UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 or 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended MARCH 31, 2002
or
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period _____________ to _________________
Commission File Number 1-11454-03
VFINANCE, INC.
(Exact name of small business issuer as specified in its charter)
Delaware 58-1974423
------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3010 North Military Trail, Suite 300, Boca Raton, FL 33431
----------------------------------------------------------
(Address of principal executive offices)
(561) 981-1000
(Issuer's telephone number)
(Former name, former address and former fiscal year,
if changed since last report)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of 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 [ ]
State the number of shares outstanding of each of the issuer's classes of common
equity, as of March 31, 2002:
23,387,097 shares of Common Stock $0.01 par value
Transitional Small Business Disclosure Format (Check one): Yes [X]; No [ ]
INDEX
VFINANCE, INC.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets - December 31, 2001 and
March 31, 2002 (Unaudited) .......................................4
Consolidated Statements of Operations for the three months ended
March 31, 2001 and 2002 (Unaudited) ..............................5
Consolidated Statements of Cash Flows for the three months ended
March 31, 2001 and 2002 (Unaudited) ..............................6
Notes to Consolidated Financial Statements (Unaudited) ............7-12
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations ........................................13-14
PART II. OTHER INFORMATION
Item 1. Legal Proceedings ...................................................15
Item 2. Changes in Securities ...............................................15
Item 3. Defaults upon Senior Securities .....................................15
Item 4. Submission of Matters to a Vote of Security Holders .................15
Item 5. Other Information ...................................................15
Item 6. Exhibits and Reports on Form 8-K ....................................16
Signatures ...................................................................17
2
FORWARD-LOOKING STATEMENTS
The following information provides cautionary statements under the safe harbor
provisions of the Private Securities Litigation Reform Act of 1995 (the Reform
Act). We identify important factors that could cause our actual results to
differ materially from those projected in forward-looking statements we make in
this report or in other documents that reference this report. All statements
that express, or involve discussions as to, expectations, beliefs, plans,
objectives, assumptions or future events or performance (often, but not always,
identified through the use of words or phrases such as we or our management
believes, expects, anticipates, hopes, words or phrases such as will result, are
expected to, will continue, is anticipated, estimated, projection and outlook,
and words of similar import) are not statements of historical facts and may be
forward-looking. These forward-looking statements are based largely on our
expectations and are subject to a number of risks and uncertainties including,
but not limited to, economic, competitive, regulatory, growth strategies,
available financing and other factors discussed elsewhere in this report and in
the documents filed by us with the Securities and Exchange Commission ("SEC").
Many of these factors are beyond our control. Actual results could differ
materially from the forward-looking statements we make in this report or in
other documents that reference this report. In light of these risks and
uncertainties, there can be no assurance that the results anticipated in the
forward-looking information contained in this report or other documents that
reference this report will, in fact, occur.
These forward-looking statements involve estimates, assumptions and
uncertainties, and, accordingly, actual results could differ materially from
those expressed in the forward-looking statements. These uncertainties include,
among others, the following: (i), the inability of our broker-dealer operations
to operate profitably in the face of intense competition from larger full
service and discount brokers; (ii) a general decrease in merger and acquisition
activities and our potential inability to receive success fees as a result of
transactions not being completed; (iii) increased competition from business
development portals; (iv) technological changes; (v) our potential inability to
implement our growth strategy through acquisitions or joint ventures; and (vi)
our potential inability to secure additional debt or equity financing.
Any forward-looking statement speaks only as of the date on which such statement
is made, and we undertake no obligation to update any forward-looking statement
or statements to reflect events or circumstances after the date on which such
statement is made or to reflect the occurrence of unanticipated events. New
factors emerge from time to time and it is not possible for our management to
predict all of such factors, nor can our management asses the impact of each
such factor on the business or the extent to which any factor, or combination of
factors, may cause actual results to differ materially from those contained in
any forward-looking statements.
3
VFINANCE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
December 31, March 31,
2001 2002
------------ ------------
Assets:
Cash and cash equivalents ............................. $ 1,826,474 $ 2,693,017
Restricted cash ....................................... 203,106 203,106
Due from clearing broker .............................. 588,222 -
Investments in trading securities ..................... 1,077,815 2,610,592
Accounts receivable, net of allowance for doubtful
accounts of $63,528 and $123,499, respectively ....... 93,719 277,000
Forgivable loans - employees, current portion ......... 307,452 209,639
Notes receivable - employees, net of allowance for
doubtful accounts of $60,550 and $60,550, respectively 107,600 114,600
Prepaid expenses and other current assets ............. 133,085 132,022
------------ ------------
Total current assets ................................. 4,337,473 6,239,976
Furniture and equipment, at cost:
Furniture and equipment ............................... 940,537 993,247
Internal use software ................................. 146,835 158,281
------------ ------------
1,087,372 1,151,528
Less accumulated depreciation .......................... (403,970) (478,348)
------------ ------------
Net furniture and equipment ........................... 683,402 673,180
Forgivable loans - employees .......................... 577,760 577,760
Goodwill .............................................. 420,000 420,000
Other assets .......................................... 387,177 392,247
------------ ------------
Total Assets ........................................... $ 6,405,812 $ 8,303,163
============ ============
Liabilities and Shareholders' Equity:
Accounts payable ...................................... $ 1,093,662 $ 1,137,539
Accounts payable - employees .......................... 66,407 -
Due to clearing broker ................................ - 579,684
Accrued liabilities ................................... 2,319,510 2,301,251
Securities sold, not yet purchased .................... 53,981 132,792
Lines of credit ....................................... 297,656 297,656
Subordinated promissory notes ......................... 650,000 650,000
Notes payable, current portion ........................ 750,429 779,492
Capital lease obligations, current portion ............ 12,627 48,731
Other ................................................. - 25,416
------------ ------------
Total current liabilities ............................ 5,244,272 5,952,561
Letter of credit and promissory note .................. 268,500 268,500
Capital lease obligations ............................. 56,641 -
Notes payable - long term ............................. - 1,500,000
Series A Convertible Preferred Stock, $0.01 par value;
122,500 shares authorized; 122,500 shares issued and
outstanding (liquidation preference of $1,556,050 at
December 31, 2001) ................................... 1,225 1,225
Series B Convertible Preferred stock, $0.01 par value;
50,000 shares authorized; 50,000 issued and
outstanding (liquidation preference of $46,450 at
December 31, 2001) ................................... 500 500
Common stock, $0.01 par value, 75,000,000 shares
authorized; 25,964,395 and 26,398,608 shares issued,
and 22,952,885 and 23,387,097 outstanding, respectively 259,644 263,986
Additional paid-in-capital on preferred stock ......... 1,565,775 1,535,150
Additional paid-in-capital on common stock ............ 22,515,699 22,635,107
Deferred compensation ................................. (82,657) (82,657)
Accumulated deficit ................................... (21,254,359) (21,601,781)
------------ ------------
3,005,827 2,751,530
Less treasury stock .................................... (2,169,428) (2,169,428)
------------ ------------
Total Shareholders' Equity ............................ 836,399 582,102
------------ ------------
Total Liabilities and Shareholders' Equity ............. $ 6,405,812 $ 8,303,163
============ ============
See accompanying notes
4
vFINANCE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months Ended March 31
----------------------------
2001 2002
------------ ------------
Revenues:
Commissions - agency ............................ $ 1,938,929 $ 2,525,019
Commissions - principal ......................... 1,593,963 1,034,365
Success fees .................................... 1,768,998 1,604,196
Consulting and retainers ........................ 272,800 331,597
Other brokerage related income .................. - 141,398
Other ........................................... 313,921 89,256
------------ ------------
Total revenues ................................... 5,888,611 5,725,831
------------ ------------
Cost of revenues:
Commissions ..................................... 2,112,741 2,118,315
Clearing and transaction costs .................. 657,338 249,860
Success ......................................... 651,977 772,420
Consulting and retainers ........................ 52,833 7,500
Other ........................................... - 9,262
------------ ------------
Total cost of revenues ........................... 3,474,889 3,157,357
------------ ------------
Gross profit ..................................... 2,413,722 2,568,474
------------ ------------
Other expenses:
General and administrative ...................... 2,282,931 2,444,340
Net loss (gain) on trading securities ........... 17,378 (12,652)
Professional fees ............................... 332,316 239,277
Provision for bad debts ......................... 50,000 60,560
Net unrealized loss (gain) on investments held
for trading and stock purchase warrants ........ 794,755 (60,329)
Depreciation and amortization ................... 351,295 73,360
Cost of arbitration actions ..................... 80,574 -
Amounts forgiven under forgivable loans ......... - 74,375
Other ........................................... 250 -
------------ ------------
Total other expenses ............................. 3,909,499 2,818,931
------------ ------------
Loss from operations ............................. (1,495,777) (250,457)
Loss on sale of property ......................... (2,108) 194
Interest and dividend income (expense) ........... 118,166 (97,158)
------------ ------------
Net loss ......................................... (1,379,719) (347,421)
Less: Preferred stock dividend ................... - (30,625)
------------ ------------
Loss available to common stockholders ............ $ (1,379,719) $ (378,046)
============ ============
Loss per share:
Basic ........................................... ($ 0.07) ($ 0.02)
============ ============
Weighted average number of common
shares used in computing basic loss
per share ....................................... 19,934,299 23,387,097
============ ============
Diluted ......................................... ($ 0.07) ($ 0.02)
============ ============
Weighted average number of common
shares used in computing diluted loss
per share ....................................... 19,934,299 23,387,097
============ ============
See accompanying notes.
5
VFINANCE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Three Months Ended March 31
------------------------------
2001 2002
------------ ------------
OPERATING ACTIVITIES
Net loss .................................................................... $(1,379,719) $ (378,046)
Adjustments to reconcile net loss to net cash used in operating activities.
Non-cash fees received .................................................... - (352,235)
Depreciation and amortization ............................................. 351,295 74,378
Provision for doubtful accounts ........................................... 50,000 60,560
Unrealized loss (gain) on sale of investments, net ........................ 497,533 (36,815)
Unrealized loss (gain) on stock purchase warrants ......................... 6,500 (23,515)
Loss on sale of investments, net .......................................... 28,333 12,652
Proceeds from sale of investments ......................................... - 14,370
Amount forgiven under forgiveable loan .................................... 252,417 74,375
Changes in operating assets and liabilities, net of businesses acquired:
Accounts receivable ..................................................... 27,991 (243,843)
Foregivable Loans ....................................................... - 23,438
Due from clearing broker ................................................ (1,133,459) 1,167,906
Notes receivable from employees ......................................... 92,445 (7,000)
Investments ............................................................. (452,624) (1,147,234)
Other current assets .................................................... 109,685 1,063
Other assets and liabilities ............................................ (339,342) 20,346
Accounts payable and accrued liabilities ................................ (89,843) (40,789)
Securities, sold not yet purchased ...................................... 70,582 78,811
----------- -----------
Net cash used in operating activities ....................................... (1,908,206) (701,578)
INVESTING ACTIVITIES
Purchase of equipment ..................................................... (184,650) (64,156)
Purchase of treasury stock, net ........................................... 12,108 -
Purchase of businesses .................................................... (1,233,335) -
Change in other assets .................................................... (151,869) -
----------- -----------
Net cash used in investing activities ....................................... (1,557,746) (64,156)
FINANCING ACTIVITIES
Changes in capital leases ................................................. (8,343) (20,537)
Changes in current debt ................................................... - 29,063
Proceeds from credit agreement ............................................ - 1,500,000
Proceeds from issuance of common stock related to private placement,
net of cash and stock issuance costs .................................. - 123,750
Increase in line of credit ................................................ 63,504 -
Payment of long term debt ................................................. (66,790) -
Repayment of shareholder's equity ......................................... (50,000) -
----------- -----------
Net cash provided (used) by financing activities ............................ (61,629) 1,632,276
(Decrease) increase in cash and cash equivalents ............................ (3,527,581) 866,542
Cash and cash equivalents at beginning of year .............................. 5,454,071 1,826,474
----------- -----------
Cash and cash equivalents at end of period .................................. $ 1,926,490 $ 2,693,016
=========== ===========
See accompanying notes
6
vFinance, Inc.
Notes to Condensed Consolidated Financial Statements
March 31, 2002
(Unaudited)
1. DESCRIPTION OF BUSINESS
vFinance, Inc. 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.
The Company conducts its broker/dealer operations and investment banking and
consulting through vFinance Investments, Inc, 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.
The Company periodically receives equity instruments and stock purchase warrants
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. Generally, such stock
purchase warrants are considered derivatives. The Company adopted Financial
Accounting Standards Board Statement No. 133, ACCOUNTING FOR DERIVATIVE
INSTRUMENTS AND HEDGING ACTIVITIES, ("SFAS No. 133") on January 1, 2000. 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.
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
7
company's securities and the filings of registration statements in connection
with a portfolio company's initial public offering when valuing warrants.
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.
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. Trading account assets, consisting of
marketable equity securities and stock purchase warrants, are stated at fair
value. At March 31, 2002 and 2001, investments consisted of common and preferred
stock and stock purchase warrants held for resale. Realized gains or losses are
recognized in the statement of operations when the related stock purchase
warrant is exercised and the underlying shares are sold. Unrealized gains or
losses are recognized in the statement of operations on a monthly basis based on
changes in the fair value of the security as quoted on national or inter-dealer
stock exchanges.
New Accounting Standards
In July 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 142, GOODWILL AND OTHER INTANGIBLE ASSETS
("FAS 142"). Under the provisions of FAS 142, goodwill and indefinite lived
intangible assets are no longer amortized, but are reviewed annually for
impairment. Separable intangible assets that are not deemed to have an
indefinite life will continue to be amortized over their useful lives. The
Company 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 does not believe it will not be material.
In August 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 144, ACCOUNTING FOR THE IMPAIRMENT OR
DISPOSAL OF LONG-LIVED ASSETS ("FAS 144"), which addresses financial accounting
and reporting for the impairment or disposal of long-lived assets and supersedes
SFAS No. 121, ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS AND FOR
LONG-LIVED ASSETS TO BE DISPOSED OF, and the accounting and reporting provisions
of APB Opinion No. 30, REPORTING THE RESULTS OF OPERATIONS - REPORTING THE
EFFECTS OF DISPOSAL OF A SEGMENT OF A BUSINESS , AND EXTRAORDINARY, UNUSUAL AND
INFREQUENTLY OCCURRING EVENTS AND TRANSACTIONS ("APB 30"). The Company adopted
the new accounting rules beginning January 1, 2002. Management is currently
assessing the financial impact FAS 144 will have on the consolidated financial
statements, but does not believe it will be material because the Company wrote
off most goodwill at December 31, 2001.
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
8
use in valuing employee stock options. Under APB 25, if the exercise price of
the Company's employee stock options or stock purchase warrants equals or
exceeds the market price of the underlying stock on the date of grant no
compensation expense is recognized.
Fair Value of Financial Instruments
The fair values of the Company's financial instruments, which includes cash and
cash equivalents, accounts receivable, investments, accounts payable, and
accrued expenses approximate their carrying values.
The Company's financial instruments that are exposed to concentrations of credit
risk consist primarily of cash and cash equivalents and accounts receivable. The
Company places its cash with high quality FDIC-insured financial institutions.
Goodwill
The carrying values of goodwill as well as other long-lived assets will be
tested annually under FAS 142. If this review indicates that the assets will not
in part or fully be recoverable, as determined based on the undiscounted
estimated cash flows of the Company, the Company's carrying values of the assets
would be reduced to their estimated fair values in accordance with FAS 144.
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.
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.
3. IMPAIRMENT OF GOODWILL
Management determined that, as of December 31, 2001, a write-down of the
goodwill related to the NW Holdings acquisition was necessary as the Company's
projections of the future operating results of First Level indicated impairment.
Based on such projections and other analysis the Company took an impairment
charge aggregating $876,000 related to NWH goodwill. Goodwill remaining as of
December 31, 2001 and March 31, 2002 totaled $420,000.
4. 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.
5. SHAREHOLDER'S EQUITY
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
9
the Company of up to $1,500,000 in the form of a 48-month non-interest bearing,
convertible note. As of December 31, 2001, the Company had received $975,000
under the Note Purchase Agreement and may receive, at SBI's option alone, an
additional $525,000 no later than June 30, 2002. The note, if and only if fully
funded by SBI, is convertible, at SBI's option, into as many as 5,263,158 shares
of our common stock at $0.285 per share. The Company, at any time during the
first three years of the agreement, can call for redemption of the note for
$1,750,000, canceling the option or forcing the conversion of the note into
shares of common stock.
Further, if SBI funds the full amount of the loan, SBI will become a party to an
Investor Right Agreement and, as additional consideration the Company will issue
to SBI an option to purchase up to that number of shares of its common stock
equal to 1,500,000 divided by the average closing bid and ask price of its
common stock for the 20 consecutive trading days preceding the date of SBI's
exercise notice to the Company, but in no event will the per share price be more
than $0.336 or less than $0.23. The Note Purchase Agreement was amended to
extended the expiration date of the option past June 30, 2002 as the date for
the funding of the third Tranche was extended.
In accordance with EITF Issue No. 00-27, APPLICATION OF ISSUE NO. 98-5,
ACCOUNTING FOR CONVERTIBLE SECURITIES WITH BENEFICIAL CONVERSION FEATURES OF
CONTINGENTLY ADJUSTABLE CONVERSION RATIOS, TO CERTAIN CONVERTIBLE INSTRUMENTS,
the Company recorded a beneficial conversion feature related to the Note
Purchase Agreement of $975,000, which is measured as the difference between the
effective conversion price of the debt and the fair value into which the Note is
convertible. The principal balance of this Note was discounted with a
corresponding increase in additional paid-in capital by such amount. The debt
discount will be accreted ratably at $60,988 per quarter, over the term of the
loan as additional interest expense.
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 three months ended March 31, 2002
is as follows:
Weighted
Average
Exercise Number Exercise Price
Price of Shares Per Option
-------- --------- -------------
Outstanding options at December 31, 2001 $0.98 9,687,050 $0.35 - $6.00
Granted ................................ $0.51 508,117 $0.35 - $2.25
Cancelled .............................. $3.32 100,000
----------
Outstanding options at March 31, 2002 .. $0.90 10,095,167 $0.35 - $6.00
----------
A summary of the stock purchase warrant activity for the three months ended
March 31, 2002 is as follows:
Weighted
Average
Exercise Number of Exercise Price
Price Warrants Per Option
-------- --------- -------------
Outstanding warrants at December 31, 2001 $2.73 3,108,499 $0.35 - $7.20
Granted ................................. - - -
Cancelled ............................... - - -
Outstanding options at March 31, 2002 ... $2.73 3,108,499 $0.35 - $7.20
=========
10
The following table summarizes information concerning stock options outstanding
at March 31, 2002.
Option Options
Price Outstanding
----- -----------
0.35 4,733,427
0.63 3,000,000
0.62 200,000
1.00 772,000
2.25 474,740
3.00 210,000
3.25 100,000
4.00 220,000
4.13 30,000
4.25 75,000
4.50 5,000
5.00 260,000
6.00 15,000
----------
10,095,167
==========
The following table summarizes information concerning warrants outstanding at
March 31, 2002.
Exercise Warrants
Price Outstanding
----- -----------
0.35 993,500
0.63 400,000
2.25 585,000
2.50 300,000
6.00 129,999
7.20 700,000
---- ---------
3,108,499
=========
6. 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 provided a
revolving credit facility of up to $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 one month LIBOR plus a LIBOR margin of 2% if the loan is repaid
within a month or 5% if it is outstanding more than a month. Among other
covenants, Section 5.10 of the Credit Agreement requires the Company to maintain
shareholder's equity of at least $7,000,000. On April 12, 2002 UBS waived this
requirement of the Credit Agreement to the extent necessary to exclude the
Company's write-off of goodwill aggregating $8,852,020 included in the Company's
consolidated financial statements for the year ended December 31, 2001.
The Company must make early repayments under the Credit Agreement if it acquires
a new broker dealer firm, enters a new line of business, or hires more than 4
brokers in a single or related transaction. This repayment is made by adding
$1.00 to the cost of each incremental clearing transaction the Company makes
through CSC, a wholly owned subsidiary of Paine Webber which is a wholly owned
subsidiary of UBS. The Company has not, to date, entered into a transaction that
would trigger any repayment. The Company borrowed $1,500,000 under the credit
facility on January 28, 2002. The Credit Agreement does not provide for
conversion of the debt into equity securities.
11
7. SUBSEQUENT EVENTS
On March 28, 2002, the Company entered into a non-binding Letter of Intent (the
"Letter") with Somerset Financial Partners, Inc., ("Somerset") a Delaware
corporation to acquire certain of its assets. Through its subsidiaries, Somerset
is a registered broker dealer and is engaged other financial services including
insurance and mortgage brokerage. The Company has agreed to acquire all
brokerage customer and client accounts, advances to registered representatives
and certain other selected assets. The Company will assume certain liabilities
including selected leases and will hire select salaried personnel and
independent contractors. The Company will pay, at closing, 1,500,000 shares of
its Common stock and warrants to purchase an additional 500,000 shares of its
Common stock at 110% of the current market price. In addition, and based upon
certain performance criteria, the Company will pay up to an additional 1,500,000
shares of its Common stock, during the first year after the sale is closed. The
Company will also issue up to 1,400,000 options to purchase its Common shares to
select Somerset employees who will be joining the Company. Those options will be
issued subject to normal vesting and other conditions. There can be no assurance
that this transaction will be completed.
In May and June, 2000 Colonial Direct Financial Group, Inc. entered into a total
of $650,0000 of subordinated loan agreements with three investors. As of March
31, 2002, these loans were in default. On May 2, 2002 the Company submitted an
agreement to one of the Colonial debt holders to convert $150,000 of principal
debt plus accrued interest into 402,000 unregistered shares of the Company's
common stock.
12
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
THREE MONTHS ENDED MARCH 31, 2002 COMPARED TO THE THREE MONTHS ENDED
MARCH 31, 2001
STATEMENTS OF OPERATIONS
Operating revenues were $5,725,831 for the three months ended March 31, 2002 as
compared to $5,888,611 for the three months ended March 31, 2001 a decrease of
$162,780 or 3%. The primary reason for the decrease was a decrease in principal
commissions on trading revenues.
Cost of revenues were $3,157,357 for the three months ended March 31, 2002 as
compared to $3,474,889 for the three months ended March 31, 2001 a decrease of
$317,532 or 9%. The decrease was primarily due to costs savings associated with
the consolidation of the Company's three broker dealers into a single entity. As
a consequence, gross profit was $2,568,474 for the three months ended March 31,
2002 as compared to $2,413,722 for the three months ended March 31, 2001, an
increase of $154,752. Gross margin percentage was 45% for the three months ended
March 31, 2002 as compared to 41% for the three months ended March 31, 2001.
General and administrative expenses were $2,444,340 for the three months ended
March 31, 2002 as compared to $2,282,931 for the three months ended March 31,
2001 an increase of $161,409 or 7%.
Net loss (gain) on trading securities was ($12,652) for the three months ended
March 31, 2002 as compared to $17,378 for the three months ended March 31, 2001,
a decrease in cost of $30,030. The change was due primarily to an increase in
the value of securities from prior periods.
Professional fees were $239,277 for the three months ended March 31, 2002 as
compared to $332,316 for the three months ended March 31, 2001, a decrease of
$93,039 or 28%. The decrease in cost was primarily attributable to a decreased
level of merger activity.
The provision for bad debt was $60,560 for the three months ended March 31, 2002
as compared to $50,000 for the three months ended March 31, 2001, an increase of
$10,560 or 21%. The Company provides for credit losses at the time it believes
accounts receivable may not be collectible. Such evaluations are made and
recorded on a monthly basis. Credit losses have not exceeded management's
expectations.
The net unrealized loss (gain) on investments held for trading and stock
purchase warrants was ($60,329) for the three months ended March 31, 2002, as
compared to $794,755 for the three months ended March 31, 2001 a decrease of
cost of $855,084. The gain 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 $73,360 for the three months ended March 31,
2002 as compared to $351,295 for the three months ended March 31, 2001, a
decrease of $277,935 or 79%. The decrease was primarily because the Company has
adopted FAS 144 that prohibits amortization of goodwill related to acquisitions.
The cost of arbitration actions was $0 for the three months ended March 31, 2002
as compared to $80,574 for the three months ended March 31, 2001 a decrease of
$80,574 or 100%. The drop was attributable primarily to the closure of the
Company's First Colonial Securities Group broker dealer.
The amount forgiven under forgivable loans was $74,375 for the three months
ended March 31, 2002 as compared to $252,417 for the three months ended March
31, 2001. The decrease was attributable to the a decrease in the number of new
brokers.
13
Total other expenses were $2,818,931 for the three months ended March 31, 2002
as compared to $3,909,499 for the three months ended March 31, 2001 a decrease
of $1,090,568 or 28%. As a consequence the loss from operations was $250,457 for
the three months ended March 31, 2002 as compared to $1,495,777 for the three
months ended March 31, 2001 a decrease of $1,245,320 or 83%.
LIQUIDITY AND CAPITAL RESOURCES
The Company had $2,693,017 of unrestricted cash at March 31, 2002.
Net cash used in operating activities for the three months ending March 31,
2002, $701,578 as opposed to net cash used in operating activities of $1,908,206
for the three months ending March 31, 2000. The decrease in net cash used in
operating activities was primarily due to a decrease in the net loss from
$1,379,719 for the three months ending March 31, 2001 to $378,046 for the three
months ended March 31, 2002.
Net cash used in investing activities for the three months ending March 31,
2002, was $64,156 as opposed to net cash used in operating activities of
$1,557,746 for the three months ending March 31, 2000. The primary reason for
the decrease in net cash used in investing activities was that the Company made
no acquisitions in the three months ending March 31, 2002 and decreased
purchases of equipment to $64,156 for the three months ending March 31, 2002
from $184,650 for the three months ending March 31, 2001.
Net cash provided in financing activities for the three months ending March 31,
2002, was $1,632,276 as opposed to net cash used in financing activities of
$61,629 for the three months ending March 31, 2001. The primary reason for the
increase in net cash provided by investing activities was that the Company
entered into the agreement described above in 7. DEBT with UBS Paine Webber on
January 25, 2002.
The Company anticipates it will need additional debt or equity financing in
order to carry out its long-term business strategy. Such strategy may be
financed by bank borrowings, public offerings, private placements of equity or
debt securities, or a combination of the foregoing.
We do not have any material commitments for capital expenditures over the course
of the next fiscal year.
The Company's operations are not affected by seasonal fluctuations however they
are to some extent reliant on the continuation of mergers and acquisitions and
related financings in the entrepreneurial marketplace.
14
Part II. OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
The Company's inactive subsidiary, Colonial Direct Financial Group,
Inc., has $650,000 of subordinated debt in default. The debt was
incurred prior to the acquisition of Colonial by the Company in
anticipation of an initial public offering by Colonial. The Company has
offered the three holders of the subordinated debt to convert their
notes issued by Colonial into common stock of the Company. One of the
holders has sent a demand letter through her attorney seeking repayment
from the Company. The Company has responded that the debt is the
obligation of the subsidiary.
Item 2. CHANGES IN SECURITIES
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.
The above noted securities issued to the two investors were exempt from
registration pursuant to Section 4(2) of the Securities Act of 1933, as
amended, and Rule 506 of Regulation D promulgated thereunder because
the securities were acquired in a privately negotiated transaction by
sophisticated investors.
During the first quarter of 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. 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.
Item 3. DEFAULTS UPON SENIOR SECURITIES
None
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
Item 5. OTHER INFORMATION
The Company dismissed its independent auditors, Ernst & Young LLP, on
May 10, 2002 to reduce expenses. During the past two fiscal years,
Ernst & Young LLP's 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.
15
On May 10, 2002, the Company engaged the firm of Feldman, Sherb & Co.,
P.C. as its new independent auditors. The Company has authorized Ernst
& Young LLP to respond fully to the inquiries of Feldman, Sherb & Co.,
P.C. with regard to any accounting or financial matters relating to the
Company.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) EXHIBITS
Number
of Exhibit Exhibit Description
---------- -------------------
16.0 Letter from Ernst & Young to the Securities and Exchange Commission
dated May 15, 2002
(b) REPORTS ON FORM 8-K
None.
16
SIGNATURES
In accordance with the requirements of the Exchange Act, the Registrant has
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Signature Title Date
--------- ----- ----
By: /s/ Leonard J. Sokolow Chief Executive Officer May 15, 2002
---------------------- and President
Leonard J. Sokolow (Principal Executive Officer)
By: /s/ Robert F. Williamson, Jr. Chief Financial Officer May 15, 2002
----------------------------- (Principal Financial and
Robert F. Williamson, Jr. Chief Accounting Officer)
17