or
40%. Gross profit margin for the year ended December 31, 2002 was 44% as
compared to 39% for the year ended December 31, 2001. The increase in gross
profit margin was primarily due to reduced commission payouts to brokers and
traders as well as a concerted effort to reduce the costs of doing business,
including reducing information services available to brokers and traders. This
was partially offset by enhanced compensation plans implemented to attract and
recruit new investment bankers.
General and administrative expenses were $8,317,561 for the year ended December
31, 2002 as compared to $9,110,274 for the year ended December 31, 2001, a
decrease of $792,713, or 9%. This decrease is primarily attributable to the
Company's cost savings measures such as headcount reductions and consolidation
of its leased space. Furthermore, the Company is consciously limiting its
spending in this difficult economic environment.
At December 31, 2001, we wrote off the unamortized goodwill of $8,582,020
remaining from the acquisition of First Level, Colonial and Critical. It was
determined that there was no need for any further write down of goodwill at
December 31, 2002.
We determined that, as of December 31, 2001, a write-down of the goodwill
related to the NWH acquisition was necessary as our projections of the future
operating results of First Level indicated impairment. The year end 2001
analysis of the operating results of First Level was performed as part of the
Company's normal budgeting process for the upcoming year (2002). Based on such
projections and other analysis, we took an impairment charge aggregating
$876,000, related to NWH goodwill. Goodwill remaining as of December 31, 2002
and 2001 totaled $420,000. The remaining $420,000 is a conservative estimate
based on the fact that the majority of First Level Capital employees were still
with the Company at December 31, 2002.
We determined that, as of December 31, 2001, a write-down of the goodwill
related to the Colonial acquisition was necessary as our projections of future
operating results indicated impairment. The year end 2001 analysis of the
operating results of Colonial was performed as part of the Company's normal
budgeting process for the upcoming year (2002). Further, because we closed the
operations formerly associated with Colonial and withdrew its broker license, as
of December 31, 2001, there does not appear to be a significant opportunity for
any future operations. Therefore, we wrote off the entire remaining unamortized
purchase goodwill of approximately $7,400,000.
We determined that, as of December 31, 2001, a write-down of the goodwill
related to the acquisition of Critical was required. We recorded an impairment
of approximately $250,000 and no goodwill remains at December 31, 2001.
-26-
Net loss (gain) on trading securities was a loss of $22,682 for the year ended
December 31, 2002 as compared to a gain of $79,827 for the year ended December
31, 2001. The change was primarily due to the sale of certain securities at
prices lower than the fair value reflected in prior periods.
Professional fees were $725,003 for the year ended December 31, 2002 as compared
to $1,006,696 for the year ended December 31, 2001, a decrease of approximately
$281,693, or 28%. The decrease was primarily due to decreases in accounting,
legal and consulting fees primarily attributable to the Company's increased
utilization of its internal professional staff.
Provision for bad debts was $593,121 for the year ended December 31, 2002 as
compared to $349,049 for the year ended December 31, 2001, an increase of
approximately $244,072, or 70%. The increase was primarily due to increases in
revenues and difficulties experienced collecting retainer fees in this difficult
investment-banking climate. 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.
Net unrealized loss on investments held for trading and stock purchase warrants
was $91,810 for the year ended December 31, 2002 as compared to $1,443,878 for
the year ended December 31, 2001, a decrease of approximately $1,352,068, or
94%. The increase in value was primarily due to an increase in the market value
of investments held by the Company in conjunction with equity instruments
received from various investment banking clients.
Depreciation and amortization was $203,897 for the year ended December 31, 2002
as compared to $958,711 for the year ended December 31, 2001, a decrease of
$754,814, or 79%. The decrease was primarily a result of the Company adopting
FAS 144, which prohibits amortization of goodwill related to acquisitions.
At December 31, 2002 the Company had $140,000 currently due from employees and
$114,660 of long-term notes receivable from employees. These represent monies
advanced to employees as a condition of employment. These advances are ratably
forgiven over a five year period, between years 2-6, as long as the employee
remains with the Company. Management has provided this benefit to attract
qualified brokers. Amounts forgiven under forgivable loans of $229,597 at
December 31, 2002 relates to the forgiven portion of advances previously given
to employees. During its term, the loan ratably becomes income to the employee
and an expense to the Company. If the employee leaves before forgiveness of the
loan is completed, the remaining amount becomes immediately due and payable.
Stock based compensation was $70,560 for the year ended December 31, 2002 as
compared to $517,675 for the year ended December 31, 2001 a decrease of
$447,115, or 86%. This decrease was due to a concerted effort by management to
enter into fewer agreements involving payments in common stock (stock
performance plans). Stock based compensation includes the issuance of common
stock and common stock options. The common stock is valued at the fair value at
the date of issuance. The fair value of the options is estimated using the
Black-Scholes valuation model.
Interest and dividend income aggregating $228,937 for the year ended December
31, 2002 and $340,993 for the year ended December 31, 2001 relates to income
earned on our cash balances. This decrease results from the combined impact of
our cash balance has decreasing during the year, and interest rates available on
investments continuing to decline.
We do not believe our operations are materially affected by inflation and or by
seasonal fluctuations. Our main lines of business are directly affected by
higher interest rates, the volatility of the stock market and capital markets,
and are reliant on the continuation of mergers and acquisitions and related
financings in the entrepreneurial marketplace.
LIQUIDITY AND CAPITAL RESOURCES
Net cash used in operating activities of $1,564,486 in fiscal year 2002 was
primarily attributable to increases in accounts receivable combined with
decreases in accounts payable and accrued liabilities, in addition to the
Company's net loss adjusted for such non-cash items as non-cash fees received,
provision for doubtful accounts and non-cash compensation.
Net cash used in investing activities of $104,018 during fiscal year 2002 was
attributed to purchases of equipment, primarily computer related. The Company
expects to continue to make investments to upgrade its existing IT
infrastructure in order to handle anticipated growth and expansion.
Net cash provided by financing activities of $1,518,209 during fiscal year 2002
was primarily attributable to proceeds from a credit agreement with UBS
Americas, Inc., of which the Company borrowed $1,500,000 in January 2002.
The Company believes that its cash on hand and cash generated from its
operations should be sufficient to satisfy its working capital and capital
expenditure requirements through fiscal year 2003
-27-
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
=====================================
2003 $ 561,481
2004 488,523
2005 288,565
2006 288,565
2007 288,565
Thereafter 192,377
--------
TOTAL $2,108,076
=========
Total rent expense under operating leases, including space rental, totaled
approximately $871,828and $1,433,057 for the years ended December 31, 2002 and
2001.
Litigation:
From time to time we are a party to various lawsuits that have arisen in the
ordinary course of business. The amounts asserted in these matters are material
to our financial statements. While any litigation contains an element of
uncertainty and although it is possible that losses exceeding amounts already
recorded may be incurred upon ultimate resolution of these existing legal
proceedings, management believes that such losses, if any, will not have a
material adverse effect on our business, results of operations or financial
position. However, unfavorable resolution of each matter individually or in the
aggregate could affect the consolidated results of operations for the quarterly
and annual periods in which they are resolved.
For a description of this litigation, see Part I, Item 3 of this Annual Report.
Subsequent events:
On January 1, 2003, the Company entered into a Joint Venture Agreement with JSM,
a retail brokerage operations 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). In exchange for a 19% equity position in JSM,
vFinance will merge its "company-owned" retail branches into JSM. Upon such
merger, JSM will become an independent contractor of the Company. It is
anticipated that the merger will take place effective April 15, 2003.
On January 1, 2003, the Company entered into an eighteen (18) month employment
agreement with John S. Mathews in the capacity of President of vFinance
Investments, Inc., Retail Brokerage Division. The Agreement shall automatically
be extended for additional one-year periods beginning at the initial eighteen
(18) month anniversary, unless the Company or Matthews provides notice of
non-renewal ninety (90) days prior to an anniversary date. Under the terms of
this Agreement, Matthews will receive a base salary, discretionary bonuses and a
certain amount of stock options subject to a specified vesting period. The
Agreement also contains provisions related to severance and change of control
upon the occurrence of certain events.
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.
-28-
ITEM 7. FINANCIAL STATEMENTS.
vFinance, Inc.
Consolidated Financial Statements
Years ended December 31, 2002 and 2001
CONTENTS
Report of Independent Auditors........................................... 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
-29-
Report of Independent Auditors
Board of Directors
vFinance, Inc.
We have audited the accompanying consolidated balance sheet of vFinance, Inc. as
of December 31, 2002 and the related consolidated statements of operations,
shareholders' equity and cash flows for the years ended December 31, 2002 and
2001. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of vFinance, Inc. at
December 31, 2002, and the results of its operations and its cash flows for the
years ended December 31, 2002 and 2001, in conformity with accounting principles
generally accepted in the United States.
New York, New York /s/ Sherb & Co., LLP
March 27, 2003 Certified Public Accountants
F-1
vFINANCE, INC.
CONSOLIDATED BALANCE SHEET
Year ended December 31, 2002
Assets:
Current Assets:
Cash and cash equivalents $ 2,227,161
Due from clearing broker 96,634
Investments in trading securities 1,241,897
Accounts receivable, net of allowance for
doubtful accounts of $269,028 229,462
Forgivable loans - employees, current portion 140,000
Notes receivable - employees 147,443
Prepaid expenses and other current assets 103,067
-----------
Total Current Assets 4,185,664
Furniture and equipment, at cost:
Furniture and equipment 397,419
Internal use software 158,500
-----------
555,919
Less accumulated depreciation (299,102)
-----------
Net furniture and equipment 256,817
Forgivable loans - employees 114,660
Goodwill 420,000
Other assets 152,094
-----------
Total Assets $ 5,129,235
===========
Liabilities and Shareholders' Equity:
Current Liabilities:
Accounts payable $ 602,947
Accrued payroll 1,097,264
Other accrued liabilities 771,803
Securities sold, not yet purchased 69,569
Notes payable, current portion 529,820
Other 36,592
-----------
Total Current Liabilities 3,107,995
Notes Payable - long term 1,500,000
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 issued and outstanding -
Common stock $0.01 par value, 75,000,000 shares
authorized, 28,351,570 issued and outstanding 283,521
Additional paid-in-capital 24,151,797
Deferred compensation (12,420)
Accumulated deficit (23,901,658)
-----------
Total Shareholders' Equity 521,240
-----------
Total Liabilities and Shareholders' Equity $ 5,129,235
===========
See Accompanying Notes
F-2
vFINANCE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
Years ended December 31,
-------------------------------------
2002 2001
--------------- ----------------
Revenues:
Commissions - agency $ 9,736,476 $ 6,799,700
Trading profits 3,861,068 4,774,010
Success fees 3,255,587 2,493,671
Consulting and retainers 1,481,453 761,061
Other brokerage related income 633,849 567,077
Other 410,186 373,704
---------- -----------
Total revenues 19,378,619 15,769,223
Cost of revenues:
Commissions 7,709,025 6,901,156
Clearing and transaction costs 833,784 1,754,446
Success 2,012,245 876,102
Consulting and retainers 234,054 84,000
Other 35,002 46,695
---------- -----------
Total cost of revenues 10,824,110 9,662,399
---------- -----------
Gross profit 8,554,509 6,106,824
---------- -----------
Other expenses:
General and administrative 8,317,561 9,110,274
Write-off of goodwill - 8,582,020
Net (gain) loss on trading securities (22,682) 79,827
Professional fees 725,003 1,006,696
Provision for bad debts 593,121 349,049
Legal litigation 212,490 215,018
Net unrealized loss on investments held
for trading and stock purchase warrants 91,810 1,443,878
Depreciation and amortization 203,897 958,711
Amounts forgiven under forgivable loans 229,597 956,543
Write-off of refundable income taxes 139,513 -
Stock based compensation 70,560 517,675
---------- -----------
Total other expenses 10,560,870 23,219,691
---------- -----------
Loss from operations (2,006,361) (17,112,867)
Interest (expense) (228,937) (340,993)
---------- -----------
Net loss (2,235,298) (17,453,860)
Less: Preferred stock dividend - 157,500
---------- -----------
Loss available to common stockholders $(2,235,298) $(17,611,360)
========== ===========
Loss per share:
Basic $ (0.08) $ (0.89)
========== ===========
Weighted average number of common
shares used in computing basic loss
per share 26,716,408 19,810,285
========== ===========
Diluted $ (0.08) $ (0.89)
========== ===========
Weighted average number of common
shares used in computing diluted loss
per share 26,716,408 19,810,285
========== ===========
See Accompanying Notes
F-3
vFINANCE, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Additional
Paid-in
Preferred Stock Common Stock Capital
Shares Amount Shares Amount Common
Balances at December 31, 2000 - $ - 14,982,178 $ 149,822 $ 12,441,007
Issuance of shares in conjunction with
acquistion of NW Holdings,Inc1, - - 1,700,000 17,000 1,697,750
Issuance of shares in conjunction with
acquistion of Colonial 172,500 1,725 5,750,000 57,500 5,631,050
Golden Note Conversion - - - - 500,000
Purchase Price adjustments - - - - (12,355)
Issuance of common shares in connection
with Giachetti settlement - - 50,000 500 17,000
Issuance of common shares in connection
with Murray settlement - - 80,000 800 26,400
Issuance of common shares in connection
with Katz settlement - - 50,000 500 24,500
SB2 post effective amendment issuance costs - - - - (8,401)
Amortization of deferred compensation - - - - -
Purchase of treasury stock - - - - -
Issuance of shares in conjunction with
acquistion of Critical Infrastructure - - 400,000 4,000 320,000
Issuance of common shares in connection
with services rendered- Insight - - 125,000 1,250 36,250
SB2 post effective amendment issuance costs - - - - (5,156)
Issuance of shares in conjunction with
Critical Infrastucture share purchase
agreement - - 877,193 8,772 241,228
Issuance of shares in conjunction with
Innovex share purchase agreement - - 980,392 9,804 240,196
Issuance of shares in conjunction with
Ryan leeds share purchase agreement - - 411,765 4,118 30,882
Issuance of common shares in connection
with services rendered - - 557,867 5,579 333,346
Issuance of compensatory stock options
and stock purchase warrants - - - - 3,000
Issuance of compensatory stock options and
stock purchase warrants - - - - 24,000
Accrued dividends payable on preferred shares - - - - -
Sale of Treasury Stock - - - - -
Softbank convertible note - - - - 975,000
Amortization of deferred compensation - - - - -
Net loss - - - - -
--------------------------------------------------------
Balances at December 31, 2001 172,500 1,725 25,964,395 259,645 22,515,697
Issuance of shares in conjunction with World
Ventures share purchase agreement - - 83,334 833 22,917
Issuance of shares in conjunction with AMRO
share purchase agreement - - 350,878 3,509 96,491
Accrued dividends payable on preferred shares - - - - -
Treasury stock donation - - - - 2,000
Dividend out of subsidiary - - - - 2,219,331
Issuance of compensatory stock options and
stock purchase warrants - Mark Wachs - - - - 49,680
Issuance of common shares in connection with
consulting services rendered - Duplan & Kiett - - 50,000 500 13,000
Partial convertion of Softbank note - - 622,807 6,228 (6,228)
Reversal of compensatory stock purchase
warrants (J.Wang) - - - - (24,000)
Amortization of Deferred Compensation
-Duplan & Kieft - - - - -
Amortization of Deferred Compensation
-Mark Wach's - - - - -
Amortization of Deferred Compensation
-Tucy Caster - - - - -
Reversal of Deferred compensation
(Tucy cancel Options) - - - - (38,857)
Partial convertion of Softbank note - - 166,667 1,667 (1,667)
Issuance of shares in conjunction with
Pittsford share purchase agreement - - 100,000 1,000 10,000
Convertion of Preferred A & B (172,500) (1,725) 4,225,000 42,250 1,432,750
Retirement of Treasury Stock - - (3,211,511) (32,111) (2,139,317)
Net Loss - - - - -
----------------------------------------------------------
Balances at December 31, 2002 - $ - 28,351,570 $ 283,521 $ 24,151,797
==========================================================
F-4
Additional
Paid-in
Capital Deferred Accumulated Treasury Shareholders'
Preferred Compensation Deficit Stock Equity
---------------------------------------------------------------------
Balances at December 31, 2000 $ - $ (127,206) $ (4,212,500) $(2,166,768) $ 6,084,355
Issuance of shares in conjunction with
acquistion of NW Holdings,Inc. - - - - 1,714,750
Issuance of shares in conjunction with
acquistion of Colonial 1,723,275 - - - 7,413,550
Golden Note Conversion - - - - 500,000
Purchase Price adjustments - - - - (12,355)
Issuance of common shares in connection
with Giachetti settlement - - - - 17,500
Issuance of common shares in connection
with Murray settlement - - - - 27,200
Issuance of common shares in connection
with Katz settlement - - - - 25,000
SB2 post effective amendment issuance costs - - - - (8,401)
Amortization of deferred compensation - 19,800 - - 19,800
Purchase of treasury stock - - - (10,392) (10,392)
Issuance of shares in conjunction with
acquistion of Critical Infrastructure - - - - 324,000
Issuance of common shares in connection
with services rendered- Insight - - - - 37,500
SB2 post effective amendment issuance costs - - - - (5,156)
Issuance of shares in conjunction with
Critical Infrastructure share purchase
agreement - - - - 250,000
Issuance of shares in conjunction with
Innovex share purchase agreement - - - - 250,000
Issuance of shares in conjunction with
Ryan leeds share purchase agreement - - - - 35,000
Issuance of common shares in connection
with services rendered - - - - 338,925
Issuance of compensatory stock options
and stock purchase warrants - - - - 3,000
Issuance of compensatory stock options and
stock purchase warrants - (24,000) - - -
Accrued dividends payable on preferred
shares (157,500) - - - (157,500)
Sale of Treasury Stock - - - 7,732 7,732
Softbank convertible note - - - - 975,000
Amortization of deferred compensation - 48,749 - - 48,749
Net loss - - (17,453,860) - (17,453,860)
--------------------------------------------------------------------
Balances at December 31, 2001 1,565,775 (82,657) (21,666,360) (2,169,428) 424,397
Issuance of shares in conjunction with World
Ventures share purchase agreement - - - - 23,750
Issuance of shares in conjunction with AMRO
share purchase agreement - - - - 100,000
Accrued dividends payable on preferred
shares (126,875) - - - (126,875)
Treasury stock donation - - - (2,000) -
Dividend out of subsidiary - - - - 2,219,331
Issuance of compensatory stock options and
stock purchase warrants -Mark Wachs - (24,840) - - 24,840
Issuance of common shares in connection with
consultingservices rendered, Duplan & Kiett - (4,500) - - 9,000
Partial convertion of Softbank note - - - - -
Reversal of compensatory stock purchase
warrants (J.Wang) - 24,000 - - -
Amortization of Deferred Compensation
-Duplan & Kieft - 4,500 - - 4,500
Amortization of Deferred Compensation
-Mark Wach's - 12,420 - - 12,420
Amortization of Deferred Compensation
-Tucy Caster - 19,800 - - 19,800
Reversal of Deferred compensation
(Tucy cancel Options) - 38,857 - - -
Partial convertion of Softbank note - - - - -
Issuance of shares in conjunction with
Pittsford share purchase agreement - - - - 11,000
Convertion of Preferred A & B (1,438,900) - - - 34,375
Retirement of Treasury Stock - - - 2,171,428 -
Net Loss - - (2,235,298) - (2,235,298)
---------------------------------------------------------------------
Balances at December 31, 2002 - $ ( 12,420) $(23,901,658) $ - $ 521,240
=====================================================================
See Accompanying Notes
F-4
vFINANCE, INC.
Consolidated Statements of Cash Flows
Years ended December 31,
-------------------------------------
2002 2001
--------------- ----------------
Operating Activities
Net (loss) $(2,235,298) $(17,453,860)
Adjustments to reconcile net loss to net
cash used in operating activities:
Write-off of goodwill - 8,582,020
Non-cash fees received (1,233,687) (1,756,411)
Depreciation and amortization 203,897 958,711
Provision for doubtful accounts 586,109 20,621
Non-cash compensation 622,495 -
Income tax receivable write off 139,513 -
Beneficial Conversion factor expense - 412,000
Imputed Interest 117,820 -
Unrealized loss on investments, net 123,865 1,491,978
Unrealized gain on warrants (32,055) (48,100)
Amount forgiven under forgiveable loan 229,597 -
Stock based compensation 70,560 68,549
Issuance of common stock and common stock
options in conjunction with services
rendered and legal settlements - 449,125
Changes in operating assets and liabilities, net
Accounts receivable (363,065) 634,318
Forgivable Loans 177,132 61,774
Due from clearing broker (79,838) 807,982
Notes receivable from employees (76,343) -
Income tax receivable - (110,402)
Investments in trading securities 296,923 866,542
Other current assets 30,018 -
Other assets and liabilities 233,997 1,432,818
Accounts payable and accrued liabilities (391,714) 134,475
Securities, sold not yet purchased 15,588 11,427
------------ -----------
Net cash used in operating activities (1,564,486) (3,436,433)
Investing Activities
Purchase of equipment (105,677) (161,805)
Purchase of businesses - (920,427)
Disposal of businesses cash effect 1,659 -
------------ -----------
Net cash used in investing activities (104,018) (1,082,232)
Financing Activities
Changes in capital leases (16,166) (65,289)
Changes in current debt (31,875) -
Proceeds from the note purchase agreement - 975,000
Proceeds from credit agreement 1,500,000 -
Proceeds from issuance of common stock 134,750 -
Proceeds from issuance of common stock
related to private placement net of
cash and stock issuance costs - 534,999
Purchase of treasury stock, net - (2,660)
Payment of long term debt (68,500) -
------------ -----------
Net cash provided by financing activities 1,518,209 1,442,050
Decrease in cash and cash equivalents (150,295) (3,076,615)
Cash and cash equivalents at beginning
of year 2,377,456 5,454,071
------------ -----------
Cash and cash equivalents at end of year $ 2,227,161 $ 2,377,456
============ ===========
See Accompanying Notes
F-5
vFinance, Inc.
Notes to the Consolidated Financial Statements
1. DESCRIPTION OF BUSINESS
vFinance, Inc. (the "Company") changed its name from vFinance.com, Inc.
effective December 28, 2001. The Company is a "new-breed" financial services
enterprise committed to building a worldwide audience of individuals looking to
create wealth through their equity investments and businesses and the name
change reflects the broader scope of services. The Company principally operates
in one business segment, investment management services, consisting primarily of
financial services, including retail brokerage and investment banking.
On January 4, 2001, the Company executed a merger agreement whereby it agreed to
acquire all of the capital stock of NW Holdings, Inc. (NWH"), a Florida
corporation. On the Closing Date of the merger, NWH was the parent company of
and wholly owned First Level Capital, Inc. ("First Level"), a Florida
corporation whose name was subsequently changed to vFinance Investments, Inc.
("VFI"). First Level contained the primary operations of NWH and was an
investment-banking firm that was licensed to conduct activities as a
broker-dealer in 49 states and had offices in New York, New Jersey and Florida.
VFI, as the Company's wholly owned subsidiary, continues to provide
investment-banking services to small and medium sized companies and retail
brokerage services to companies, financial institutions and individual
investors.
On August 20, 2001, the Company entered into a Securities Exchange Agreement
acquiring all of the membership interests in two related companies, Critical
Investments, LLC, a Delaware limited liability company ("Critical Investments"),
and Critical Advisors, L.L.C., a Virginia limited liability company ("Critical
Advisors") (collectively "Critical"). Critical Investments manages and is the
sole general partner in Critical Infrastructure Fund, L.P. ("Critical
Infrastructure LP"), a Delaware limited partnership. Critical Advisors manages
Critical Infrastructure Fund, Ltd. ("Critical Infrastructure Ltd."), an
international business company organized and existing under the laws of the
British Virgin Islands and receives (i) a management fee equal to 1% of the net
asset value of Critical Infrastructure Ltd. and (ii) a performance fee equal to
20% of the increase in the net asset value of Critical Infrastructure Ltd.
Critical Infrastructure LP and Critical Infrastructure Ltd. are the sole
partners in, owning 96% and 4% respectively, and conduct their investment and
trading activities through Critical Infrastructure Fund (BVI), LP, a limited
partnership organized and existing under the laws of the British Virgin Islands
which holds a portfolio of securities. Critical Investments and Critical
Advisors changed their names to vFinance Investors, LLC and vFinance Advisors,
LLC, subsequent to the acquisition.
The Company now conducts its broker/dealer operations and investment banking and
consulting through VFI, a licensed broker dealer. It also operates its
vFinance.com website through vFinance Holdings, Inc. and manages Critical
Infrastructure Fund (BVI) LP through vFinance Advisors, LLC and vFinance
Investors, LLC.
2. SIGNIFICANT ACCOUNTING POLICIES AND OTHER MATTERS
Basis of Presentation
The consolidated financial statements include the accounts of the Company and
its wholly owned subsidiaries. All intercompany accounts have been eliminated in
consolidation. Certain amounts for the prior year financial statements have been
reclassified to conform to the current year presentation.
Revenue Recognition
The Company earns revenue (commissions) from brokerage and trading which are
recognized on the day of the trade - trade date basis. The Company also earns
revenue from investment banking and consulting. Monthly retainer fees for
investment banking and consulting are recognized as services are provided.
Investment banking success fees are generally based on a percentage of the total
value of a transaction and are recognized upon successful completion.
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.
F-6
vFinance, Inc.
Notes to Consolidated Financial Statements (continued)
2. SIGNIFICANT ACCOUNTING POLICIES AND OTHER MATTERS (CONTINUED)
Revenue Recognition (continued)
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, 2002 and 2001, the Company recognized $1,233,687 and $1,756,411 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, 2002, certain transactions in process may result in the
Company receiving equity instruments or stock purchase warrants in subsequent
periods as discussed above. In such event, the Company will recognize revenue
related to the receipt of such equity instruments consistent with the
aforementioned policies.
The Company sells two types of listings to its website: (i) perpetual listings
to venture capital vendors, who are interested in providing services to other
companies or individuals; and (ii) three-month listings to entrepreneurs who
have new business ideas to sell. Revenue related to the listings is generally
recognized over the terms of such listings. Website revenues are concentrated
primarily in the United States but are not concentrated in any particular region
of the country or with any individual or group. Fees related to such listings
are included in "other" in the statements of operations for the years ended
December 31, 2002 and 2001.
Reclassifications
Certain prior period balances have been reclassified to conform to the current
period's financial statement presentation. These reclassifications had no impact
on previously reported results of operations or shareholders' equity.
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 note receivable balances are reviewed monthly to determine the
collectible of such receivables. The Company records both a specific and general
reserve on such balances as deemed appropriate. Notes receivable are generally
from employees and result from commission advances and deficits that may be
generated by trading adjustments or open customer balances.
F-7
vFinance, Inc.
Notes to Consolidated Financial Statements (continued)
2. SIGNIFICANT ACCOUNTING POLICIES AND OTHER MATTERS (CONTINUED)
Investments
Investments are classified as trading securities and are held for resale in
anticipation of short-term market movements or until such securities are
registered or are otherwise unrestricted. Any unregistered securities received
contain a registration right within 1 year. Trading account assets, consisting
of marketable equity securities and stock purchase warrants, are stated at fair
value. At December 31, 2002, investments consisted of common stock and common
stock purchase warrants held for resale. Gains or losses are recognized in the
statement of operations as trading profits when the underlying shares are sold.
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 EITF00-8 "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 and for stock
purchase warrants based on the Black-Scholes valuation model. Realized gains or
losses are recorded in the statement of operations when the security is sold.
Unrealized gains or losses are recognized in the statement of operations on a
monthly basis based on changes in the fair value of the security as quoted on
national or inter-dealer stock exchanges. Net unrealized losses related to
investments held for trading and stock purchase warrants as of December 31,
2002, and 2001, aggregated $91,810 and $1,443,878.
Investments in trading securities and securities sold, not yet purchased,
consist of trading and investment securities at market values at December 31,
2002, as follows:
Sold, not yet
Owned Purchased
------------------------------------
Corporate Bonds $ 9,815 $25,459
Corporate Stocks 970,510 44,110
Options 50 -
Warrants 261,522 -
------------------------------------
Total $1,241,897 $69,569
====================================
At December 31, 2002, restricted equity securities had an aggregate fair value
of $399,970.
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 statement of financial
condition.
F-8
vFinance, Inc.
Notes to Consolidated Financial Statements (continued)
2. SIGNIFICANT ACCOUNTING POLICIES AND OTHER MATTERS (CONTINUED)
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"), 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.
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, 2002 and 2001,
accrued payroll of $221,447 and $254,625, respectively, was owed to current
employees of the Company in connection with equity investments received as
compensation.
Fair Value of Financial Instruments
The fair values of the Company's financial instruments, which includes cash and
cash equivalents, accounts receivable, investments, accounts payable, and
accrued expenses approximate their carrying values.
The Company's financial instruments that are exposed to concentrations of credit
risk consist primarily of cash and cash equivalents and accounts receivable. The
Company places its cash with high quality insured financial institutions.
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, 2002 and 2001, totaled $203,897 and $259,417,
respectively.
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"). See Note 4.
Income Taxes
The Company accounts for income taxes under the liability method in accordance
with Statement of Financial Accounting Standards No. 109, ACCOUNTING FOR INCOME
TAXES. Under this method, deferred income tax assets and liabilities are
determined based on differences between the financial reporting and tax bases of
assets and liabilities and are measured using the enacted tax rates and laws
that will be in effect when the differences are expected to reverse.
F-9
vFinance, Inc.
Notes to Consolidated Financial Statements (continued)
2. SIGNIFICANT ACCOUNTING POLICIES AND OTHER MATTERS (CONTINUED)
Statement of Cash Flows
Supplemental disclosure of cash flow information:
2002 2001
---------- ----------
Cash paid for interest
during the year $91,929 --
Non-cash items affecting the
statements of cash flows are as follows:
2002 2001
---------- ----------
Beneficial conversion related to
Softbank note payable -- $412,000
Accrual of Series A and B Preferred
Stock dividends -- $157,500
Earnings per Share
The Company calculates earnings per share in accordance with Statement of
Financial Accounting Standards No. 128, EARNINGS PER SHARE ("SFAS No. 128"). In
accordance with SFAS No. 128, basic earnings per share is computed using the
weighted average number of shares of common stock outstanding and diluted
earnings per share is computed using the weighted average number of shares of
common stock and the dilutive effect of options and warrants outstanding, using
the "treasury stock" method. The Company had 0 and 481,927 options,
respectively, at December 31, 2002 and 2001, not included in diluted earnings
per share because the options and warrants would be anti-dilutive because the
Company had a net loss.
Forgivable Loans
In order to remain competitive in the marketplace, the Company granted
forgivable loans to certain employees. The terms of the loans range 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 principal and related interest 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, 2002, the balance of the forgivable loans was $254,660, of which
$140,000 is classified as current. The remaining long-term portion of $114,660
is scheduled for forgiveness as follows: $140,000 in 2003, $105,160 in 2004 and
$9,500 in 2005.
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.
F-10
vFinance, Inc.
Notes to Consolidated Financial Statements (continued)
3. ACQUISITIONS
On January 4, 2001, the Company closed on the merger of Colonial, acquiring all
of its outstanding capital stock. The acquisition was accounted for under the
purchase method of accounting. The results of operations of Colonial for the
period January 1, 2001 through January 3, 2001 were not material. The purchase
price consisted of the issuance of 5,750,000 common shares of stock, the
issuance of 625,000 stock options, the conversion of 490,000 stock options, the
issuance of 585,000 common stock purchase warrants and the issuance of 172,500
preferred shares of stock for total consideration of approximately $7,400,000.
The 5,750,000 common shares were valued at $0.81 per share or ($4,657,500),
which was the closing price on January 4, 2001. The 625,000 stock options were
valued at $0.58 per share or ($362,500) as determined by the Black-Scholes
valuation model. The conversion of the 490,000 stock options were valued at
$0.58 per share or ($284,200) as determined by the Black-Scholes valuation
model. The 585,000 common stock purchase warrants were valued at $0.58 per share
or ($339,300) as determined by the Black-Scholes valuation model. The 172,500
preferred shares were valued at the liquidation preference value of $10 per
share or ($1,725,000). The purchase price was allocated to the assets acquired
and the liabilities assumed with the excess of such purchase price of
approximately $8,100,000 allocated to goodwill, which was being amortized over
15 years. (See Note 4.)
The Colonial merger shares were issued on a pro rata basis to shareholders based
on their relative ownership of Colonial common stock, except for twenty percent
(20%) of the 5,750,000 common shares of stock, totaling approximately 1,150,000
shares, which were withheld from the Majority Shareholders and placed in escrow
for a term of six months subject to offset by the Company to cover losses or
damages to the Company due to breaches by the Majority Shareholders of their
representations, warranties or covenants contained in the Colonial merger
agreement. As part of a meeting held on June 28, 2002 and pursuant to Delaware
General Corporation Law, the Company's Board of Directors approved a dividend to
the Company's Series A Preferred Shareholders of all the common stock of
Colonial. The impact of the dividend on the Company's consolidated balance sheet
at that time was as follows:
Reduction of Total Assets.................$ 362,513
Reduction of Total Liablilities...........$2,581,841
Net Increase in Book Value................$2,219,328
Prior to Colonial's acquisition by the Company, Colonial had entered into
certain debt instruments. These amounts remained unpaid subsequent to the
acquisition by the Company and the corresponding liabilities were included in
the dividend to the Company's Series A Preferred Shareholders.
As previously noted, on January 4, 2001, the Company closed on the merger of
NWH acquiring all of its outstanding capital stock. The acquisition was
accounted for under the purchase method of accounting. The results of operations
of NWH for the period from January 1, 2001 through January 3, 2001, were not
material. The purchase price consisted of the issuance of 1,700,000 common
shares of stock, the issuance of 575,000 stock options and cash of $1,000,000
for total consideration of $2,714,750. The 1,700,000 common shares were valued
at $0.81 per share, ($1,377,000) which was the closing price on January 4, 2001.
The 575,000 stock options were valued at $0.58 per share, ($333,500) as
determined by the Black-Scholes valuation model.The purchase price was allocated
to the assets acquired and the liabilities assumed with the excess of such
purchase price of approximately $1,300,000 allocated to goodwill, which was
being amortized over 15 years. (See Note 4.)
The results of operations of Colonial and NWH are included in the Company's
consolidated results of operations for the year ended December 31, 2001 from
their respective acquisition dates (January 4, 2001), accordingly, no pro forma
results of operations are presented for the year ended December 31, 2001 as the
Company's consolidated results of operations include substantially all of each
company's actual results.
As previously noted on August 20, 2001, the Company closed on the acquisition of
all of the membership interests of Critical for total consideration of
approximately $325,000 and the results of operations of Critical are included in
the consolidated results of operations from August 20, 2001.The $325,000
consideration consists of 400,000 common shares valued at $0.36 per share,
($144,000) which was the closing price on August 20, 2001, and 500,000 options
and warrants valued at $0.36 per share as ($180,000) as determined by the
Black-Scholes valuation model. The Company recorded approximately $270,000 of
goodwill, related to the excess of the purchase price over the fair value which
was being amortized over 15 years (see Note 4). The acquisition is immaterial to
the consolidated financial statements taken as a whole. A determination has been
made to liquidate the funds. The SEC has commenced a non-public investigation
relating to Critical Infrastructure LP, Critical Investments and Critical
Advisors. The Company is cooperating with this investigation.
F-11
vFinance, Inc.
Notes to Consolidated Financial Statements (continued)
3. ACQUISITIONS (CONTINUED)
On May 29, 2002, the Company entered into a select asset purchase agreement (the
"Agreement"), which was subsequently 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 including
financial planning, insurance and mortgage brokerage. Pursuant to the Agreement
and Amendment, effective June 17, 2002 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. Furthermore, as of such
date, 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 will only be delivered to Somerset when Somerset achieves all
the closing conditions. In August 2002, as all closing conditions of the
Agreement and Amendment were not met as of the Amended Closing Date, 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.
In accordance with Financial Interpretation No. 44 "Accounting for Certain
Transactions Involving Stock Compensation" we have included all vested stock
options issued by the company in exchange for outstanding awards held by
employees of the acquiree as part of the purchase price.
4. IMPAIRMENT OF GOODWILL
In connection with the aforementioned mergers and acquisition, the Company
recognized goodwill as follows: First Level, approximately $1,300,000; Colonial,
approximately $8,100,000; and Critical, approximately $270,000. See Note 3
above.
Management determined that, as of December 31, 2001, a write-down of the
goodwill related to the NWH acquisition was necessary as the Company's
projections of the future operating results of First Level indicated impairment.
Based on such projections and other analysis the Company took an impairment
charge aggregating $876,000 related to NWH goodwill. Goodwill remaining as of
December 31, 2002 and 2001 totaled $420,000. The remaining $420,000 is estimated
based on the fact that the majority of First Level Capital employees still
remained with the Company at December 31, 2002. The Company consolidated the
operations of its various broker dealers for the period ended December 31, 2001
and changed its operating name to vFinance Investments, Inc.
Management determined that, as of December 31, 2001, a write-down of the
goodwill related to the Colonial acquisition was necessary as the Company's
projections of future operating results indicated impairment. Further, as the
Company has closed the operations formerly associated with Colonial and
withdrawn its broker license, there does not appear to be a significant
opportunity for any future operations. Therefore, the Company wrote off the
entire remaining unamortized purchase goodwill of approximately $7,400,000 which
is reflected in the Company's brokerage and trading business segment.
Management determined that, as of December 31, 2001, a write-down of the
goodwill related to the to the acquisition of Critical was necessary. Thus, the
Company recorded an impairment of approximately $250,000 and no goodwill remains
at December 31, 2001. Such write-down is reflected in the Company's other
business segment.
The Company reported approximately $8,500,000 of goodwill write-downs for the
year ended December 31, 2001 related to these acquisitions. This amount is
included in the statement of operations under "write-off of goodwill.
F-12
vFinance, Inc.
Notes to Consolidated Financial Statements (continued)
5. RELATED PARTY TRANSACTIONS
On November 8, 1999, the Company entered into three year employment agreements
(the "Agreements") with the Company's Chief Executive Officer and President,
who is the beneficial owner of 20.8% and 16.1% of the total outstanding common
shares of the Company at December 31, 2002 and 2001, respectively, and the
Company's Chief Operating Officer and Chairman, who is the beneficial owner of
20.8% and 16.1% of the total outstanding common shares of the Company at
December 31, 2002 and 2001, respectively (collectively the "Primary
Shareholders"). Under the terms of the Agreements, which are renewable as
directed by a majority vote of the board of directors, each individual shall
receive (i) an initial base salary of $150,000 per annum for the first year with
a 5% increase per annum beginning one year from the date of the Agreements (the
Company's board of directors may increase such salaries at their discretion);
(ii) discretionary bonuses as determined by the Company's board of directors
primarily based on each individuals performance; and (iii) incentive
compensation paid monthly equal to Available Cash, as defined, primarily based
on performance of the Company and its respective subsidiaries. vFinance, Inc.
The Agreements also contain provisions related to severance and change of
control upon the occurrence of such events. Such Agreements were amended on
January 5, 2001, July 2, 2001 and January 7, 2002 and the salary was increased
to $208,000 per annum beginning in January 2002. The Company made payments to
each of the Primary Shareholders aggregating $226,000 and $326,789 for the years
ended December 31, 2002 and 2001, respectively, in connection with these
Agreements.
On January 5, 2001 the Company modified the Agreements with its Primary
Shareholders giving them the right to receive a grant of 500,000 stock options
to each at an exercise price that exceeded the stock price on the date of the
modification. These modified grants would not have taken effect until certain
conditions, including continued employment, were met. These grants were
cancelled before any of the conditions were met.
On July 6, 2001, the Company modified the Agreements with its Primary
Shareholders granting 500,000 stock options to each at an exercise price that
exceeded the stock price on the date of issuance and were exercisable over a
five-year period, beginning on July 6, 2001. No compensation expense was
recognized related to these stock options in the year ended December 31, 2001,
as the grant price exceeded the quoted market price on the date of the grant.
On August 2001, the Company granted to each of its Primary Shareholders 234,802
stock options at an exercise price that exceeded the stock price on the date of
issuance and were exercisable over a five-year period, beginning on August 2001.
No compensation expense was recognized related to these stock options in the
year ended December 31, 2001, as the grant price exceeded the quoted market
price on the date of the grant.
On 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 December 18, 2001, Critical Infrastructure Fund (BVI), LP, purchased 877,193
shares of the Company's common stock for $250,000 and received registration
rights incidental to a Company registration of securities with the SEC with
respect to these shares. Critical Infrastructure Fund (BVI), LP, sold some of
these shares to individual officers of the Company, including its Chief
Executive Officer and Vice-Chairman, at $0.285 per share, the price at which the
shares were sold. vFinance, Inc.
F-13
vFinance, Inc.
Notes to Consolidated Financial Statements (continued)
6. INCOME TAXES
Deferred income taxes reflect the net income tax effect of temporary differences
between the carrying amounts of the assets and liabilities for financial
reporting purposes and amounts used for income taxes. The Company's deferred
income tax assets and liabilities consist of the following:
Year Ended December 31,
---------------------------------
2002 2001
----------- -----------
Net operating loss carryforwards $ 4,201,834 $ 3,295,515
Deferred compensation amortization -- 639,283
Unrealized losses 34,265 546,014
Goodwill impairment 2,775,663 3,027,949
Other 75,017 465,248
Allowance for doubtful accounts 54,098 47,150
Depreciation 10,114 --
----------- -----------
Gross deferred income tax assets 7,150,991 8,021,159
Depreciation -- (64,560)
Other -- --
----------- -----------
Gross deferred income tax liabilities -- (64,560)
Deferred income tax asset valuation
allowance (7,150,991) (7,956,599)
----------- -----------
Net deferred income tax assets $ -- $ --
=========== ===========
Net operating loss carryforwards totaled approximately $11,000,000 at December
31, 2002. 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, 2002 and
2001, due to the uncertainty of realizing the deferred income tax assets.
7. SHAREHOLDERS' EQUITY
The Company is authorized to issue up to 2,500,000 shares of preferred stock.
As part of the Colonial transaction (i) 122,500 shares were designated as Series
A Convertible Preferred Stock, par value $0.01 per share, and (ii) 50,000 shares
were designated as Series B Convertible Preferred Stock, par value $0.01 per
share. All of the Series A and Series B shares were delivered to Colonial
shareholders. The Series A and Series B Preferred Stock accrued annual dividends
of 10% and 7%, respectively, on a quarterly basis.
On June 28, 2002 the Company's Board of Directors approved a dividend to the
Company's Series A Preferred Shareholders of all the common stock of Colonial.
The impact of the dividend on the Company's net book value was an increase of
$2,219,328.
Series A and Series B accrued unpaid dividends but earned no interest. The
Company accrued $157,500 of such dividends during both 2001 and 2002 ($315,000
total). This amount was reversed at December 31, 2002 through the transactions
noted below.
On November 6, 2002, the Company proposed that the Series A Convertible
shareholders fully redeem their shares, including any unpaid or undeclared
dividends, into common shares of the Company. Under the original terms, one (1)
share of Series A preferred was convertible into approximately 3.85 shares of
the Company's common stock. However, under the proposal, the Company offered to
convert one (1) share of Series A preferred into ten (10) unregistered shares of
F-14
vFinance, Inc.
Notes to Consolidated Financial Statements (continued)
7. SHAREHOLDERS' EQUITY (CONTINUED)
the Company's common stock. The majority of the Series A Convertible Preferred
shareholders approved the Company's proposal. Accordingly, effective November 6,
2002, the Company redeemed 122,500 Shares of Series A Preferred stock in
exchange for 1,225,000 unregistered common shares of the Company. As a result of
this transaction, there are no Series A Preferred shares outstanding as of
year-end.
Under the terms of the settlement agreement with Michael Golden (a former
director of the Company, see Note 9; Commitments and Contingencies) signed on
December 30, 2002, Golden and the Company entered into a full general release of
any and all outstanding obligations between Golden and the Company. In
consideration, the Company redeemed the 50,000 Shares of Series B Preferred
Stock Golden owned in exchange for 3,000,000 unregistered common shares of the
Company. As a result of this transaction, there are no Series B Preferred shares
outstanding as of December 31, 2002.
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 August 30, 2001 and on October 16, 2001, the Company granted 673,500 stock
purchase warrants to certain individuals and 878,427 stock options to employees
in conjunction with the individuals purchase of common stock of the Company from
existing shareholders. One stock option was granted for each share of common
stock purchased by the individuals. The stock options were granted at above fair
market value at an exercise price of $0.35 and vested on the date of grant.
On November 28, 2001, the Company entered into a Note Purchase Agreement, as
amended by subsequent letter agreements dated November 30, 2001, December 14,
2001, and December 28, 2001, February 13, 2002 and March 4, 2002 (collectively,
the "Note Purchase Agreement"), with SBI Investments (USA) Inc. ("SBI"). Under
the terms of the Note Purchase Agreement, SBI may provide a subordinated loan to
the Company of up to $1,500,000 in the form of a 48-month non-interest bearing,
convertible note (the "Note"). As of December 31, 2002, the Company had received
$975,000 under the Note Purchase Agreement and was entitled to receive, at SBI's
option alone, an additional $525,000 no later than June 30, 2002. The additional
$525,000 was not funded. The Note is convertible, at SBI's option, into as many
as 3,421,053 shares of the Company's common stock at $0.285 per share. The
Company, at any time during the first three years of the agreement, can call for
redemption of the Note at a price equal to 116.67% of the then outstanding
principal amount of the Note, in whole (but not in part), or force the
conversion of the Note into shares of the Company's common stock.
In July 2002, certain SBI Note holders converted $177,500 of principal into
622,807 shares of common stock of the Company. The Company reflected an
adjustment to its par value of Common Stock equal to $6,228 and reduced its note
payable and unamortized beneficial conversion/imputed interest amount by
$177,500.
F-15
vFinance, Inc.
Notes to Consolidated Financial Statements (continued)
7. SHAREHOLDERS' EQUITY (CONTINUED)
In November 2002, an SBI Note holder converted $47,500 of principal into 166,667
shares of common stock of the Company. The Company reflected an adjustment to
its par value of Common Stock equal to $1,667 and reduced its note payable and
unamortized beneficial conversion/imputed interest amount by $47,500.
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 will be accreted ratably over the
term of the loan as additional interest expense. Amortization of the imputed
interest began in January 2002.
As of December 31, 2002 the SBI note payable balance was $750,000 and was netted
against the $220,180 corresponding asset imputed interest, therefore $529,820
appears on the face of the balance sheet.
On December 18, 2001, Critical Infrastructure Fund (BVI), LP, a limited
partnership controlled by us, purchased, at a discount to the then market price
of our common stock, 877,193 shares of common stock at $0.285 per share for
$250,000 and received piggyback registration rights with respect to these
shares. In January 2002, Critical Infrastructure Fund (BVI), LP sold to Messrs.
Sokolow, Mahoney (two executive officers of our company) and Williamson (former
executive of the Company), 61,403 shares, 61,403 shares and 150,000 shares,
respectively, of our common stock at a price of $0.285 per share, the price at
which the shares were purchased from us by Critical Infrastructure Fund (BVI),
LP.
On December 21, 2001, the Company entered into an agreement whereby Innovex
Partners purchased 980,392 common shares at $0.255 per share and were granted a
warrant to purchase 1,000,000 shares of common stock at $0.35 per share. The
warrant is immediately exercisable and expires on December 21, 2006.
On January 7, 2002 the Company sold 350,878 unregistered shares at a price of
$0.285 per share for a total consideration of $100,000 to AMRO International,
S.A.
On January 17, 2002 the Company sold 83,334 unregistered shares at a price of
$0.285 per share for a total consideration of $23,750 to WorldVentures Fund I,
LLC.
On November 8, 2002 the Company sold 100,000 unregistered shares at a price of
$0.11 per share for a total consideration of $11,000 to Pittsford Capital
Warrant Partners, LLC.
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.
At December 31, 2002 the Company made a decision to retire all of the treasury
stock outstanding as of that date, which resulted in a decrease to the number of
common shares of 3,211,511, and a corresponding reduction in the par value
amount of common stock of $32,111, as well as an increase to additional
paid-in-capital, common, in the amount of $2,139,317.
During the first quarter of 2002, the Company granted stock options to purchase
an aggregate of 508,117 shares of the Company 's common stock to six employees
of the Company. The exercise prices of these options range from $.35 to $2.25.
During the second quarter of 2002, the Company granted stock options to purchase
an aggregate of 830,000 shares of the Company's common stock to four employees
of the Company and 108,000 to an outside consultant. The exercise prices of
these options range from $.35 to $2.25. During the third quarter of 2002, the
Company granted stock options to purchase an aggregate of 2,206,000 shares of
the Company 's common stock to employees of the Company. The exercise prices of
these options range from $.32 to $.625. During the fourth quarter of 2002, the
Company granted stock options to purchase an aggregate of 550,000 shares of the
Company 's common stock to four employees of the Company. The exercise prices of
these options range from $.15 to $.32. 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
F-16
vFinance, Inc.
Notes to Consolidated Financial Statements (continued)
7. SHAREHOLDERS' EQUITY (CONTINUED)
The Company has elected to follow Accounting Principle Board Opinion No. 25,
Accounting for Stock Issued to Employees ("APB 25"), and related interpretations
in accounting for its employee stock options because the alternative fair value
accounting provided under FASB Statement No. 123, ACCOUNTING FOR STOCK-BASED
COMPENSATION, ("SFAS 123") requires the use of option valuation models that were
not developed for use in valuing employee stock options. As permitted, the
Company adopted the disclosure alternative of SFAS 123. Under APB 25, when the
exercise price of the Company's stock options equals or exceeds the fair value
of the underlying stock on the date of grant, no compensation expense is
recorded.
A summary of the stock option activity for the years ended December 31, 2002 and
2001 is as follows:
Weighted
Average
Exercise Number of Exercise Price
Price Shares Per Option
--------- ---------- ---------------
Outstanding Options at December 31, 2000 3,160,000
Granted 0.79 13,441,567 0.35 - 2.25
Forfeited 2.13 (6,914,517) 0.66 - 5.85
----------
Outstanding Options at December 31, 2001 0.98 9,687,050 0.35 - 6.00
Granted 0.40 4,202,117 0.15 - 2.25
Forfeited 0.93 (9,417,503) 0.32 - 6.00
----------
Outstanding Options at December 31, 2002 0.50 4,471,664 0.15 - 6.00
==========
The following table summarizes information concerning stock options outstanding
at December 31, 2002
Weighted
Average
Exercise Number
Price Outstanding
-------- ----------
$0.15 70,000
0.32 1,870,000
0.35 1,539,215
0.50 100,000
0.55 69,000
0.63 542,500
0.70 39,000
1.00 31,000
2.25 160,949
4.00 10,000
4.13 20,000
5.00 10,000
6.00 10,000
---------
4,471,664
=========
F-17
vFinance, Inc.
Notes to Consolidated Financial Statements (continued)
7. SHAREHOLDERS' EQUITY (CONTINUED)
A summary of the warrant activity for the years ended December 31, 2002 and 2001
is as follows:
Weighted
Average
Exercise Number of Exercise Price
Price Shares Per Option
-------- ---------- --------------
Outstanding Warrants at December 31, 2000 2,296,666
Granted 0.97 1,978,500 0.35 - 2.25
Forfeited 5.81 (1,166,667) 3.00 - 6.00
-----------
Outstanding Warrants at December 31, 2001 2.73 3,108,499 0.35 - 7.20
Granted 0.35 1,000,000 0.35
-----------
Outstanding Warrants at December 31, 2002 2.15 4,108,499 0.35 - 7.20
===========
The following table summarizes information concerning warrants outstanding at
December 31, 2002.
Weighted
Average
Exercise Number
Price Outstanding
-------- -----------
0.35 1,993,500
0.63 400,000
2.25 585,000
2.50 300,000
6.00 129,999
7.20 700,000
---------
4,108,499
=========
The weighted average grant-date fair value of warrants granted equaled $0.97 for
the year ended December 31, 2001. The weighted average grant-date fair value of
options granted during the year equaled $0.40 and $0.79 for the years ended
December 31, 2002 and 2001, respectively. For purposes of pro forma disclosures,
the estimated fair value of the options and warrants is amortized to expense
over their respective vesting periods. The weighted average remaining
contractual life for warrants outstanding at December 31, 2002 and 2001, is 3.00
years and 3.62 years respectively. The weighted average remaining contractual
life for options outstanding at December 31, 2002 and 2001, is 4.15 years and
4.33 years respectively.
Options granted to employees are exercisable according to the terms of each
agreement, ranging from one month to four years. At December 31, 2002 and 2001,
1,119,703 and 3,452,760 options outstanding were exercisable with weighted
average exercise prices of $0.89 and $1.49, respectively. At December 31, 2002
and 2001, 8,580,163 and 12,795,549 total shares of the Company's common stock
are reserved for issuance related to stock options and stock purchase warrants
which were outstanding at December 31, 2002 and 2001, respectively.
F-18
vFinance, Inc.
Notes to Consolidated Financial Statements (continued)
7. SHAREHOLDERS' EQUITY (CONTINUED)
Pro forma information regarding net loss is required by SFAS 123, which also
requires that the information be determined as if the Company has accounted for
its employee stock options under the fair value method. The fair value for
options and warrants granted was estimated at the date of grant using the Black
Scholes option pricing model with the following weighted-average assumptions:
for 2002 risk-free interest rates of 4.875%; no dividend yields; volatility
factor of the expected market price of the Company's common stock of 1.523 for
options and warrants and an expected life of the options and warrants of 4-5
years; for 2001: risk-free interest of 3.53%; no dividend yields; volatility
factor of the expected market price of the Company's common stock of 1.610; and
an expected life of the options and warrants of 4-5 years. The Company's pro
forma net loss for the years ended December 31, 2002 and 2001 was $ 2,555,978,
and $17,702,620, respectively. The Company's pro forma basic and diluted net
loss per share for the years ended December 31, 2002 and 2001 was $0.10 and
$0.89, respectively. The impact of the Company's pro-forma net loss and loss per
share of the SFAS 123 pro forma requirements are not likely to be representative
of future pro forma results.
The Company recorded deferred compensation of $29,340 and $24,000 during the
years ended December 31, 2002 and 2001, 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 $ 82,657 at
December 31, 2001 of which $19,800 was amortized during 2002 and the remaining $
62,857 was reversed. The Company had an unamortized balance of $ 12,420 at
December 31, 2002. This balance represents the amount of deferred compensation
recorded during 2002, $29,340, offset by amortization of $16,920.
8. DEBT
On January 25, 2002, the Company entered into a Credit Agreement with UBS
Americas, Inc. ("UBS"). Under the terms of the Credit Agreement, UBS will
provide a revolving credit facility of $3,000,000 to the Company for the purpose
of supporting the expansion of its brokerage business or investments in
infrastructure to expand its operations or its broker-dealer operations. The
loan has a term of 4 years, must be repaid in full by January 2005 and bears
interest at LIBOR plus a LIBOR margin of 2%. Among other covenants, the Company
must maintain shareholder's equity of at least $7,000,000; however, the Credit
Agreement, as amended, specifically provides that the Company may exclude
goodwill write-offs aggregating approximately $8,500,000 from shareholder's
equity. The Company is in compliance with all covenants as of the filing date
and expects to remain in compliance throughout 2003. The Company must make early
repayments under the Credit Agreement if it acquires a new broker dealer firm,
enters a new line of business, or hires more than 4 brokers in a single or
related transaction. This repayment is made by adding $1.00 to the cost of each
incremental clearing transaction the Company makes through CSC, a wholly owned
subsidiary of Paine Webber which is a wholly owned subsidiary of UBS. All
determinations as to required early repayment shall be made by UBS, in its
reasonable judgment. To date, UBS has not notified the Company of any such
determination. The Company borrowed $1,500,000 under the credit facility in
January 2002. The Credit Agreement does not provide for conversion of the debt
into equity securities.
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.
Year Amount
---- ----------
2003 $561,481
2004 488,523
2005 288,565
2006 288,565
2007 288,565
Thereafter 192,377
----------
Total $2,108,076
==========
Total rent expense under operating leases, including space rental, totaled
approximately $871,818 and $1,433,057 for the years ended December 31, 2002 and
2001.
F-19
vFinance, Inc.
Notes to Consolidated Financial Statements (continued)
9. COMMITMENTS AND CONTINGENCIES (CONTINUED)
From time to time a subsidiary of ours or we are named as a party to a lawsuit
that has arisen in the ordinary course of business. Although it is possible that
losses exceeding amounts already recorded may be incurred upon ultimate
resolution of these existing legal proceedings, we believe that such losses, if
any, will not have a material adverse effect on our business, results of
operations or financial position; however, unfavorable resolution of each matter
individually or in the aggregate could affect the consolidated results of
operations for the quarterly and annual periods in which they are resolved.
The business of vFinance Investments involves substantial risks of liability,
including exposure to liability under federal and state securities laws in
connection with the underwriting or distribution of securities and claims by
dissatisfied customers for fraud, unauthorized trading, churning, mismanagement
and breach of fiduciary duty. In recent years, there has been an increasing
incidence of litigation involving the securities industry, including class
actions that generally seek rescission and substantial damages.
In the ordinary course of business, our company and/or its subsidiaries may be
parties to other legal proceedings and regulatory inquiries, the outcome of
which, either singly or in the aggregate, is not expected to be material. There
can be no assurance however that any sanctions will not have a material adverse
effect on the financial condition or results of operations of our company and/or
its subsidiaries. What follows below is a brief summary of certain matters
pending against or involving our subsidiaries and us.
First Colonial Securities Group, Inc. ("First Colonial") is subject to
supervision and regulation by the NASD, the SEC and various state securities
commissions. As part of this regulatory oversight, First Colonial is subject to
periodic examination and inspections by these authorities. First Colonial has
been advised that as a result of an examination performed by the Philadelphia
office of the NASD for the years 1996 and 1997, the NASD identified several
possible material deficiencies. The NASD and our company settled the matter in
February 2002 with the Company paying a fine of $75,000.
On or about May 17, 2001, Michael Golden ("Golden"), (a former Director of the
Company and former President of the Company's broker dealer and the controlling
shareholder of Colonial Direct Financial("Colonial Direct"), a former
wholly-owned subsidiary of the Company) filed an initial complaint against the
Company in the Circuit Court of the 17th Judicial Circuit in and for Broward
County, Florida, alleging that the Company breached its January 5, 2001
employment agreement with Golden, which was entered into as a result of the
merger between Colonial Direct and the Company. Mr. Golden claims that he
terminated the agreement for "good reason," as defined in the agreement, and
that we have failed to pay him severance payments and other benefits as well as
accrued commissions and un-reimbursed expenses. In the initial complaint, Golden
sought monetary damages from the Company in excess of $50,000 together with
interest, attorney's fees and costs. On or about July 18, 2001, the Company
filed its answer and affirmative defenses and counterclaims with the Circuit
Court against Golden and Ben Lichtenberg ("Lichtenberg"), Golden's partner in
Colonial Direct, denying all material allegations in the complaint,
affirmatively alleging that Golden is not entitled to any severance payments
because he was terminated for cause for his insubordination, failure to follow
directives of our board of directors and for breaches of fiduciary duty to the
Company. The Company also alleged that both Golden and Lichtenberg violated the
merger agreement between Colonial Direct and the Company by breaching certain of
the representations and warranties set forth in the merger agreement by, among
other things, failing to advise the Company of certain loan agreement defaults,
improperly withdrawing approximately $400,000 of capital from Colonial Direct,
failing to deliver a closing balance sheet and failing to disclose significant
liabilities of Colonial Direct. Claiming that the activities of Golden and
Lichtenberg constituted violations of Florida's Securities Investor Protection
Act, common law fraud, breach of fiduciary duty, breach of contract, intentional
interference with advantageous business relationships, and breach of the implied
covenant of good faith and dealing, the Company is seeking indemnification under
the merger agreement and additional monetary damages against Golden and
Lichtenberg in excess of $15,000. In response to the Company's answer,
affirmative defenses and counterclaims, on or about September 1, 2001, Golden
filed an amended complaint with the Court against the Company, Leonard Sokolow
("Sokolow"), our President and Chief Executive Officer, and Timothy Mahoney
("Mahoney"), the Chairman of our board of directors. In the amended complaint,
Golden alleges that Sokolow and Mahoney made various false representations that
induced Golden to enter into the merger agreement and his employment agreement.
Golden is seeking monetary damages from Sokolow, Mahoney and the Company in
excess of $4.6 million. Lichtenberg filed an answer, affirmative defenses and
counterclaims with the Court in response to the Company's filing with the Court
on July 13, 2001. In addition to denying all material allegations in our July
13, 2001 counterclaims against him, Lichtenberg alleges that: (a) the Company
breached its employment Agreement with him, (b) Sokolow and the company made
various false representations that induced Lichtenberg to enter into the merger
agreement and (c) the Company materially breached the Colonial Direct merger
F-20
vFinance, Inc.
Notes to Consolidated Financial Statements (continued)
9. COMMITMENTS AND CONTINGENCIES (CONTINUED)
agreement. Lichtenberg is seeking delivery from the Company of 414,825 shares of
the Company's common stock and monetary damages of at least $488,000 from
Sokolow and the Company, jointly and severally.
As of October 23, 2002 the Company has settled its dispute with Lichtenberg, and
as of December 30, 2002, the Company entered into a definitive settlement
agreement with Golden. Under the terms of the settlement with Lichtenberg, a
full mutual general release and covenant not to sue was entered into with no
payments to or by the Company. The settlement agreement with Golden brings to
closure all lawsuits between the parties. Specifically, under the terms of the
agreement, Golden and the Company have entered into a full general release of
any and all outstanding obligations between the parties, and in consideration,
the Company redeemed 50,000 Shares of Series B Preferred Stock having an
aggregate par value of $500,000 in exchange for 3,000,000 unregistered common
shares of the Company subject to a one year lock-up. In addition, Golden will
receive from the Company $7,000 per month for 12 months and thereafter $5,000
per month for approximately 34 months. In a separate settlement agreement,
Sokolow and Mahoney privately purchased 4.5m shares of Golden's vFinance Common
Stock.
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 Promissary Note in the
principal amount of $250,00. The Company believes their claim is without merit
and will vigorously defend the action.
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 relet the premises at a similar rate. The
Company (s) believe that their claim is without merit and will vigorously defend
the action.
PROCEEDINGS INVOLVING FIRST COLONIAL SECURITIES GROUP, INC.
On May 15, 2001, Louis D'Alessio filed a claim with the NASD against First
Colonial and Joel Kamphuis. His claim alleges compensatory damages in an amount
between $100,000 and $500,000 plus unspecified punitive damages. He alleges
unfair business practices, violation of the federal securities act, violation of
state securities statutes, and common law fraud. vFinance Investments believes
that their claim is without merit and is vigorously defending the action. This
matter was settled on June 24, 2002 in the amount of $16,250.
On August 14, 2001, Rosario Catanzarite, Joann Catanzarite, Anna Piegaro, Brian
Catanzarite and Dina Catanzarite filed a claim with the NASD against First
Colonial, Rodney Strong, Glen Merendino, Michael Golden, Lewis Maniloff, and
Steven Schwartz. Their claim alleges compensatory damages in the amount of
$125,000 plus interest. They allege that Mr. Merendino completely abused their
trust, processed unsuitable trades, coupled with abusive use of margin. This
matter was settled on November 27, 2002 in the amount of $30,000.
On October 3, 2001, Sterling Financial Investment Group filed a claim with the
NASD against vFinance Investment, Michael Kraft, Mickey Dubberly and Jaret
Brietstein. Their claim alleges compensatory damages and punitive damages to not
exceed the sum of $500,000. They alleged vFinance Investments offered and made
significant cash payments to Sterling's employees, Kraft, Dubberly and
Brietstein to entice them to break their written employment agreements with
Sterling and work for vFinance Investments. This matter was settled on September
6, 2002 in the amount of $500.
On January 22, 2002, Josephine and Frank Oliveri filed a claim with the NASD
against First Colonial and Anthony Guglieri. Their claim alleges compensatory
damages of $192,286.50 plus interest and punitive damages of $100,000. They
allege unsuitable investments, unauthorized trading, excessive trading and lack
of supervision. vFinance Investments believes that their claim is without merit
and is vigorously defending the action. We anticipate that this matter will
result in a settlement of approximately $35,000.
We are engaged in a number of other legal proceedings incidental to the conduct
of our business. These claims aggregate a range of $140,000 to $1,395,000. In
the opinion of our management, our company is adequately insured against the
claims relating to such proceedings, and any ultimate liability arising out of
such proceedings will not have a material adverse effect on the financial
condition or results of operations of our company.
F-21
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, 2002 and 2001, respectively.
11. SUBSEQUENT EVENTS
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 (who was also, at the same time, named
the President of vFinance's Retail Brokerage Division). In exchange for a 19%
equity position in JSM, vFinance will merge its "company-owned" retail branches
into JSM. It is anticipated that the merger will take place effective April 15,
2003. Effective upon such merger JSM will become an independent contractor of
the Company.
On January 1, 2003, the Company entered into an eighteen (18) month employment
agreement with John S. Mathews in the capacity of President of vFinance
Investments, Inc., Retail Brokerage Division. The Agreement shall automatically
be extended for additional one-year periods beginning at the initial eighteen
(18) month anniversary, unless the Company or Matthews provides notice of
non-renewal ninety (90) days prior to an anniversary date. Under the terms of
this Agreement, Matthews will receive a base salary, discretionary bonuses and a
certain amount of stock options subject to a specified vesting period. The
Agreement also contains provisions related to severance and change of control
upon the occurrence of certain events.
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.
F-22
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
The Company dismissed its independent auditors, Ernst & Young LLP, on May 10,
2002 to reduce expenses. During the two fiscal years that were audited by Ernst
& Young LLP's, their report on the Company's financial statements for each of
the two fiscal years ended December 31, 2000 and 2001 did not contain an adverse
opinion or disclaimer of opinion, nor was it modified as to uncertainty, audit
scope, or accounting principles. The decision to dismiss Ernst & Young, LLP was
recommended and approved by the Board of Directors.
During each of the Company's fiscal years ended December 31, 2000 and 2001 and
the interim period preceding the dismissal, there were no disagreements with
Ernst & Young LLP on any matter of accounting principles or practices, financial
statement disclosure, or auditing scope or procedure, which, if not resolved to
the satisfaction of Ernst & Young LLP, would have caused Ernst & Young LLP to
make reference to the subject matter of the disagreements in connection with its
reports.
On May 10, 2002, the Company engaged the firm of Feldman, Sherb & Co., P.C.
("Feldman") as its new independent auditors. At the time of such engagement, the
Company was aware of Feldman's planned merger into Grassi & Co., CPA's, P.C. as
well as the planned departure of certain of the principal accountants at Feldman
who subsequently formed their own firm, Sherb & Co., LLP ("Sherb").
The Company dismissed Feldman, on August 9, 2002. The decision to dismiss
Feldman was recommended and approved by the Board of Directors. During the
interim period preceding the dismissal, there were no disagreements with Feldman
on any matter of accounting principles or practices, financial statement
disclosure, or auditing scope or procedure, which, if not resolved to the
satisfaction of Feldman, would have caused Feldman to make reference to the
subject matter of the disagreements in connection with its reports. Feldman was
not required to issue any reports on the Company's financial statements during
the period prior to Feldman's dismissal.
On August 10, 2002, the Company engaged the firm Sherb as its new independent
auditors. The Company has authorized Feldman to respond fully to the inquiries
of Sherb with regard to any accounting or financial matters relating to the
Company. Since their engagement as the Company's auditors Sherb, has re-audited
the December 31, 2001 and 2000 financial statements originally audited by Ernst
& Young LLP, and audited the 2002 financial statements.
-30-
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 27, 2003. 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 46 Director, Chief Executive Officer
and President
Timothy E. Mahoney 46 Director, Chief Operating Officer
and Chairman
David A. Spector 37 Executive Vice President, Marketing
and Web Operations
Richard Campanella 52 Secretary
Mark Kacer 46 Chief Financial Officer, Executive
Vice President - Administration
LEONARD J. SOKOLOW has been a director since November 8, 1997, our Chief
Executive Officer since November 8, 1999, and our President since January 5,
2001. From November 8, 1999 through January 4, 2001, Mr. Sokolow was Vice
Chairman of the Board. Since September 1996, Mr. Sokolow has been President of
Union Atlantic LC, a merchant, banking and strategic consulting firm
specializing domestically and internationally in technology industries that is a
wholly owned subsidiary of our company. Since August 1993, Mr. Sokolow has been
President of Genesis Partners, Inc., a private financial business-consulting
firm. From August 1994 through December 1998, Mr. Sokolow was the Chairman and
Chief Executive Officer of the Americas Growth Fund, Inc., a public closed-end
management investment company. Mr. Sokolow presently serves as a director of
Advanced Electronics Support Products, Inc., a worldwide distributor and
manufacturer of active and passive networking components traded on Nasdaq. Mr.
Sokolow received a B.A. degree with majors in Economics and Accounting from the
University of Florida in 1977, a J.D. degree from the University of Florida
School of Law in 1980 and an LL.M. (Taxation) degree from the New York
University Graduate School of Law in 1982. Mr. Sokolow is a Certified Public
Accountant.
TIMOTHY E. MAHONEY has been a director since November 8, 1999 and since November
8, 1999, Chairman of the Board and our Chief Operating Officer. Since September
1996, Mr. Mahoney has been a partner of Union Atlantic LC. From 1994 through
1995, Mr. Mahoney was President of the Highlands Group. Mr. Mahoney was a
founder of the consumer products business for SyQuest Technology. In 1986, Mr.
Mahoney founded and was the President of Rodime Systems, a computer disk drive
sub-system manufacturer. In addition, Mr. Mahoney was the Vice President of
Marketing and Sales for Tecmar, the first PC add-in board company and spent
eight years in marketing and sales management in the computer timesharing
business with Computer Sciences Corporation, Automatic Data Processing and
General Electric Information Services. Mr. Mahoney presently serves as a
director of FOCUS Enhancements, Inc., a developer and marketer of advanced,
proprietary video scan conversion products traded on the Nasdaq SmallCap market.
Mr. Mahoney received a B.A. degree with majors in Computer Science and Business
from the West Virginia University in 1978. Mr. Mahoney received a Masters of
Business Administration from George Washington University in 1983.
DAVID A. SPECTOR has been a Vice President of our company since November 8,
1999. From 1995 through 1999, Mr. Spector served as Vice President and regional
creative director of Green Advertising, a division of London-based WPP Group plc
managing the creative efforts of the agency. Prior to that, Mr. Spector was a
copywriter with Greenstone Roberts Advertising, with responsibilities for Royal
Caribbean Cruise Lines and Radisson Hotels.
RICHARD CAMPANELLA has been Secretary of the Company since December 18, 2001.
Mr. Campanella currently serves as 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.
MARK KACER has been the CFO of the Company since February 3, 2003. Mr. Kacer was
the President of Mangowood Advisors, a financial consulting firm, from January
2001 until January 2003. Prior to that, Mr. Kacer was the CFO and a director of
Equinox Systems Inc., a publicly traded technology company, from June 1986 until
December 2000. Mr. Kacer was a senior auditor with Arthur Andersen from July
1981 until January 1986. He has a B.S degree in Accounting from Florida State
University.
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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, there are no transactions
during the fiscal year ended December 31, 2002 for which the officers, directors
and significant stockholders have not timely filed the appropriate form under
Section 16(a) of the Exchange Act.
ITEM 10. EXECUTIVE COMPENSATION.
The following table provides information concerning the annual and long term
compensation earned by our chief executive officer and each of the four other
most highly compensated executive officers of our company during the fiscal
years ended December 31, 2002, 2001 and 2000:
SUMMARY COMPENSATION TABLE
Securities
Annual Other Underlying
Name/position Year Salary Bonus Compensation Options
------------- ---- ------ ----- ------------ ----------
Leonard J. Sokolow 2002 $226,000 $0 $0 0 (3)
CEO, President (1)(2)(3) 2001 $169,500 $150,000 $7,289 734,802 (3)
2000 $150,000 $120,000 $12,000 500,000 (3)
Timothy E. Mahoney 2002 $226,000 $0 $0 0 (3)
COO, Chairman (1)(2)(3) 2001 $169,500 $150,000 $7,289 734,802 (3)
2000 $150,000 $120,000 $12,000 500,000 (3)
Marc Siegel 2002 $125,000 0 $229,437 0
President, vFinance 2001 $120,000 0 $92,000 565,000
Investments, Inc. (4) 2000 0 0 0 0
Richard Campanella 2002 $125,000 0 0 25,000
Chief Operating Officer 2001 $125,000 0 0 100,000
vFinance Investments, Inc. 2000 0 0 0 0
David Spector 2002 $100,000 0 0 25,000
Vice President 2001 $100,000 0 $1,902 25,000
2000 $100,000 0 $3,180 300,000
(1) Messrs. Sokolow and Mahoney each received $120,000 in 2000 and $150,000 in
2001 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 $12,000 car allowance during
2000 and 2001 and a $18,000 car allowance during 2002, which are reflected in
the corresponding table as other annual compensation.
(3) Cancellation of 500,000 options in January 2001 and reissuance in July 2001
per employment agreement. Subsequently all options were cancelled in 2002.
(4) Messrs. Siegel's employment with the Company was terminated during fiscal
year 2002.
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OPTION GRANTS IN LAST FISCAL YEAR
The following table provides information with respect to the chief executive
officer and each of the other named executive officers listed in the Summary
Compensation Table concerning stock options granted on our common stock in
fiscal year 2002:
Number of Percent of Total
Securities Options Granted to
Underlying Options Employees in Fiscal Exercise or Base
Name Granted Year Price ($/Share) Expiration Date
---- ------------------ ------------------ --------------- ---------------
Leonard Sokolow 0 0% N/A N/A
Timothy Mahoney 0 0% N/A N/A
Richard Campanella 25,000 0.0% $0.35 August 30, 2006
David Spector 0 0% N/A N/A
AGGREGATED OPEN EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END VALUES
The following table provides information regarding stock option exercises during
2002 by the chief executive officer and each of the other named executive
officers listed in the Summary Compensation Table:
Number of Securities
Underlying Unexercisable Value of Unexercised In-the-Money
Shares Options at Fiscal Year-End Options at Fiscal Year-End
Acquired on Value ---------------------------- ---------------------------------
Name Exercise Realized Exercisable Unexercisable Exercisable Unexercisable
---- ----------- -------- ----------- ------------- ----------- -------------
Leonard Sokolow 0 0 0 0 $ 0 $ 0
Timothy Mahoney 0 0 0 0 $ 0 $ 0
Richard Campanella 0 0 0 25,000 $ 0 $ 0
David Spector 0 0 0 0 $ 0 $ 0
COMPENSATION OF DIRECTORS
Directors do not receive any compensation for serving on our Board of Directors.
EMPLOYMENT AGREEMENTS
On January 5, 2001, we entered into a three-year employment agreement, as
subsequently amended, with each of Mr. Sokolow, our Chief Executive Officer and
President, and Mr. Mahoney, our Chairman and Chief Operating Officer. Under the
terms of these agreements, which are automatically extended unless we have
provided a non-renewal notice as directed by a majority vote of the board of
directors, each of Messrs. Sokolow and Mahoney are entitled to receive:
- An initial base salary of $208,000 per annum for the first year with
a 5% increase per annum beginning one year from the date of the
agreements (our board of directors may increase such salaries at its
discretion);
- Discretionary bonuses as determined by the board of directors primarily
based on each employee's performance;
- Four weeks paid vacation per annum and an automobile expense allowance of
$1,500 per month; and
- Incentive compensation paid quarterly from distributions of "Division
Available Income" and "Division Non-Cash consideration" as such terms are
defined in an exhibit to each of the employment agreements, primarily based
on the performance of our company and our operating divisions.
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The employment agreements also contain severance and change of control
provisions.
Under the terms of the employment agreements, as of July 6, 2001, Leonard J.
Sokolow and Timothy Mahoney were each granted 500,000 stock options. These stock
options are exercisable for five years at an exercise price of $.625 per share.
Of the 500,000 stock options granted to each of Messrs. Sokolow and Mahoney,
125,000 options vested for each of them on July 6, 2001 and the balance of the
options vest for each of them at the rate of 125,000 per year thereafter. On the
date these options were granted, the closing per share sale price of our common
stock was $.32 as reported by the OTC Bulletin Board. These options have been
cancelled in 2002.
CANCELLATION AND REISSUANCE OF STOCK OPTIONS
The Board of Directors, comprised of Leonard Sokolow and Timothy Mahoney,
initially issued 500,000 stock options to each of Messrs. Sokolow and Mahoney on
June 1, 2000. These stock options had the same terms as the stock options
described above. However, the exercise price of the options was $5.85 per share.
On the date these options were granted, the closing sale price of our common
stock on the OTC Bulletin Board was $4.88 per share. These options were
cancelled on January 1, 2001 because as part of the Company's merger with
Colonial Direct Financial Group, Inc., Michael Golden, a principal of Colonial
Direct Financial Group, Inc., entered into an employment agreement with the
Company and was granted stock options. On January 5, 2001, Messrs. Sokolow and
Mahoney entered into new employment agreements with our company so that their
terms of employment were substantially the same as Mr. Golden's agreement.
In connection with employment agreements for each of Messrs. Sokolow and
Mahoney, the Board of Directors gave each of them the right to acquire 500,000
stock options on January 5, 2001. In order to receive a grant of these options,
certain conditions had to be met, including continued employment through July 1,
2001. The exercise price of the options would have been $2.25 per share. On the
date these rights were granted, the closing price of our common stock was $.8125
per share, as reported by the OTC Bulletin Board. These options were
subsequently cancelled on April 2, 2001, when the closing sale price of our
common stock on the OTC Bulletin Board was $.3125 per share.
At the time that the 500,000 stock options were granted to each of Messrs.
Sokolow and Mahoney, the Company had just completed the merger with Colonial
Direct Financial Group, Inc. The Board of Directors expected this merger to
materially enhance the financial performance of our Company. Subsequent to the
merger, we learned of certain breaches of the representations and warranties in
the merger agreement which ultimately caused us to write-off $7 million of
goodwill associated with the transaction, and we have ceased operating Colonial
Direct Financial Group, Inc. and its subsidiaries.
The Board of Directors had expected Colonial Direct Financial Group, Inc. and
its subsidiaries to generate significant profits for us. As a result, the Board
of Directors initially issued stock options to Messrs. Sokolow and Mahoney at an
exercise price of $2.25 per share. When the Board of Directors became aware of
the actual financial condition of Colonial Direct Financial Group, Inc. and its
subsidiaries, the Board of Directors decided it was in the best interests of our
company to provide Messrs. Sokolow and Mahoney with stock options having an
exercise price more closely tied to the financial condition of our company.
Accordingly, after the January 5, 2001 stock options granted to Messrs. Sokolow
and Mahoney were cancelled on April 2, 2001, the Board of Directors on July 6,
2001 granted new options to each of Messrs. Sokolow and Mahoney. These options
had an exercise price 95% higher than the closing sale price of our common stock
on the date of grant. The Board of Directors set the exercise price of the
options materially above the market price of the common stock on the date of the
grant in order to create an incentive for Messrs. Sokolow and Mahoney to improve
the financial performance of our company.
On August 2001, the Company granted to each Messrs. Sokolow and Mahoney 234,802
stock options at an exercise price that exceeded the stock price on the date of
issuance and were exercisable over a five-year period, beginning on August 2001.
No compensation expense was recognized related to these stock options in the
year ended December 31, 2001, as the grant price exceeded the quoted market
price on the date of the grant.
On December 2002, Messrs. Sokolow and Mahoney each 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 Messrs. Sokolow and
Mahoney.
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ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth common stock ownership information as of March
27, 2003 with respect to:
- Each person known to us to be the beneficial owner of more than 5% of our
common stock;
- Each of our 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 27, 2003. Except as otherwise indicated, to our
knowledge, each stockholder has sole power to vote and dispose of all the shares
of common stock listed opposite his name.
For purposes of this table, each person is deemed to have beneficial ownership
of any shares of our common stock such person has the right to acquire on or
within 60 days after March 27, 2003.
Amount of Shares
Name of Beneficial Owner Beneficially Owned Percent of Class
------------------------ ------------------ ----------------
Leonard J. Sokolow(1) 5,883,010 19.70%
Timothy E. Mahoney(2) 5,883,009 19.70%
Highlands Group Holdings, Inc. (3) 2,175,000 7.28%
David A. Spector (4) 25,000 *
Richard Campanella (5) 25,000 *
Mark Kacer - -
All executive officers and directors
as a group (4 persons)(6) 11,816,019 39.58%
* 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.
(6) See footnotes (1) though (5) of this table.
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The following table sets forth certain information as of December 31,2002, 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
Plan category warrants and rights warrants and rights reflected in column (a))
(a) (b) (c)
Equity compensation
plans approved by
security holders - - -
Equity compensation
plans not approved by
ecurity holders * 8,580,113 1.33 -
-----------------------------------------------------------------
Total 8,580,113 1.33 -
* For a description of the plans See Note 7 to the Consolidated Financial
Statements included elsewhere herein.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
On December 18, 2001, Critical Infrastructure Fund (BVI), LP, a limited
partnership controlled by us, purchased 877,193 shares of our common stock from
us for $250,000 and received piggyback registration rights with respect to these
shares. In January 2002, Critical Infrastructure Fund (BVI), LP sold to Messrs.
Sokolow, Mahoney and Williamson, three executive officers of our company, 61,403
shares, 61,403 shares and 150,000 shares, respectively, of our common stock at a
price of $0.285 per share, the same price at which the shares were purchased
from us by Critical Infrastructure Fund (BVI), LP.
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ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
Number of
Exhibit Exhibit Description
--------- --------------------------------------------------------------------
2.1 Share Exchange Agreement among the Company, vFinance Holdings, Inc.,
certain shareholders of vFinance Holdings, Inc. and Union Atlantic
LC, dated November 8, 1999 (incorporated by reference to the
Company's Current Report on Form 8-K filed with the SEC on
November 8, 1999).
2.2 Amendment to Share Exchange Agreement dated November 29, 1999
(incorporated by reference to the Company's Annual Report on Form
10-KSB filed with the SEC on March 30, 2000).
2.3 Agreement and Plan of Merger dated as of December 22, 2000, by and
among the Company, NW Holdings, Inc., and Alvin S. Mirman,
Ilene Mirman, Marc N. Siegel, Richard L. Galterio, Vincent W.
Labarbara, Eric M. Rand, and Mario Marsillo, Jr. (incorporated by
reference to the Company's Current Report on Form 8-K filed with
the SEC on January 17, 2001).
2.4 Agreement and Plan of Merger, dated as of January 3, 2001, by and
among the Company, Colonial Acquisition Corp., Colonial Direct
Financial Group, Inc., and Michael Golden and Ben Lichtenberg
(incorporated by reference to the Company's Current Report on Form
8-K filed with the SEC on January 17, 2001).
3.1 Certificate of Incorporation as filed with the Delaware Secretary of
State on February 12, 1992 (incorporated by reference to the
Company's Registration Statement on Form S-18 filed with the SEC on
July 24, 1992).
3.2 Certificate of Renewal and Revival of Certificate of Incorporation
as filed with the Delaware Secretary of State on March 15, 1996
(incorporated by reference to the Company's Annual Report on Form
10-KSB filed with the SEC on March 30, 2000).
3.3 Certificate of Amendment to the Certificate of Incorporation as
filed with the Delaware Secretary of State on April 28, 1999
(incorporated by reference to the Company's Annual Report on Form
10-KSB filed with the SEC on March 30, 2000).
3.4 Certificate of Amendment to Certificate of Incorporation as filed
with the Delaware Secretary of State on March 13,2000 (incorporated
by reference to the Company's Annual Report on Form 10-KSB filed
with the SEC on March 30, 2000).
3.5 Certificate of Amendment to Certificate of Incorporation as filed
with the Delaware Secretary of State on November 28, 2001.
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).
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5.1 Opinion of Krieger & Prager, LLP
10.1 Purchase Agreement between the Company and Steven Jacobs and
Mauricio Borgonovo, dated December 24, 1999, for the purchase of
Pinnacle Capital Group,LLC (incorporated by reference to the
Company's Annual Report on Form 10-KSB filed with the SEC on March
30, 2000).
10.2 Asset Purchase Agreement among the Company, Steven Jacobs and
Mauricio Borgonovo dated January 3, 2000 (incorporated by reference
to the Company's Annual Report on Form 10-KSB filed with the SEC on
March 30, 2000).
10.3 Stock Purchase Agreement between the Company and River Rapids Ltd.,
dated September 27, 1999 (incorporated by reference to the Company's
Annual Report on Form 10-KSB filed with the SEC on March 30, 2000).
10.4 Amendment to Stock Purchase Agreement between the Company and River
Rapids Ltd. dated December 22, 1999 (incorporated by reference to
the Company's Annual Report on Form 10-KSB filed with the SEC on
March 30, 2000).
10.5 Common Stock and Warrants Purchase Agreement among the Company, AMRO
International, S.A., CALP II Limited Partnership, a Bermuda Limited
partnership, Celeste Trust Reg, Balmore SA, Sallee Investments LLLP,
worldVentures Fund I, LLC and RBB Bank Aktiengesellschaft, dated
March 31, 2000 (incorporated by reference to the Company's Current
Report on Form 8-K filed with the SEC on April 13, 2000).
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 Employment Agreement dated as of January 5, 2001, between the
Company and Leonard J. Sokolow (incorporated by reference to the
Company's Annual Report on Form 10-KSB filed with the SEC on March
20, 2001).
10.11 Employment Agreement dated as of January 5, 2001, between the
Company and Timothy Mahoney (incorporated by reference to the
Company's Annual Report on Form 10-KSB filed with the SEC on March
20, 2001).
10.12 Options Cancellation Agreement dated January 1, 2001 by Leonard J.
Sokolow (incorporated by reference to the Company's Annual Report on
Form 10-KSB filed with the SEC on March 20, 2001).
10.13 Options Cancellation Agreement dated January 1, 2001 by Timothy
Mahoney (incorporated by reference to the Company's Annual Report on
Form 10-KSB filed with the SEC on March 20, 2001).
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10.14 Securities Exchange Agreement, dated as of August 15, 2001, among
Kathleen Wallman, Steven Wallman, Joseph Daniel and vFinance.com,
Inc. (n/k/a vFinance, Inc.) (Incorporated by reference to the
Company's Quarterly Report on Form 10-QSB filed on August 14, 2001).
10.15 Registration Rights Agreement, dated as of August 15, 2001, among
Kathleen Wallman, Joseph Daniel and vFinance.com, Inc. (n/k/a
vFinance, Inc.)(Incorporated by reference to the Company's Quarterly
Report on Form 10-QSB filed on August 14, 2001).
10.16 Stock Purchase Warrant, dated August 15, 2001, issued to Kathleen
Wallman to purchase 400,000 shares of common stock of vFinance, Inc.
(incorporated by reference to the Company's Quarterly Report on Form
10-QSB filed on August 14, 2001).
10.17 Letter Agreement, dated August 15, 2001, from vFinance.com, Inc. to
Joseph Daniel re employment of Joseph Daniel by vFinance.com, Inc.
(incorporated by reference to the Company's Quarterly Report on
Form 10-QSB filed on August 14, 2001).
10.18 Note Purchase Agreement by and between vFinance.com, Inc. d/b/a
vFinance, Inc. (n/k/a vFinance, Inc.) and Best Finance Investments
Limited (n/k/a SBI Investments (USA), Inc.) dated November 28, 2001
(incorporated by reference to the Company's Annual Report on Form
10-KSB filed April 16, 2002).
10.19 Letter Agreement dated November 30, 2001 amending Note Purchase
Agreement (incorporated by reference to the Company's Annual Report
on Form 10-KSB filed April 16, 2002).
10.20 Letter Agreement dated December 14, 2001 amending Note Purchase
Agreement (incorporated by reference to the Company's Annual Report
on Form 10-KSB filed April 16, 2002).
10.21 Letter Agreement dated December 28, 2001 amending Note Purchase
Agreement (incorporated by reference to the Company's Annual Report
on Form 10-KSB filed April 16, 2002).
10.22 Letter Agreement dated February 13, 2002 amending Note Purchase
Agreement (incorporated by reference to the Company's Annual Report
on Form 10-KSB filed April 16, 2002).
10.23 Letter Agreement dated March 4, 2002 amending Note Purchase
Agreement (incorporated by reference to the Company's Annual Report
on Form 10-KSB filed April 16, 2002).
10.24 Credit Facility by and between vFinance, Inc. and UBS Americas, Inc.
dated as of January 25, 2002 (incorporated by reference to the
Company's Annual Report on Form 10-KSB filed April 16, 2002).
10.25 Subordination Agreement by and among vFinance, Inc., 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 April 16, 2002).
10.26 Cancellation Agreement/Conditional Right to Option Grant dated
April 2, 2001 by Leonard J. Sokolow (incorporated by reference to
the Company's Annual Report on Form 10-KSB filed April 16, 2002).
10.27 Employment Agreement Amendment dated as of July 2, 2001 by and
between vFinance.com, Inc. and Leonard J. Sokolow (incorporated by
reference to the Company's Annual Report on Form 10-KSB filed April
16, 2002).
10.28 Stock Option Agreement dated as of July 6, 2001 by and between
Leonard J. Sokolow and vFinance.com, Inc. (incorporated by reference
to the Company's Annual Report on Form 10-KSB filed April 16, 2002).
10.29 Employment Agreement Amendment No. 3 dated as of January 7, 2002 by
and between vFinance, Inc. and Leonard J. Sokolow (incorporated by
reference to the Company's Annual Report on Form 10-KSB filed April
16, 2002).
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10.30 Cancellation Agreement/Conditional Right to Option Grant dated April
2, 2001 by Timothy Mahoney (incorporated by reference to the
Company's Annual Report on Form 10-KSB filed April 16, 2002)
(incorporated by reference to the Company's Annual Report on Form
10-KSB filed April 16, 2002).
10.31 Employment Agreement Amendment dated as of July 2, 2001 by and
between vFinance.com, Inc. and Timothy Mahoney (incorporated by
reference to the Company's Annual Report on Form 10-KSB filed April
16, 2002).
10.32 Stock Option Agreement dated as of July 6, 2001 by and between
Timothy Mahoney and vFinance.com, Inc. (incorporated by reference to
the Company's Annual Report on Form 10-KSB filed April 16, 2002).
10.33 Employment Agreement Amendment No. 3 dated as of January 7, 2002 by
and between vFinance, Inc. and Timothy Mahoney (incorporated by
reference to the Company's Annual Report on Form 10-KSB filed April
16, 2002).
10.34 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 April 16, 2002).
10.35 Letter Agreement dated February 5, 2002 executed by vFinance, Inc.
and Robert F. Williamson, Jr. containing terms and conditions of Mr.
Williamson's employment (incorporated by reference to the Company's
Annual Report on Form 10-KSB filed April 16, 2002).
10.36 Amendment to Credit Agreement dated April 12, 2002 by and between
vFinance, Inc. and UBS Americas Inc. (incorporated by reference to
the Company's Annual Report on Form 10-KSB filed April 16, 2002).
10.37 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 Form 10-QSB filed August 14, 2002).
10.38 Amendment to Select Asset Purchase Agreement dated June 17, 2002
(the "Amendment") (incorporated by reference to the Company's Form
10-QSB filed August 14, 2002).
10.39 Escrow Agreement executed in conjunction with the Amendment
(incorporated by reference to the Company's Form 10-QSB filed August
14, 2002).
10.40 Termination Agreement (incorporated by reference to the Company's
Form 10-QSB/A filed November 14, 2002)
10.41 Branch Agreement between the Company and JSM Holding Corp.
10.42 Employment Agreement between the Company and John S. Matthews.
21 List of Subsidiaries
23 Consent of Sherb & Co.,LLP, Certified Public Accountants.
99.1 Certification by Chief Executive Officer pursuant to Section 906 of
the Sarbanes-Oxley act of 2002.
99.2 Certification by Chief Financial Officer pursuant to Section 906 of
the Sarbanes-Oxley act of 2002.
(b) REPORTS ON FORM 8-K
Form 8-K filed on November 14, 2002 pursuant to item 9 thereof.
-40-
ITEM 14. 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. Based upon such officers' evaluation
of these controls and procedures as of a date within 90 days of the filing of
this Annual Report, and subject to the limitations noted hereinafter, the
Certifying Officers have concluded that our disclosure controls and procedures
are effective to ensure that information required to be disclosed by us in this
Annual 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. Over time, control may become inadequate
because of changes in conditions, or the degree of compliance with the policies
or procedures may deteriorate. Because of these inherent limitations in a
cost-effective control system, misstatements due to error or fraud may occur and
not be detected.
-41-
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 27, 2003
In accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
Signature Capacity Date
-------------------------------- --------- --------------------
/s/ Leonard J. Sokolow Director, Chief Executive Officer and
-------------------------------- President (Principal Executive Officer) March 27,2003
Leonard J. Sokolow
/s/ Mark Kacer. Chief Financial Officer and (Principal
-------------------------------- Financial and Accounting Officer) March 27, 2003
Mark Kacer
/s/ Timothy E. Mahoney Director, Chairman of the Board and March 27, 2003
-------------------------------- Chief Operating Officer
Timothy E. Mahoney
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350 AS ADOPTED
PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of vFinance, Inc. on Form 10-KSB
for the fiscal year ended December 31, 2002, as filed with the Securities and
Exchange Commission on the date hereof, I, Mark Kacer, the Chief Financial
Officer of the Company, certify, pursuant to and for purposes of 18 U.S.C.
Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
2002, that:
1. I have reviewed this annual report on Form 10-KSB of vFinance, Inc.;
2. Based on my knowledge, this annual report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
annual report;
3. Based on my knowledge, the financial statements and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant, including its
consolidated subsidiaries is made known to us by others within those
entities, particularly during the period in which this annual report is
being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the filing
date of this annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and the audit
committee of the registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's ability
to record, process, summarize and report financial data and have
identified for the registrant's auditors any material weakness in
internal controls; and
b) any fraud, whether or not material, that involves
management or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officer and I have indicated in
this annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: March 27, 2003 /s/ Mark Kacer
--------------
Name: Mark Kacer
Title: Chief Financial Officer
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350 AS ADOPTED
PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of vFinance, Inc. on Form 10-KSB
for the fiscal year ended December 31, 2002, as filed with the Securities and
Exchange Commission on the date hereof, I, Leonard J. Sokolow, the Chief
Executive Officer of the Company, certify, pursuant to and for purposes of 18
U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002, that:
1. I have reviewed this annual report on Form 10-KSB of vFinance, Inc.;
2. Based on my knowledge, this annual report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
annual report;
3. Based on my knowledge, the financial statements and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant, including its
consolidated subsidiaries is made known to us by others within those
entities, particularly during the period in which this annual report is
being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the filing
date of this annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and the audit
committee of the registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's ability
to record, process, summarize and report financial data and have
identified for the registrant's auditors any material weakness in
internal controls; and
b) any fraud, whether or not material, that involves
management or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officer and I have indicated in
this annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: March 27, 2003 /s/ Leonard J. Sokolow
----------------------
Name: Leonard J. Sokolow
Title: Chief Executive Officer
INDEX OF DOCUMENTS FILED WITH THIS ANNUAL REPORT
Number of
Exhibit Exhibit Description
--------- --------------------------------------------------------------------
10.41 Branch Agreement between the Company and JSM Holding Corp.
10.42 Employment Agreement between the Company and John S. Matthews.
99.1 Certification by Chief Executive Officer pursuant to Section 906 of
the Sarbanes-Oxley act of 2002.
99.2 Certification by Chief Financial Officer pursuant to Section 906 of
the Sarbanes-Oxley act of 2002.