As filed with the Securities
and Exchange Commission on
November 20, 2002
Registration No.
____________
U.S. SECURITIES AND EXCHANGE COMMISSION
-----------------
FORM S-2
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
vFINANCE, INC.
(Exact name of registrant 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, Florida 33431
(561)- 981-1000
(Address, including zip code, and telephone number,
including area code, of registrant's principal executive offices)
Leonard Sokolow Copies of communications to:
CEO & President Samuel M. Krieger, Esq.
3010 N. Military Trail Krieger & Prager, LLP
Suite 300 39 Broadway
Boca Raton, Florida 33431 New York, New York 10006
(561) 981-1000 Tele:(212) 363-2900
Fax: (212) 363-2999
(Name, address, including zip code, and
telephone number, including area
code, of agent for service)
------------------------------
Approximate dates of proposed sales to the public: From
time to time after this Registration Statementbecomes
effective.
If any of the securities being registered on this form are to be offered on a
delayed or continuing basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [X]
If the registrant elects to deliver its latest annual report to security
holders, or a complete and legible facsimile thereof, pursuant to Item 11(a)(1)
of this form, check the following box. [X]
If this form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, please check the following box and list
the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If this form is a post-effective amendment filed pursuant to Rule 462(d) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434, check
the following box. [ ]
CALCULATION OF REGISTRATION FEE
--------------------------------------------------------------------------------
Title of each class Proposed maximum
of securities to aggregate Amount of
be registered offering price (1)(2) registration fee
--------------------------------------------------------------------------------
Common Stock,
$.01 par value $376,316.00 $ 34.62
--------------------------------------------------------------------------------
1 Calculated in accordance with Rule 457(c).
2 Pursuant to Rule 416, there are also registered hereby such additional
indeterminate number of shares of such Class A common stock as may become
issuable as dividends or to prevent dilution resulting from stock splits,
stock dividends or similar transactions.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE
A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE
SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a)
OF THE ACT, MAY DETERMINE.
PROSPECTUS
SHARES OF COMMON STOCK
OF
vFINANCE, INC.
This prospectus relates to the possible resale at market of shares of our common
stock by some of our existing shareholders including shares that some of these
shareholders do not now own but are entitled to acquire upon conversion of a
convertible note. We will not receive any proceeds from the sale of these
shares.
Our common stock is traded on the over the counter Bulletin Board under the
symbol VFIN. The last sale price for our common stock, as reported on OTC
Bulletin Board on November 18, 2002, was $.145.
We will bear all expenses, other than selling commissions and fees, in
connection with the registration and sale of the shares being offered by this
prospectus.
INVESTING IN OUR COMMON STOCK INVOLVES RISKS.
SEE RISK FACTORS STARTING ON PAGE 4.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION ("SEC") NOR ANY STATE
SECURITIES COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR
PASSED UPON THE ADEQUACY OR ACCURACY OF THIS PROSPECTUS. ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.
November 18, 2002
vFINANCE, INC.
FORM S-2
Table of Contents
PROSPECTUS SUMMARY 1
SUMMARY FINANCIAL INFORMATION 3
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS 3
RISK FACTORS 4
THE OFFERING 13
SELLING SHAREHOLDERS 14
PLAN OF DISTRIBUTION 15
DESCRIPTION OF CAPITAL STOCK 17
LEGAL MATTERS 19
EXPERTS 19
ADDITIONAL INFORMATION AND INFORMATION INCORPORATED BY REFERENCE 19
RECENT DEVELOPMENTS 20
DISCLOSURE OF COMMISSION POSITION IN INDEMNIFICATION FOR SECURITIES
ACT LIABILITIES 21
FINANCIAL STATEMENTS F-1
PROSPECTUS SUMMARY
The following summary contains basic information about vFinance, Inc. and this
prospectus. It likely does not contain all the information that is important to
you. For a more complete understanding, we encourage you to read the entire
document and the documents referred to in this prospectus, including the
financial statements and related notes included in the reports that we file with
the SEC.
In this prospectus, the words vFinance, Inc., we, our, and us refer to vFinance,
Inc.
THE COMPANY
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.
On January 4, 2001, we closed the merger of NW Holdings, Inc., a Florida
corporation, with and into us, with us as the surviving corporation. On the
closing date of the merger, NW Holdings, Inc. was the parent company of and
wholly owned First Level Capital, Inc., a Florida corporation. First Level
Capital, Inc. is now known as vFinance Investments, Inc., an investment-banking
firm that is licensed to conduct activities as a broker-dealer in 49 states, has
branch offices in New York, New York, Red Bank, New Jersey and Boca Raton,
Florida and independent contractor offices in 25 other locations, with
approximately 134 licensed registered representatives. 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. The Colonial group of
companies is now inactive and no longer owned by us but some of its personnel
were hired by vFinance Investments, Inc.
From time to time, we have acquired selected assets and personnel of other
broker-dealers and integrated them into our operations, and may continue to do
so in the future.
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 Virginia 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 and Critical
Infrastructure Fund, Ltd. ("Critical Infrastructure Ltd."), an international
business company organized and existing under the laws of the British Virgin
Islands (collectively, the "Funds"). The Funds are currently in a liquidation
mode Critical Investments and Critical Advisors and changed their names to
vFinance Investors, LLC and vFinance Advisors, LLC, respectively, subsequent to
the acquisition.
The chart below has been included to help understand our current corporate
structure. We conduct our broker/dealer operations and investment banking and
consulting through vFinance Investments, Inc., a licensed broker dealer. We
operate our vfinance.com website through vFinance Holdings, Inc.. We may decide,
going forward, to liquidate one or more of the inactive subsidiaries.
1
Active Subsidiaries
-----------------------
vFinance Investments Holdings, Inc.
holding company
vFinance Investments, Inc.
registered broker dealer
vFinance Holdings, Inc.
website
vFinance Advisors, LLC
vFinance Investors, LLC
hedge-fund manager
vFinance Financial Planning Services, Inc.
financial planning, insurance and mortgage brokerage
Our executive office is located at 3010 North Military Trail, Boca Raton,
Florida 33431. Our telephone number is (561) 981-1000 and our website address is
http://www.vfinance.com.
THE OFFERING
Common Shares Offered by
the Selling Shareholders................... 3,421,053 aggregate amount
of common stock.
Common Shares Outstanding
Before Offering (1)........................ 23,859,904 shares of
common stock.
Common Shares Outstanding
After Offering............................. approximately 27,280,957 shares
of common stock.
Use of Proceeds............................. We will not receive any proceeds
from the sale of any of the shares
that may be sold by selling
shareholders.
Risk Factors .............................. The common stock offered by this
prospectus is speculative and very
risky. You should carefully
consider the risk factors contained
in this prospectus before
investing. See the Risk Factors
section for a more complete
discussion of the risks associated
with investment in vFinance shares.
(1) Outstanding as of November 1, 2002
vFinance currently has 75,000,000 shares of common stock authorized and
2,500,000 shares of preferred stock authorized.
2
SUMMARY FINANCIAL INFORMATION
The following summary financial information is based on our audited consolidated
financial statements for the years ended December 31, 2001 and 2000, and our
unaudited consolidated financial statements for the nine months ended September
30, 2002 and 2001. The historical results are not necessarily indicative of the
operating results to be expected in the future. You should read this summary
financial information together with the more detailed financial statements and
related notes beginning on page F-1 of this prospectus.
Year Ending December 31 Nine Months Ending
September 30
2001 2000 2002 2001
---- ---- ---- ----
(unaudited) (unaudited)
Consolidated Statement of Operations
Date:
Total revenue............................... 15,769,223 5,517,480 14,712,064 11,905,002
Total costs and expenses.................. 33,882,090 9,625,682 16,398,000 17,802,079
Income (Loss) available to common
Stockholders........................... (17,199,362) (3,911,649) (2,238,350) (5,810,871)
Income (Loss) per share -basic.......... (0.87) (0.39) (0.10) (0.30)
Weighted average number of common
Shares used in per share
Calculation - basic.................... 19,810,285 10,131,616 23,417,252 19,474,872
Income (Loss) per share - diluted.......
Weighted average number of common
Shares used in per share
Calculation - diluted.................. (0.87) (0.39) (0.10) (0.30)
Year Ended Nine Months Ended
December 31, 2001 September 30, 2002
----------------- ------------------
(unaudited)
Consolidated Balance Sheet Data:
Working Capital........................ (906,799) 1,208,059
Total Assets............................. 6,405,812 5,578,294
Total Liabilities........................ 5,569,413 4,603,326
Total Shareholders' Equity............ 836,399 974,968
Accumulated Deficit.................. (21,254,359) (23,365,834)
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Our disclosure and analysis in this prospectus and the documents incorporated by
reference or delivered to you with this prospectus, including the documents
listed below in the section entitled "Additional Information and Information
Incorporated by Reference" contain forward-looking statements, which provide our
current expectations or forecasts of future events. 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.
3
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.
RISK FACTORS
You should carefully consider the risks described below, together with all other
information contained in this prospectus. If any of the following risks actually
occur, our business, financial condition or operating results may be harmed. In
that case, the trading price of our common stock may decline or we may be forced
out of business and you could lose your entire investment in us.
WE HAVE A LIMITED OPERATING HISTORY. AS A RESULT, YOU MAY HAVE DIFFICULTY
EVALUATING OUR BUSINESS AND PROSPECTS.
We have a limited operating history. We only commenced our broker-dealer
operations in the middle of 2000. In addition, we completely restructured our
broker-dealer operations in 2001 through the acquisition of the two firms
mentioned above and their merger into a single operation. We purchased our hedge
fund management business in mid-2001 but have determined to liquidate such
operation. Our website has been in existence since 1995. Our business and
prospects must be considered in light of the risks, expenses and difficulties
frequently encountered by companies in the early stages of development. These
risks are particularly severe among companies in new and rapidly evolving
markets such as online business development services and those in regulated
industries such as the securities industry. It may be difficult or impossible to
accurately forecast our operating results and evaluate our business and
prospects based on our historical results.
WE HAVE HAD SUBSTANTIAL AND CONTINUING LOSSES SINCE INCEPTION
Since inception, we have sustained substantial losses. Although we showed a
profit for the quarter ending September 30, 2002, such losses continued through
June 30, 2002 due to ongoing operating expenses and a lack of revenues
sufficient to offset operating expenses. We have raised capital to fund ongoing
operations by private sales of our securities, some of which sales have been
highly dilutive and involve considerable expense.
We incurred net losses of $2,111,475 for the nine months ended September 30,
2002, and $17,041,860 and $3,911,649 for the years ending December 31, 2001
and December 31, 2000 respectively. As of September 30, 2002, we had an
accumulated deficit of $23,365,834
We expect to spend significant amounts to enhance our products and technologies,
and to expand domestic and international sales and operations. As a result, we
will need to generate significant additional revenue to achieve profitability
based on such planned expenditures and expansion. Even if we do achieve
profitability, we may not be able to sustain or increase profitability on a
quarterly or annual basis. If we do not achieve and maintain profitability, the
market price for our common stock may further decline, perhaps substantially.
If we do not receive additional capital when and in the amounts needed in the
near future, our ability to continue as a going concern is in substantial doubt.
Obtaining future financing may be costly and will likely be dilutive to existing
stockholders. If we are not able to obtain financing when and in the amounts
needed, and on terms that are acceptable, our operations, financial condition
and prospects could be materially and adversely affected, and we could be forced
to curtail our operations or sell part or all of our assets.
WE WILL NEED TO RAISE ADDITIONAL FUNDS. THESE FUNDS MAY NOT BE AVAILABLE WHEN WE
NEED THEM.
4
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. After this time, we may need to
raise additional funds to operate the business, support more rapid expansion,
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.
THERE ARE RISKS ASSOCIATED WITH OUR PLANNED EXPANSION AND ACQUISITIONS.
We have undertaken certain additional risks in connection with our expansion and
will undertake such risks in the future, many of which are not risks presently
associated with our core business and operations. We believe that our management
team and the new internal procedures that we are implementing in connection with
the expansion of our operations will be adequate to manage and supervise this
new business line. However, we cannot be sure that management will be able to
address all of the new risks associated with this business or that the policies
and procedures we implement will be sufficient.
THE COMPETITION WE FACE FROM BOTH ESTABLISHED AND RECENTLY FORMED FIRMS MAY
ADVERSELY AFFECT OUR REVENUE AND PROFITABILITY. WE ALSO FACE COMPETITION FROM
FIRMS THAT ARE NOT CURRENTLY IN OUR MARKET BUT COULD QUICKLY AND EASILY ENTER
OUR MARKET.
We encounter intense competition in all aspects of our business, and we expect
this competition to increase. For example, we face competition from regionally
focused companies, both domestically and internationally, which are trying to
connect start-ups with venture investors using an Internet-based market. These
competitors include SeedStage Capital and Vcapital.com. We also compete in the
business development portal industry with portals that provide content and
services to our target market including USBX, Merger Network, Vcapital and
VentureOne, The Venture Capital Marketplace, Venture Capital Unlimited,
Garage.com and VCA Online.com.
We also face competition from Internet incubator firms such as Internet Capital
Group, divine interVentures, Bill Gross' ideaLab!, and eCompanies. These
companies offer an alternative source of capital and also provide start-ups with
office space, equipment, professional services and strategic guidance. More
generally, we face competition from established venture capital firms, merchant
banks, investment banks, management consulting firms and angel investor
networks. In addition, companies that have not traditionally provided
investment-banking services, including commercial banks and providers of online
financial services, may elect to enter into our industry, particularly if our
existing competitors or we are successful. This competition could reduce the
demand for our services and create pricing pressures. Established professional
service and financial firms could leverage their existing and future
relationships with start-ups, their expertise and their established reputations
to enter our market quickly, thereby reducing the demand for, or the prices of,
our services.
If we are unable to compete effectively with these competitors, the quality of
the companies applying to us for assistance may be reduced. Many of our
competitors have longer operating histories and significantly greater financial,
technical and marketing resources than we have. In addition, many of these
competitors offer a wider range of services and financial products than we
offer. Many current and potential competitors also have greater name recognition
and more extensive customer bases that could be used to accelerate their
competitive activity. Moreover, current and potential competitors have
established and may establish future cooperative relationships among themselves
and with third parties to enhance their products and services in this space.
Consequently, new competitors or alliances may emerge and rapidly acquire
significant market share. We cannot assure you that we will be able to compete
effectively with current or future competitors or that the competitive pressures
up face will not harm our business.
VARIATIONS IN OUR QUARTERLY OPERATING RESULTS CAUSED BY THE TIMING OF OUR CLIENT
COMPANIES' FINANCING TRANSACTIONS AND THE TIMING OF OUR EVENTS COULD CAUSE OUR
STOCK PRICE TO FLUCTUATE. THIS FLUCTUATION COULD RESULT IN SUBSTANTIAL LOSSES TO
INVESTORS.
The timing of our revenue depends on a number of factors that are outside of our
control. For example, we receive success fees only when our client companies
close their transactions, the timing of which is outside our control. To the
extent that a particular transaction is delayed into a subsequent quarter, our
cash revenue from that client will also be deferred into a subsequent quarter,
which could cause us to fail to meet the quarterly expectations of stock market
analysts or investors.
5
PERIODS OF DECLINING SECURITIES PRICES, INACTIVITY OR UNCERTAINTY IN THE PUBLIC
OR PRIVATE EQUITY MARKETS MAY ADVERSELY AFFECT OUR SUCCESS AND CONSULTING FEE
REVENUE DUE TO A DECLINE IN INVESTMENT ACTIVITY.
Our success fee revenue is likely to be lower during periods of declining
securities prices. To the extent potential investors incur losses on their other
securities, they may be less able or willing to invest in startup companies. In
addition, startup companies may find it more difficult to raise capital or
engage in other transactions such as mergers or acquisitions during periods of
declining securities prices. The public markets have historically experienced
significant volatility not only in the number and size of initial financing
transactions, but also in the secondary market trading volume and prices of
newly issued securities. For example, the securities markets have recently
experienced significant activity and volatility, generally resulting in
declining prices and share volume. We believe activity in the private equity
markets frequently reflects trends in the public markets. As a result, our
revenue may be adversely affected during periods of declining prices or
inactivity in the public markets to the extent that our client companies or our
prospective client companies may be unable or unwilling to seek financing or
general management consulting services.
Broker-dealers are directly affected by national and international economic and
political conditions, broad trends in business and finance, and substantial
fluctuations in volume and price levels of securities transactions. Unfavorable
financial or economic conditions would likely reduce the number and size of
transactions in which we provide services. Because our success fees are based on
a percentage of the total value of a transaction, our revenue is 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.
OUR DIRECTORS AND EXECUTIVE OFFICERS CONTROL APPROXIMATELY 34% OF OUR COMMON
STOCK AND MAY HAVE INTERESTS DIFFERING FROM THOSE OF OTHER STOCKHOLDERS.
At September 30, 2002, our directors and executive officers control
approximately 32% of our outstanding common stock, directly as stockholders and
indirectly through control relationships with other stockholders. These
directors and executive officers, if acting together, would be able
significantly to influence all matters requiring approval by our stockholders,
including the election of directors and approval of significant corporate
transactions, including mergers, consolidations and the sale of substantially
all of our assets. This control could have the effect of delaying or preventing
a third party from acquiring or merging with us, which could hinder your ability
to receive a premium for your shares.
OUR VFINANCE BRAND MAY NOT ACHIEVE THE BROAD RECOGNITION NECESSARY TO SUCCEED.
We believe that broader recognition and positive perception of the "vFinance"
brand is essential to our future success. Accordingly, we intend to continue to
pursue an aggressive brand enhancement strategy, which will include multimedia
advertising, promotional programs and public relations activities. These
initiatives will require significant expenditures. If our brand enhancement
strategy is unsuccessful, these expenses may never be recovered and we may be
unable to increase future revenues. Successful positioning of our brand will
depend in large part on:
o The success of our advertising and promotional efforts;
o An increase in the number of users and page views of our website; and
o The ability to continue to provide a website and services useful to our
clients.
These expenditures may not result in sufficient increases in revenues to offset
these expenditures. In addition, even if brand recognition increases, the number
of new users or the number of page views of our website may not increase. Even
if the number of new users increases, those users may not regularly use our
website.
FAILURE TO MAINTAIN OR INCREASE THE FLOW OF TRAFFIC TO OUR WEBSITE COULD HARM
OUR BUSINESS.
Our business partially depends on our ability to maintain or increase traffic on
our website as well as our ability to have visitors to our website use our
services. The website is dependent on the flow of information for its validity.
It is important for our business development activities to increase the number
of daily visitors, repeat visitors and the amount of time visitors spend on our
website. Failure to do so could adversely affect our revenue and our ability to
raise additional funds.
IF WE DO NOT CONTINUE TO DEVELOP AND ENHANCE OUR SERVICES IN A TIMELY MANNER,
OUR BUSINESS MAY BE HARMED.
6
Our future success will depend on our ability to develop and enhance our
services and add new services. We operate in a very competitive industry in
which the ability to develop and deliver advanced services through the Internet
and other channels is a key competitive factor. There are significant risks in
the development of new or enhanced services, including the risks that we will be
unable to:
o Effectively use new technologies;
o Adapt our services to emerging industry or regulatory standards; or
o Market new or enhanced services.
If we are unable to develop and introduce new or enhanced services quickly
enough to respond to market or customer requirements or to comply with emerging
industry standards, or if these services do not achieve market acceptance, our
business could be seriously harmed.
INTERNET AND INTERNAL COMPUTER SYSTEM FAILURES OR COMPROMISES OF OUR SYSTEMS OR
SECURITY COULD DAMAGE OUR REPUTATION AND HARM OUR BUSINESS.
Although a significant portion of our business is conducted using traditional
methods of contact and communications such as face-to-face meetings, a portion
of our business is conducted through the Internet. We could experience future
system failures and degradations. We cannot assure you that we will be able to
prevent an extended systems failure if any of the following events occurs:
o Human error;
o Subsystem, component, or software failure;
o A power or telecommunications failure;
o An earthquake, fire, or other natural disaster;
o Hacker attacks or other intentional acts of vandalism; or
o An act of God or war.
Any such systems failure that interrupts our operations could seriously harm our
business. We currently have limited off-site data storage and disaster recovery
systems.
The Internet has experienced, and is expected to continue to experience,
significant growth in the number of users and amount of traffic. Our future
success will depend upon the development and maintenance of the Internet's
infrastructure to cope with this increased traffic. This will require a reliable
network backbone with the necessary speed, data capacity, and security, and the
timely development of complementary products, such as high-speed modems, for
providing reliable Internet access and services.
The secure transmission of confidential information over public networks is a
critical element of our operations. We rely on encryption and authentication
technology to provide the security and authentication necessary to effect secure
transmission of confidential information over the Internet. To the best of our
knowledge, to date, we have not experienced any security breaches in the
transmission of confidential information. Moreover, we continually evaluate
advanced encryption technology to ensure the continued integrity of our systems.
However, we cannot assure you that advances in computer capabilities, new
discoveries in the field of cryptography or other events or developments will
not result in a compromise of the technology or other algorithms used by our
vendors and us to protect client transaction and other data. Any compromise of
our systems or security could harm our business.
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.
7
The effects of not being able to list our securities on a national exchange
include:
o Limited release of the market prices of our securities;
o Limited news coverage of us;
o Limited interest by investors in our securities;
o Volatility of our stock price due to low trading volume;
o Increased difficulty in selling our securities in certain
states due to "blue sky" restrictions; and
o Limited ability to issue additional securities or to secure
additional financing.
IF OUR COMMON STOCK IS SUBJECT TO PENNY STOCK RULES, YOU MAY HAVE GREATER
DIFFICULTY SELLING YOUR SHARES.
The Securities Enforcement and Penny Stock Reform Act of 1990 applies to
stock characterized as "penny stocks," and requires additional disclosure
relating to the market for penny stocks in connection with trades in any stock
defined as a penny stock. The Securities and Exchange Commission has adopted
regulations that generally define a penny stock to be any equity security that
has a market price of less than $5.00 per share, subject to certain exceptions.
The exceptions include exchange-listed equity securities and any equity security
issued by an issuer that has
- net tangible assets of at least $2,000,000, if the issuer has
been in continuous operation for at least three years;
- net tangible assets of at least $5,000,000, if the issuer has been
in continuous operation for less than three years; or
- average annual revenue of at least $6,000,000 for the last three
years.
Unless an exception is available, the regulations require the delivery,
prior to any transaction involving a penny stock, of a disclosure schedule
explaining the penny stock market and the associated risks.
If our financial condition does not meet the above tests, then trading
in the common stock will be covered by Rules 15g-1 through 15g-6 and 15g-9
promulgated under the Securities Exchange Act. Under those rules, broker-dealers
who recommend such securities to persons other than their established customers
and institutional accredited investors must make a special written suitability
determination for the purchaser and must have received the purchaser's written
agreement to a transaction prior to sale. These regulations would likely limit
the ability of broker-dealers to trade in our common stock and thus would make
it more difficult for purchasers of common stock to sell their securities in the
secondary market. The market liquidity for the common stock could be severely
affected.
WE DEPEND ON A LIMITED NUMBER OF KEY EXECUTIVES WHO WOULD BE DIFFICULT TO
REPLACE.
Our success depends significantly on the continued services of our senior
management, especially Leonard J. Sokolow, our Chief Executive Officer and
President. Losing Mr. Sokolow or any of our and our subsidiaries' other key
executives, including Timothy E. Mahoney, our Chairman and Chief Operating
Officer; and David A. Spector, one of our Vice Presidents, could seriously harm
our business. We cannot assure you that we will be able to retain our key
executives or that we would be able to replace any of our key executives if we
were to lose their services for any reason. Competition for these executives is
intense. If we had to replace any of these key executives, we would not be able
to replace the significant amount of knowledge that these key executives have
about our operations. We do not maintain "key person" insurance policies on any
of our executives.
OUR GROWTH WILL BE LIMITED IF WE ARE UNABLE TO ATTRACT AND RETAIN QUALIFIED
PERSONNEL.
Our future success depends in significant part on our ability to retain our key
technical staff, business development managers, and management and marketing
personnel. In addition, we must continue to attract and retain qualified
professionals to perform services for our existing and future clients.
8
Competition for highly qualified technical, business development, and management
and marketing personnel is intense. We have in the past experienced difficulty
in attracting new personnel. We may not be able to hire the necessary personnel
to implement our business strategy, or we may need to pay higher compensation
for employees than we currently expect. We cannot assure you that we will
succeed in attracting and retaining the personnel we need to grow.
WE RELY VERY HEAVILY ON CORRESPONDENT SERVICES CORP. ("CSC"), CLEARING BROKER
FOR VFINANCE INVESTMENTS, OUR OPERATING BROKER-DEALER SUBSIDIARY. THE
TERMINATION OF THE AGREEMENT BETWEEN THE CLEARING BROKER AND VFINANCE
INVESTMENTS COULD HARM OUR BUSINESS.
Either party upon 60 days prior written notice may terminate the clearing
agreement between CSC and us. According to the terms of the agreement, the
clearing broker, on a fee basis, processes all securities transactions for the
accounts of vFinance Investments and the accounts of its clients. CSC services
include billing and credit extension, control and receipt, custody and delivery
of securities, for which vFinance Investments pays a transaction charge. We are
dependent on the operational capacity and the ability of CSC for the orderly
processing of transactions. In addition, by engaging the processing services of
a clearing broker, vFinance Investments is exempt from certain capital reserve
requirements and other complex regulatory requirements imposed by federal and
state securities laws. Moreover, vFinance Investments has agreed to indemnify
and hold CSC harmless from certain liabilities or claims, including claims
arising from the transactions of its clients.
OUR OPERATING BROKER-DEALER SUBSIDIARY EXTENDS CREDIT TO ITS CLIENTS AND IS
SUBJECT TO RISKS AS A RESULT.
Our broker dealer clears all transactions for its customers on a fully disclosed
basis with its clearing broker, CSC, which carries and clears all customer
securities accounts. A limited portion of the customer securities activities of
vFinance Investments are transacted on a "margin" basis, pursuant to which
credit is extended to customers, which (a) is secured by cash and securities in
customer accounts, or (b) involve (i) "short sales" (i.e., the sale of
securities not yet purchased) or (ii) the purchase and sale of commodity futures
contracts, substantially all of which are transacted on a margin basis. These
risks are increased during periods of volatile markets in which the value of the
collateral vFinance Investments holds could fall below the amount borrowed by
its clients. If margin requirements are not sufficient to cover losses, vFinance
Investments may be required to sell or buy securities at prevailing market
prices and incur losses to satisfy its client obligations.
WE UNDERWRITE SECURITIES THROUGH VFINANCE INVESTMENTS AND ARE SUBJECT TO LOSSES
RELATING TO A DECLINE IN THE MARKET VALUE OF SECURITIES THAT WE HOLD IN
INVENTORY AND TO LIABILITY FOR ENGAGING IN UNDERWRITING ACTIVITIES.
The underwriting activities of vFinance Investments involve the purchase, sale
or short sale of securities as a principal. As an underwriter, vFinance
Investments agrees to purchase securities on a "firm commitment" basis and is
subject to risk that it may be unable to resell securities or be required to
dispose of securities at a loss. In connection with our investment-banking
activities in which vFinance Investments acts as a manager or co-manager of
public offerings of securities, we expect to make increased commitments through
vFinance Investments of capital to market making activities in securities of
those issuers. Any additional concentration of capital in the securities of
those issuers held in inventory will increase the risk of loss from possible
declines in the market price of those securities. In addition, under federal
securities laws, other laws and court decisions with respect to underwriters'
liabilities and limitations on the indemnification of underwriters by issuers,
an underwriter is subject to substantial potential liability for misstatements
or omissions of material facts in prospectuses and other communications with
respect to securities offerings. Our potential liability through vFinance
Investments as an underwriter is generally not covered by insurance. Moreover,
underwriting commitments constitute a charge against net capital and the ability
of vFinance Investments to make underwriting commitments may be limited by the
requirement that it must at all times be in compliance with the net capital
rule.
IF WE CANNOT ADEQUATELY PROTECT OUR INTELLECTUAL PROPERTY, OUR COMPETITIVENESS
MAY BE HARMED.
9
Our success and ability to compete depend to a significant degree on our
intellectual property. We rely on copyright and trademark law, as well as
confidentiality arrangements, to protect our intellectual property. Our company
owns the following federally registered marks: vFinance, Inc.(R), vFinance.com,
Inc.(R), 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:
o Enforce our intellectual property rights;
o Determine the validity and scope of the proprietary rights of
others; or
o Defend against claims of infringement or invalidity.
Such litigation, whether successful or unsuccessful, could result in substantial
costs and diversions of resources, either of which could seriously harm our
business.
OUR BOARD OF DIRECTORS CAN ISSUE SHARES OF "BLANK CHECK" PREFERRED STOCK WITHOUT
FURTHER ACTION BY OUR STOCKHOLDERS.
Our Board of Directors has the authority, without further action by the
stockholders, to issue up to 2,500,000 shares of preferred stock (of which,
122,500 shares are designated as Series A Convertible Preferred Stock and were
issued in connection with the merger with Colonial Direct Financial Group, Inc.,
and 50,000 shares are designated as Series B Convertible Preferred Stock and
were issued in connection with the merger with Colonial Direct Financial Group,
Inc.) in one or more series and to fix the rights, preferences, privileges and
restrictions in each series of the preferred stock, including:
o Dividend rights;
o Conversion rights;
o Voting rights, which may be greater or lesser than the voting
rights of the common stock;
o Rights and terms of redemption;
o Liquidation preferences; and
o Sinking fund terms.
The issuance of shares of preferred stock could adversely affect the voting
power of holders of our common stock and the likelihood that these holders will
receive dividends and payments upon liquidation of our company and could have
the effect of delaying, deferring or preventing a change in control of our
company.
WE MAY HAVE LIABILITIES TO CERTAIN HOLDERS OF OUR COMMON STOCK, AND OPTIONS
WHICH ARE NOT INCLUDED IN THIS REGISTRATION STATEMENT.
In connection with the prior issuance of common stock and/or options to acquire
our common stock, the Company granted registration rights, including
"piggy-back" registration rights giving such holders the right to be included in
any registration statement filed by the Company subsequent to the date of
issuance of such stock or options. Additionally, certain employees have options
to acquire Company stock with registration rights. The Company expects to file a
registration statement on a Form S-8 for such employee shares and stock options.
Notwithstanding the existence of the piggy-back registration rights, the Company
has not elected to include in this Registration Statement any options whose
exercise price exceeds $0.31. The Company believes that all holders of
restricted common stock are free to sell such stock without restrictions
pursuant to the provisions of Rule 144(k) of the Securities Act of 1933. The
Company may incur liability to certain holders of such piggy-back registration
rights for the failure to include them in this Registration Statement.
10
RISKS RELATED TO OUR INDUSTRY
THE MARKET FOR ONLINE BUSINESS DEVELOPMENT SERVICES IS NEW AND UNPROVEN. IF THE
MARKET FOR THESE SERVICES FAILS TO GROW, OUR BUSINESS WILL SUFFER.
The market for online business development services is at an early stage of
development and is rapidly evolving. Consequently, demand and market acceptance
for these recently introduced services are subject to a high level of
uncertainty. Traditional means of investing and raising capital generally
involve numerous face-to-face meetings. Our business requires entrepreneurs and
venture capital investors, who have relied in the past upon traditional means of
investing and raising capital, to submit information through our website.
Accordingly, we must conduct marketing and sales efforts to educate these
prospective clients about the uses and benefits of investing and raising capital
online. For example, we must persuade our prospective startup clients that the
services we offer, such as facilitating venture capital transactions, and
business model review and counseling, provide value in relation to the services
that our competitors offer, principally providing capital. If these prospective
clients do not accept our online and our traditional retail brokerage and
investment-banking services, our business will be seriously harmed.
GOVERNMENTAL REGULATION OF THE INTERNET MAY NEGATIVELY AFFECT OUR BUSINESS AND
REDUCE DEMAND FOR OUR SERVICES.
Laws directly applicable to communications or commerce over the Internet are
becoming more prevalent. The manner in which new and existing laws will be
applied to the Internet, however, remains largely unsettled. It may take years
to determine whether and to what extent existing laws will apply to Internet
transactions. The uncertainty relating to how these laws will be applied may
increase our cost of doing business and increase the risk associated with doing
business.
WE, THROUGH OUR BROKER-DEALER SUBSIDIARY, ARE SUBJECT TO REGULATION BY THE SEC,
STATE REGULATORS AND THE NASD.
The securities industry in the United States is subject to regulation under both
federal and state laws. The SEC, the NASD, other self-regulatory organizations
and state securities commissions can censure, fine, issue cease-and-desist
orders, or suspend or expel a broker-dealer or any of its officers or employees.
If any of these events occur to our broker-dealer subsidiaries, our business and
reputation could be seriously harmed.
Broker-dealers are subject to regulations covering many aspects of the
securities business, including:
o Sales methods;
o Trade practices among broker-dealers;
o Use and safekeeping of customers' funds and securities;
o Capital structure;
o Record keeping;
o Conduct of directors, officers, and employees; and
o Supervision of employees, particularly those in branch
offices.
Our mode of operation and profitability may be directly affected by:
o Additional legislation;
o Net capital requirements;
o Changes in rules promulgated by the SEC, state regulators, the
NASD, and other self-regulatory organizations; and
o Changes in the interpretation or enforcement of existing laws
and rules.
11
Our ability to comply with applicable laws and rules will depend on our
establishment and maintenance of an effective compliance system, as well as our
ability to attract and retain qualified compliance personnel. The principal
purpose of regulation and discipline of broker-dealers is the protection of
customers and the securities markets, rather than protection of creditors and
stockholders of broker-dealers. If we are unable to comply with applicable laws
and rules, our business could be seriously harmed.
WE MAY BE LIABLE FOR INFORMATION RETRIEVED FROM OUR WEBSITE, THE WEBSITES OF OUR
SPONSORS, AND THE WEBSITES OF OTHER THIRD PARTIES.
Users of our website may access content on our website and on the websites of
our sponsors or other third parties through website links, and they may download
content and subsequently transmit this content to others over the Internet or
other means. This could result in claims against us based on a variety of
theories, including defamation, obscenity, negligence, copyright, trademark
infringement or the wrongful actions of third parties. Other actions may be
brought based on the nature, publication and distribution of our content or
based on errors or false or misleading information provided on our website.
Claims have been brought against online services in the past, sometimes
successfully, based on the content of material contained on their websites.
We are not aware of any such claims threatened against us. However, claims
brought by users of our website could be material. Even if these claims do not
result in liability, we could incur significant costs in investigating and
defending against these claims. The imposition of potential liability for
information carried on or disseminated through our systems could require us to
implement measures to reduce our exposure to liability. Those measures may
require the expenditure of substantial resources and limit the attractiveness of
our services. Additionally, we have limited insurance coverage, which may not
cover all such claims to which we are exposed.
12
THE OFFERING
EXPENSES OF THE OFFERING
We have agreed to bear all reasonable expenses incurred in connection with the
preparation and filing of the registration statement of which this prospectus is
a part, including, without limitation, all registration, listing and
qualification fees, printers and accounting fees, the fees and disbursements of
counsel for the Company.
USE OF PROCEEDS
Existing shareholders are offering these shares for their accounts. We will not
receive any proceeds from their sale.
SELLING SHAREHOLDERS
The following table sets forth certain information for each of the beneficial
owners of the 3,421,052 shares of common stock registered in the registration
statement covering shares being offered by selling shareholders. These shares
will be sold, if at all, solely by and at the discretion of the selling
shareholders. We will not receive any proceeds from any sales. The information
in the first and last two columns is based on information derived by us from our
records, from statements on Schedule 13D, where applicable, or from information
voluntarily furnished to us by the respective selling shareholder. It is
possible, however, that some of the selling shareholders own beneficially some
shares that we do not know about and that they are free to sell without our
registering them.
---------------------------------------- ----------------------------- ---------------- ------------------------- ------------
Number of shares known to
us to be owned or to which Number of % of
the selling shareholder has shares being Number of shares to be shares to
the right to acquire registered for owned by selling be
pursuant to outstanding possible shareholder after outstanding
Name of selling shareholder options or warrants as of resale by completion of the upon
the date of this prospectus selling offering.(2) completion
(1) shareholder of
offering(2)
Brad Dunlap 10,506 10,506 -- -- %
---------------------------------------- ----------------------------- ---------------- ------------------------- ------------
Gerald Kieft 10,506 10,506 -- -- %
---------------------------------------- ----------------------------- ---------------- ------------------------- ------------
Dunlap Capital Manager I, L.P. 11,128 11,128 -- --
---------------------------------------- ----------------------------- ---------------- ------------------------- ------------
Barry Hixon 2,334 2,334 -- --
---------------------------------------- ----------------------------- ---------------- ------------------------- ------------
Dean DuMont 5,000 5,000 -- --
---------------------------------------- ----------------------------- ---------------- ------------------------- ------------
Thomas Hickey 166,667 166,667 -- -- %
---------------------------------------- ----------------------------- ---------------- ------------------------- ------------
Bret Dunlap 166,667 166,667 -- -- %
---------------------------------------- ----------------------------- ---------------- ------------------------- ------------
Dunlap Capital Manager I, L.P. 333,333 333,333 -- -- %
---------------------------------------- ----------------------------- ---------------- ------------------------- ------------
Alexander Lapatka 83,333 83,333 -- --
---------------------------------------- ----------------------------- ---------------- ------------------------- ------------
SBI Investment (USA) Inc.(3) 1,912,280 1,912,280 -- --
---------------------------------------- ----------------------------- ---------------- ------------------------- ------------
Shelly Singhal 285,965 285,965 -- --
---------------------------------------- ----------------------------- ---------------- ------------------------- ------------
Angela McCleer 15,789 15,789 -- --
---------------------------------------- ----------------------------- ---------------- ------------------------- ------------
Don Danks 100,000 100,000 -- --
---------------------------------------- ----------------------------- ---------------- ------------------------- ------------
Matt McGovern 45,614 45,614 -- --
---------------------------------------- ----------------------------- ---------------- ------------------------- ------------
Mike Vanderhoff 100,000 100,000 -- --
---------------------------------------- ----------------------------- ---------------- ------------------------- ------------
John Wang 105,263 105,263 -- --
---------------------------------------- ----------------------------- ---------------- ------------------------- ------------
Jon Buttles 66,667 66,667 -- --
---------------------------------------- ----------------------------- ---------------- ------------------------- ------------
14
(1) Beneficial ownership is determined in accordance with SEC rules and
generally include voting or investment power with respect to securities. Shares
of common stock subject to options, warrants and convertible securities
currently exercisable or convertible, or exercisable or convertible within sixty
(60) days, are counted as outstanding for computing the percentage of the person
holding such options or warrants but are not counted as outstanding for
computing the percentage of any other person.
(2) Assumes that all of the shares held by the selling shareholders and being
offered under this prospectus are sold, and that the selling shareholders
acquire no additional shares of common stock before the completion of this
offering. The actual number of shares of common stock offered hereby is subject
to change and could be materially greater or less than the estimated amount
indicated, depending upon a number of factors, including whether the number of
shares of common stock outstanding have been adjusted to account for any stock
dividend, stock split and similar transactions or adjustment.
(3) By a Note Purchase Agreement dated November 28, 2001 between vFinance and
SBI Investments (USA), Inc. (f/k/a Best Finance Investments Limited) ("SBI"),
SBI obligated itself to purchase and the Company obligated itself to issue a
Convertible Note (the "Note") for up to $1,500,000. As of January 11, 2002, a
total of $975,000 had been advanced by under such Note. Pursuant to the
Agreement as modified, SBI's obligation to extend a third tranche of $525,000 to
the Company expired June 30, 2002. The Note matures on November 28, 2005, and is
convertible into common stock of vFinance at a conversion price of $.285. The
Note bears no interest. As of September 30, 2002, $177,500 of the Note had been
converted into Common Stock. Under the terms of the Note Purchase Agreement, the
Company would have been obligated to deliver to SBI an option to purchase shares
of the Common Stock of the Company. The option would have expired on June 30,
2002. However, because SBI did not fund the full amount under the Note Purchase
Agreement, no option was delivered. Additionally, the parties have mutually
waived the provisions of the Investor Rights Agreement executed simultaneous
with the Note Purchase Agreement. The Company is obligated to register the
shares issuable upon conversion of the Note pursuant to a Registration Rights
Agreement between the parties.
The principal amount of the Note is redeemable in full at our option
prior to the third anniversary date upon no less than thirty days notice at
116.66% of the principal balance. The Note may also be prepaid prior to the
maturity date upon at least thirty days notice, subject to the right of SBI to
convert all or part of the Note prior to the receipt of the prepayment amount.
The person with voting and investment control over SBI Investments (USA) Inc.
is John Wang. The other Selling Shareholders are assignees of the Note
from SBI.
PLAN OF DISTRIBUTION
Once the registration statement of which this prospectus is part
becomes effective, the common stock covered by this prospectus may be offered
and sold from time to time by the selling shareholders or its pledgees, donees,
transferees or successors in interest. Such sales may be made on the OTC
Bulletin Board or otherwise, at prices and under terms then prevailing or at
prices related to the then current market price, or in negotiated transactions.
The Shares may be sold by any means permitted under law, including one or more
of the following:
- a block trade in which a broker-dealer engaged by selling
shareholders will attempt to sell the common stock covered by this
prospectus as agent, but may position and resell a portion of the
block as principal to facilitate the transaction;
- purchases by a broker-dealer as principal and resale by such
broker-dealer for its account under this prospectus;
- ordinary brokerage transactions in which the broker solicits
purchasers; and
- privately negotiated transactions.
In effecting sales, broker-dealers engaged by the selling shareholders
may arrange for other broker-dealers to participate in the resales.
In connection with distributions of the common stock covered by this
prospectus or otherwise, the selling shareholder may enter into hedging
transactions with broker-dealers. In connection with such transactions,
broker-dealers may engage in short sales of the common stock covered by this
prospectus in the course of hedging the positions they assume with the selling
shareholder. The selling shareholders may also sell short and redeliver the
common stock covered by this prospectus to close out such short positions. The
selling shareholder may also enter into option or other transactions with
broker-dealers which require the delivery to the broker-dealer of the common
stock covered by this prospectus, which the broker-dealer may resell or
otherwise transfer under this prospectus. The selling shareholder may also loan
or pledge the common stock registered hereunder to a broker-dealer and the
broker-dealer may sell the shares so loaned or upon a default the broker dealer
may effect sales of the pledged shares pursuant to this prospectus.
15
All costs, expenses and fees in connection with the registration of the
common stock covered hereunder will be borne by us. Commissions and discounts,
if any, attributable to the sales of the common stock covered by this prospectus
will be borne by the selling shareholders. The selling shareholders may agree to
indemnify any broker-dealer or agent that participates in transactions involving
sales of the common stock covered by this prospectus against certain
liabilities, including liabilities arising under the Securities Act.
The selling shareholders are not obligated to sell any or all of the
common stock covered by this prospectus.
16
In order to comply with the securities laws of certain states, the
common stock will be sold in such jurisdictions only through registered or
licensed brokers or dealers. In addition, the sale and issuance of common stock
may be subject to the notice filing requirements of certain states. In addition,
we will make copies of this prospectus available to the selling shareholders and
have informed them of the need for delivery of copies of this prospectus to
purchasers at or prior to the time of any sale of the common stock offered
hereby. The selling shareholders must furnish each broker which offers common
stock covered by this prospectus with the number of copies of this prospectus
and any prospectus supplement that the broker requires.
Any broker-dealers or agents that participate with the selling
shareholders in sales of the shares may be deemed to be "underwriters" within
the meaning of the Securities Act in connection with sales in which they
participate. If any broker-dealers or agents are deemed to be "underwriters,"
then any commissions they receive and any profit on the resale of the shares
purchased by them may be considered to be underwriting commissions or discounts
under the Securities Act.
The selling shareholders and any other persons participating in the
sale or distribution of the shares will be subject to liability under the
federal securities laws and must comply with the requirements of the Securities
Act and the Exchange Act and related rules and regulations, including Rule 10b-5
and Regulation M under the Exchange Act. These rules and regulations may limit
the timing of purchases and sales by the selling shareholders or any other such
person. Under these rules and regulations, the selling shareholders and such
other persons that are "deemed engaged in a distribution":
- may not engage in any stabilization activity in connection with
shares of our common stock; stabilization means the placing of any
bid, or the effecting of any purchase, for the purpose of pegging,
fixing or maintaining the price of shares of our common stock.
This also includes bidding for or purchasing securities in the
market;
- may not engage in any passive market transactions in shares of our
common stock; passive market making involves bidding for or
purchasing shares of our common stock provided that the net
purchases do not exceed specified levels as set forth in Rule 103
of Regulation M; and
- may not bid for or purchase any shares of our common stock or
attempt to induce any person to purchase any shares of our
common stock other than as permitted by the Exchange Act.
These restrictions may affect the marketability of the shares of our
common stock offered by the selling shareholders.
DESCRIPTION OF CAPITAL STOCK
GENERAL
Our authorized capital stock consists of 75,000,000 shares of common
stock, par value $.01 per share, and 2,500,000 shares of preferred stock, par
value $.01 per share.
COMMON STOCK
The holders of our common stock are entitled to one vote per share on
all matters to be voted on by stockholders and do not have cumulative voting
rights. They are also entitled to receive any dividends that may be declared
from time to time by our Board of Directors out of legally available funds. If
our company is liquidated, dissolved or wound up, the holders of our common
stock are entitled to share ratably in all assets remaining after payment of
liabilities outstanding at that time. Our common stock has no preemptive or
conversion rights or other subscription rights. All outstanding shares of our
common stock are fully paid and nonassessable. We may designate and issue
preferred stock in the future. The rights and privileges of the holders of our
common stock may be adversely affected by any issuance of preferred stock.
17
PREFERRED STOCK
The 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 of the
preferred stock, including:
o dividend rights;
o conversion rights;
o voting rights, which may be greater or lesser than the voting
rights of the common stock;
o rights and terms of redemption;
o liquidation preferences; and
o sinking fund terms.
The issuance of shares of preferred stock could adversely affect the
voting power of holders of 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 present plans to issue any shares of preferred stock.
Our authorized stock includes 2,500,000 shares of preferred stock. Our
board of directors has the authority to designate the relative rights and
preferences of one or more series of preferred stock.
CERTAIN TERMS OF SERIES A PREFERRED STOCK AND SERIES B PREFERRED STOCK
To date our board has authorized two series of preferred stock,
designated as Series A and Series B Convertible Preferred Stock. Series A
consists of 122,500 shares and Series B consists of 50,000 shares. All of those
shares were issued to shareholders of Colonial Direct Financial Group, Inc. in
connection with our merger with Colonial Direct and are currently outstanding.
The Series A Preferred Stock and Series B Preferred Stock have the
following rights, preferences, privileges and restrictions:
SHAREHOLDERS CONVERSION RIGHT. The holders of our Series A Convertible
Preferred Stock and Series B Convertible Preferred Stock have the right to
convert their shares at the then effective conversion price into shares of our
Common Stock. They may exercise this right at any time by giving us written
notice at least 15 but not more than 30 days in advance of the conversion.
OUR RIGHT TO REQUIRE CONVERSION. Under certain conditions, we have the
right to require the holders of our Series A Preferred Stock and Series B
Preferred Stock to convert all, but not less than all, of their outstanding
shares at the then effective conversion price. We may exercise this right by
giving written notice to the shareholders at least 15 but not more than 30 days
in advance of the conversion. The conditions for our exercise of this option
include:
- the fact that our Common Stock is listed for trading on an exchange
or automated dealer quotation system,
- the closing price of our Common Stock being at least $3.37 per share
for at least 20 consecutive trading days, and
- the ability of the holders of our Preferred Stock being able to sell
the shares either pursuant to Rule 144 or pursuant to an effective
registration statement.
CONVERSION PRICE. The number of shares issued on conversion of our
Preferred Stock is equal to $10 per share of Preferred Stock divided by the
conversion price in effect on the conversion date. The conversion price is $2.60
per share, subject to adjustment for certain capital events, such as stock
splits, stock dividends, mergers or consolidations. The conversion price will
also be adjusted, on a weighted average basis, if we issue either additional
shares of our Common Stock or rights to acquire our Common Stock on the exercise
of options or conversion rights at a price which is less than the then current
conversion price. If the adjustment was based on the issuance of convertible
securities, rights or options, the conversion price may subsequently be
readjusted when those rights expire.
DIVIDEND RIGHTS. The holders of our Series A Preferred Stock and B
Preferred Stock are entitled to receive cumulative dividends at the annual rate
of $1 per share for the Series A Preferred Stock and $0.70 per share for the
Series B Preferred Stock, in each case whether or not such dividends are earned
or declared. All those dividends must be paid before the holders of our Common
Stock can receive any dividends on their shares.
18
REDEMPTION RIGHTS. We have the option to redeem the outstanding shares
of our Preferred Stock, in whole or in part, at any time, upon written notice
given at least 30 and not more than 60 days in advance, at a redemption price of
$11 per share for the Series A Preferred Stock and $10 per share for the Series
B Preferred Stock. If we receive net proceeds from a single sale of our equity
securities of at least $500,000, the holders of our Series B Preferred Stock may
require us to redeem all, but not less than all, of the outstanding Series B
Preferred Stock at a redemption price equal to $10 per share. They must give us
that notice in writing within 20 days of the consummation of that sale.
LIQUIDATION PREFERENCE. If our company is liquidated or wound up, the
holders of the Series A Preferred Stock and Series B Preferred Stock will be
entitled to receive an amount equal to the liquidation preference amount, plus
any accrued but unpaid dividends. The liquidation preference amount is $10 per
share, adjusted for certain capital events such as stock splits or stock
dividends. Those amounts must be paid before the holders of our Common Stock
receive any distributions. A consolidation or merger of our company will not be
considered to be a liquidation or winding up for purposes of this liquidation
preference unless it is part of a plan of liquidation..
VOTING RIGHTS. Unless required by law, the holders of our Series A and
B Preferred Stock have no voting rights until they convert their shares into
shares of our Common Stock.
CERTAIN CHARTER AND BY-LAW PROVISIONS
Our certificate of incorporation and bylaws contain provisions that may
make it more difficult for a third party to acquire control of our company.
These provisions could limit the price investors might be willing to pay in the
future for shares of our common stock. For example, we are allowed to issue
preferred stock without stockholder approval and special meetings of our
stockholders may be called only by the Chairman of the Board of Directors or by
the Board of Directors. These provisions may make it more difficult for
stockholders to force our company to take action and could have the effect of
delaying or preventing a change in control of our company.
STOCK TRANSFER AGENT
The transfer agent for our common stock is North American Transfer Co.,
Freeport, New York 11520.
LEGAL MATTERS
Certain legal matters relating to the issue and resale of the shares of
common stock under this prospectus will be passed upon for vFinance by Krieger &
Prager, LLP, New York, New York.
EXPERTS
Sherb & Co., LLP, Certified Public Accountants, have audited our
consolidated balance sheet as at December 31, 2001, consolidated statements of
operations for years ended December 31, 2001 and December 31, 2000, consolidated
statements of shareholder's equity for years ended December 31, 2001 and
December 31, 2000, and our consolidated statements of cash flow for years ended
December 31, 2000 and December 31, 2000. Their reports are included in this
prospectus. Our consolidated financial statements are included in this
prospectus in reliance on their reports, given their authority as experts in
accounting and auditing.
ADDITIONAL INFORMATION AND INFORMATION INCORPORATED BY REFERENCE
We are subject to the informational reporting requirements of the
Exchange Act and file reports, proxy statements and other information with the
SEC. Our SEC filings are available to the public over the Internet at the SEC's
website at http://www.sec.gov. You may also read and copy any document we file
with the SEC at the SEC's Public Reference Room at 450 Fifth Street, N.W.,
Washington, D.C. 20549. You may also obtain copies of the documents at
prescribed rates by writing to the SEC's Public Reference Section at 450 Fifth
Street, N.W., Washington, D.C. 20549. Please call the SEC at 1-800-SEC-0330 for
further information on the operation of its Public Reference Room.
The SEC allows us to "incorporate by reference" into this prospectus
the information we have filed with the SEC. We incorporate by reference into
this prospectus the information contained in the documents listed below, which
is considered to be a part of this prospectus:
- Our annual report on Form 10-KSB for the year ended December 31,
2001, which contains audited financial statements for the most
recent fiscal year for which we have filed audited financial
statements;
- Our quarterly report on Form 10-QSB and Form 10-QSB/A for the
quarter ended September 30, 2002, as filed with the SEC;
19
We have filed with the SEC a registration statement on Form S-2 under
the Securities Act to register under the Securities Act the common stock offered
hereby. This prospectus does not contain all of the information set forth in the
registration statement or in the exhibits to it, certain portions of which may
have been omitted as permitted by the rules and regulations of the SEC. You may
obtain from the SEC at its principal office in Washington, D.C. upon payment of
the fees prescribed by the SEC a copy of any contract or other document referred
to in this prospectus or in any document incorporated herein by reference that
has been filed as an exhibit to the registration statement or such document.
Our registration statement on Form S-2, including exhibits, as well as
any reports, proxy statements and other information filed under the Exchange
Act, can also be obtained electronically after we have filed them with the SEC
through a variety of databases, including, among others, the SEC's Electronic
Data Gathering, Analysis and Retrieval (EDGAR) program, Knight-Ridder
Information, Inc., Federal Filings/Dow Jones and Lexis/Nexis. Additionally, the
SEC maintains a Website (at http://www.sec.gov) that contains information
regarding us.
This prospectus is accompanied by a copy of our latest annual report on
Form 10-KSB and latest quarterly report on Form 10-QSB. The information in this
prospectus should be read together with the information and financial statements
(including notes thereto) that appear or will appear in the Form 10-KSB and the
documents referred to above as incorporated herein by reference. This prospectus
incorporates documents by reference that are not presented herein or delivered
herewith on Form 10-KSB or Form 10-QSB. These documents are available without
charge, upon written or oral request by any person to whom this prospectus has
been delivered, from the Secretary, vFinance, Inc., 3010 North Military Trail,
Suite 300, Boca Raton, Florida 33431, (561) 981-1000 or by e-mail at
richc@vfinance.com.
RECENT DEVELOPMENTS
On May 29, 2002, the Company entered into a definitive select asset
purchase agreement (the "Agreement") 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. Through the Agreement, the Company agreed to acquire all Somerset's
brokerage customer and client accounts, advances to registered representatives
and certain other selected assets. The Company also agreed to assume certain
liabilities including selected leases and hire select salaried personnel and
independent contractors. The Agreement was subsequently amended on June 17, 2002
(the "Amendment"). The Agreement and Amendment provide for the payment of
1,000,000 shares of Common Stock. In addition, and based upon certain
performance criteria, the Company also has agreed to pay up to an additional
2,000,000 shares of its Common Stock and warrants to purchase up to 500,000
additional shares of its Common Stock, during the first year after the
transaction is closed. The Company will also issue up to 1,400,000 incentive
stock 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. All closing conditions of the Agreement and
Amendment were required to be met on or before August 1, 2002 (the "Amended
Closing Date").
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 Commons
Stock (the "Escrowed Shares"). The Escrowed Shares were to 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"). As a result of Somerset's
inability to comply with Closing Conditions pursuant to the Agreement as
modified, the parties mutually terminated the Agreement. During the period
between the execution of the Agreement and the date hereof, 21 registered
personnel of Somerset became currently employees or independent contractors of
vFinance. As a result of the termination, no shares or options were issued to
Somerset.
20
The litigation between Ben Lichtenberg and Michael Golden, as more
fully described in Form 10-KSB under Item 3, Legal Proceedings, has been
settled as of October 23, 2002 with respect to Ben Lichtenberg and as of October
18 as to a preliminary written settlement agreement with Michael Golden subject
to a definitive Agreement. Under the terms of the settlement with Ben
Lichtenberg a full mutual general release and covenant not to sue was entered
into with no payments to or by us. Under the terms of the preliminary settlement
agreement with Michael Golden, Michael Golden and vFinance have agreed to a full
general release, and in consideration we will redeem the 50,000 Shares of Series
B Preferred Stock Michael Golden currently owns in exchange for 3,000,000
unregistered common shares subject to a 1 year lock up. In addition, Michael
Golden will receive from us $7,000 per month for 12 months and $5,000 per month
for an approximately an additional 33.2 months.
Certain other material developments with respect to vFinance which have
occurred since the end of the latest fiscal year for which certified financial
statements were included in the latest Form 10-KSB and in the latest Form 10-QSB
have been included in Forms 8-K filed with the SEC and incorporated by
reference. A list of such Forms 8-K are set forth above under Additional
Information and Information Incorporated by Reference.
DISCLOSURE OF COMMISSION POSITION IN INDEMNIFICATION FOR SECURITIES ACT
LIABILITIES.
We have agreed to indemnify the selling shareholder and the officers,
directors and each person who controls the selling shareholder against all
losses, claims, damages, liabilities and expenses caused by:
- any untrue or alleged untrue statement of material fact contained
in the registration statement, this prospectus or any amendment or
supplement to these documents;
- any omission or alleged omission to state a material fact in the
registration statement, this prospectus or any amendment or
supplement to these documents that is required to be stated or
necessary to ensure that the documents are not misleading; or
- any violation or alleged violation by the Company of the
Securities Act, the Exchange Act, any state securities law or any
rule or regulation under the Securities Act, the Exchange Act or
any state securities law.
The selling shareholders will not be indemnified if the claims
result from any written information furnished to us by the selling shareholders
or if the selling shareholders fail to deliver a copy of this prospectus to a
buyer.
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers, or persons controlling vFinance
pursuant to the foregoing provisions, vFinance has been informed that in the
opinion of the Securities and Exchange Commission, such indemnification is
against public policy as expressed in the Securities Act and is therefore
unenforceable.
21
ITEM 7. FINANCIAL STATEMENTS.
vFinance, Inc.
Consolidated Financial Statements
Years ended December 31, 2001 and 2000
CONTENTS
Report of Independent Auditors........................................... F-2
Audited Financial Statements
Consolidated Balance Sheet............................................... F-3
Consolidated Statements of Operations ................................... F-4
Consolidated Statements of Shareholders' Equity.......................... F-5
Consolidated Statements of Cash Flows.................................... F-8
Notes to Consolidated Financial Statements............................... F-9
F-1
Report of Independent Auditors
Board of Directors
vFinance, Inc.
We have audited the accompanying consolidated balance sheet of vFinance, Inc.
(formerly vFinance.com, Inc.) as of December 31, 2001 and the related
consolidated statements of operations, shareholders' equity and cash flows for
the years ended December 31, 2001 and 2000. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of vFinance, Inc. at
December 31, 2001, and the results of its operations and its cash flows for the
years ended December 31, 2001 and 2000, in conformity with accounting principles
generally accepted in the United States of America.
/s/ Sherb & Co., LLP.
New York, New York
November 8, 2002
F-2
vFINANCE, INC.
CONSOLIDATED BALANCE SHEET
December 31, 2001
Assets:
Cash and cash equivalents $ 1,826,474
Restricted cash 203,106
Due from clearing broker 588,222
Investments in trading securities 1,077,815
Accounts receivable, net of allowance for doubtful
accounts of $63,528 93,719
Forgivable loans - employees, current portion 307,452
Notes receivable - employees, net of allowance for 107,600
doubtful accounts of $60,550
Prepaid expenses and other current assets 133,085
------------
Total current assets 4,337,473
Furniture and equipment, at cost:
Furniture and equipment 940,537
Internal use software 146,835
------------
1,087,372
Less accumulated depreciation (403,970)
------------
Net furniture and equipment 683,402
Forgivable loans - employees 577,760
Goodwill, net of accumulated amortization
of $699,294 420,000
Other assets 387,177
------------
Total Assets $ 6,405,812
============
Liabilities and Shareholders' Equity:
Accounts payable $ 1,093,662
Accounts payable - employees 66,407
Accrued liabilities 2,319,510
Securities sold, not yet purchased 53,981
Lines of credit 297,656
Subordinated promissory notes 650,000
Notes payable, current portion 750,429
Capital lease obligations, current portion 12,627
------------
Total current liabilities 5,244,272
Letter of credit and promissory note 268,500
Capital lease obligations 56,641
Shareholders' Equity:
Series A Convertible Preferred Stock, $0.01 par value; 122,500 shares
authorized; 122,500 shares issued and outstanding (liquidation preference of
$1,225,000 at
December 31, 2001) 1,225
Series B Convertible Preferred stock, $0.01 par value;
50,000 shares authorized; 50,000 issued and outstanding
(liquidation preference of $500,000 at December 31, 2001) 500
Common stock, $0.01 par value, 75,000,000 shares
authorized; 25,964,395 shares issued, 22,952,885 outstanding 259,644
Additional paid-in-capital on preferred stock 1,565,775
Additional paid-in-capital on common stock 22,515,699
Deferred compensation (82,657)
Accumulated deficit (21,254,359)
------------
3,005,827
Less treasury stock, at cost, 3,011,510 shares (2,169,428)
------------
Total Shareholders' Equity 836,399
------------
Total Liabilities and Shareholders' Equity $ 6,405,812
============
See Accompanying Notes.
F-3
vFINANCE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended December 31,
-----------------------------------
2001 2000
------------ ------------
Revenues:
Commissions - agency $ 6,799,700 $ --
Commissions - principal 4,774,010 --
Success fees 2,493,671 2,965,135
Consulting and retainers 761,061 2,193,889
Other brokerage related income 567,077 --
Other 373,704 358,456
------------ ------------
TOTAL REVENUES 15,769,223 5,517,480
------------ ------------
COST OF REVENUES:
Commissions 6,901,156 --
Clearing and transaction costs 1,754,446 --
Success 715,608 2,397,804
Consulting and retainers 244,494 653,453
Other 46,695 --
------------ ------------
TOTAL COST OF REVENUES 9,662,399 3,051,257
------------ ------------
GROSS PROFIT 6,106,824 2,466,223
------------ ------------
OTHER EXPENSES:
General and administrative 9,470,371 3,665,063
Write-off of goodwill 8,582,020 --
Net loss on trading securities 79,827 236,006
Professional fees 1,006,696 478,841
Provision for bad debts 349,049 88,150
Net unrealized loss on investments held
for trading and stock purchase warrants 1,443,878 424,041
Depreciation and amortization 958,711 1,682,324
Amounts forgiven under forgivable loans 956,543 --
Stock based compensation 372,596 --
------------ ------------
Total other expenses 23,219,691 6,574,425
------------ ------------
Loss from operations (17,112,867) (4,108,202)
Interest and dividend income 71,007 196,553
------------ ------------
NET LOSS (17,041,860) (3,911,649)
Less: Preferred stock dividend 157,500 --
------------ ------------
LOSS AVAILABLE TO COMMON STOCKHOLDERS $(17,199,360) $ (3,911,649)
============ ============
Loss per share:
Basic $ (0.87) $ (0.39)
============ ============
Weighted average number of common
shares used in computing basic loss
per share 19,810,285 10,131,616
============ ============
Diluted $ (0.87) $ (0.39)
============ ============
Weighted average number of common
shares used in computing diluted loss
per share 19,810,285 10,131,616
============ ============
See accompanying notes.
F-4
vFINANCE, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Additional
Preferred Stock Common Stock Paid-in
------------------ ------------------- Capital
Shares Amount Shares Amount Common
------ ------ --------- -------- ------------
Balances at December 31, 1999 -- $ -- 9,099,400 $ 90,994 $ 5,097,410
Issuance of common shares in
connection with private
placement (net of cash
issuance costs of $1,071,342
and non cash issuance costs
of $361,333) -- -- 2,333,334 23,334 5,905,324
Purchase of treasury stock -- -- -- -- --
Issuance of common shares in
connection with services
rendered -- -- 538,333 5,383 2,539,361
Change in per share fair value
of common shares under
restricted stock performance
plan (First Tranche Shares) -- -- -- -- (3,740,872)
Amortization of deferred
compensation under restricted
stock performance plan
(First Tranche Shares) -- -- -- -- --
Issuance of common shares
under the restricted stock
performance plan
(Second Tranche Shares) -- -- 3,011,111 30,111 7,498,667
Change in per share fair value
of common shares under
restricted stock performance
plan (Second Tranche Shares) -- -- -- -- (4,987,665)
Rescission of common shares
under the restricted stock
performance plan
(Second Tranche Shares) -- -- -- -- --
Issuance of compensatory stock
options and stock purchase
warrants -- -- -- -- 128,783
Amortization of deferred
compensation (Second Tranche
Shares) -- -- -- -- --
Amortization of deferred
compensation -- -- -- -- --
Net loss -- -- -- -- --
------- ------ ---------- -------- ------------
Balances at December 31, 2000 -- -- 14,982,178 149,822 12,441,008
Issuance of shares in
conjunction with merger
of NW Holdings, Inc. -- -- 1,700,000 17,000 1,697,750
Issuance of shares in
conjunction with merger
of Colonial 172,500 1,725 5,750,000 57,500 6,105,139
Accrued dividends payable on
preferred shares -- -- -- -- --
Issuance of common shares in
connection with legal
settlements -- -- 180,000 1,800 67,900
Amortization of deferred
compensation -- -- -- -- --
F-5
Purchase of treasury stock,
at cost -- -- -- -- --
Issuance of shares in
conjunction with acquisition
of Critical -- -- 400,000 4,000 320,000
Issuance of common shares in
connection with services
rendered -- -- 682,867 6,829 369,596
Issuance of shares in
conjunction with related
party share purchase
agreement -- -- 877,193 8,772 241,228
Issuance of shares to investors -- -- 1,392,157 13,921 271,078
Other grants of stock options
and stock purchase warrants -- -- -- -- 27,000
Sale of treasury stock,
at cost -- -- -- -- --
Beneficial conversion and imputed
interest on
Softbank note purchase
agreement -- -- -- -- 975,000
Net loss -- -- -- -- --
------- ------ ---------- -------- ------------
Balances at December 31, 2001 172,500 $1,725 25,964,395 $259,644 $ 22,515,699
======= ====== ========== ======== ============
Additional
Paid-in
Capital Deferred Accumulated Treasury Shareholders'
Preferred Compensation Deficit Stock Equity
---------- ------------ ------------ ----------- ------------
Balances at December 31, 1999 $ -- $ (4,760,452) $ (300,850) $ -- $ 127,102
Issuance of common shares in
connection with private
placement (net of cash
issuance costs of $1,071,342
and non cash issuance costs
of $361,333) -- -- -- -- 5,928,658
Purchase of treasury stock -- -- -- (6,822) (6,822)
Issuance of common shares in
connection with services
rendered -- (280,000) -- -- 2,264,744
Change in per share fair value
of common shares under
restricted stock performance
plan (First Tranche Shares) -- 3,740,872 -- -- --
Amortization of deferred
compensation under restricted
stock performance plan
(First Tranche Shares) -- 675,813 -- -- 675,813
Issuance of common shares
under the restricted stock
performance plan
(Second Tranche Shares) -- (7,528,778) -- -- --
Change in per share fair value
of common shares under
restricted stock performance
plan (Second Tranche Shares) -- 4,987,665 -- -- --
Rescission of common shares
under the restricted stock
performance plan
(Second Tranche Shares) -- 2,159,946 -- (2,159,946) --
Issuance of compensatory stock
options and stock purchase
warrants -- (128,783) -- -- --
F-6
Amortization of deferred
compensation (Second Tranche
Shares) -- 381,167 -- -- 381,167
Amortization of deferred
compensation -- 625,344 -- -- 625,344
Net loss -- -- (3,911,649) -- (3,911,649)
---------- ------------ ------------ ----------- ------------
Balances at December 31, 2000 -- (127,206) (4,212,499) (2,166,768) 6,084,357
issuance of shares in
conjunction with merger
of NW Holdings, Inc. -- -- -- -- 1,714,750
Issuance of shares in
conjunction with merger
of Colonial 1,723,275 -- -- -- 7,887,639
Accrued dividends payable on
preferred shares (157,500) -- -- -- (157,500)
Issuance of common shares in
connection with legal
settlements -- -- -- -- 69,700
Amortization of deferred
compensation -- 68,549 -- -- 68,549
Purchase of treasury stock,
at cost -- -- -- (10,392) (10,392)
Issuance of shares in
conjunction with acquisition
of Critical -- -- -- -- 324,000
Issuance of common shares in
connection with services
rendered -- -- -- -- 376,425
Issuance of shares in
conjunction with related
party share purchase
agreement -- -- -- -- 250,000
Issuance of shares to investors -- -- -- -- 284,999
Other grants of stock options
and stock purchase warrants -- (24,000) -- -- 3,000
Sale of treasury stock,
at cost -- -- -- 7,732 7,732
Beneficial conversion on
Softbank note purchase
agreement -- -- -- -- 975,000
Net loss -- -- (17,041,860) -- (17,041,860)
---------- ------------ ------------ ----------- ------------
Balances at December 31, 2001 $1,565,775 $ (82,657) $(21,254,359) $(2,169,428) $ 836,399
========== ============ ============ =========== ============
See accompanying notes.
F-7
vFinance, Inc.
Consolidated Statements of Cash Flows
Years Ended December 31,
-----------------------------------
2001 2000
------------ ------------
OPERATING ACTIVITIES
Net loss $(17,041,860) $ (3,911,649)
Adjustments to reconcile net loss to net cash used in operating
activities:
Write-off of goodwill 8,582,020 --
Non-cash fees received (1,756,411) (1,501,654)
Depreciation and amortization 958,711 49,324
Amortization of deferred compensation 68,549 1,682,324
Issuance of common stock and common stock options in
conjunction with services rendered and legal settlements 449,125 2,259,402
Provision for doubtful accounts 20,621 --
Unrealized loss on investments, net 1,443,878 424,041
Loss on sale of investments, net 79,827 236,006
Proceeds from sale of investments 405,056 491,533
Changes in operating assets and liabilities, net of businesses
acquired:
Accounts receivable 207,677 (35,704)
Due from clearing broker 257,000 --
Notes and other receivable 426,641 --
Notes receivable from employees 61,774 (149,666)
Investments in trading securities 381,659 --
Income taxes receivable (110,402) --
Other assets 1,432,818 (70,365)
Accounts payable and accrued liabilities 134,475 46,575
Securities, sold not yet purchased 11,427 --
------------ ------------
Net cash used in operating activities (3,987,415) (479,833)
INVESTING ACTIVITIES
Purchase of equipment (161,805) (155,614)
Purchase of treasury stock, net (2,660) (6,822)
Prepaid transaction costs -- (60,802)
Acquisition of NW Holdings, Inc., net of cash acquired (940,037) --
Acquisition of Colonial, net of cash acquired 12,024 --
Acquisition of Critical, net of cash acquired 7,586 --
------------ ------------
Net cash used in investing activities (1,084,892) (223,238)
FINANCING ACTIVITIES
Payments of capital leases (65,289) --
Proceeds from the note purchase agreement 975,000 --
Proceeds from issuance of common stock related to private placement,
net of cash and stock issuance costs 534,999 5,928,658
------------ ------------
Net cash provided by financing activities 1,444,710 5,928,658
------------ ------------
(Decrease) increase in cash and cash equivalents (3,627,597) 5,225,587
Cash and cash equivalents at beginning of year 5,454,071 228,484
------------ ------------
Cash and cash equivalents at end of year $ 1,826,474 $ 5,454,071
============ ============
See accompanying notes.
F-8
vFinance, Inc.
Notes to the Consolidated Financial Statements
December 31, 2001
1. DESCRIPTION OF BUSINESS
vFinance, Inc. (the "Company") changed its name from vFinance.com, Inc.
effective December 28, 2001. The Company is a "new-breed" financial services
enterprise committed to building a worldwide audience of individuals looking to
create wealth through their equity investments and businesses and the name
change reflects the broader scope of services. The Company principally operates
in one business segment, investment management services, consisting primarily of
financial services, including retail brokerage and investment banking.
On January 4, 2001, the Company executed a merger agreement whereby it agreed to
acquire all of the capital stock of NW Holdings, Inc. (NWH"), a Florida
corporation. On the Closing Date of the merger, NWH was the parent company of
and wholly owned First Level Capital, Inc. ("First Level"), a Florida
corporation whose name was subsequently changed to vFinance Investments, Inc.
("VFI"). First Level contained the primary operations of NWH and was an
investment-banking firm that was licensed to conduct activities as a
broker-dealer in 49 states and had offices in New York, New Jersey and Florida.
VFI, as the Company's wholly owned subsidiary, continues to provide
investment-banking services to small and medium sized companies and retail
brokerage services to companies, financial institutions and individual
investors.
On January 4, 2001, the Company also executed a merger agreement whereby it
agreed to acquire all of the outstanding capital stock of Colonial Direct
Financial Group, Inc. ("Colonial") a Delaware corporation. At the time of the
merger, Colonial was a holding company comprised of two diversified financial
services companies, First Colonial Securities Group, Inc. and Colonial Direct
Retirement Services, Inc., and a company that provides administrative support to
these financial service companies. The Colonial group of companies is now
inactive.
F-9
vFinance, Inc.
Notes to Consolidated Financial Statements (continued)
December 31, 2001
1. DESCRIPTION OF BUSINESS (CONTINUED)
On August 20, 2001, the Company entered into a Securities Exchange Agreement
acquiring all of the membership interests in two related companies, Critical
Investments, LLC, a Delaware limited liability company ("Critical Investments"),
and Critical Advisors, L.L.C., a Virginia limited liability company ("Critical
Advisors") (collectively "Critical"). Critical Investments manages and is the
sole general partner in Critical Infrastructure Fund, L.P. ("Critical
Infrastructure LP"), a Delaware limited partnership. Critical Advisors manages
Critical Infrastructure Fund, Ltd. ("Critical Infrastructure Ltd."), an
international business company organized and existing under the laws of the
British Virgin Islands and receives (i) a management fee equal to 1% of the net
asset value of Critical Infrastructure Ltd. and (ii) a performance fee equal to
20% of the increase in the net asset value of Critical Infrastructure Ltd.
Critical Infrastructure LP and Critical Infrastructure Ltd. are the sole
partners in, owning 96% and 4% respectively, and conduct their investment and
trading activities through Critical Infrastructure Fund (BVI), LP, a limited
partnership organized and existing under the laws of the British Virgin Islands
which holds a portfolio of securities. Critical Investments and Critical
Advisors changed their names to vFinance Investors, LLC and vFinance Advisors,
LLC, subsequent to the acquisition.
The Company now conducts its broker/dealer operations and investment banking and
consulting through VFI, a licensed broker dealer. It also operates its
vFinance.com website through vFinance Holdings, Inc. and manages Critical
Infrastructure Fund (BVI) LP through vFinance Advisors, LLC and vFinance
Investors, LLC.
2. SIGNIFICANT ACCOUNTING POLICIES AND OTHER MATTERS
Basis of Presentation
The consolidated financial statements include the accounts of the Company and
its wholly owned subsidiaries. All intercompany accounts have been eliminated in
consolidation. Certain amounts for the prior year financial statements have been
reclassified to conform to the current year presentation.
Revenue Recognition
The Company earns revenue (commissions) from brokerage and trading which are
recognized on the day of the trade - trade date basis. The Company also earns
revenue from investment banking and consulting. Monthly retainer fees for
investment banking and consulting are recognized as services are provided.
Investment banking success fees are generally based on a percentage of the total
value of a transaction and are recognized upon successful completion.
F-10
vFinance, Inc.
Notes to Consolidated Financial Statements (continued)
December 31, 2001
2. SIGNIFICANT ACCOUNTING POLICIES AND OTHER MATTERS (CONTINUED)
Revenue Recognition (continued)
The Company does not require collateral from its customers. Revenues are not
concentrated in any particular region of the country or with any individual or
group.
The Company 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.
Realized gains or losses are recognized in the statement of operations when the
related stock purchase warrant is exercised and sold. For the years ended
December 31, 2001 and 2000, the Company recognized $1,756,411 and $1,501,654 of
revenue in connection with the receipt of equity instruments.
Occasionally, the Company receives equity instruments in private companies with
no readily available market value. Equity interests and warrants for which there
is not a public market are valued based on factors such as significant equity
financing by sophisticated, unrelated new investors, history of positive cash
flow from operations, the market value of comparable publicly traded companies
(discounted for liquidity) and other pertinent factors. Management also
considers recent offers to purchase a portfolio company's securities and the
filings of registration statements in connection with a portfolio company's
initial public offering when valuing warrants.
F-11
vFinance, Inc.
Notes to Consolidated Financial Statements (continued)
December 31, 2001
2. SIGNIFICANT ACCOUNTING POLICIES AND OTHER MATTERS (CONTINUED)
Revenue Recognition (continued)
Prior to October 25, 2001, the Company's policy was to periodically distribute
equity instruments or proceeds from the sale of equity instruments to its
employees. Accordingly, unrealized gains or losses recorded in the statement of
operations related to securities held by the Company at each period end which
ultimately will be distributed to the Company's employees also impact
compensation expense and accrued compensation. At December 31, 2001, $28,811 of
accrued payroll is owed to former employees of the Company in connection with
equity instruments held by the Company that have not yet been distributed. At
December 31, 2001 and 2000, $254,625 and $227,548 of accrued payroll is owed to
employees of the Company in connection with equity investments received as
compensation.
As of December 31, 2001, certain transactions in process may result in the
Company receiving equity instruments or stock purchase warrants in subsequent
periods as discussed above. In such event, the Company will recognize revenue
related to the receipt of such equity instruments consistent with the
aforementioned policies. In addition, the Company would also record compensation
expense at fair value related to the distribution of some or all of such equity
instruments to employees or independent contractors involved with the related
transaction.
The Company sells two types of listings to its website: (i) perpetual listings
to venture capital vendors, who are interested in providing services to other
companies or individuals; and (ii) three-month listings to entrepreneurs who
have new business ideas to sell. Revenue related to the listings is generally
recognized over the terms of such listings. Website revenues are concentrated
primarily in the United States but are not concentrated in any particular region
of the country or with any individual or group. Fees related to such listings
are included in "other" in the statements of operations for the years ended
December 31, 2001 and 2000.
Use of Estimates
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the amounts reported in the accompanying financial
statements. Actual results may differ from those estimates, and such differences
may be material to the financial statements.
F-12
vFinance, Inc.
Notes to Consolidated Financial Statements (continued)
December 31, 2001
2. SIGNIFICANT ACCOUNTING POLICIES AND OTHER MATTERS (CONTINUED)
Cash and cash equivalents
Cash and cash equivalents include all highly liquid investments with maturities
of three months or less when purchased.
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 December 31, 2001 and 2000, investments consisted of common and
preferred stock and stock purchase warrants held for resale. Realized gains or
losses are recognized in the statement of operations when the related stock
purchase warrant is exercised and the underlying shares are sold. Unrealized
gains or losses are recognized in the statement of operations on a monthly basis
based on changes in the fair value of the security as quoted on national or
inter-dealer stock exchanges. Net unrealized losses related to investments held
for trading and stock purchase warrants as of December 31, 2001 and 2000,
aggregated $1,443,878 and $424,041.
New Accounting Standards
In July 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No.'s 141, BUSINESS COMBINATIONS ("FAS 141") and
142, GOODWILL AND OTHER INTANGIBLE ASSETS ("FAS 142"). The provisions of FAS 141
eliminated the pooling-of-interests method of accounting for business
combinations consummated after June 30, 2001. The Company adopted FAS 141 on
July 1, 2001 and it did not have a significant impact on the Company's financial
position or results of operations. Under the provisions of FAS 142, goodwill and
indefinite lived intangible assets are no longer amortized, but are reviewed
annually for impairment. Separable intangible assets that are not deemed to have
an indefinite life will continue to be amortized over their useful lives. The
Company is required to adopt the new accounting rules beginning January 1, 2002.
Management is currently assessing the financial impact FAS 142 will have on the
consolidated financial statements, but it will not be material.
F-13
vFinance, Inc.
Notes to Consolidated Financial Statements (continued)
December 31, 2001
2. SIGNIFICANT ACCOUNTING POLICIES AND OTHER MATTERS (CONTINUED)
New Accounting Standards (continued)
In August 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 144, ACCOUNTING FOR THE IMPAIRMENT OR
DISPOSAL OF LONG-LIVED ASSETS ("FAS 144"), which addresses financial accounting
and reporting for the impairment or disposal of long-lived assets and supersedes
SFAS No. 121, ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS AND FOR
LONG-LIVED ASSETS TO BE DISPOSED OF, and the accounting and reporting provisions
of APB Opinion No. 30, REPORTING THE RESULTS OF OPERATIONS - REPORTING THE
EFFECTS OF DISPOSAL OF A SEGMENT OF A BUSINESS , AND EXTRAORDINARY, UNUSUAL AND
INFREQUENTLY OCCURRING EVENTS AND TRANSACTIONS ("APB 30"). The Company is
required to adopt the new accounting rules beginning January 1, 2002. Management
is currently assessing the financial impact FAS 144 will have on the
consolidated financial statements, but does not believe it will be material
because the Company wrote off most of the 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 use in valuing employee stock options. Under APB 25, if the
exercise price of the Company's employee stock options or stock purchase
warrants equals or exceeds the market price of the underlying stock on the date
of grant no compensation expense is recognized.
Fair Value of Financial Instruments
The fair values of the Company's financial instruments, which includes cash and
cash equivalents, accounts and loans receivable, investments, accounts and notes
payable, and accrued expenses approximate their carrying values.
The Company's financial instruments that are exposed to concentrations of credit
risk consist primarily of cash and cash equivalents and accounts receivable. The
Company places its cash with high quality insured financial institutions.
F-14
vFinance, Inc.
Notes to Consolidated Financial Statements (continued)
December 31, 2001
2. SIGNIFICANT ACCOUNTING POLICIES AND OTHER MATTERS (CONTINUED)
Furniture and Equipment
Furniture and equipment are stated on the basis of cost less accumulated
depreciation and consists primarily of computer equipment. Depreciation is
computed using the straight-line method over the estimated useful lives of the
assets, 2-5 years, for financial reporting purposes. Depreciation expense for
the years ended December 31, 2001 and 2000, totaled $259,417 and $31,658,
respectively.
Goodwill
The carrying values of goodwill as well as other long-lived assets are reviewed
if the facts and circumstances suggest that they may be impaired. If this review
indicates that the assets will not be recoverable, as determined based on the
undiscounted estimated cash flows of the Company over the remaining amortization
period, the Company's carrying values of the assets would be reduced to their
estimated fair values in accordance with Statement of Financial Accounting
Standards No. 142, ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS AND FOR
LONG-LIVED ASSETS TO BE DISPOSED OF. See Note 4.
Income Taxes
The Company accounts for income taxes under the liability method in accordance
with Statement of Financial Accounting Standards No. 109, ACCOUNTING FOR INCOME
TAXES. Under this method, deferred income tax assets and liabilities are
determined based on differences between the financial reporting and tax bases of
assets and liabilities and are measured using the enacted tax rates and laws
that will be in effect when the differences are expected to reverse.
F-15
vFinance, Inc.
Notes to Consolidated Financial Statements (continued)
December 31, 2001
2. SIGNIFICANT ACCOUNTING POLICIES AND OTHER MATTERS (CONTINUED)
Statement of Cash Flows
Non-cash items affecting the statements of cash flows are as follows:
2001 2000
---------- ----------
Prepaid and accrued consulting and professional fees $ -- $ 147,395
Issuance of stock purchase warrants in connection with employment
agreements and asset acquisition with former Pinnacle partners -- 285,000
Issuance of common stock related to the Second Tranche of restricted
stock performance plan -- 7,528,778
Change in fair market value of stock issued in connection with Second
Tranche of restricted stock performance plan -- 4,987,665
Rescission of Second Tranche of restricted stock performance plan -- 2,159,946
Change in fair market value of stock issued in connection with First
Tranche of restricted stock performance plan -- 3,740,872
Beneficial conversion related to Softbank note payable 975,000 --
Accrual of Series A and B Preferred Stock dividends 157,500 --
Earnings per Share
The Company calculates earnings per share in accordance with Statement of
Financial Accounting Standards No. 128, EARNINGS PER SHARE ("SFAS No. 128"). In
accordance with SFAS No. 128, basic earnings per share is computed using the
weighted average number of shares of common stock outstanding and diluted
earnings per share is computed using the weighted average number of shares of
common stock and the dilutive effect of options and warrants outstanding, using
the "treasury stock" method.
F-16
vFinance, Inc.
Notes to Consolidated Financial Statements (continued)
December 31, 2001
3. ACQUISITIONS
As previously noted, on January 4, 2001, the Company closed on the merger of
Colonial, acquiring all of its outstanding capital stock. The acquisition was
accounted for under the purchase method of accounting. The results of operations
of Colonial for the period January 1, 2001 through January 3, 2001 were not
material. The purchase price consisted of the issuance of 5,750,000 common
shares of stock, the issuance of 625,000 stock options, the conversion of
490,000 stock options, the issuance of 585,000 common stock purchase warrants
and the issuance of 172,500 preferred shares of stock for total consideration of
approximately $7,400,000. The purchase price was allocated to the assets
acquired and the liabilities assumed with the excess of such purchase price of
approximately $8,100,000 allocated to goodwill, which was being amortized over
15 years. (See Note 4.) The Colonial merger shares were issued on a pro rata
basis to shareholders based on their relative ownership of Colonial common
stock, except for twenty percent (20%) of the 5,750,000 common shares of stock,
totaling approximately 1,150,000 shares, which were withheld from the Majority
Shareholders and placed in escrow for a term of six months subject to offset by
the Company to cover losses or damages to the Company due to breaches by the
Majority Shareholders of their representations, warranties or covenants
contained in the Colonial merger agreement. The Company has made a claim of
offset seeking a return of all Colonial merger shares held in escrow to cover
certain losses or damages to the Company due to breaches by the Majority
Shareholders of their representations, warranties or covenants contained in the
Colonial merger agreement. Such claims have not been resolved and the shares
remain in escrow. See Note 10.
As previously noted, on January 4, 2001, the Company closed on the merger of NWH
acquiring all of its outstanding capital stock. The acquisition was accounted
for under the purchase method of accounting. The results of operations of NWH
for the period from January 1, 2001 through January 3, 2001, were not material.
The purchase price consisted of the issuance of 1,700,000 common shares of
stock, the issuance of 575,000 stock options and cash of $1,000,000 for total
consideration of $2,714,750. The purchase price was allocated to the assets
acquired and the liabilities assumed with the excess of such purchase price of
approximately $1,300,000 allocated to goodwill, which was being amortized over
15 years. (See Note 4.)
As previously noted on August 20, 2001, the Company closed on the acquisition of
all of the membership interests of Critical for total consideration of
approximately $325,000 and the results of operations of Critical are included in
the consolidated results of operations from August 20, 2001. The 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.
F-17
vFinance, Inc.
Notes to Consolidated Financial Statements (continued)
December 31, 2001
3. ACQUISITIONS (CONTINUED)
The results of operations of Colonial and NWH are included in the Company's
consolidated results of operations for the year ended December 31, 2001 from
their respective acquisition dates (January 4, 2001), accordingly, no pro forma
results of operations are presented for the year ended December 31, 2001 as the
Company's consolidated results of operations include substantially all of each
company's actual results.
The following unaudited pro-forma condensed financial information reflects the
results of operations and assets of the Company, Colonial and NWH as if the
transactions had taken place on January 1, 2000, but does not purport to be
indicative of the consolidated results of operations or financial position of
the combined entities if the transactions had been consummated on January 1,
2000.
Year ended
December 31, 2000
-----------------
Revenues $28,163,609
Net loss (8,267,009)
Loss per share (0.42)
Total assets 12,927,733
4. IMPAIRMENT OF GOODWILL
In connection with the aforementioned mergers and acquisition, the Company
recognized goodwill as follows: First Level, approximately $1,300,000; Colonial,
approximately $8,100,000; and Critical, approximately $270,000. See Note 3
above.
Management determined that, as of December 31, 2001, a write-down of the
goodwill related to the NWH acquisition was necessary as the Company's
projections of the future operating results of First Level indicated impairment.
Based on such projections and other analysis the Company took an impairment
charge aggregating $876,000 related to NWH goodwill. Goodwill remaining as of
December 31, 2001 totaled $420,000.
F-18
vFinance, Inc.
Notes to Consolidated Financial Statements (continued)
December 31, 2001
4. IMPAIRMENT OF GOODWILL (CONTINUED)
Management determined that, as of December 31, 2001, a write-down of the
goodwill related to the Colonial acquisition was necessary as the Company's
projections of future operating results indicated impairment. Further, as the
Company has closed the operations formerly associated with Colonial and
withdrawn its broker license, there does not appear to be a significant
opportunity for any future operations. Therefore, the Company wrote off the
entire remaining unamortized purchase goodwill of approximately $7,400,000 which
is reflected in the Company's brokerage and trading business segment.
Management determined that, as of December 31, 2001, a write-down of the
goodwill related to the 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.
5. RELATED PARTY TRANSACTIONS
On November 8, 1999, the Company entered into three year employment agreements
(the "Agreements") with the Company's Chief Executive Officer and Vice Chairman,
who is the beneficial owner of 16.1% and 21% of the total outstanding common
shares of the Company at December 31, 2001 and 2000, respectively, and the
Company's Chief Operating Officer and Chairman, who is the beneficial owner of
16.1% and 21% of the total outstanding common shares of the Company at December
31, 2001 and 2000, respectively (collectively the "Primary Shareholders"). Under
the terms of the Agreements, which are renewable as directed by a majority vote
of the board of directors, each individual shall receive (i) an initial base
salary of $150,000 per annum for the first year with a 5% increase per annum
beginning one year from the date of the Agreements (the Company's board of
directors may increase such salaries at their discretion); (ii) discretionary
bonuses as determined by the Company's board of directors primarily based on
each individuals performance; and (iii) incentive compensation paid monthly
equal to Available Cash, as defined, primarily based on performance of the
Company and its respective subsidiaries. The Agreements also contain provisions
related to severance and change of control upon the occurrence of such events.
Such Agreements were amended on January 5, 2001 and the salary was increased to
$208,000 per annum. The Company made payments to each of the Primary
Shareholders aggregating $326,789 and $282,000 for the years ended December 31,
2001 and 2000, respectively, in connection with these Agreements.
F-19
vFinance, Inc.
Notes to Consolidated Financial Statements (continued)
December 31, 2001
5. RELATED PARTY TRANSACTIONS (CONTINUED)
On June 1, 2000, the Company granted to each of its Primary Shareholders,
500,000 stock options in connection with certain stock option agreements that
were part of their respective employment agreements. The stock options were
granted at an exercise price that exceeded the stock price on the date of
issuance and were exercisable over a three-year period, beginning on June 1,
2000. On January 1, 2001, the Primary Shareholders forfeited the 1,000,000
options by signing an Options Cancellation Agreement with the Company. No
compensation expense was recognized related to these stock options in the year
ended December 31, 2000, as the grant price exceeded the quoted market price on
the date of the grant.
On January 5, 2001 the Company modified the Agreements with its Primary
Shareholders giving them the right to receive a grant of 500,000 stock options
to each at an exercise price that exceeded the stock price on the date of the
modification. These modified grants would not have taken effect until certain
conditions, including continued employment, were met. These grants were
cancelled before any of the conditions were met.
On July 6, 2001, the Company modified the Agreements with its Primary
Shareholders granting 500,000 stock options to each at an exercise price that
exceeded the stock price on the date of issuance and were exercisable over a
five-year period, beginning on July 6, 2001. No compensation expense was
recognized related to these stock options in the year ended December 31, 2001,
as the grant price exceeded the quoted market price on the date of the grant.
On October 6, 2000, the Company entered into promissory notes (the "Notes") with
the three individuals subject to the Employment Agreements, as defined in Note
7. The Notes were for approximately $150,000 and bore interest at a rate of 7%.
The Notes, including interest, were due and payable within 30 days of the
registration of common shares owned by the individuals and were secured by such
common shares. The Notes were repaid in full with the proceeds from the sale of
the commons shares in November 2001.
On December 18, 2001, Critical Infrastructure Fund (BVI), LP, purchased 877,193
shares of the Company's common stock for $250,000 and received registration
rights incidental to a Company registration of securities with the SEC with
respect to these shares. Critical Infrastructure Fund (BVI), LP, subsequent to
year end sold some of these shares to individual officers of the Company,
including its Chief Executive Officer and Vice-Chairman, at $0.285 per share,
the price at which the shares were sold.
F-20
vFinance, Inc.
Notes to Consolidated Financial Statements (continued)
December 31, 2001
6. INCOME TAXES
Deferred income taxes reflect the net income tax effect of temporary differences
between the carrying amounts of the assets and liabilities for financial
reporting purposes and amounts used for income taxes. The Company's deferred
income tax assets and liabilities consist of the following:
Year Ended December 31,
---------------------------------
2001 2000
----------- -----------
Net operating loss carryforwards $ 3,295,515 $ 121,665
Deferred compensation amortization 639,283 494,440
Unrealized losses 546,014 51,357
Goodwill impairment 3,027,949 --
Other 465,248 --
Allowance for doubtful accounts 47,150 8,227
----------- -----------
Gross deferred income tax assets 8,021,159 675,689
Depreciation (64,560) (26,201)
Other -- (41,483)
----------- -----------
Gross deferred income tax liabilities (64,560) (67,684)
Deferred income tax asset valuation allowance (7,956,599) (608,005)
----------- -----------
Net deferred income tax assets $ -- $ --
=========== ===========
Net operating loss carryforwards totaled $8,577,672 at December 31, 2001. The
net operating loss carryforwards will begin to expire in the year 2021 if not
utilized. After consideration of all the evidence, both positive and negative,
management has recorded a valuation allowance at December 31, 2001 and 2000, due
to the uncertainty of realizing the deferred income tax assets.
F-21
vFinance, Inc.
Notes to Consolidated Financial Statements (continued)
December 31, 2001
7. EMPLOYMENT AGREEMENTS
On December 17, 1999, the Company entered into employment agreements with three
individuals (the "Employment Agreements"). In connection with the Employment
Agreements the Company issued 773,500 shares of its common stock (the "First
Tranche Shares"). However, the First Tranche Shares were subject to divestment
and return to the Company in the event and to the extent that certain
performance criteria and/or other employment conditions were not met. The First
Tranche Shares issued to employees were held in escrow until (i) cessation of
the employee's employment with the Company prior to December 31, 2000, in which
event all of the shares would be immediately returnable to the Company or (ii)
the employee failed to meet certain cash revenue goals by February 15, 2001, as
defined by the Employment Agreements, in which event such shares, or a
percentage of such shares, would be immediately returnable to the Company, based
on a formula contained in each Employment Agreement.
On August 18, 2000, the Company entered into amended and restated employment
agreements (the "Amended Employment Agreements") with the same three
individuals. The Amended Employment Agreements (i) modified the performance
criteria and employment conditions under the Employment Agreements to provide,
among other things, that the First Tranche Shares issued to the employees be
held in escrow until (a) cessation of the employee's employment with the Company
prior to October 6, 2000, in which event all of the First Tranche Shares would
be immediately returnable to the Company or (b) the employee failed to meet
certain cash revenue goals by February 15, 2001, as defined by the Employment
Agreements, in which event the First Tranche Shares, or a percentage of such
shares, would be immediately returnable to the Company, based on a formula
contained in each Employment Agreement, and (ii) provided for the Company to
issue an additional 3,011,111 shares of its common stock, which shares are
subject to divestment and similar performance criteria (the "Second Tranche
Shares"). The Second Tranche Shares issued to employees were split into two
equal pieces and were being held in escrow until (i) cessation of the employees
employment with the Company prior to December 31, 2001 (for one-half of the
Second Tranche Shares) and December 31, 2002 (for one-half of the Second Tranche
Shares), respectively, in which event all or a portion of such shares,
respectively, would be immediately returnable to the Company or (ii) the
employee fails to meet certain cash revenue goals by September 30, 2001 (for
one-half of the Second Tranche Shares) and September 30, 2002 (for one-half of
the Second Tranche Shares) respectively, as defined by the Amended Employment
Agreements, in which event such shares, or a percentage of such shares,
respectively, would be immediately returnable to the Company, based on a formula
contained in each Amended Employment Agreement.
F-22
vFinance, Inc.
Notes to Consolidated Financial Statements (continued)
December 31, 2001
7. EMPLOYMENT AGREEMENTS (CONTINUED)
The Amended Employment Agreements were accounted for as restricted stock
performance plans. In a restricted stock performance plan, the nature of the
restriction results in the compensation cost being measured at the date when the
number of shares to be awarded is known. Consequently, the measurement of
compensation at the date the performance criteria are met, measures the ultimate
compensation to be recognized by the Company. These employment agreements were
variable plans, therefore, interim estimates of compensation were required based
on the fair market value of the common stock as of the end of the reporting
period and the extent or degree of compliance with the performance criteria.
Accordingly, in connection with the First Tranche Shares, the Company initially
recorded deferred compensation aggregating $3,828,825, based on the fair market
value of the Company's common stock when the shares were issued. Based on the
change in the fair market value of the Company's stock and the attainment of the
required performance criteria, the Company recognized compensation expense of
$675,813 related to the First Tranche Shares during the year ended December 31,
2000. On November 10, 2000, the Company released the First Tranche Shares to the
individuals as they had met the required performance criteria.
In connection with the Second Tranche Shares, on August 18, 2000, the Company
initially recorded deferred compensation aggregating $7,528,778, based on the
fair market value of the Company's common stock when the shares were issued.
Compensation expense for the Second Tranche Shares of $381,167 was recognized
through December 23, 2000. On December 23, 2000, the Company further amended and
restated the Amended Employment Agreements to reduce the income tax consequences
for the employees. These amendments superseded the August 18, 2000 Amended
Employment Agreements, canceling and rescinding the Second Tranche Shares under
the restricted stock performance plan. Upon cancellation of the Second Tranche
Shares, the Company recorded the remaining unamortized deferred compensation of
$2,159,946 as treasury stock.
The Amended Employment Agreements provided for the Company to grant an
additional 3,011,111 stock options to the individuals on January 23, 2001 that
would have begun vesting on June 30, 2001. The employees resigned in June 2001
before any options had vested, and such options were forfeited.
F-23
vFinance, Inc.
Notes to Consolidated Financial Statements (continued)
December 31, 2001
8. SHAREHOLDER'S EQUITY
On January 3, 2000, the Company entered into an asset purchase agreement and
employment agreements with two individuals, who were former partners in Pinnacle
Capital Group, L.C. (now known as Union Atlantic Capital, L.C., a wholly owned
subsidiary), for a term of three years. The assets purchased were furniture and
fixtures owned individually by the key personnel. The consideration consisted of
stock purchase warrants giving the two employees rights to purchase 190,000
shares of the Company's common stock at an exercise price of $2.50 per share.
The warrants are exercisable for a period of five years, at the discretion of
the holders and had a fair value, as determined by the Black Scholes model of
$285,000; the Company allocated $280,000 to deferred compensation and $5,000 to
furniture acquired. This amount was being amortized over the term of the
respective employment agreements; however, during the year ended December 31,
2000, the employees were separated from the Company, and accordingly, the
deferred compensation expense relating to the warrants was fully amortized. The
employment agreements also granted each individual 200,000 stock options, which
were forfeited in connection with their separations.
In March 2000, the Company increased the number of authorized common shares from
20,000,000 to 25,000,000. In addition, the Company established Preferred Stock,
authorizing 2,500,000 shares, subject to the rights, preferences and privileges
as determined by the Board of Directors. Further, on December 28, 2001, the
Company increased the number of authorized common shares from 25,000,000 to
75,000,000.
As part of the Colonial transaction discussed in Note 1, the Company was
authorized to issue up to 2,500,000 shares of preferred stock, of which (i)
122,500 shares were designated as Series A Convertible Preferred Stock, par
value $0.01 per share, all of which are currently issued and outstanding, and
(ii) 50,000 shares were designated as Series B Convertible Preferred Stock, par
value $0.01 per share, all of which are currently issued and outstanding. All of
the Series A and Series B shares were delivered to Colonial shareholders. The
Series A and Series B Preferred Stock accrues annual dividends of 10% and 7%,
respectively, on a quarterly basis. Accrued but unpaid dividends earn no
interest. During the year ended December 31, 2001, $157,500 of such dividends
were accrued.
Series A and B Preferred Stock have the following rights, preferences,
privileges and restrictions:
LIQUIDATION PREFERENCE. In the event of any liquidation or winding up of the
Company, the holders of the Series A and B Preferred Stock will be entitled to
receive, in preference to the holders of Common Stock, an amount equal to $10
per share, plus unpaid dividends, if any. A consolidation or merger shall be
deemed a liquidation or winding up for purposes of the liquidation preference.
F-24
vFinance, Inc.
Notes to Consolidated Financial Statements (continued)
December 31, 2001
8. SHAREHOLDER'S EQUITY (CONTINUED)
DIVIDEND RIGHTS. The holders of Series A and B Preferred Stock will be entitled
to receive cumulative dividends in preference to holders of Common Stock at the
rate of $1 and $0.70 per share annum (10% and 7% of the liquidation preference
price) for Series A and B, respectively, whether or not earned or declared.
CONVERSION PRICE ADJUSTMENTS. The conversion price of the Series A and B
Preferred Stock will be subject to adjustments to prevent dilution, on the
weighted average basis, in the event the Company issues additional shares, at a
purchase price of $2.60 per share.
VOTING RIGHTS. The holders of Series A and B Preferred Stock have no voting
rights.
REDEMPTION RIGHTS. The Company, at its option, may redeem, in whole or in part,
the shares of Series A and B Preferred Stock outstanding, at any time, upon
notice given, at a redemption price of $11 and $10 per share, respectively. If
the Company receives proceeds from a single sale of its equity securities of at
least $500,000, the holders of Series A and B Preferred Stock may require the
Company to redeem all, but not less than all, the Series B Preferred Stock at a
redemption price equal to $10 per share.
In 2000, the Company closed on a $7 million round of private financing (the
"Private Placement"), $3,500,000 of which closed on March 31, 2000 and
$3,500,000 of which closed on August 17, 2000 (collectively the "Closing
Dates"), before cash registration and issuance costs of $1,071,342. As part of
the Private Placement, on the Closing Dates, the Company issued (i) to certain
banks and institutional investors 2,333,334 shares of the Company's common stock
and 1,866,667 stock purchase warrants at exercise prices ranging from $3.00-
$6.00 per share (ii) to other parties a total of 229,999 warrants, of which
83,333 warrants were issued to agents, 46,666 warrants were issued to employees
for placing the financing and 100,000 warrants were issued to a company for a
finder's fee. The warrants have exercise prices ranging from $2.50 to $7.20 and
are exercisable on the earlier of a) one year from the effective date of the
registration statement filed by the Company covering the securities issued and
to be issued to the investors or b) three or four years, as the case may be, as
defined in the agreements from the closing date. In conjunction with the 46,666
warrants, which were issued with prices below fair value, the Company recognized
$49,583 of compensation expense in the year ended December 31, 2000.
The warrants issued to non-employees in conjunction with the Private Placement
were for services related to the Private Placement and have a fair value of
$361,333 as determined by the Black Scholes valuation model. Such amounts have
been recorded as additional issuance costs.
F-25
vFinance, Inc.
Notes to Consolidated Financial Statements (continued)
December 31, 2001
8. SHAREHOLDER'S EQUITY (CONTINUED)
On May 2, 2000, the Company granted 20,000 options to a consultant. The stock
options were granted as consideration for future services at an exercise price
of $5.00 and are exercisable over a four-year period, beginning May 2, 2001. The
fair value of the options granted was estimated to be $79,200 at the date of
grant using the Black Scholes valuation model and will be ratably expensed over
the term services are to be provided. During 2001 the Company amortized $19,800.
On August 18, 2000, the Company entered into Amended Employment Agreements (see
Note 6 above) with three individuals. The Amended Employment Agreements provided
for the Company to grant an additional 400,000 stock options to individuals. The
stock options were granted at an exercise price of $3.15 and were exercisable
over a four-year period, beginning on August 18, 2001 and were canceled upon
their separation from the Company.
On August 30, 2001 and on October 16, 2001, the Company granted 673,500 stock
purchase warrants to certain individuals and 878,427 stock options to employees
in conjunction with the individuals purchase of common stock of the Company from
existing shareholders. One stock option was granted for each share of common
stock purchased by the individuals. The stock options were granted at above fair
market value an exercise price of $0.35 and vested on the date of grant.
On October 16, 2001, the Company granted 120,000 options to an individual in
conjunction for serving on the Board of Directors for fiscal 2002. The stock
options were granted as consideration for future services at an exercise price
of $0.35 and are exercisable on October 16, 2004. The fair value of the options
granted was estimated to be $24,000 at the date of grant using the Black Scholes
valuation model and will be ratably expensed over the term services are to be
provided. The remaining fair value of the shares is stated as deferred
compensation at December 31, 2001.
F-26
vFinance, Inc.
Notes to Consolidated Financial Statements (continued)
December 31, 2001
8. SHAREHOLDER'S EQUITY (CONTINUED)
On November 28, 2001, the Company entered into a Note Purchase Agreement, as
amended by subsequent letter agreements dated November 30, 2001, December 14,
2001, and December 28, 2001, February 13, 2002 and March 4, 2002 (collectively,
the "Note Purchase Agreement"), with SBI Investments (USA) Inc. ("SBI"). Under
the terms of the Note Purchase Agreement, SBI may provide a subordinated loan to
the Company of up to $1,500,000 in the form of a 48-month non-interest bearing,
convertible note. As of December 31, 2001, the Company had received $975,000
under the Note Purchase Agreement and may receive, at SBI's option alone, an
additional $525,000 no later than June 30, 2002. The note, 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
extend 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 and APB
21, the Company recorded a beneficial conversion feature and an imputed interest
factor related to the Note 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 and imputed interest will be accreted ratably over the term of the loan
as additional interest expense. The above conversion reduced the monthly
amortization by $4,329 to $15,983.
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.
F-27
vFinance, Inc.
Notes to Consolidated Financial Statements (continued)
December 31, 2001
8. SHAREHOLDER'S EQUITY (CONTINUED)
The Company has elected to follow Accounting Principle Board Opinion No. 25,
Accounting for Stock Issued to Employees ("APB 25"), and related interpretations
in accounting for its employee stock options because the alternative fair value
accounting provided under FASB Statement No. 123, ACCOUNTING FOR STOCK-BASED
COMPENSATION, ("SFAS 123") requires the use of option valuation models that were
not developed for use in valuing employee stock options. As permitted, the
Company adopted the disclosure alternative of SFAS 123. Under APB 25, when the
exercise price of the Company's stock options equals or exceeds the fair value
of the underlying stock on the date of grant, no compensation expense is
recorded.
A summary of the stock option activity for the years ended December 31, 2000 and
2001 is as follows:
Weighted
Average
Exercise Number of Exercise Price
Price Shares Per Option
--------- ---------- ---------------
Outstanding Options at December 31, 1999 $4.19 1,065,000 $2.50 - $6.00
Granted 4.69 2,615,000 1.00 - 7.50
Forfeited 6.00 (520,000) 4.50 - 7.50
-----------
Outstanding Options at December 31, 2000 3,160,000
Granted 0.79 13,441,567 0.35 - 2.25
Forfeited 2.13 (6,914,517) 0.66 - 5.85
----------
Outstanding Options at December 31, 2001 0.98 9,687,050 0.35 - 6.00
==========
F-28
vFinance, Inc.
Notes to Consolidated Financial Statements (continued)
December 31, 2001
8. SHAREHOLDER'S EQUITY (CONTINUED)
The following table summarizes information concerning stock options outstanding
at December 31, 2001.
Weighted
Average
Exercise Number
Price Outstanding
-------- ----------
$0.35 3,508,427
0.63 3,920,000
1.00 822,000
2.25 471,623
3.00 210,000
3.25 100,000
4.00 220,000
4.13 30,000
4.25 75,000
4.50 5,000
5.00 260,000
5.63 50,000
6.00 15,000
---------
9,687,050
=========
A summary of the warrant activity for the years ended December 31, 2000 and 2001
is as follows:
Weighted
Average
Exercise Number of Exercise Price
Price Shares Per Option
-------- ---------- --------------
Outstanding Warrants at December 31, 1999 $2.50 10,000 $2.50
Granted 5.84 2,286,666 2.50 - 7.20
-----------
Outstanding Warrants at December 31, 2000 2,296,666
Granted 0.97 1,978,500 0.35 - 2.25
Forfeited 5.81 (1,166,667) 3.00 - 6.00
-----------
Outstanding Warrants at December 31, 2001 2.73 3,108,499 0.35 - 7.20
===========
F-29
vFinance, Inc.
Notes to Consolidated Financial Statements (continued)
December 31, 2001
8. SHAREHOLDER'S EQUITY (CONTINUED)
The following table summarizes information concerning warrants outstanding at
December 31, 2001.
Weighted
Average
Exercise Number
Price Outstanding
-------- -----------
0.35 993,500
0.63 400,000
2.25 585,000
2.50 300,000
6.00 129,999
7.20 700,000
---------
3,108,499
=========
The weighted average grant-date fair value of warrants granted during the year
equaled $2.73 and $5.84 for the years ended December 31, 2001 and 2000,
respectively. The weighted average grant-date fair value of options granted
during the year equaled $0.98 and $4.69 for the years ended December 31, 2001
and 2000, respectively. For purposes of pro forma disclosures, the estimated
fair value of the options and warrants is amortized to expense over their
respective vesting periods. The weighted average remaining contractual life for
warrants outstanding at December 31, 2001 and 2000, is 3.62 years and 3.50 years
respectively. The weighted average remaining contractual life for options
outstanding at December 31, 2001 and 2000, is 4.33 years and 4.50 years
respectively.
Options granted to employees are exercisable according to the terms of each
agreement, ranging from one month to four years. At December 31, 2001 and 2000,
3,452,760 and 1,168,000 options outstanding were exercisable with weighted
average exercise prices of $1.49 and $3.51, respectively. At December 31, 2001
and 2000, 12,795,549 and 5,456,666 total shares of the Company's common stock
are reserved for issuance related to stock options and stock purchase warrants
which were outstanding at December 31, 2001 and 2000, respectively.
F-30
vFinance, Inc.
Notes to Consolidated Financial Statements (continued)
December 31, 2001
8. SHAREHOLDER'S EQUITY (CONTINUED)
Pro forma information regarding net loss is required by SFAS 123, which also
requires that the information be determined as if the Company has accounted for
its employee stock options under the fair value method. The fair value for
options and warrants granted was estimated at the date of grant using the Black
Scholes option pricing model with the following weighted-average assumptions:
for 2001 risk-free interest rates of 3.53%; no dividend yields; volatility
factor of the expected market price of the Company's common stock of 1.610 for
options and warrants and an expected life of the options and warrants of 4-5
years; for 2000: risk-free interest rates ranging from 5.52% to 6.57%; no
dividend yields; volatility factor of the expected market price of the Company's
common stock ranging from 0.771 to 1.92; and an expected life of the options and
warrants of 4-5 years. The Company's pro forma net loss for the years ended
December 31, 2001 and 2000 was $ 17,702,620 and $7,611,842, respectively. The
Company's pro forma basic and diluted net loss income per share for the years
ended December 31, 2001 and 2000 was $0.89 and $0.75, respectively. The impact
of the Company's pro-forma net loss and loss per share of the SFAS 123 pro forma
requirements are not likely to be representative of future pro forma results.
The Company recorded deferred compensation of $24,000 and $408,783 during the
years ended December 31, 2001 and 2000 respectively in connection with the
grants of employee stock options with exercise prices lower than the deemed fair
value per share of the Company's common stock on the date of the grant. Such
amounts are being amortized over the vesting period, and accordingly, $3,000 and
$116,250 of compensation expense was recognized in the years ended December 31,
2001 and 2000 relative to such options.
F-31
vFinance, Inc.
Notes to Consolidated Financial Statements (continued)
December 31, 2001
9. DEBT
Lines of credit
On April 5, 2001 Fleet National Bank ("Fleet") filed a complaint against Michael
Golden ("Golden"), a former controlling shareholder of Colonial, in the Superior
Court of New Jersey in the amount of $315,903 for Lines of Credit issued prior
to Company's January 2001 acquisition of Colonial. In October 2001, the Superior
Court entered a summary judgment in favor of Fleet and the line of credit became
due immediately. The period for appeal of the summary judgment expired on
December 10, 2001. The Company has established reserves for this judgment due to
the uncertainty surrounding the financial position of Golden.
Subordinated promissory notes
Prior to its acquisition by the Company, Colonial entered into a $650,000 bridge
loan with three investors. The notes became due in November and December 2001.
Interest for these loans is being accrued at the stated rate, 10 percent.
Notes payable
Prior to its acquisition by the Company, Colonial entered into a loan agreement
with one of its principal shareholders. Its obligation under this loan, if any,
is subject to litigation. The Company cannot establish when or if it will be
required to repay this loan, carried at $500,000, that is the obligation of its
inactive Colonial subsidiary. Interest for this loan is being accrued at the
Company's weighted average interest rate, 10 percent.
On April 5, 2001, Fleet filed a complaint against First Colonial Securities,
Inc., a wholly owned subsidiary of Colonial in the Superior Court of New Jersey
in the amount of $210,928 for a letter of credit issued prior to the January
2001 acquisition of Colonial. In October 2001, the Superior Court entered a
summary judgment in favor of Fleet and the letter of credit became due
immediately. The period for appeal of the summary judgment expired on December
10, 2001. The Company has fully accrued for and established reserves for this
judgment.
F-32
vFinance, Inc.
Notes to Consolidated Financial Statements (continued)
December 31, 2001
10. COMMITMENTS AND CONTINGENCIES
The Company leases office space under the terms of operating leases. The
following chart shows lease obligations including rental of real property and
equipment.
Year Amount
---- ----------
2002 $1,212,000
2003 1,129,000
2004 957,000
2005 917,000
2006 823,000
Thereafter 552,000
----------
Total $5,590,000
==========
Total rent expense under operating leases, including space rental, totaled
approximately $1,433,057 and $79,646 for the years ended December 31, 2001 and
2000. The Company has total non-cancelable leases of $2,446,177, included above,
of which the Company has entered into sublease agreements with payments
aggregating $117,048 for the year ending December 31, 2002 and $48,000 in each
of the years ending December 31, 2003 through 2006.
In lieu of a security deposit, the Company has obtained a letter-of-credit from
a commercial bank which is collateralized by a restricted cash deposit.
From time to time the Company is a party to various lawsuits that have arisen in
the ordinary course of business. The amounts asserted in these matters are
material to the Company's financial statements. While any litigation contains an
element of uncertainty and although it is possible that losses exceeding amounts
already recorded may be incurred upon ultimate resolution of these existing
legal proceedings, management believes that such losses, if any, will not have a
material adverse effect on our the results of operations or financial position.
However, unfavorable resolution of each matter individually or in the aggregate
could affect the consolidated results of operations for the quarterly and annual
periods in which they are resolved.
F-33
vFinance, Inc.
Notes to Consolidated Financial Statements (continued)
December 31, 2001
10. COMMITMENTS AND CONTINGENCIES (CONTINUED)
On or about May 17, 2001, Golden filed an initial complaint against the Company
in the Circuit Court of the 17th Judicial Circuit in and for Broward County,
Florida, alleging that the Company breached its January 5, 2001 employment
agreement with Golden, which was entered into as a result of the merger between
Colonial and the Company. Mr. Golden claims that he terminated the agreement for
"good reason," as defined in the agreement, and that the Company failed to pay
him severance payments and other benefits as well as accrued commissions and
un-reimbursed expenses. In the initial complaint, Golden sought monetary damages
from the Company in excess of $50,000 including interest, attorney's fees and
costs.
On or about July 18, 2001, the Company filed an answer and affirmative defenses
and counterclaims with the Circuit Court against Golden and Ben Lichtenberg
("Lichtenberg"), Golden's partner in Colonial, denying all material allegations
in the complaint, affirmatively alleging that Golden is not entitled to any
severance payments because he was terminated for cause for insubordination,
failure to follow directives of the board of directors and for breaches of
fiduciary duty. The Company also alleged that both Golden and Lichtenberg
violated the merger agreement between Colonial and the Company by breaching
certain of the representations and warranties set forth in the merger agreement
by, among other things, failing to advise the Company of certain loan agreement
defaults, improperly withdrawing approximately $400,000 of capital from
Colonial, failing to deliver a closing balance sheet and failing to disclose
significant liabilities of Colonial. The Company believes the activities of
Golden and Lichtenberg constituted violations of Florida's Securities Investor
Protection Act, common law fraud, breach of fiduciary duty, breach of contract,
intentional interference with advantageous business relationships, and breach of
the implied covenant of good faith and dealing, and the Company is seeking
indemnification under the merger agreement and additional monetary damages
against Golden and Lichtenberg in excess of $15,000.
In response to the Company's answer, affirmative defenses and counterclaims, on
or about September 1, 2001, Golden filed an amended complaint with the Court
against the Company and its Primary Shareholders. In the amended complaint,
Golden alleges the Primary Shareholders made various false representations that
induced Golden to enter into the merger agreement and his employment agreement.
Golden is seeking monetary damages from the Company and the Primary Shareholders
in excess of $4.6 million.
F-34
vFinance, Inc.
Notes to Consolidated Financial Statements (continued)
December 31, 2001
10. COMMITMENTS AND CONTINGENCIES (CONTINUED)
Lichtenberg filed an answer, affirmative defenses and counterclaims with the
Court in response to the Company's filing with the Court on July 13, 2001. In
addition to denying all material allegations in the Company's July 13, 2001
counterclaims against him, Lichtenberg alleges that: (a) the Company breached
its employment agreement with him, (b) the Chief Executive Officer and
Vice-Chariman and the Company made various false representations that induced
Lichtenberg to enter into the merger agreement and (c) the Company materially
breached the Colonial merger agreement. Lichtenberg is seeking delivery from the
Company of 414,825 shares of the Company's common stock and monetary damages of
at least $488,000 from the Chief Executive Officer and Vice-Chariman and the
Company, jointly and severally. On November 20, 2001, the Chief Executive
Officer and Vice-Chariman and the Company filed an answer and affirmative
defenses to these allegations denying Lichtenberg's allegations. The parties are
proceeding with discovery and the matter has been placed on the Circuit Court's
September 2002 trial docket. As the Company intends to vigorously defend itself
and believes it has meritorious defenses against these claims, no amounts have
been accrued.
First Colonial Securities Group, Inc. ("First Colonial") was subject to
supervision and regulation by the NASD, the SEC and various state securities
commissions. As part of this regulatory oversight, First Colonial was subject to
periodic examination and inspections by these authorities. First Colonial was
advised that as a result of an examination performed by the Philadelphia office
of the NASD for the years 1996 and 1997, the NASD identified several possible
material deficiencies. The NASD and the Company settled the matter in February
2002 with the Company paying a $75,000 fine. Such fine was accrued in accounts
payable at December 31, 2001.
On May 15, 2001, Louis D'Alessio filed a claim with the NASD against First
Colonial and one of its employees. His claim alleges compensatory damages in an
amount between $100,000 and $500,000 plus unspecified punitive damages. He
alleges unfair business practices, violation of the federal securities act,
violation of state securities statutes and common law fraud. The Company
believes that the claim is without merit and is vigorously defending itself;
however, the Company anticipates that the outcome will result in settlement.
Thus, $15,000, the Company's estimate of the amount of the settlement , is
accrued as of December 31, 2001.
F-35
vFinance, Inc.
Notes to Consolidated Financial Statements (continued)
December 31, 2001
10. COMMITMENTS AND CONTINGENCIES (CONTINUED)
On January 22, 2001, Josephine and Frank Oliveri filed a claim with the NASD
against First Colonial and one of its employees. Their claim alleges
compensatory damages of $192,287 plus interest and punitive damages of $100,000.
They allege unsuitable investments, unauthorized trading, excessive trading and
lack of supervision. The Company believes that the claim is without merit and is
vigorously defending itself; however, the Company anticipates that the outcome
will result in settlement. Thus, $25,000, the Company's estimate of the amount
of the ultimate settlement, is accrued as of December 31, 2001.
On October 3, 2001, Sterling Financial Investment Group filed a claim with the
NASD against the Company and several of its employees. Their claim alleges
compensatory damages and punitive damages to not exceed the sum of $500,000.
They alleged the Company offered and made significant cash payments to certain
of Sterling's employees, to entice them to break their written employment
agreements with Sterling and work for the Company. The Company believes that the
claim is without merit and is vigorously defending itself; thus, no amounts have
been accrued.
On August 14, 2001, Rosario Catanzarite, Joann Catanzarite, Anna Piegaro, Brian
Catanzarite and Dina Catanzarite filed a claim with the NASD against First
Colonial and several of its employees. Their claim alleges compensatory damages
in the amount of $125,000 plus interest. They allege that the employees abused
their trust, processed unsuitable trades, coupled with abusive use of margin.
The Company believes that the claim is without merit and is vigorously defending
itself; however, the Company anticipates that the outcome will result in
settlement. Thus, $25,000, the Company's estimate of the amount of the ultimate
settlement, is accrued as of December 31, 2001.
The Company is also engaged in a number of other legal proceedings incidental to
the conduct of its business. Such claims aggregate a range of $684,000 to
$1,919,000. In the opinion of management, the Company is adequately insured
against the claims relating to such proceedings or has adequate resources to
settle such claims, and any ultimate liability arising out of such proceedings
will not have a material adverse effect on the financial condition or results of
operations of the Company. The Company believes that the claims are without
merit and is vigorously defending itself; however, the Company anticipates that
the outcome of certain claims will result in certain settlements Thus, $112,000,
the Company's estimate of the amount of the ultimate settlements, is accrued as
of December 31, 2001.
F-36
vFinance, Inc.
Notes to Consolidated Financial Statements (continued)
December 31, 2001
11. DEFINED CONTRIBUTION PLAN
The Company maintains a defined contribution savings plan in which substantially
all employees are eligible to participate. The Company may match up to 25% of
the employee's salary. The Company made no contributions to the plan for the
years ended December 31, 2001 and 2000, respectively.
12. SUBSEQUENT EVENT
On January 25, 2002, the Company entered into a Credit Agreement with UBS
Americas, Inc. ("UBS"). Under the terms of the Credit Agreement, UBS will
provide a revolving credit facility of $3,000,000 to the Company for the purpose
of supporting the expansion of its brokerage business or investments in
infrastructure to expand its operations or its broker-dealer operations. The
loan has a term of 4 years, must be repaid in full by January 2005 and bears
interest at LIBOR plus a LIBOR margin of 2%. Among other covenants, the Company
must maintain shareholder's equity of at least $7,000,000; however, the Credit
Agreement, as amended, specifically provides that the Company may exclude
goodwill write-offs aggregating approximately $8,500,000 from shareholder's
equity. The Company is in compliance with all covenants as of the filing date
and expects to remain in compliance throughout 2002. The Company must make early
repayments under the Credit Agreement if it acquires a new broker dealer firm,
enters a new line of business, or hires more than 4 brokers in a single or
related transaction. This repayment is made by adding $1.00 to the cost of each
incremental clearing transaction the Company makes through CSC, a wholly owned
subsidiary of Paine Webber which is a wholly owned subsidiary of UBS. The
Company has not, to date, entered into a transaction that would trigger any
repayment. The Company borrowed $1,500,000 under the credit facility in January
2002. The Credit Agreement does not provide for conversion of the debt into
equity securities.
F-37
vFINANCE, INC.
3,421,052 Shares of Common Stock
- - - - - - - - - - - - - -
PROSPECTUS
- - - - - - - - - - - - - -
____________, 2002
YOU MAY RELY ONLY ON THE INFORMATION CONTAINED IN THIS PROSPECTUS. WE HAVE NOT
AUTHORZIED ANYONE TO OPROVIDE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS
OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, AND, IF GIEN OR MADE, SUCH
INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED
BY VFINANCE, INC. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER OR SOLICITATION
TO ANY PERSON IN ANY JURISDICTION WHERE SUCHOFFER OR SOLICITATION WOULD BE
UNLAWFUL. NEITHER DELIVERY OF THIS PROSPECTUS NOR ANY SALE OF THE SHARES OF
COMMON STOCK HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION
THAT THERE HAS BEEN NO CHANGE IN THE AFFIRES OF VFINANCE, INC. SINCE THE DATE
HEREOF.
- - - - - - - - - - - - - - -
UNTIL _________, 2003 (___ DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL DEALERS
EFFECTING TRANSACTIONS IN THE REGISTERD SECURITIES, WEHTHER OR NOT PARTICIPATING
IN THIS DISTRIBUTION, MAY BE REQURIED TO DELIVER A PROSPECTUS. THIS IS IN
ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS
UNDERWRITERS.
22
PART II
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following is an estimate of the expenses that we expect to incur
specifically in connection with this registration. We will pay all of these
expenses, and the selling shareholder will not pay any of them.
SEC Registration fee $ 34.62
Printing and engraving expenses $ 1,000*
Legal fees and expenses $ 20,000*
Accounting fees and expenses $ 12,000*
Miscellaneous $ 1,965.38*
---------
Total $ 35,000
---------
* Estimate, and subject to future contingencies.
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 145 of the Delaware General Corporation Law provides that a corporation
may indemnify directors and officers as well as other employees and individuals
against expenses (including attorneys' fees), judgments, fines and amounts paid
in settlement actually and reasonably incurred by such person in connection with
any threatened, pending or completed actions, suits or proceedings in which such
person is made a party by reason of such person being or having been a director,
officer, employee or agent to the corporation. The Delaware General Corporation
Law provides that Section 145 is not exclusive of other rights to which those
seeking indemnification may be entitled under any bylaw, agreement, vote of
stockholders or disinterested directors or otherwise. Article XII of the Bylaws
of vFinance.com, Inc. (the "Company") provides for indemnification by the
Company of its directors, officers and employees.
Section 102(b)(7) of the Delaware General Corporation Law permits a
corporation to provide in its certificate of incorporation that a director of
the corporation shall not be personally liable to the corporation or its
stockholders for monetary damages for breach of fiduciary duty as a director,
except for liability (i) for any breach of the director's duty of loyalty to the
corporation or its stockholders, (ii) for acts or omissions not in good faith or
which involve intentional misconduct or a knowing violation of law, (iii) for
unlawful payments of dividends or unlawful stock repurchases, redemptions or
other distributions, or (iv) for any transaction from which the director derived
an improper personal benefit. The Company's Certificate of Incorporation
provides for such limitation of liability.
The Company has obtained directors and officers insurance providing
indemnification for certain of the Company's directors, officers and employees
for certain liabilities.
ITEM 16. EXHIBITS
The Exhibits shown in the attached Exhibit Index are either filed
herewith or incorporated herein by reference to such Exhibits filed with other
documents, as indicated in that Exhibit Index.
ITEM 17. UNDERTAKINGS.
The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made,
a post-effective amendment to this Registration Statement:
(i) To include any prospectus required by Section 10(a)(3) of
the Securities Act of 1933, as amended (the Securities Act");
23
(ii) To reflect in the prospectus any facts or events arising
after the effective date of this Registration Statement (or the most recent
post-effective amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth in this Registration
Statement. Notwithstanding the foregoing, any increase or decrease in the volume
of securities offered (if the total dollar value of securities offered would not
exceed that which was registered) and any derivation from the low or high end of
the estimated maximum offering range may be reflected in the form of prospectus
filed with the Commission pursuant to Rule 424(b) if, in the aggregate, the
changes in volume and price represent no more than 20 percent change in the
maximum aggregate offering price set forth in the "Calculation of Registration
Fee" table in the Registration Statement; and
(iii) To include any material information with respect to the
plan of distribution not previously disclosed in this Registration Statement or
any material change to such information in this Registration Statement;
provided, however, that paragraphs (1)(i) and (1)(ii) do not apply if the
information required to be included in a post-effective amendment by those
paragraphs is contained in periodic reports filed by the Company pursuant to
Section 13 or Section 15(d) of the Securities Exchange Act of 1934, as amended
(the "Exchange Act"), that are incorporated by reference in this Registration
Statement.
(2) That, for the purposes of determining any liability under the
Securities Act, each post-effective amendment that contains a form of prospectus
shall be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at the time shall be deemed
to be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the termination of
the offering.
The Company hereby undertakes that, for purposes of determining any
liability under the Securities Act, each filing of the Company's annual report
pursuant to Section 13(a) or 15(d) of the Exchange Act (and, where applicable,
each filing of an employee benefit plan's annual report pursuant to Section
15(d) of the Exchange Act) that is incorporated by reference in this
Registration Statement shall be deemed to be a new registration statement
relating to the securities offered therein and the offering of such securities
at the time shall be deemed to be the initial bona fide offering thereof.
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
Corporation pursuant to the indemnification provisions described herein, or
otherwise, the Company has been advised that in the opinion of the Securities
and Exchange Commission such indemnification is against public policy as
expressed in the Securities Act and is, therefore, unenforceable. In the event
that a claim for indemnification against such liabilities (other than the
payment by the Company of expenses incurred or paid by a director, officer or
controlling person of the Company in the successful defense of any action, suit
or proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Company will, unless in the
opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Securities
Act and will be governed by the final adjudication of such issue.
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to believe that it met all
the requirements for filing on Form S-2 and has duly caused this registration
statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Boca Raton, Florida, on November 19, 2002.
vFINANCE, INC.
By:/s/Leonard J. Sokolow
----------------------
Leonard J. Sokolow
President & CEO
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POWER OF ATTORNEY
Know all men by these presents, that each person whose signature appears below
constitutes and appoints Leonard J. Sokolow his true and lawful attorney-in-fact
and agent, with full power of substitution and re-substitution, for him and in
his place and stead, in any and all capacities, to sign any and all further
amendments to this Registration Statement and to file the same, with all
exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorney-in-fact and
agent full power and authority to do and perform each and every act and thing
requisite and necessary to be done in and about the premises, as fully to all
intents and purposes as he might or could do in person, hereby ratifying and
confirming all that said attorney-in-fact and agent, or his substitute or
substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this registration
statement has been signed by the following persons in the capacities and on the
dates indicated:
Person Capacity Date
------ -------- ----
/s/Leonard J. Sokolow Chief Executive Officer, President & November 19, 2002
------------------- Director (Principal Executive Officer)
Leonard J. Sokolow
/s/Timothy E. Mahoney Chief Operating Officer, November 19, 2002
------------------- Acting Principal Financial Officer,
Timothy E. Mahoney Acting Principal Accounting
Officer and Director
/s/Richard Campanella Secretary November 19, 2002
------------------
Richard Campanella
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vFINANCE, INC.
EXHIBIT INDEX
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).
26
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).
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).
27
10.10 Employment Agreement dated as of January 5, 2001, between the Company
and Leonard J. Sokolow (incorporated by reference to the Company's
Annual Report on Form 10-KSB filed with the SEC on March 20, 2001).
10.11 Employment Agreement dated as of January 5, 2001, between the Company
and Timothy Mahoney (incorporated by reference to the Company's Annual Report on
Form 10-KSB filed with the SEC on March 20, 2001).
10.12 Options Cancellation Agreement dated January 1, 2001 by Leonard J.
Sokolow (incorporated by reference to the Company's Annual Report on Form 10-KSB
filed with the SEC on March 20, 2001).
10.13 Options Cancellation Agreement dated January 1, 2001 by Timothy Mahoney
(incorporated by reference to the Company's Annual Report on Form 10-KSB filed
with the SEC on March 20, 2001).
10.14 Securities Exchange Agreement, dated as of August 15, 2001, among
Kathleen Wallman, Steven Wallman, Joseph Daniel and vFinance.com, Inc. (n/k/a
vFinance, Inc.) (incorporated by reference to the Company's Quarterly Report on
Form 10-QSB filed on August 14, 2001).
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).
28
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 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).
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)
23.1 Consent of Sherb & Co., LLP, Certified Public Accountants
23.2 Consent of Krieger & Prager, LLP (to be included in Exhibit 5.1 to this
Registration Statement)
24 Power of Attorney (included on the signature page to this registration
statement).
29
Exhibit 5.1
KRIEGER & PRAGER, LLP
39 Broadway
New York, NY 10006
212-363-2900
November 18, 2002
vFinance, Inc.
3010 North Military Trail
Boca Raton, Florida 33431
Gentlemen:
You have requested our opinion as counsel for vFinance, Inc.,
incorporated in Delaware (the "Company"), in connection with the registration
statement on Form S-2 (the "Registration Statement") under the Securities Act of
1933, as amended (the "Act"), being filed by the Company with the Securities and
Exchange Commission.
The Registration Statement related to an offering of 3,421,053 shares
of common stock, no par value ("Common Stock"), which Common Stock includes
shares of Common Stock issuable upon the conversion of a Convertible
Note; (the "Selling Stockholder Shares").
We have examined such records and documents and made such examinations
of law as wel have deemed relevant in connection with this opinion. It is our
opinion that the Selling Stockholder Shares have been fully paid, validly issued
and are non-assessable.
No opinion is expressed herein as to any laws other than the Deleware
General Corporation Law, the laws of the State of New York and the laws of the
United States.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and to the reference to our firm under the caption "Legal
Matters" in the Registration Statement. In so doing, we do not admit that we are
in the category of persons whose consent is required under Section 7 of the Act
of the rules and regulations of the Securities and Exchange Commission
promulgated thereunder.
Very truly yours,
/s/ KRIEGER & PRAGER LLP
KRIEGER & PRAGER LLP
30
Exhibit 23.1
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANT
We consent to the incorporation in this Registration Statement on
Form S-2, of our report dated November 8, 2002 (for the year ended
December 31, 2001 relating to the consolidated balance sheet of vFinance, Inc.
and Subsidiaries as of December 31, 2001 and the related consolidated statements
of operations, stockholders' equity, and cash flows for the years ended December
31, 2001 and 2000 We also consent to the reference to our firm under the caption
"Experts" in the Prospectus.
/s/ Sherb & Co., LLP
Sherb & Co., LLP
Certified Public Accountants
New York, New York
November 19, 2002
31