SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2003
Commission File Number 1-11454-03
VFINANCE, INC.
(Name of Small Business Issuer in Its Charter)
Delaware 58-1974423
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(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
3010 North Military Trail, Suite 300
Boca Raton, FL 33431 (561) 981-1000
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(Address of Principal Executive Offices) (Issuer's Telephone Number,
Including Area Code)
Securities registered under Section 12(b) of the Act: NONE
Securities registered under Section 12(g) of the Act:
COMMON STOCK, PAR VALUE $0.01 PER SHARE
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Securities Exchange Act of 1934, as amended (the "Exchange
Act") during the past 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form and no disclosure will be contained, to
the best of registrant`s knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. [X]
The issuer's revenues for the fiscal year ended December 31, 2003 were
$24,478,466
The aggregate market value of the voting stock held by non-affiliates of the
issuer on March 22, 2004, based upon the average bid and ask prices of such
stock on that date was $6,521,456. The number of shares of Common Stock of the
issuer outstanding as of March 22, 2004 was 32,852,974.
DOCUMENTS INCORPORATED BY
REFERENCE: NONE
TABLE OF CONTENTS
Page No.
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Forward-Looking Statements 3
PART I.
Item 1. Description of Business 4
Item 2. Description of Property 18
Item 3. Legal Proceedings 18
Item 4. Submission of Matters to a Vote of Security Holders 20
PART II.
Item 5. Market for Common Equity and Related Stockholder Matters 21
Item 6. Management's Discussion and Analysis of Financial Condition
or Plan of Operations 22
Item 7. Financial Statements 29
Item 8. Changes in and Disagreements With Accountants on Accounting
and Financial Disclosure 30
Item 8a. Controls and Procedures 30
PART III.
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act 31
Item 10. Executive Compensation 32
Item 11. Security Ownership of Certain Beneficial Owners and Management
And Related Stockholder Matters 35
Item 12. Certain Relationships and Related Transactions 36
Item 13. Exhibits, List and Reports on Form 8-K 37
Item 14. Principal Accountant Fees and Services 41
Signatures
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FORWARD-LOOKING STATEMENTS
The following information provides cautionary statements under the safe harbor
provisions of the Private Securities Litigation Reform Act of 1995 (the Reform
Act). We identify important factors that could cause our actual results to
differ materially from those projected in forward-looking statements we make in
this report or in other documents that reference this report. All statements
that express or involve discussions as to: expectations, beliefs, plans,
objectives, assumptions or future events or performance (often, but not always,
identified through the use of words or phrases such as we or our management
believes, expects, anticipates or hopes and words or phrases such as will
result, are expected to, will continue, is anticipated, estimated, projection
and outlook, and words of similar import) are not statements of historical facts
and may be forward-looking. These forward-looking statements are based largely
on our expectations and are subject to a number of risks and uncertainties
including, but not limited to, economic, competitive, regulatory, growth
strategies, available financing and other factors discussed elsewhere in this
report and in the documents filed by us with the Securities and Exchange
Commission ("SEC"). Many of these factors are beyond our control. Actual results
could differ materially from the forward-looking statements we make in this
report or in other documents that reference this report. In light of these risks
and uncertainties, there can be no assurance that the results anticipated in the
forward-looking information contained in this report or other documents that
reference this report will, in fact, occur.
These forward-looking statements involve estimates, assumptions and
uncertainties, and, accordingly, actual results could differ materially from
those expressed in the forward-looking statements. These uncertainties include,
among others, the following: (i), the inability of our broker-dealer operations
to operate profitably in the face of intense competition from larger full
service and discount brokers; (ii) a general decrease in merger and acquisition
activities and our potential inability to receive success fees as a result of
transactions not being completed; (iii) increased competition from business
development portals; (iv) technological changes; (v) our potential inability to
implement our growth strategy through acquisitions or joint ventures; and (vi)
our potential inability to secure additional debt or equity financing.
Any forward-looking statement speaks only as of the date on which such statement
is made, and we undertake no obligation to update any forward-looking statement
or statements to reflect events or circumstances after the date on which such
statement is made or to reflect the occurrence of unanticipated events. New
factors emerge from time to time and it is not possible for our management to
predict all of such factors, nor can our management assess the impact of each
such factor on the business or the extent to which any factor, or combination of
factors, may cause actual results to differ materially from those contained in
any forward-looking statements.
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PART I
ITEM 1. DESCRIPTION OF BUSINESS.
BUSINESS DEVELOPMENT
vFinance, Inc. is a holding company engaged in the financial services business
where our strategic focus is on servicing the needs of high net-worth and
institutional investors and high growth companies. The Company, through its web
site www.vfinance.com, provides financial information services to entrepreneurs
and venture investors. Through our principal operating subsidiary, vFinance
Investments, Inc., a licensed broker-dealer, we provide investment banking,
retail and institutional securities brokerage services in all 50 states and the
District of Columbia.
OUR HISTORY. We were incorporated in the state of Delaware in February 1992
under the name Peachtree Fiberoptics, Inc., primarily to engage in the
production and sale of plastic optical fiber. On October 27, 1993, we ceased all
operations and subsequently sold certain assets relating to our machinery and
optical fiber operations.
On November 8, 1999, we acquired vFinance Holdings, Inc., a Florida corporation,
and Union Atlantic LC, a Florida limited liability company, through a Share
Exchange Agreement. We received all the outstanding capital stock of vFinance
Holdings, Inc. and all the outstanding membership interests of Union Atlantic LC
in exchange for a total of 6,955,000 shares of our common stock. vFinance
Holdings, Inc. has succeeded to the business of Union Atlantic LC and its
operating subsidiary, Union Atlantic Capital, L.C., is now operating under the
name vFinance Capital, Inc.
On January 4, 2001, we closed the merger of NW Holdings, Inc. ("NWH"), a Florida
corporation, with and into us with us as the surviving corporation. On the
closing date of the merger, NWH was the parent company of and wholly owned First
Level Capital, Inc., a Florida corporation. First Level Capital, Inc. is now
known as vFinance Investments, Inc. which has offices in New York, New Jersey
and Florida. In addition to these offices the Company has relationships with
certain independent contractors located throughout the United States.
On January 4, 2001, we also completed the merger of Colonial Direct Financial
Group, Inc., a Delaware corporation, with and into Colonial Acquisition Corp.,
our wholly owned subsidiary, with Colonial Direct Financial Group, Inc. as the
surviving corporation and as our wholly owned subsidiary. At the time of the
merger, Colonial Direct Financial Group, Inc. was a holding company comprised of
two diversified financial services companies, including First Colonial
Securities Group, Inc. and Colonial Direct Retirement Services, Inc., and a
company that provides administrative support to these financial service
companies, Colonial Direct Capital Management, Inc. On June 22, 2002, the
Company's Board of Directors approved a dividend to the Company's Series A
Preferred shareholders of all of the common stock of Colonial. Although Colonial
is no longer a subsidiary of the Company, the majority of its personnel remained
with vFinance Investments, Inc.
On August 20, 2001, we entered into a Securities Exchange Agreement by means of
which we acquired the membership interests in two related companies, Critical
Investments, LLC, a Delaware limited liability company ("Critical Investments"),
and Critical Advisors, L.L.C., a Virginia limited liability company ("Critical
Advisors"). Critical Investments manages Critical Infrastructure Fund, L.P.
("Critical Infrastructure LP"), a Delaware limited partnership. Critical
Advisors manages Critical Infrastructure Fund, Ltd. ("Critical Infrastructure
Ltd."), an international business company organized and existing under the laws
of the British Virgin Islands and receives (i) a management fee equal to 1% of
the net asset value of Critical Infrastructure Ltd. and (ii) a performance fee
equal to 20% of the increase in net asset value of Critical Infrastructure Ltd.
Critical Infrastructure LP and Critical Infrastructure Ltd. are the sole general
partners in, owning 96% and 4%, respectively, and conduct their investment and
trading activity through Critical Infrastructure Fund (BVI), LP, a limited
partnership organized and existing under the laws of the British Virgin Islands,
which holds a portfolio of securities. A determination has been made to
liquidate the funds. The SEC has commenced a non-public investigation relating
to Critical Infrastructure LP, Critical Investments and Critical Advisors. The
Company is cooperating with this investigation. Critical Investments and
Critical Advisors changed their names to vFinance Investors, LLC and vFinance
Advisors, LLC, respectively, subsequent to the acquisition.
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On May 29, 2002, the Company entered into a select asset purchase agreement (the
"Agreement"), as amended on June 17, 2002 (the "Amendment"), with Somerset
Financial Partners, Inc., ("Somerset") a Delaware corporation to acquire certain
of its assets. Through its subsidiaries, Somerset acted as a registered broker
dealer and was engaged in other financial services. Pursuant to the Agreement
the Company received the transfer of all agreed upon brokerage customers and
client accounts as well as the registration of approximately 25 registered
personnel of Somerset. As of June 17, 2002, the Company began reflecting in its
financial statements the applicable revenue production and other associated
costs. Under the escrow agreement signed in conjunction with the Agreement and
Amendment, the Company instructed its transfer agent to deliver to and in the
name of its escrow agent a total of 3,000,000 shares of the Company's common
stock (the "Escrowed Shares"). The Escrowed Shares were to be delivered to
Somerset when Somerset achieves all the closing conditions. In August 2002, all
of the closing conditions of the Agreement and Amendment were not met by
Somerset and the Company issued a default letter to Somerset (the "Default
Letter"). Among other things, the Default Letter provided formal notice to
Somerset of its default under the Agreement and Amendment. In October 2002, a
formal termination notice was executed by the Company and Somerset and the
Escrowed Shares were returned to the Company and cancelled.
The Company, as part of its strategic focus to operate its retail brokerage
business using an independent contractor (IC) model, on January 1, 2003, entered
into a Joint Venture Agreement with JSM Capital Holding Corp. ("JSM"), a retail
brokerage IC headquartered in New York and founded by John S. Matthews (who was
also, at the same time, named the President of vFinance's Retail Brokerage
Division). Effective May 1, 2003, vFinance merged its "company-owned" retail
branches into JSM, in exchange for a 19% equity position in JSM. Effective upon
such mergers JSM became an IC of the Company.
OUR COMPANY. We are a "new breed" financial services company committed to
servicing the financial needs of high net-worth investors, institutional
investors focused on aggressive growth investment strategies, and high growth
companies. In the execution of our business strategy, the Company has created a
worldwide audience, via our website, www.vfinance.com, of individuals looking to
create wealth through equity investments in both their personal portfolios and
their businesses. Our website is a leading destination for entrepreneurs, owners
of small and medium sized businesses looking for capital, venture capitalists
and private (i.e. Angel) and institutional investors looking to make equity
investments in high growth companies. Each month our website attracts an
estimated 100,000 businesses from over 75 countries and communicates to
approximately 60,000 high net worth individuals and institutional investors. Our
website is typically listed by search engines as one of the top sites for
relevant content. In addition, over 3000 websites have links to our website
including Microsoft Network, Dow Jones, THE WALL STREET JOURNAL, ENTREPRENEUR
MAGAZINE, INC., Stanford University, and Yahoo!. Utilizing the Internet and
other traditional communication mediums, we generate income by providing our
audience with access to products and services that assist them in achieving
their financial goals. Our business model is scalable as a) the website provides
sales leads to our Investment Banking, Retail Brokerage and Institutional
Services Divisions and b) the firm has structured its Banking and Brokerage
business to take advantage of an Independent Contractor model allowing the firm
to expand and contract without the costs and liabilities associated with
employees and offices. Due to the website's large, global audience of
entrepreneurs and venture investors, the Company uses it to collect, measure and
analyze data on entrepreneurial activity. The Company uses its proprietary
research to publish reports on the entrepreneurial economy that provides the
firm's clients with unique insights to investment opportunities.
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RECENT FINANCINGS
The Company entered into two agreements with finance institutions to increase
our resources. The discussion below is qualified in its entirety by reference to
the copies of the agreements attached as exhibits to this filed report.
On November 28, 2001, we entered into a Note Purchase Agreement, as amended on
November 30, December 14 and December 28, 2001 and February 13 and March 4, 2002
(collectively, the "Agreement"), with SBI Investments (USA) Inc. ("SBI"). Under
the terms of the Agreement, SBI provided a loan to us in the amount of $975,000
in the form of a 48-month non-interest bearing, convertible note (the SBI
Note"). The SBI Note is convertible at SBI's option into as many as 3,421,052
shares of our common stock at $0.285 per share. During year 2002, the SBI Note
was reduced by $225,000 as a portion of the SBI Note was converted into 789,474
shares of the Company's common stock. Accordingly, the balance due SBI at
December 31, 2002 and 2003 was $750,000. During 2004, $623,775 of the SBI Note
was converted into 3,001,403 shares of the Company's common stock. Under a
special arrangement made by the Company to encourage further equity
participation by SBI, the Company offered SBI the right to convert $545,000 of
such converted amount into shares of the Company's common stock at a discounted
rate of $0.20 per share.
On January 25, 2002, the Company entered into a Credit Agreement, as amended on
April 12, 2002, with UBS Americas, Inc. ("UBS"). Under the terms of the Credit
Agreement, UBS provided the Company with a revolving credit facility for up to
$3,000,000 for the purpose of supporting the expansion of our brokerage business
or investments in infrastructure to expand our operations and our broker-dealer
operations. The loan must be repaid in full by January 2005 and bears interest
at LIBOR plus a margin of 2%. Among other covenants, we must maintain
stockholders' equity of at least $7 million; however, the Credit Agreement, as
amended, provides that we may exclude goodwill write-offs aggregating $8.5
million from stockholders' equity. We must make early repayments under the
Credit Agreement if we acquire a new broker dealer firm, enter a new line of
business, or hire more than four brokers in single or related transactions. This
repayment will be made by adding $1.00 to the cost of each incremental closing
transaction we make through CSC, an affiliate of UBS.
We borrowed $1,500,000 under the credit facility in January 2002. The amount of
the loan under the credit facility was not convertible into our equity
securities. In March 2004, the Company entered into an agreement with a new
clearing firm, National Financial Services LLC, Member NYSE/SIPC, a Fidelity
Investments company ("NFS"). As part of this agreement, NFS paid the remaining
balance outstanding to UBS, on behalf of vFinance. We expect to begin clearing
through NFS during May 2004.
OUR BUSINESS
RETAIL AND TRADING BUSINESS. The largest portion of our revenues (82% in 2003)
(75% in 2002) was attributable to commissions generated by our brokerage and
trading activities through our wholly owned broker-dealer subsidiary, vFinance
Investments. vFinance Investments' Retail Brokerage and Trading Divisions buys
and sells securities for its customers from other dealers on an agency basis,
and charges its customers a commission for its services. Such commission revenue
is derived from brokerage transactions in listed and over-the-counter securities
and mutual fund securities. vFinance Investments has agreements with numerous
mutual fund management companies pursuant to which it sells shares in a variety
of mutual funds. Mutual fund commissions are derived from standard dealers'
discounts that are a small percentage of the purchase price of the shares
depending upon the terms of the dealer agreement and the size of the
transaction. In addition, most funds permit vFinance Investments to receive
additional periodic fees based upon the customer's investments maintained in
particular funds.
INVESTMENT BANKING. A significant portion of our revenues in our last fiscal
year were derived from the success fees generated by our vFinance Investments'
Investment Banking Division (14% in 2003) (16% in 2002). We assist emerging
growth private and public companies by (i) developing sound strategic plans,
(ii) obtaining equity, mezzanine, bridge, or acquisition capital, (iii)
executing strategically sound acquisitions or divestiture strategies, (iv)
raising capital in the public markets, and (v) maximizing shareholder value by
conducting recapitalizations or other liquidity transactions. As consideration
for such services, we are paid retainers and success fees, based on the
percentage of the total value of a transaction, which are contingent on the
successful completion of a specified transaction. As part of our success fees,
we periodically receive equity instruments and stock purchase warrants from
companies for which we perform services in addition to cash paid for such
services.
In the area of corporate finance, vFinance Investments has been active as
underwriters or selling group members in numerous public equity transactions.
Participation as a managing underwriter or in an underwriting syndicate involves
both economic and regulatory risks. An underwriter may incur losses if it is
unable to resell the securities it is committed to purchase. In addition, under
the federal securities laws, other laws and court decisions with respect to
underwriters' liabilities and limitations on the indemnification of underwriters
by issuers, an underwriter is subject to substantial potential liability for
misstatements or omissions of material facts in prospectuses and other
communications with respect to such offerings. Acting as a managing underwriter
increases these risks. Underwriting commitments constitute a charge against net
capital and our subsidiaries' ability to make underwriting commitments may be
limited by the requirement that they must at all times be in compliance with
regulations regarding their net capital.
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WHOLESALE TRADING BUSINESS. In support of the firm's retail brokerage, banking
and institutional services businesses, we offer wholesale market-making
services. vFinance Investments makes markets in more than 800 Over-the-Counter
Bulletin Board and NASDAQ Small Cap stocks. The Company's customers are national
and regional full-service broker-dealers, electronic discount brokers and
institutional investors that require fast and efficient executions for each
security. This expertise supports the firm's investment banking strategy of
servicing high growth public companies that are looking for a financial services
firm that is capable of assisting them in building broad-based market support
for their securities. Market makers use the firm's capital, research, retail and
systems resources to represent a stock and compete with other market makers.
Operated primarily by electronic execution, buyers and sellers meet via computer
to make bids and offers. Each market maker competes for "customer order flow" by
displaying buy and sell quotations for a guaranteed number of shares in a
security. Once an order is received, the market maker will immediately purchase
for or sell from its own inventory, or seek the other side of the trade until it
is executed, often in a matter of seconds. The market maker generates all of its
revenue from the difference between the price paid when a security is bought and
price received when that security is sold or the price received when the
security is shorted and the price received when the short is covered.
INTERNET STRATEGY (www.vfinance.com). Through vFinance Holdings, Inc., we
operate a branded financial services website or "channel" on the Web located at
www.vfinance.com. We offer visitors to our website convenient access to a
variety of financial services, proprietary business development tools,
searchable databases and daily news. We target a worldwide audience of
entrepreneurs, CEOs, private and institutional investors, allowing them to
interconnect, transact and grow wealth. Our Venture Capital Resource Library
offers current articles on venture capital and other issues, information on
initial public offerings and a searchable database of investment opportunities.
Our website also provides directory listings for venture capital firms and
so-called venture capital angels (which provide first round financing for risky
investments). In addition, our website offers to start-ups and other early-stage
firms a Web-based search engine, vSearch, which provides access to our
proprietary database of venture capital firms by different criteria, including
geography, amount of funds required, industry, stage of corporate development or
keyword. Furthermore, we offer an online loan center, where growing businesses
can apply for loans of up to $20 million. Much of the information on the website
is provided free of charge. However, we do charge nominal fees for the use of
proprietary search engines and premium services such as our business plan
listings. Our website provides sales leads to our investment banking, brokerage
and trading divisions, as well as research on entrepreneurial activities and
trends that is used by our institutional services professionals to produce the
Company's proprietary ECI and sector research reports.
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INSTITUTIONAL SERVICES. The Institutional Services Division is focused on
providing proprietary and third party research to mid and micro cap
institutional investors. Our products and those we represent utilize
fundamental, technical and quantitative methods.
Our research department:
- reviews and analyzes the entrepreneurial data collected from our website and
publishes macro economic and sector reports;
- identifies independent research firms that have demonstrable track records of
producing quality product in the mid and micro cap segments of the markets;
- issues written reports on sectors and companies, with recommendations on
specific actions to buy, sell or hold securities;
- furnishes information to retail and institutional customers; and
- responds to inquiries from institutions, customers and registered
representatives.
Additionally, our research analysts interface regularly with industry leaders
and portfolio managers in order to produce actionable evaluations and decisions.
These recommendations are communicated to clients and the firm via the ECI and
company and sector reports.
ADMINISTRATION, OPERATIONS, SECURITIES TRANSACTIONS PROCESSING AND CUSTOMER
ACCOUNTS
Our operating subsidiary does not hold any funds or securities for its
customers. Instead, it uses the services of clearing agents on a fully disclosed
basis. These clearing agents process all securities transactions and maintain
customer accounts on a fee basis. Customer accounts are protected through the
SIPC for up to $500,000, of which coverage for cash balances is limited to
$100,000. In addition, all customer accounts are fully protected by an Excess
Securities Bond providing protection for the account's entire net equity (both
cash and securities). The services of our subsidiary's clearing agents include
billing and credit control as well as receipt, custody and delivery of
securities. The clearing agents provide the operational support necessary to
process, record, and maintain securities transactions for our subsidiary's
brokerage activities. They provide these services to our subsidiary's customers
at a total cost which we believe is less than it would cost us to process such
transactions on our own. The clearing agents also lend funds to our subsidiary's
customers through the use of margin credit. These loans are made to customers on
a secured basis, with the clearing agents maintaining collateral in the form of
saleable securities, cash or cash equivalents. vFinance Investments, our
subsidiary, has agreed to indemnify the clearing brokers for losses they incur
on these credit arrangements.
COMPETITION
vFinance Investments encounters competition in all aspects of its business. Many
of its competitors have significantly greater financial, technical, marketing
and other resources. National retail firms such as Merrill Lynch Pierce Fenner &
Smith Incorporated, Salomon Smith Barney, Inc. and Morgan Stanley/Dean Witter
dominate the industry. vFinance Investments also competes with numerous regional
and local firms. In addition, a number of firms offer discount brokerage
services to retail customers and generally effect transactions at substantially
lower commission rates on an "execution only" basis, without offering other
services such as investment recommendations and research. Moreover, there is
substantial commission discounting by full-service broker-dealers competing for
institutional and retail brokerage business. The recent emergence of online
trading has further intensified the competition for brokerage customers. Our
subsidiary currently does not offer any online trading services to its
customers. The continued expansion of discount brokerage firms and online
trading could adversely affect our retail business. Other financial
institutions, notably commercial banks and savings and loan associations, offer
customers some of the same services and products presently provided by
securities firms. While it is not possible to predict the type and extent of
competing services which banks and other institutions ultimately may offer to
customers, our subsidiary may be adversely affected to the extent those services
are offered on a large-scale basis. We try to compete through our advertising
and recruiting programs for registered representatives interested in potentially
joining our Company.
GOVERNMENT REGULATION
REGULATION OF THE SECURITIES INDUSTRY AND BROKER-DEALERS. Our business is
subject to extensive regulation applicable to the securities industry in the
United States and elsewhere. As a matter of public policy, regulatory bodies in
the United States and the rest of the world are charged with safeguarding the
integrity of the securities and other financial markets and with protecting the
interests of customers participating in those markets. In the United States, the
SEC is the federal agency responsible for the administration of the federal
securities laws. In general, broker-dealers are required to register with the
SEC under the Securities Exchange Act of 1934, as amended (the "Exchange Act").
Under the Exchange Act, every registered broker-dealer that does business with
the public is required to be a member of and is subject to the rules of the
NASD. The NASD administers qualification testing for all securities principals
and registered representatives for its own account and on behalf of the state
securities authorities. vFinance Investments is a broker-dealer registered with
the SEC and is a member of the NASD. Our broker-dealer is also subject to
regulation under state law. vFinance Investments is currently registered as a
broker-dealer in all 50 states and the District of Columbia. The NASD approved
the change of ownership to us of (i) Union Atlantic Capital, L.C. from Pinnacle
Capital Group, L.C., (ii) First Level Capital, Inc. from NW Holdings, Inc. and
(iii) First Colonial Securities Group, Inc. A recent amendment to the federal
securities laws prohibits the states from imposing substantive requirements on
broker-dealers that exceed those imposed under federal law. The amendment,
however, does not preclude the states from imposing registration requirements on
broker-dealers that operate within their jurisdiction or from sanctioning these
broker-dealers who have engaged in misconduct.
The SEC, self-regulatory organizations such as the NASD and state securities
commissions may conduct administrative proceedings which can result in censure,
fine, the issuance of cease-and-desist orders, or the suspension or expulsion of
a broker-dealer, its officers, or its employees. The SEC and self-regulatory
organization rules cover many aspects of a broker-dealer's business, including
capital structure and withdrawals, sales methods, trade practices among
broker-dealers, use, and safekeeping of customers' funds and securities,
record-keeping, the financing of customers' purchases, broker-dealer and
employee registration, and the conduct of directors, officers, and employees.
Additional legislation, changes in rules promulgated by the Commission and
self-regulatory organizations, or changes in the interpretation or enforcement
of existing laws and rules, may directly affect the mode of operation and
profitability of broker-dealers.
-8-
The Uniform Net Capital Rule and NASD rules require prior notice to the SEC and
the NASD for certain withdrawals of capital and also provide that the SEC may
restrict for up to 20 business days any withdrawal of equity capital, or
unsecured loans or advances to shareholders, employees or affiliates if the
capital withdrawal, together with all other net capital withdrawals during a
30-day period, exceeds 30% of excess net capital and the SEC concludes that the
capital withdrawal may be detrimental to the financial integrity of the
broker-dealer.
In addition, the Uniform Net Capital Rule provides that the total outstanding
principal amount of a broker-dealer's indebtedness under certain subordination
agreements, the proceeds of which are included in its net capital, may not
exceed 70% of the sum of the outstanding principal amount of all subordinated
indebtedness included in net capital, par or stated value of capital stock, paid
in capital in excess of par, retained earnings and other capital accounts for a
period in excess of 90 days. A change in the Uniform Net Capital Rule, the
imposition of new rules or any unusually large charge against net capital could
limit those parts of our operations that require the intensive use of capital
and also could restrict our ability to pay dividends, repay debt and repurchase
shares of our outstanding stock.
As of December 31, 2003, the minimum amount of net capital required to be
maintained by vFinance Investments was $1,000,000. A significant operating loss
or any unusually large charge against net capital could adversely affect our
ability to expand or even maintain our present levels of business, which could
have a material adverse affect on our business and operations. vFinance
Investments is a member of Securities Investor Protection Corporation ("SIPC")
which provides, in the event of the liquidation of a broker-dealer, protection
for clients' accounts up to $500,000, subject to a limitation of $100,000 for
claims for cash balances. Our clients' accounts are carried on the books and
records of CSC. CSC has obtained additional insurance from a private insurer in
an amount equal to $4,500,000 for the benefit of our clients' accounts with
vFinance Investments that is supplemental to SIPC protection.
APPLICATION OF LAWS AND RULES TO INTERNET BUSINESS AND OTHER ONLINE SERVICES.
Due to the increasing popularity and use of the Internet and other online
services, various regulatory authorities are considering laws and/or regulations
with respect to the Internet or other online services covering issues such as
user privacy, pricing, content copyrights, and quality of services. In addition,
the growth and development of the market for online commerce may prompt more
stringent consumer protection laws that may impose additional burdens on those
companies conducting business online. When the Securities Act of 1933, as
amended (the "Securities Act"), which governs the offer and sale of securities,
and the Exchange Act, which governs, among other things, the operation of the
securities markets and broker-dealers, were enacted, such acts did not
contemplate the conduct of a securities business through the Internet and other
online services. The recent increase in the number of complaints by online
traders could lead to more stringent regulations of online trading firms and
their practices by the SEC, NASD and other regulatory agencies.
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Although the SEC, in releases and no-action letters, has provided guidance on
various issues related to the offer and sale of securities and the conduct of a
securities business through the Internet, the application of the laws to the
conduct of a securities business through the Internet continues to evolve.
Furthermore, the applicability to the Internet and other online services of
existing laws in various jurisdictions governing issues such as property
ownership, sales and other taxes and personal privacy is uncertain and may take
years to resolve. Uncertainty regarding these issues may adversely affect the
viability and profitability of our business.
As our services, through our subsidiaries, are available over the Internet in
multiple jurisdictions, and as we, through our subsidiaries, have numerous
clients residing in these jurisdictions, these jurisdictions may claim that our
subsidiaries are required to qualify to do business as a foreign corporation in
each such jurisdiction. While vFinance Investments is currently registered as a
broker-dealer in the jurisdictions described in this report, vFinance
Investments and our non-broker dealer subsidiaries are qualified to do business
as a foreign corporation in only a few jurisdictions. Failure to qualify as an
out-of-state or foreign corporation in a jurisdiction where it is required to do
so could subject us to taxes and penalties for the failure to qualify.
INTELLECTUAL PROPERTY
We own the following federally registered marks: vFinance, Inc.(R),
vFinance.com, Inc.(R), AngelSearch(R). In addition, we use the following
trademarks: Union Atlantic, L.C. TM, Union Atlantic Capital, L.C. TM.
EMPLOYEES
At December 31, 2003, we employed the following personnel:
Position Salaried Contract Total
-------- -------- -------- -----
Officers 7 0 7
Clerical 18 16 34
Brokers 10 83 93
Traders 12 1 13
Investment Bankers 9 6 15
Website 2 0 2
-------- -------- -----
Totals 58 106 164
None of our personnel is covered by a collective bargaining agreement. We
consider our relationships with our employees to be good. Any future increase in
the number of employees will depend upon the growth of our business. Our
registered representatives are required to take examinations administered by the
NASD and state authorities in order to qualify to transact business and are
required to enter into agreements with us obligating them, among other things,
to adhere to industry rules and regulations, our supervisory procedures and not
to solicit customers in the event of termination of employment.
RESEARCH AND DEVELOPMENT AND ENVIRONMENTAL MATTERS
We did not incur any research and development expenses. We do not incur any
significant costs or experience any significant effects as a result of
compliance with federal, state and local environmental laws.
RISKS RELATED TO OUR COMPANY
In addition to other information in this report, the following risks whould be
considered in evaluating our condition and prospects. These risks may have a
material effect on our operating results.
WE HAVE A LIMITED OPERATING HISTORY. AS A RESULT, IT MAY BE DIFFICULT EVALUATING
OUR BUSINESS AND PROSPECTS.
We have a limited operating history. We only commenced our broker-dealer
operations in the middle of 2000. In addition, we completely restructured our
broker-dealer operations in 2001 through the acquisition of two firms and their
merger into a single operation. We purchased our hedge fund management business
in mid-2001, but we have decided to liquidate such funds. Our website has been
in existence since 1995. Our business and prospects must be considered in light
of the risks, expenses and difficulties frequently encountered by companies in
the early stages of development. These risks are particularly severe among
companies in new and rapidly evolving markets such as online business
development services and those in regulated industries such as the securities
industry. It may be difficult or impossible to accurately forecast our operating
results and evaluate our business and prospects based on our historical results.
-10-
WE HAVE HAD SUBSTANTIAL LOSSES SINCE INCEPTION
Prior to 2003, the Company had sustained substantial losses in each year since
its inception. Although we showed a profit for the year ended December 31, 2003,
the Company incurred significant losses in each of the years prior to that 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
involved considerable expense.
Although we had net income of $311,415 for the year ended December 31, 2003, we
incurred a net loss of $2,235,298 for the year ended December 31, 2002 and prior
years had even larger net losses. As of December 31, 2003, we had an accumulated
deficit of $23,590,243.
We expect to spend significant amounts to enhance our products and technologies,
and to expand domestic and international sales and operations. As a result, we
will need to continue to generate significant additional revenue to maintain our
recent profitability and generate sufficient working capital to fund our planned
spending. Even if we do maintain profitability, we may not be able to increase
profitability on a quarterly or annual basis. If we do not increase our
profitability, the market price for our common stock may further decline.
If we do not generate significant working capital or receive additional capital
when and in the amounts needed, our ability to continue as a going concern is in
substantial doubt.
Obtaining future financing may be costly and could be dilutive to existing
stockholders. If we are not able to obtain financing when and in the amounts
needed, and on terms that are acceptable, our operations, financial condition
and prospects could be materially and adversely affected, and we could be forced
to curtail our operations or sell part or all of our assets.
WE MAY NEED TO RAISE ADDITIONAL FUNDS. THESE FUNDS MAY NOT BE AVAILABLE WHEN WE
NEED THEM.
Based on our current spending plans and our projected working capital, we
believe that our cash on hand and cash generated from our operations will be
sufficient to fund our operations for at least the next 12 months. However, the
Company may attempt to raise additional capital to operate the business, support
expansion plans, develop new or enhanced services and products, respond to
competitive pressures, acquire complementary businesses or technologies or
respond to unanticipated events. We can provide no assurances that additional
financing will be available when needed on favorable terms, if at all. If these
funds are not available when we need them, we may need to change our business
strategy or reduce our operations or investment activities. In addition, any
issuance of additional equity securities will dilute the ownership interest of
our existing stockholders and the issuance of additional debt securities may
increase the perceived risk of investing in us.
WE ARE SUBJECT TO VARIOUS RISKS ASSOCIATED WITH THE SECURITIES INDUSTRY.
As securities broker-dealers, we are subject to uncertainties that are common in
the securities industry. These uncertainties include:
- the volatility of domestic and international financial, bond and stock
markets, as demonstrated by past disruptions in the financial markets;
- extensive governmental regulation;
- litigation;
- intense competition;
- substantial fluctuations in the volume and price level of securities; and
- dependence on the solvency of various third parties.
As a result of these risks, revenues and earnings may vary significantly from
quarter to quarter and from year to year. We are much smaller and have much less
capital than many of our competitors in the securities industry. Accordingly, we
could be impacted by these risks to a larger degree. In the event of a market
downturn our revenues would likely decline and, if we were unable to reduce
expenses at the same pace, our profit margins would quickly erode. Our business
could be adversely affected in many other ways, including those described below.
OUR BUSINESS COULD BE ADVERSELY AFFECTED BY A BREAKDOWN IN THE FINANCIAL MARKETS
As a securities broker-dealer, our business is materially affected by conditions
in the financial markets and economic conditions in general, both in the United
States and elsewhere around the world. Many factors or events could lead to a
breakdown in the financial markets including war, terrorism, natural
catastrophes and other types of disasters. These types of events could cause
people to begin to lose confidence in the financial markets and their ability to
function effectively. If the financial markets are unable to effectively prepare
for these types of events and ease public concern over their ability to
function, our revenues may decline and our operations could be adversely
affected.
-11-
WE HAVE INCURRED, AND MAY IN THE FUTURE INCUR, SIGNIFICANT LOSSES FROM TRADING
AND INVESTMENT ACTIVITIES DUE TO MARKET FLUCTUATIONS AND VOLATILITY.
We generally maintain trading and investment positions in the equity markets. To
the extent that we own assets, i.e.: have long positions, a downturn in those
markets could result in losses from a decline in the value of such long
positions. Conversely, to the extent that we have sold assets that we do not
own, i.e.: have short positions in any of those markets, an upturn could expose
us to potentially unlimited losses as we attempt to cover our short positions by
acquiring assets in a rising market.
We may, from time to time, have a trading strategy consisting of holding a long
position in one asset and a short position in another from which we expect to
earn revenues based on changes in the relative value of the two assets. If,
however, the relative value of the two assets changes in a direction or manner
that we did not anticipate or against which we are not hedged, we might realize
a loss in those paired positions. In addition, we maintain trading positions
that can be adversely affected by the level of volatility in the financial
markets, i.e., the degree to which trading prices fluctuate over a particular
period, in a particular market, regardless of market levels.
OUR REVENUES MAY DECLINE IN ADVERSE MARKET OR ECONOMIC CONDITIONS.
Unfavorable financial or economic conditions may reduce the number and size of
the transactions in which we provide underwriting services, merger and
acquisition consulting and other services. Our investment banking revenues, in
the form of financial advisory and underwriting fees, are directly related to
the number and size of the transactions in which we participate and would
therefore be adversely affected by a sustained market downturn. Additionally, a
downturn in market conditions could lead to a decline in the volume of
transactions that we execute for our customers and, therefore, to a decline in
the revenues we receive from commissions and spreads.
OUR RISK MANAGEMENT POLICIES AND PROCEDURES MAY LEAVE US EXPOSED TO UNIDENTIFIED
RISKS OR AN UNANTICIPATED LEVEL OF RISK.
The policies and procedures we employ to identify, monitor and manage risks may
not be fully effective. Some methods of risk management are based on the use of
observed historical market behavior. As a result, these methods may not
accurately predict future risk exposures, which could be significantly greater
than the historical measures indicate. Other risk management methods depend on
evaluation of information regarding markets, clients or other matters that are
publicly available or otherwise accessible by us. This information may not be
accurate, complete, up-to-date or properly evaluated. Management of operational,
legal and regulatory risks requires, among other things, policies and procedures
to properly record and verify a large number of transactions and events. We
cannot assure that our policies and procedures will effectively and accurately
record and verify this information.
We seek to monitor and control our risk exposure through a variety of separate
but complementary financial, credit, operational and legal reporting systems. We
believe that we are able to evaluate and manage the market, credit and other
risks to which we are exposed. Nonetheless, our ability to manage risk exposure
can never be completely or accurately predicted or fully assured. For example,
unexpectedly large or rapid movements or disruptions in one or more markets or
other unforeseen developments can have a material adverse effect on our results
of operations and financial condition. The consequences of these developments
can include losses due to adverse changes in inventory values, decreases in the
liquidity of trading positions, higher volatility in earnings, increases in our
credit risk to customers as well as to third parties and increases in general
systemic risk.
CREDIT RISK EXPOSES US TO LOSSES CAUSED BY FINANCIAL OR OTHER PROBLEMS
EXPERIENCED BY THIRD PARTIES.
We are exposed to the risk that third parties which owe us money, securities or
other assets will not perform their obligations. These parties include:
- trading counterparties;
- customers;
- clearing agents;
- exchanges;
- clearing houses; and
- other financial intermediaries as well as issuers whose securities we hold.
-12-
These parties may default on their obligations owed to us due to bankruptcy,
lack of liquidity, operational failure or other reasons. This risk may arise,
for example, from:
- holding securities of third parties;
- executing securities trades that fail to settle at the required time due to
non-delivery by the counterparty or systems failure by clearing agents,
exchanges, clearing houses or other financial intermediaries; and
- extending credit to clients through bridge or margin loans or other
arrangements.
Significant failures by third parties to perform their obligations owed to us
could adversely affect our revenues and perhaps our ability to borrow in the
credit markets.
WE MAY HAVE DIFFICULTY EFFECTIVELY MANAGING OUR GROWTH.
Over the past several years, we have experienced significant growth in our
business activities through a variety of transactions. We expect our business to
continue to grow through similar transactions as well as organically. Future
growth through mergers, acquisitions and other such transactions involves
numerous risks such as:
- difficulties and expenses incurred in connection with the subsequent
assimilation of the operations and services or products of the acquired company;
- the potential loss of key employees of the acquired company; and
- the diversion of management's attention from other business concerns.
If we are unable to effectively address these risks, we may be required to
restructure the acquired business or write off the value of some or all of the
assets of the acquired business. Further, this type of growth requires increased
investments in management personnel, financial and management systems and
controls as well as facilities. We cannot assure that we will experience
parallel growth in these areas. If these areas do not grow at the same time, our
operating margins may decline from current levels.
Additionally, as is common in the securities industry, we will continue to be
highly dependent on the effective and reliable operation of our communications
and information systems. We believe that our current and anticipated future
growth will require implementation of new and enhanced communications and
information systems and training of our personnel to operate such systems. Any
difficulty or significant delay in the implementation or operation of existing
or new systems or the training of personnel could adversely affect our ability
to manage our growth.
INTENSE COMPETITION FROM EXISTING AND NEW ENTITIES MAY ADVERSELY AFFECT OUR
REVENUES AND PROFITABILITY.
The securities industry is rapidly evolving, intensely competitive and has few
barriers to entry. We expect competition to continue to intensify in the future.
Many of our competitors have significantly greater financial, technical,
marketing and other resources than we do. They may also offer a wider range of
services and financial products than we do and have greater name recognition and
a larger client base. These competitors may be able to respond more quickly to
new or changing opportunities, technologies and client requirements. They may
also be able to undertake more extensive promotional activities, offer more
attractive terms to clients, and adopt more aggressive pricing policies. We may
not be able to compete effectively with current or future competitors and
competitive pressures faced by us may harm our business.
THE PRECAUTIONS WE TAKE TO PREVENT AND DETECT EMPLOYEE MISCONDUCT MAY NOT BE
EFFECTIVE AND WE COULD BE EXPOSED TO UNKNOWN AND UNMANAGED RISKS OR LOSSES.
We run the risk that employee misconduct could occur. Misconduct by employees
could include:
- employees binding us to transactions that exceed authorized limits or present
unacceptable risks to us;
- employees hiding unauthorized or unsuccessful activities from us; or
- the improper use of confidential information.
These types of misconduct could result in unknown and unmanaged risks or losses
to us including regulatory sanctions and serious harm to our reputation. The
precautions we take to prevent and detect these activities may not be effective.
If employee misconduct does occur, our business operations could be materially
adversely affected.
-13-
RISK OF LOSSES ASSOCIATED WITH SECURITIES LAWS VIOLATIONS AND LITIGATION.
Many aspects of our business involve substantial risks of liability. An
underwriter is exposed to substantial liability under federal and state
securities laws, other federal and state laws, and court decisions, including
decisions with respect to underwriters' liability and limitations on
indemnification of underwriters by issuers. For example, a firm that acts as an
underwriter may be held liable for material misstatements or omissions of fact
in a prospectus used in connection with the securities being offered or for
statements made by its securities analysts or other personnel. In recent years,
there has been an increasing incidence of litigation involving the securities
industry, including class actions that seek substantial damages. Our
underwriting activities will usually involve offerings of the securities of
smaller companies, which often involve a higher degree of risk and are more
volatile than the securities of more established companies. In comparison with
more established companies, smaller companies are also more likely to be the
subject of securities class actions, not to carry directors and officer's
liability insurance or policies with lower limits, and to become insolvent. Each
of these factors increases the likelihood that an underwriter of smaller
companies' securities will be required to contribute to an adverse judgment or
settlement of a securities lawsuit.
In the normal course of business, our operating subsidiaries have been and
continue to be the subject of numerous civil actions and arbitrations arising
out of customer complaints relating to our activities as a broker-dealer and as
a result of other business activities. In general, the cases involve various
allegations that our employees had mishandled customer accounts. We believe
that, based on our historical experience and the reserves established by us, the
resolution of the claims presently pending will not have a material adverse
effect on our financial condition. However, although we typically reserve an
amount we believe will be sufficient to cover any damages assessed against us,
we have in the past been assessed damages that exceeded our reserves. If we
misjudged the amount of damages that may be assessed against us from pending or
threatened claims or if we are unable to adequately estimate the amount of
damages that will be assessed against us from claims that arise in the future
and fail to appropriately reserve, our financial condition may be materially
adversely affected.
OUR DIRECTORS AND EXECUTIVE OFFICERS CONTROL APPROXIMATELY 39.4% OF OUR COMMON
STOCK AND MAY HAVE INTERESTS DIFFERING FROM THOSE OF OTHER STOCKHOLDERS.
At December 31, 2003, our directors and executive officers controlled
approximately 39.4% of our outstanding common stock, directly as stockholders
and indirectly through control relationships with other stockholders. There is
no supermajority vote in our Certificate of Incorporation. These directors and
executive officers, if acting together, would be able to significantly influence
all matters requiring approval by our stockholders, including the election of
directors and approval of significant corporate transactions including mergers,
consolidations and the sale of substantially all of our assets. This control
could have the effect of delaying or preventing a third party from acquiring or
merging with us, which could hinder shareholders' ability to receive a premium
for their shares.
OUR VFINANCE BRAND MAY NOT ACHIEVE THE BROAD RECOGNITION NECESSARY TO SUCCEED.
We believe that broader recognition and positive perception of the "vFinance"
brand is essential to our future success. Accordingly, we intend to continue to
pursue an aggressive brand enhancement strategy, which will include multimedia
advertising, promotional programs and public relations activities. These
initiatives will require significant expenditures. If our brand enhancement
strategy is unsuccessful, these expenses may never be recovered and we may be
unable to increase future revenues. Successful positioning of our brand will
depend in a large part on:
- The success of our advertising and promotional efforts;
- An increase in the number of users and page views of our website; and
- The ability to continue to provide a website and services useful to our
clients.
FAILURE TO MAINTAIN OR INCREASE THE FLOW OF TRAFFIC TO OUR WEBSITE COULD HARM
OUR BUSINESS.
Our business partially depends on our ability to maintain or increase traffic on
our website as well as our ability to have visitors to our website use our
services. The website is dependent on the flow of information for its validity,
lead generation and data. It is important for our business development
activities to increase the number of daily visitors, repeat visitors and the
amount of time visitors spend on our website. Failure to do so could adversely
affect our revenue and our ability to raise additional funds.
-14-
IF WE DO NOT CONTINUE TO DEVELOP AND ENHANCE OUR SERVICES IN A TIMELY MANNER,
OUR BUSINESS MAY BE HARMED.
Our future success will depend on our ability to develop and enhance our
services and add new services. We operate in a very competitive industry in
which the ability to develop and deliver advanced services through the Internet
and other channels is a key competitive factor. There are significant risks in
the development of new or enhanced services, including the risks that we will be
unable to:
- Effectively use new technologies;
- Adapt our services to emerging industry or regulatory standards; or
- Market new or enhanced services.
If we are unable to develop and introduce new or enhanced services quickly
enough to respond to market or customer requirements or to comply with emerging
industry standards, or if these services do not achieve market acceptance, our
business could be seriously harmed.
INTERNET AND INTERNAL COMPUTER SYSTEM FAILURES OR COMPROMISES OF OUR SYSTEMS OR
SECURITY COULD DAMAGE OUR REPUTATION AND HARM OUR BUSINESS.
Although a significant portion of our business is conducted using traditional
methods of contact and communications such as face-to-face meetings, a portion
of our business is conducted through the Internet. We could experience future
system failures and degradations. We cannot assure you that we will be able to
prevent an extended systems failure if any of the following events occur:
- Human error;
- Subsystem, component, or software failure;
- A power or telecommunications failure;
- An earthquake, fire, or other natural disaster or other act of God;
- Hacker attacks or other intentional acts of vandalism; or
- Terrorists acts or war.
Any such systems failure that interrupts our operations could seriously harm our
business. We currently have limited off-site data storage and disaster recovery
systems.
The Internet has experienced, and is expected to continue to experience,
significant growth in the number of users and amount of traffic. Our future
success will depend upon the development and maintenance of the Internet's
infrastructure to cope with this increased traffic. This will require a reliable
network backbone with the necessary speed, data capacity, security, and the
timely development of complementary products such as high-speed modems, for
providing reliable Internet access and services.
The secure transmission of confidential information over public networks is a
critical element of our operations. We rely on encryption and authentication
technology to provide the security and authentication necessary to effect secure
transmission of confidential information over the Internet. To the best of our
knowledge, to date, we have not experienced any security breaches in the
transmission of confidential information. Moreover, we continually evaluate
advanced encryption technology to ensure the continued integrity of our systems.
However, we cannot assure that advances in computer capabilities, new
discoveries in the field of cryptography or other events or developments will
not result in a compromise of the technology or other algorithms used by our
vendors and us to protect client transaction and other data. Any compromise of
our systems or security could harm our business.
THERE ARE RISKS ASSOCIATED WITH OUR STOCK TRADING ON THE NASD OTC BULLETIN BOARD
RATHER THAN A NATIONAL EXCHANGE.
There are significant consequences associated with our stock trading on the NASD
OTC Bulletin Board rather than a national exchange. The effects of not being
able to list our securities on a national exchange include:
- Limited release of the market prices of our securities;
- Limited news coverage;
- Limited interest by investors in our securities;
- Volatility of our stock price due to low trading volume;
- Increased difficulty in selling our securities in certain states due to
"blue sky" restrictions; and
- Limited ability to issue additional securities or to secure additional
financing.
-15-
IF OUR COMMON STOCK IS SUBJECT TO PENNY STOCK RULES, A STOCKHOLDER MAY HAVE
GREATER DIFFICULTY SELLING SHARES.
The Securities Enforcement and Penny Stock Reform Act of 1990 applies to stocks
characterized as "penny stocks," and requires additional disclosure relating to
the market for penny stocks in connection with trades in any stock defined as a
penny stock. The Securities and Exchange Commission has adopted regulations that
generally define a penny stock to be any equity security that has a market price
of less than $5.00 per share, subject to certain exceptions.
The exceptions include exchange-listed equity securities and any equity security
issued by an issuer that has:
- net tangible assets of at least $2,000,000, if the issuer has been in
continuous operation for at least three years; - net tangible assets of at least
$5,000,000, if the issuer has been in continuous operation for less than three
years; or - average annual revenue of at least $6,000,000 for the last three
years.
Unless an exception is available, the regulations require the delivery, prior to
any transaction involving a penny stock, of a disclosure schedule explaining the
penny stock market and the associated risks.
If our financial condition does not meet the above tests, then trading in the
common stock will be covered by Rules 15g-1 through 15g-6 and 15g-9 promulgated
under the Securities Exchange Act. Under those rules, broker-dealers who
recommend such securities to persons other than their established customers and
institutional accredited investors must make a special written suitability
determination for the purchaser and must have received the purchaser's written
agreement to a transaction prior to sale. These regulations would likely limit
the ability of broker-dealers to trade in our common stock and thus would make
it more difficult for purchasers of common stock to sell their securities in the
secondary market. The market liquidity for the common stock could be severely
affected.
WE DEPEND ON A LIMITED NUMBER OF KEY EXECUTIVES WHO WOULD BE DIFFICULT TO
REPLACE.
Our success depends significantly on the continued services of our senior
management, especially Leonard J. Sokolow, our Chief Executive Officer and
President. Losing Mr. Sokolow or any of our and our subsidiaries' other key
executives, including Timothy E. Mahoney, our Chairman and Chief Operating
Officer, could seriously harm our business. We cannot assure you that we will be
able to retain our key executives or that we would be able to replace any of our
key executives if we were to lose their services for any reason. Competition for
these executives is intense. If we had to replace any of these key executives,
we would not be able to replace the significant amount of knowledge that these
key executives have about our operations. We do not maintain "key person"
insurance policies on any of our executives.
OUR OPERATING BROKER-DEALER 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. (The Company has entered into an agreement with NFS,
another clearing broker, and anticipates to begin clearing through them in May,
2004. A limited portion of the customer securities activities of vFinance
Investments are transacted on a "margin" basis, pursuant to which credit is
extended to customers, which (a) is secured by cash and securities in customer
accounts, or (b) involve (i) "short sales" (i.e., the sale of securities not yet
purchased) or (ii) the purchase and sale of commodity futures contracts,
substantially all of which are transacted on a margin basis. These risks are
increased during periods of volatile markets in which the value of the
collateral vFinance Investments holds could fall below the amount borrowed by
its clients. If margin requirements are not sufficient to cover losses, vFinance
Investments may be required to sell or buy securities at prevailing market
prices and incur losses to satisfy its client obligations.
-16-
WE MAY UNDERWRITE SECURITIES THROUGH VFINANCE INVESTMENTS AND ARE SUBJECT TO
LOSSES RELATING TO A DECLINE IN THE MARKET VALUE OF SECURITIES THAT WE HOLD IN
INVENTORY AND TO POTENTIAL LIABILITY FOR ENGAGING IN UNDERWRITING ACTIVITIES.
The underwriting activities of vFinance Investments involve the purchase, sale
or short sale of securities as a principal. As an underwriter, vFinance
Investments agrees to purchase securities on a "firm commitment" basis and is
subject to risk that it may be unable to resell securities or be required to
dispose of securities at a loss. In connection with our investment-banking
activities in which vFinance Investments acts as a manager or co-manager of
public offerings of securities, we expect to make increased commitments through
vFinance Investments of capital to market making activities in securities of
those issuers. Any additional concentration of capital in the securities of
those issuers held in inventory will increase the risk of loss from possible
declines in the market price of those securities. In addition, under federal
securities laws, other laws and court decisions with respect to underwriters'
liabilities and limitations on the indemnification of underwriters by issuers,
an underwriter is subject to substantial potential liability for misstatements
or omissions of material facts in prospectuses and other communications with
respect to securities offerings. Our potential liability through vFinance
Investments as an underwriter is generally not covered by insurance. Moreover,
underwriting commitments constitute a charge against net capital and the ability
of vFinance Investments to make underwriting commitments may be limited by the
requirement that it must at all times be in compliance with the net capital
rule. During 2002 and 2003 the Company did not participate in any firm
commitment underwritings.
Our success and ability to compete depend to a significant degree on our
intellectual property. We rely on copyright and trademark law, as well as
confidentiality arrangements, to protect our intellectual property. The Company
owns the following federally registered marks: vFinance, Inc.(R), vFinance.com,
Inc.(R), and AngelSearch(R). In addition, the 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 the inherent difficulty in controlling the ultimate
destination or security of software or other data transmitted on it.
The laws of other countries may afford us little or no effective protection for
our intellectual property. We cannot assure you that the steps we take will
prevent misappropriation of our intellectual property or that agreements entered
into for that purpose will be enforceable. In addition, litigation may be
necessary in the future to:
- Enforce our intellectual property rights;
- Determine the validity and scope of the proprietary rights of others; or
- Defend against claims of infringement or invalidity.
Such litigation, whether successful or unsuccessful, could result in substantial
costs and diversions of resources, either of which could seriously harm our
business.
OUR BOARD OF DIRECTORS CAN ISSUE SHARES OF "BLANK CHECK" PREFERRED STOCK WITHOUT
FURTHER ACTION BY OUR STOCKHOLDERS.
Our Board of Directors has the authority, without further action by the
stockholders, to issue up to 2,500,000 shares of preferred stock in one or more
series and to fix the rights, preferences, privileges and restrictions in each
series of the preferred stock, including:
- Dividend rights;
- Conversion rights;
- Voting rights, which may be greater or lesser than the voting rights of the
common stock;
- Rights and terms of redemption;
- Liquidation preferences; and
- Sinking fund terms.
In connection with the merger with Colonial Direct Financial Group, Inc., the
Company issued 122,500 shares of Series A Convertible Preferred Stock and 50,000
shares of Series B Convertible Preferred Stock which were, during 2002,
subsequently converted into shares of the Company's common stock.
The issuance of shares of preferred stock could adversely affect the voting
power of holders of our common stock and the likelihood that these holders will
receive dividends and payments upon liquidation of the Company and could have
the effect of delaying, deferring or preventing a change in control of the
Company. We have no current plans to issue any additional preferred stock in the
next twelve months. Although the issuance of preferred stock may be necessary in
order to raise additional capital.
-17-
ADDITIONAL DILUTION AS A RISK TO STOCKHOLDERS.
As of December 31, 2003, the Company had 29,851,570 shares of common stock
outstanding, options to purchase a total of 10,346,211 shares of common stock,
warrants to purchase a total of 5,398,499 shares of common stock and
subordinated convertible promissory notes convertible into 2,564,911 shares of
common stock, we are authorized to issue up to 75,000,000 shares of common stock
and are therefore able to issue additional shares without being required to
obtain shareholder approval. If we issue additional shares, or if our existing
shareholders exercise or convert their outstanding options or notes, our other
shareholders may find their holdings drastically diluted, which if it occurs,
means that they will own a smaller percentage of the Company.
ITEM 2. DESCRIPTION OF PROPERTY.
The Company leases office space in three locations. The following chart provides
information related to these lease obligations:
Approximate Lease Expiration
Office Location Square Footage Rental Date
---------------------------------------------------------------------------
3010 N. Military, Boca Raton FL 9,877 $ 324,361 08/01/08
Red Bank, NJ (new) 1,249 $ 26,853 10/31/05
880 Third Ave., NY 6,102 $ 199,928 12/31/04
880 Third Ave., NY 5,000 $ 108,000 12/31/04
Our corporate headquarters are located at 3010 North Military Trail, Boca Raton,
Florida 33431, where Colonial Direct Financial Group, Inc. leased approximately
15,750 square feet. The Company terminated the original lease and entered into a
new lease in January 2003. The new lease is for approximately 9,877 square feet
at a rental of $324,361 per annum.
During the year 2002, three of our property leases expired, two leases were
successfully terminated through negotiated settlements and two other leases were
terminated. Of the two leases, which were terminated, the Company is currently
in legal proceedings regarding one of them (830 Third Ave., NY. see Item 3,
Legal Proceedings).
During the year 2003, we entered into a new lease for our Red Bank, NJ office
and expanded our New York facility by renting the remainder of the 4th floor at
880 Third Avenue under a separate lease. In addition to the leased locations
listed herein, the Company has relationships with certain independent
contractors located in their own leased facilities throughout the country.
We consider the facilities of our company and our subsidiaries to be reasonably
insured and adequate for the foreseeable needs of our company and its
subsidiaries.
ITEM 3. LEGAL PROCEEDINGS.
From time to time the Company, and/or one of its subsidiaries, is named as a
party to a lawsuit that has arisen in the ordinary course of business. Although
it is possible that losses exceeding amounts already recorded may be incurred
upon ultimate resolution of these existing legal proceedings, we believe that
such losses, if any, will not have a material adverse effect on our business,
results of operations or financial position; however, unfavorable resolution of
each matter individually or in the aggregate could affect the consolidated
results of operations for the quarterly and annual periods in which they are
resolved.
The business of vFinance Investments involves substantial risks of liability,
including exposure to liability under federal and state securities laws in
connection with the underwriting or distribution of securities and claims by
dissatisfied customers for fraud, unauthorized trading, churning, mismanagement
and breach of fiduciary duty. In recent years, there has been an increasing
incidence of litigation involving the securities industry, including class
actions that generally seek rescission and substantial damages.
In the ordinary course of business, the Company and/or its subsidiaries may be
parties to other legal proceedings and regulatory inquiries, the outcome of
which, either singularly or in the aggregate, is not expected to be material.
There can be no assurance however that any sanctions will not have a material
adverse effect on the financial condition or results of operations of the
Company and/or its subsidiaries. The following is a brief summary of certain
matters pending against or involving the Company and its subsidiaries.
-18-
On or about May 17, 2001, Michael Golden ("Golden"), (a former Director of the
Company and former President of the Company's broker dealer and the controlling
shareholder of Colonial Direct Financial ("Colonial Direct"), a former
wholly-owned subsidiary of the Company) filed an initial complaint against the
Company in the Circuit Court of the 17th Judicial Circuit in and for Broward
County, Florida, alleging that the Company breached its January 5, 2001
employment agreement with Golden, which was entered into as a result of the
merger between Colonial Direct and the Company. Mr. Golden claims that he
terminated the agreement for "good reason," as defined in the agreement, and
that we have failed to pay him severance payments and other benefits as well as
accrued commissions and un-reimbursed expenses. In the initial complaint, Golden
sought monetary damages from the Company in excess of $50,000 together with
interest, attorney's fees and costs. On or about July 18, 2001, the Company
filed its answer and affirmative defenses and counterclaims with the Circuit
Court against Golden and Ben Lichtenberg ("Lichtenberg"), Golden's partner in
Colonial Direct, denying all material allegations in the complaint,
affirmatively alleging that Golden is not entitled to any severance payments
because he was terminated for cause for his insubordination, failure to follow
directives of our board of directors and for breaches of fiduciary duty to the
Company. The Company also alleged certain other breaches.
As of October 23, 2002 the Company has settled its dispute with Lichtenberg, and
as of December 30, 2002, the Company entered into a definitive settlement
agreement with Golden. Under the terms of the settlement with Lichtenberg, a
full mutual general release and covenant not to sue was entered into with no
payments to or by the Company. The settlement agreement with Golden brings to
closure all lawsuits between the parties. Specifically, under the terms of the
agreement, Golden and the Company have entered into a full general release of
any and all outstanding obligations between the parties, and in consideration,
the Company redeemed 50,000 Shares of Series B Preferred Stock having an
aggregate par value of $500,000 in exchange for 3,000,000 unregistered common
shares of the Company subject to a one year lock-up. In addition, Golden will
receive from the Company $7,000 per month for 12 months and thereafter, $5,000
per month for approximately 34 months. In a separate settlement agreement,
Leonard Sokolow, the Company's President and Chief Executive Officer, and
Timothy Mahoney, the Company's Chief Operating Officer and Chairman, privately
purchased 4,500,000 shares of Golden's vFinance, Inc. common stock.
On August 20, 2001, we entered into a Securities Exchange Agreement by means of
which we acquired the membership interests in two related companies, Critical
Investments, LLC, a Delaware limited liability company ("Critical Investments"),
and Critical Advisors, L.L.C., a Virginia limited liability company ("Critical
Advisors"). Critical Investments manages Critical Infrastructure Fund, L.P.
("Critical Infrastructure LP"), a Delaware limited partnership. Critical
Advisors manages Critical Infrastructure Fund, Ltd. ("Critical Infrastructure
Ltd."), an international business company organized and existing under the laws
of the British Virgin Islands and receives (i) a management fee equal to 1% of
the net asset value of Critical Infrastructure Ltd. and (ii) a performance fee
equal to 20% of the increase in net asset value of Critical Infrastructure Ltd.
Critical Infrastructure LP and Critical Infrastructure Ltd. are the sole general
partners in, owning 96% and 4%, respectively, and conduct their investment and
trading activity through Critical Infrastructure Fund (BVI), LP, a limited
partnership organized and existing under the laws of the British Virgin Islands,
which holds a portfolio of securities. A determination has been made to
liquidate the funds. The SEC has commenced a non-public investigation relating
to Critical Infrastructure LP, Critical Investments and Critical Advisors. The
Company is cooperating with this investigation. Critical Investments and
Critical Advisors changed their names to vFinance Investors, LLC and vFinance
Advisors, LLC, respectively, subsequent to the acquisition.
On August 14, 2002, Henry S. Snow and Sandra L. Snow filed a complaint against
Colonial Direct and vFinance, Inc. in the Circuit Court of the 15th Judicial
Circuit in Palm Beach County, Florida. The claim alleges "Breach of Contract"
and "Unjust Enrichment" and seeks damages of $250,000 plus interest and court
costs. It is alleged that Colonial Direct defaulted on a Promissary Note in the
principal amount of $250,000. The Company believes their claim is without merit
and is vigorously defending the action.
On October 23, 2002, Henry Shoemaker, III, filed a claim with the NASD against
First Level Securities, now known as vFinance Investments, Inc., stating among
other things, that there was a breach of fiduciary duties resulting in a loss of
$570,000. This matter went to the arbitration panel during 2004 and Mr.
Shoemaker was awarded $15,000.
On January 12, 2003, MP 830 Third Avenue LLC ( the Landlord), filed a claim
against First Colonial, vFinance, Inc. and vFinance Investments Inc. in the
Supreme Court of the State of New York, alleging the abandonment of leased
facilities and seeking payment of the related rent. The lease was for a term of
seven years expiring on December 31, 2006. First Colonial allegedly ceased
paying rent as of July 1, 2002. After applying First Colonial's security deposit
of $200,000, the Landlord is seeking $59,868 plus any further rent due until
such time as they can successfully relet the premises at a similar rate. The
Company believes that the Landlord's claim is without merit and is vigorously
defending the action.
-19-
On April 15, 2003, Ms. Madeline Moore filed a claim with the NASD against
vFinance Investments, Inc. in the amount of $150,527 claiming a breach of
fiduciary duties. This matter was settled on February 27, 2004 in the amount of
$125,000.
On May 6, 2003, an Answer and Counterclaim was filed by FreeStar Technology
Corporation and Paul Egan (collectively, the "Defendants") in response to a
complaint, as amended, previously filed against the Defendants in the United
States District Court, Southern District of New York by the Plaintiffs, Boat
Basin Investors, LLC, Papell Holdings, Ltd., Marc Siegel, David Stefansky and
Richard Rosenblum. In the Answer and Counterclaim, Defendants counteclaimed
against the Plaintiffs and also named vFinance Investments, Inc. as a
counterdefendant on such counterclaim. Defendants' claims against vFinance
Investments, Inc. included rescission, breach of fiduciary dury, breach of
contract, negligence, and negligent misrepresentation and omission, and
securities fraud. Defendants sought judgment against vFinance Investments, Inc.
for genreral and special damages in an amount of at least $10 million and
punitive damages in an amount of at least $6 million. vFinance Investments, Inc.
replied to the counterclaims by denying any wrongdoing in response to the
material allegations, asserted a number of affirmative defenses, and
counterclaimed for breach of contract and defamation. During 2004, vFinance
Investments, Inc. and the Defendants settled their dispute by exchanging mutual
releases without the payment of any other consideration to either party.
On September 4, 2003, Mr.Gabriel filed a claim with the NASD against vFinance
Investments, Inc. (which is claimed to be the successor firm to Somerset)
alleging, among other things, unsuitable recommendations, breach of fiduciary
duty and fraud. The claim alleges damages of $195,000, plus interest and
punitive damages. The Company believes that Mr. Gabriel's claim is without merit
and is vigorously defending the action.
On September 10, 2003, Mr.Tavares filed a claim with the NASD against vFinance
Investments, Inc. (which is claimed to be the successor firm to Somerset)
alleging, among other things, unsuitable recommendations, breach of fiduciary
duty and fraud. The claim alleges damages of $210,000, plus interest and
punitive damages. The Company believes that Mr.Tavares claim is without merit
and is vigorously defending the action.
On October 17, 2003, we were advised by the staff of the SEC that it intended to
recommend that the SEC institute enforcement proceedings against vFinance
Investments and one of its former employees. We have been informed by the staff
of the SEC that they would claim that vFinance Investments and its former
employee failed reasonably to supervise the alleged illegal trading activities
over a period of approximately two months of one of our broker/dealer's former
securities traders with respect to one publicly traded security that resulted in
vFinance Investments earning $11,000 in commissions related to that one security
over the two month period. vFinance Investments has retained counsel and is
actively engaged in discussions with the staff of the SEC. The Company believes
that it will be able to resolve this matter in a manner which will not have a
material adverse affect on its business and operations.
On November 13, 2003, UBUY Holdings, Inc., f/k/a E-PAWN.COM, Inc., and Steven
Bazuly, and for and on behalf of all of the shareholders of UBUY Holdings, Inc.
filed an amended complaint for damages and consequential damages against
vFinance Investments, Inc. and approximately 60 other defendants in the United
States District Court for the Southern District of Florida stating, among other
things, that there were violations of certain securities rules and regulations.
The Company has not yet been served with this complaint, but in the event it is,
the Company believes that their claim is without merit and will vigorously
defend this action.
On November 20, 2003, Mr.Hughes filed a claim with the NASD against vFinance
Investments, Inc. (which is claimed to be the successor firm to Somerset)
alleging, among other things, unsuitable recommendations, breach of fiduciary
duty and fraud. The claim alleges damages of $285,000, plus interest and
punitive damages. The Company believes that their claim is without merit and
will vigorously defend the action.
On February 3, 2004, Ms. Elizabeth Redden filed a claim against vFinance
Investments, Inc., Somerset Financial Group, Inc., Somerset Financial Partners,
Inc., Leonard J. Sokolow, and certain other individuals in the amount of
$191,845 plus interest and court costs and consequential and punitive damages in
the United States District Court, District of New Jersey, stating among other
things, that there was a fraudulent or wrongful transfer of Somerser's assets.
The Company and Mr. Sokolow believe that their claim is without merit and will
vigorously defend the action.
We are engaged in a number of other legal proceedings incidental to the conduct
of our business. These claims aggregate a range of $150,000 to $938,000. In the
opinion of our management, the Company is adequately insured against the claims
relating to such proceedings, and any ultimate liability arising out of such
proceedings will not have a material adverse effect on the financial condition
or results of operations of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of stockholders during the fourth quarter of
fiscal year 2003.
-20-
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
Our common stock, par value $0.01 per share, is traded on the OTC Bulletin Board
of the National Association of Securities Dealers, Inc. under the symbol "VFIN."
The following table sets forth the closing high and low bid information for our
common stock for the periods indicated below, as reported by the National
Quotation Bureau during such periods:
High Low
2002
1st Quarter 0.60 0.30
2nd Quarter 0.51 0.25
3rd Quarter 0.27 0.11
4th Quarter 0.20 0.06
2003
1st Quarter 0.17 0.05
2nd Quarter 0.26 0.06
3rd Quarter 0.20 0.11
4th Quarter 0.36 0.14
The foregoing quotations supplied by the National Quotations Bureau reflect
inter-dealer prices, without retail mark-up, markdown or commission and may not
represent actual transactions.
We are authorized to issue 75,000,000 shares of common stock, of which
32,852,974 shares were issued and outstanding as of March 22, 2004. We are
authorized to issue up to 2,500,000 shares of preferred stock, none of which are
currently issued or outstanding. The number of stockholders of record for the
common stock as of March 22, 2004 is 330.
We have not paid any cash dividends since inception, and we do not anticipate
paying any cash dividends in the foreseeable future.
Our transfer agent is North American Transfer Co., Freeport, New York 11520.
Recent Sales of Unregistered Securities
On February 27, 2003, the Company entered into an agreement whereby Arend
Verweij and Hoss Bozorgzad, independent contractors of the Company, purchased
1,500,000 unregistered common shares at a price of $0.0867 for a total
consideration of $130,000.
The above noted securities issued to the investors were exempt from registration
pursuant to Section 4(2) of the Securities Act of 1933, as amended, and Rule 506
of Regulation D promulgated thereunder because the securities were acquired in a
privately negotiated transaction by sophisticated investors.
During the first quarter of 2003, the Company granted stock options to purchase
an aggregate of 1,390,000 shares of the Company 's common stock to five
employees of the Company. The exercise prices of these options range from $.15
to $.20. During the second quarter of 2003, the Company granted stock options to
purchase an aggregate of 1,010,000 shares of the Company's common stock to two
employees of the Company. The exercise price of these options was $0.15. During
the third quarter of 2003, the Company granted stock options to purchase an
aggregate of 4,980,349 shares of the Company 's common stock to certain
employees of the Company. The exercise prices of these options range from $0.15
to $0.22. During the fourth quarter of 2003, the Company granted stock options
to purchase an aggregate of 255,000 shares of the Company 's common stock to
four employees of the Company. The exercise prices of these options range from
$0.20 to $0.21. The option grants were exempt from registration pursuant to
Section 4(2) of the Securities Act of 1933, as amended, because the individuals
receiving the options are sophisticated investors who have knowledge of all
material information about the Company
During February and March of 2004, $623,775 of the SBI Note was converted into
3,001,403 shares of the Company's common stock. Of this amount, $545,000 was
converted into 2,725,000 shares of the Company's common stock at a discounted
rate of $0.20 per share under a special arrangement offered by the Company to
encourage further equity participation by SBI. The remainder was converted at
the stated conversion rate of $0.28 per share. The issuance of these shares was
exempt pursuant to Section 4 (2) of the Securities Act of 1933, as amended,
because the shares were issued to sophisticated investors who have knowledge of
all material information about the Company.
-21-
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION OR PLAN OF
OPERATIONS
CRITICAL ACCOUNTING POLICIES
Financial Reporting Release No. 60, released by the SEC, requires all companies
to include a discussion of critical accounting policies or methods used in the
preparation of financial statements. Note 2 to our consolidated financial
statements includes a summary of the significant accounting policies and methods
used in the preparation of our consolidated financial statements. The following
is a brief discussion of the more significant accounting policies and methods
used by us.
GENERAL. The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities,
disclosure of contingent assets and liabilities and the reported amounts of
revenues and expenses. Actual results could differ from those estimates.
REVENUE RECOGNITION
The Company earns revenue (commissions) from brokerage and trading which are
recognized on the day of the trade - trade date basis. The Company also earns
revenue from investment banking and consulting. Monthly retainer fees for
investment banking and consulting are recognized as services are provided.
Investment banking success fees are generally based on a percentage of the total
value of a transaction and are recognized upon successful completion.
The Company does not require collateral from its customers. Revenues are not
concentrated in any particular region of the country or with any individual or
group.
The Company may receive equity instruments which include stock purchase warrants
and common and preferred stock from companies as part of its compensation for
investment-banking services that are classified as investments in trading
securities on the balance sheet, if still held at the financial reporting date.
Primarily all of the equity instruments are received from small public
companies. The Company recognizes revenue for such stock purchase warrants when
received based on the Black Scholes valuation model. On a monthly basis the
Company recognizes unrealized gains or losses in the statement of operations
based on the changes in value in the stock purchase warrants as determined by
the Black Scholes valuation model. Realized gains or losses are recognized in
the statement of operations when the related stock purchase warrant is exercised
and sold. For the years ended December 31, 2003 and 2002, the Company recognized
$777,669 and $1,233,687 of revenue in connection with the receipt of equity
instruments.
Occasionally, the Company receives equity instruments in private companies with
no readily available market value. Equity interests and warrants for which there
is not a public market, are valued based on factors such as significant equity
financing by sophisticated, unrelated new investors, history of positive cash
flow from operations, the market value of comparable publicly traded companies
(discounted for liquidity) and other pertinent factors. Management also
considers recent offers to purchase a portfolio company's securities and the
filings of registration statements in connection with a portfolio company's
initial public offering when valuing warrants.
As of December 31, 2003, certain transactions in process may result in the
Company receiving equity instruments or stock purchase warrants in subsequent
periods as discussed above. In such event, the Company will recognize revenue
related to the receipt of such equity instruments consistent with the
aforementioned policies.
The Company sells two types of listings through its website: (i) perpetual
listings to venture capital vendors, who are interested in providing services to
other companies or individuals; and (ii) three-month listings to entrepreneurs
who have new business ideas to sell. Revenue related to the listings is
generally recognized over the terms of such listings. Website revenues are
concentrated primarily in the United States but are not concentrated in any
particular region of the country or with any individual or group. Fees related
to such listings are included in "other" in the statements of operations for the
years ended December 31, 2003 and 2002.
CLEARING ARRANGEMENT. We do not carry accounts for customers or perform
custodial functions related to customers' securities. We introduce all of their
customer transactions, which are not reflected in these financial statements, to
their respective clearing brokers, which maintain the customers' accounts and
clear such transactions. Additionally, our clearing firm provides the clearing
and depository operations for our proprietary securities transactions. These
activities may expose our broker dealer to off-balance-sheet risk in the event
that customers do not fulfill their obligations with the clearing broker, as our
broker dealer has agreed to indemnify our clearing firm.
NET CAPITAL REQUIREMENT. As of December 31,2003, the minimum amount of net
capital required to be maintained by vFinance Investments was $1,000,000.
-22-
CUSTOMER CLAIMS. In the normal course of business, our operating subsidiaries
have been and continue to be the subject of numerous civil actions and
arbitrations arising out of customer complaints relating to our activities as a
broker-dealer, as an employer and as a result of other business activities. In
general, the cases involve various allegations that our employees had mishandled
customer accounts. Based on our historical experience and consultation with
counsel, we typically reserve an amount we believe will be sufficient to cover
any damages assessed against us. However, we have in the past been assessed
damages that exceeded our reserves. If we misjudged the amount of damages that
may be assessed against us from pending or threatened claims, or if we are
unable to adequately estimate the amount of damages that will be assessed
against us from claims that arise in the future and reserve accordingly, our
operating income would be reduced.
STOCK BASED COMPENSATION. Upon the consummation of an advisory, consulting,
capital or other similar transactions the Company may distribute equity
instruments or proceeds from the sale of equity instruments to its employees.
These distributions are made at the Company's discretion on a case by case basis
as determined by the role of the employee and the nature of the transaction. At
December 31, 2003 and 2002, no amounts were owed to employees of the Company in
connection with equity investments received as compensation.
FAIR VALUE. "Trading securities owned" and "Securities sold, not yet purchased"
on our consolidated statements of financial condition are carried at fair value
or amounts that approximate fair value, with related unrealized gains and losses
recognized in our results of operations. The determination of fair value is
fundamental to our financial condition and results of operations and, in certain
circumstances, it requires management to make complex judgments.
Fair values are based on listed market prices, where possible. If listed market
prices are not available or if the liquidation of our positions would reasonably
be expected to impact market prices, fair value is determined based on other
relevant factors, including dealer price quotations. Fair values for certain
derivative contracts are derived from pricing models that consider current
market and contractual prices for the underlying financial instruments or
commodities, as well as time value and yield curve or volatility factors
underlying the positions.
Pricing models and their underlying assumptions impact the amount and timing of
unrealized gains and losses recognized, and the use of different pricing models
or assumptions could produce different financial results. Changes in the fixed
income and equity markets will impact our estimates of fair value in the future,
potentially affecting principal trading revenues. The illiquid nature of certain
securities or debt instruments also requires a high degree of judgment in
determining fair value due to the lack of listed market prices and the potential
impact of the liquidation of our position on market prices, among other factors.
YEAR ENDED DECEMBER 31, 2003 COMPARED TO THE YEAR ENDED DECEMBER 31, 2002
STATEMENTS OF OPERATIONS
Business Environment
The securities industry is highly competitive and sensitive to many factors and
is directly affected by general economic and market conditions, including the
volatility and price level of securities markets; the volume, size, and timing
of securities transactions; the demand for investment banking services and
changes in interest rates. All such conditions have an impact on commissions,
trading and investment income as well as on liquidity. In addition, a
significant portion of the Company's expenses are relatively fixed and do not
vary with market activity. Consequently, substantial fluctuations can occur in
the Company's revenues and net income from period to period due to these and
other factors.
In addition, the Company has faced increasing competition from commercial banks
and other sources as these institutions begin to offer more investment banking
and financial services traditionally only provided by securities firms. The
effect of the consolidation of the securities industry of recent years means
that a variety of financial services companies have merged to offer a broader
spectrum of investment products and such competitors have substantially greater
financial resources than the Company. The Company is also experiencing
increasing regulation in the securities industry, particularly affecting the
over-the-counter markets, making compliance with regulations more difficult and
costly. At present, the Company is unable to predict the extent of the changes,
or their potential effect on the Company's business.
-23-
Outlook
The Company's long-term plan is to continue to add independent contractors
thereby further leveraging its IT intensive support base as well as expanding
the development of existing retail brokerage, trading, investment banking,
investment advisory and other activities. Equally important is the search for
viable acquisition and merger candidates. As opportunities are presented, it is
the intention of the Company to pursue growth by acquisition or merger where a
synergistic match can be found in terms of corporate goals and personnel and at
a price or valuation that would provide the Company's shareholders with
incremental value.
Results of Operations
Markets in fiscal 2003 continued to be volatile however strengthened throughout
the year. Despite the extremely unfavorable market conditions during the first
quarter of 2003, the Company was able to achieve record revenues and net income
for the fiscal year. The compressed results for the first quarter were more than
offset by record results in the second, third and fourth quarters of the year.
During 2003, the Company's revenues grew by 21% and achieved profitability, as
compared to the significant net losses incurred in prior years. In the upcoming
fiscal year, the Company will continue with its operating plan focused on
efficiencies. Cost saving measures have been, and will continue to be,
implemented throughout the organization. Acquisitions or mergers may still
present growth opportunities subject to the valuations of synergistic companies
and the Company's financial resources available to consummate such a
transaction.
-24-
The following table and discussion summarizes the changes in the major revenue
and expense categories for the past two years.
Years ended December 31,
----------------------------------------------------------
2003 2002
--------------------------- -----------------------------
Revenues % of Revenues Revenues % of Revenues
Revenues:
Commissions - agency $13,372,875 55% $ 9,736,476 48%
Trading profits 4,533,933 19% 3,861,068 19%
Success fees 3,549,453 14% 3,186,459 16%
Consulting and retainers 468,168 2% 1,481,453 7%
Other brokerage related
income 2,085,313 8% 1,528,658 8%
Other 468,724 2% 410,186 2%
---------- ------ ---------- -------
Total revenues 24,478,466 100% 20,204,300 100%
---------- ------ ---------- -------
Cost of revenues:
Commissions 15,246,423 62% 10,850,133 54%
Clearing and
transaction costs 934,884 4% 833,784 4%
Other 16,138 0% 35,002 0%
---------- ------ ---------- -------
Total cost of revenues 16,197,445 66% 11,718,919 58%
---------- ------ ---------- -------
Gross profit 8,281,021 34% 8,485,381 42%
---------- ------ ---------- -------
Other expenses:
General and
administrative 6,776,221 28% 8,317,561 41%
Professional fees 324,712 1% 725,003 4%
Provision for bad debts 148,672 1% 593,121 3%
Legal litigation 327,499 1% 212,490 1%
Depreciation and
amortization 118,619 0% 203,897 1%
Amounts forgiven under
forgivable loans 152,902 1% 229,597 1%
Stock based compensation 17,714 0% 70,560 0%
Write-off of refundable
income taxes - 0% 139,513 1%
---------- ------ ---------- -------
Total other expenses 7,866,339 32% 10,491,742 52%
---------- ------ ---------- -------
Income (loss) from 414,682 2% (2,006,361) (10)%
operations
Interest and dividend
(expense) (103,267) 0% (228,937) (1)%
---------- ------ ---------- -------
Net Income (loss) $ 311,415 1% $(2,235,298) (11)%
Total revenues were $24,478,466 for the year ended December 31, 2003 as compared
to $20,204,300 for the year ended December 31, 2002, an increase of $4,274,166,
or 21 %. The increase in revenues was primarily related to Brokerage and Trading
which increased $4,865,919, or 32% from the prior year, partially offset by a
decrease in Investment Banking which decreased $650,291, or 14%, from the prior
year. The revenue increase was primarily a result of ongoing recruiting efforts
to attract seasoned professionals with high profile clientele and relationships,
supported by a comparatively strong marketplace.
-25-
Cost of revenues was $16,197,445 for the year ended December 31, 2003 as
compared to $11,718,919 for the year ended December 31, 2002, an increase of
$4,478,526, or 38%. The increase was primarily related to increased revenues and
the corresponding increase to commissions as well as the Company's transition to
an Independent Contractor (I/C) based retail sales model, as opposed to an
employee based model. I/Cs require higher payouts than employees as they are
relatively self supporting, independent businesses. The move to the I/C business
model had a corresponding benefit as it reduced the Company's general and
administrative expenses (discussed below).
Gross profit was $8,281,021 for the year ended December 31, 2003 as compared to
$8,485,381 for the year ended December 31, 2002, a decrease of $204,360, or 2%.
Gross profit margin for the year ended December 31, 2003 was 34% as compared to
42% for the year ended December 31, 2002. The decrease in gross profit margin
was primarily due to increased payout percentages related to the Company's
transition to an I/C sales model.
General and administrative expenses were $6,776,221 for the year ended December
31, 2003 as compared to $8,317,561 for the year ended December 31, 2002, a
decrease of $1,541,340, or 19%. This decrease was also primarily attributable to
the Company's transition to an I/C based sales model, as opposed to an employee
based model. This sales model results in reduced general and administrative
expenses as the sales force, and their related administrative costs, are not the
direct, fiscal responsibility of the Company. However, as mentioned above, it
also results in higher payouts to I/Cs which reduces the Company's gross margin.
The Company has made other cost savings measures which also favorably impacted
its G&A costs. Such measures included headcount reductions and consolidation of
its leased headquarters space.
Professional fees were $324,712 for the year ended December 31, 2003 as compared
to $725,003 for the year ended December 31, 2002, a decrease of approximately
$400,291, or 55%. The decrease was primarily due to decreases in accounting,
legal and consulting fees largely attributable to the Company's increased
utilization of its internal professional staff.
Provision for bad debts was $148,672 for the year ended December 31, 2003 as
compared to $593,121 for the year ended December 31, 2002, a decrease of
approximately $444,449, or 75%. The decrease was primarily due to a significant
reduction in retainer fees, which often prove difficult to collect. Retainer
fees are recognized as services are provided. We provide for credit losses at
the time we believe accounts receivable may not be collectible. Our evaluation
is made and recorded on a monthly basis. Credit losses have not exceeded
management's expectations.
Legal litigation was $327,499 for the year ended December 31, 2003 as compared
to $212,490 for the year ended December 31, 2002, an increase of $115,009, or
54%. As is typical in the industry, customers make claims regarding the
Company's actions and the Company defends itself vigorously against such claims.
The Company's cost of defending itself varies quarter-to-quarter depending on
the volume of claims which are in process at any given time.
Depreciation and amortization was $118,619 for the year ended December 31, 2003
as compared to $203,897 for the year ended December 31, 2002, a decrease of
$85,278 or 42%. The decrease was primarily due to certain fixed assets becoming
fully depreciated and not subsequently replaced. Additionally, as facilities
were consolidated and headcount reduced, there was a reduction in requirements
for additional fixed asset purchases.
The amount forgiven under forgivable loans was $152,902 for the year ended
December 31, 2003 as compared to $229,597 for the year ended December 31, 2002,
a decrease of $76,695, or 33%. This decrease was attributable to the fact that
several years ago the Company discontinued its practice of providing forgivable
loans to brokers as part of its recruitment efforts. Accordingly, there have
been no additions to the outstanding balance and the remaining balance is simply
being amortized over time.
Stock based compensation was $17,714 for the year ended December 31, 2003 as
compared to $70,560 for the year ended December 31, 2002 a decrease of $52,846,
or 75%. This amount primarily represents the amortization of deferred
compensation to an outside consultant who was granted options from the Company
in return for his services. The amount related to this consultant was fully
recognized as of March 31, 2003. In addition, the Company recently granted
warrants to its landlord related to the renegotiation of its lease and this
amount is being amortized over the life of the lease.
We do not believe our operations are materially affected by inflation and or by
seasonal fluctuations. Our main lines of business are directly affected by
higher interest rates, the volatility of the stock market and capital markets,
and are reliant on the continuation of mergers and acquisitions and related
financings in the entrepreneurial marketplace.
-26-
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities for the year ended December 31,2003
was $1,484,387 as opposed to net cash used in operating activities of
($1,564,486) for the year ended December 31, 2002. The increase in cash provided
by operating activities is primarily attributable to a significant improvement
to the Company's net income. The Company's net income for fiscal year 2003 was
$311,415 versus a net loss of $2,235,298 for fiscal year 2002. In addition, the
Company's accounts payable and accrued liabilities increased significantly from
the prior year while its non-cash fees received decreased.
Net cash used in investing activities for the year ended December 31, 2003 was
$57,734 as opposed to $104,018 for the year ended December 31, 2002. The primary
reason for the decrease was that the Company has reduced its headcount and
facility space resulting in reduced fixed asset requirements
Net cash provided by financing activities for the year ended December 31, 2003
was $130,000 as opposed to $1,518,209 for the year ended December 31, 2002. The
decrease is primarily due to the fact that the Company entered into a debt
agreement with UBS Paine Webber borrowing $1,500,000 during the first quarter of
2002. The Company has not had a need to increase its outside funding since that
time.
The Company believes that its cash on hand and cash generated from its
operations should be sufficient to satisfy its working capital and capital
expenditure requirements through fiscal year 2004
FUTURE AND CONTINGENT LIABILITIES:
The following statements are made in consideration of Financial Reporting
Release (FR-61), LIQUIDITY AND OFF-BALANCE SHEET ARRANGEMENTS, CERTAIN TRADING
ACTIVITIES, & TRANSACTIONS WITH RELATED AND CERTAIN OTHER PARTIES. We do not
have "off-balance sheet arrangements."
We lease office space under the terms of operating leases. The following chart
shows lease obligations including rental of real property and equipment.
YEAR AMOUNT
2004 $ 654,518
2005 326,660
2006 304,237
2007 302,349
2008 194,753
----------
TOTAL $1,782,517
==========
Total rent expense under operating leases, including space rental, totaled
approximately $700,464 and $871,828 for the years ended December 31, 2003 and
2002.
Litigation:
From time to time we are a party to various lawsuits that have arisen in the
ordinary course of business. The amounts asserted in these matters are material
to our financial statements. While any litigation contains an element of
uncertainty and although it is possible that losses exceeding amounts already
recorded may be incurred upon ultimate resolution of these existing legal
proceedings, management believes that such losses, if any, will not have a
material adverse effect on our business, results of operations or financial
position. However, unfavorable resolution of each matter individually or in the
aggregate could affect the consolidated results of operations for the quarterly
and annual periods in which they are resolved.
For a description of this litigation, see Part I, Item 3 of this Annual Report.
-27-
Subsequent events:
During March, 2004, the Company entered into an agreement with a new clearing
firm; National Financial Services LLC, Member NYSE/SIPC, a Fidelity Investments
company ("NFS"). In connection with this agreement NFS agreed to pay, on
vFinance's behalf, $1,500,000 that the Company owed to UBS under an existing
credit facility. The amount was paid to UBS by NFS in March, 2004. The new
clearing agreement also requires NFS to provide the Company with $200,000 to
assist us with the transition. This amount was paid to vFinance in March, 2004.
The operating terms of the new clearing agreement are competitive. It is
anticipated that the Company will convert to, and begin clearing through, NFS
during May 2004.
During February and March of 2004, $623,775 of the SBI Note was converted into
3,001,403 shares of the Company's common stock. Of this amount, $545,000 was
converted into 2,725,000 shares of the Company's common stock at a discounted
rate of $0.20 per share under a special arrangement offered by the Company to
encourage further equity participation by SBI. The remainder was converted at
the stated conversion rate of $0.28 per share.
-28-
ITEM 7. FINANCIAL STATEMENTS.
vFinance, Inc.
Consolidated Financial Statements
Years ended December 31, 2003 and 2002
CONTENTS
Report of Independent Auditors........................................... F-1
Audited Financial Statements
Consolidated Balance Sheet............................................... F-2
Consolidated Statements of Operations .................................. F-3
Consolidated Statements of Shareholders' Equity.......................... F-4
Consolidated Statements of Cash Flows.................................... F-5
Notes to Consolidated Financial Statements............................... F-6
-29-
Report of Independent Auditors
Board of Directors
vFinance, Inc.
We have audited the accompanying consolidated balance sheet of vFinance, Inc. as
of December 31, 2003 and the related consolidated statements of operations,
shareholders' equity and cash flows for the years ended December 31, 2003 and
2002. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of vFinance, Inc. at
December 31, 2003, and the results of its operations and its cash flows for the
years ended December 31, 2003 and 2002, in conformity with accounting principles
generally accepted in the United States.
New York, New York /s/ Sherb & Co., LLP
March 15, 2004 Certified Public Accountants
F-1
vFinance, Inc.
Consolidated Balance Sheet
December 31, 2003
Assets:
Current Assets:
Cash and cash equivalents $ 3,783,814
Due from clearing broker 169,629
Investments in trading securities 1,002,033
Accounts receivable, net of allowance for
doubtful accounts of $199,672 188,776
Forgivable loans - employees, current portion 80,161
Notes receivable - employees 181,959
Prepaid expenses and other current assets 79,734
------------
Total Current Assets 5,486,106
Furniture and equipment, at cost:
Furniture and equipment 455,153
Internal use software 158,500
------------
613,653
Less accumulated depreciation (417,721)
------------
Net furniture and equipment 195,932
Forgivable loans - employees 6,597
Goodwill 420,000
Other assets 269,853
------------
Total Assets $ 6,378,488
============
Liabilities and Shareholders' Equity:
Current Liabilities:
Accounts payable $ 1,041,203
Accrued payroll 1,414,209
Other accrued liabilities 659,667
Securities sold, not yet purchased 83,780
Notes payable, current portion 603,213
Other 16,046
------------
Total Current Liabilities 3,818,118
Notes Payable - long term 1,500,000
Shareholders' Equity:
Series A Convertible Preferred Stock $0.01 par value,
122,500 shares authorized, 0 shares issued and outstanding -
Series B Convertible Preferred Stock $0.01 par value,
50,000 shares authorized, 0 shares issued and outstanding -
Common stock $0.01 par value, 75,000,000 shares
authorized, 29,851,570 issued and outstanding 298,520
Additional paid-in-capital 24,376,798
Deferred compensation (24,705)
Accumulated deficit (23,590,243)
------------
Total Shareholders' Equity 1,060,370
------------
Total Liabilities and Shareholders' Equity $ 6,378,488
============
See Accompanying Notes
F-2
vFinance, Inc.
Consolidated Statements of Operations
Years ended December 31,
---------------------------------------------
2003 2002
-------------------- --------------------
Revenues:
Commissions - agency $ 13,372,875 $ 9,736,476
Trading profits 4,533,933 3,861,068
Success fees 3,549,453 3,186,459
Consulting and retainers 468,168 1,481,453
Other brokerage related income 2,085,313 1,528,658
Other 468,724 410,186
-------------------- --------------------
Total revenues 24,478,466 20,204,300
-------------------- --------------------
Cost of revenues:
Commissions 13,234,856 8,603,834
Clearing and transaction costs 934,884 833,784
Success 1,792,760 2,012,245
Consulting and retainers 218,807 234,054
Other 16,138 35,002
-------------------- --------------------
Total cost of revenues 16,197,445 11,718,919
-------------------- --------------------
Gross profit 8,281,021 8,485,381
-------------------- --------------------
Other expenses:
General and administrative 6,776,221 8,317,561
Professional fees 324,712 725,003
Provision for bad debts 148,672 593,121
Legal litigation 327,499 212,490
Depreciation 118,619 203,897
Amounts forgiven under forgivable
loans 152,902 229,597
Write-off of refundable income
taxes - 139,513
Stock based compensation 17,714 70,560
-------------------- --------------------
Total other expenses 7,866,339 10,491,742
-------------------- --------------------
Income (loss) from operations 414,682 (2,006,361)
Interest expense, net of interest
income of $95,843 and $163,732 (103,267) (228,937)
-------------------- --------------------
Net income (loss) available to
common stockholders $ 311,415 $ (2,235,298)
==================== ====================
Income (loss) per share:
Basic $ 0.01 $ (0.08)
==================== ====================
Weighted average number of common
shares used in computing basic
income (loss) per share 29,609,104 26,716,408
==================== ====================
Diluted $ 0.01 $ (0.08)
==================== ====================
Weighted average number of common
shares used in computing diluted
income (loss) per share 29,963,446 26,716,408
==================== ====================
See Accompanying Notes
F-3
vFinance, Inc.
Consolidated Statements of Shareholders' Equity
Additional Additional
Preferred Stock Common Stock Paid-in Paid-in
Shares Amount Shares Amount Capital Common Capital Preferred
Balance at December 31, 2001 172,500 $ 1,725 25,964,395 $ 259,645 $ 22,515,698 $ 1,565,775
Issuance of shares in conjunction with
share purchase agreement 83,334 833 22,917
Issuance of shares in conjunction with
share purchase agreement 350,878 3,509 96,491
Accrued dividends payable on preferred shares - - - - - (126,875)
Treasuary stock donation 2,000
Dividend out of subsidiary 2,219,331
Issuance of compensatory stock options and
stock purchase warrants - - - - 49,680 -
Issuance of common shares in connection with
consulting services rendered - - 50,000 500 13,000
Partial conversion of promissory note 622,807 6,228 (6,228)
Reversal of compensatory stock purchase
warrants (24,000)
Amortization of Deferred Compensation
Amortization of Deferred Compensation
Amortization of Deferred Compensation
Reversal of Deferred compensation (38,857)
Partial conversion of promissory note 166,667 1,667 (1,667)
Issuance of shares in conjunction with share
purchase agreement 100,000 1,000 10,000
Conversion of Preferred A & B (172,500) (1,725) 4,225,000 42,250 1,432,750 (1,438,900)
Retirement of Treasuary Stock (3,211,511) (32,112) (2,139,317)
Net Loss
------------------------------------------------------------------------------
Balance at December 31, 2002 - - 28,351,570 283,520 24,151,798 -
Issuance of shares in conjunction with share
purchase agreement 1,500,000 15,000 115,000
Amortization of Deferred Compensation
Acquisition of JSM 80,000
Issuance of stock purchase warrants in
conjunction with lease agreement - - 30,000
Amortization of Deferred Compensation
Net Income
------------------------------------------------------------------------------
Balance at December 31, 2003 - $ - 29,851,570 $ 298,520 $ 24,376,798 $ -
==============================================================================
See Accompanying Notes
F-4
vFinance, Inc.
Consolidated Statements of Shareholders' Equity
Deferred Accumulated Treasury Shareholders'
Compensation Deficit Stock Equity
Balance at December 31, 2001 $ (82,657) $ (21,666,360) $ (2,169,429) $ 424,397
Issuance of shares in conjunction with
share purchase agreement 23,750
Issuance of shares in conjunction with
share purchase agreement 100,000
Accrued dividends payable on preferred
shares (126,875)
Treasuary stock donation (2,000) -
Dividend out of subsidiary 2,219,331
Issuance of compensatory stock options
and stock purchase warrants (24,840) 24,840
Issuance of common shares in connection
with consulting services rendered (4,500) 9,000
Partial conversion of promissory note -
Reversal of compensatory stock purchase
warrants 24,000 -
Amortization of Deferred Compensation 4,500 4,500
Amortization of Deferred Compensation 12,420 12,420
Amortization of Deferred Compensation 19,800 19,800
Reversal of Deferred compensation 38,857 -
Partial conversion of promissory note -
Issuance of shares in conjunction with
share purchase agreement 11,000
Conversion of Preferred A & B 34,375
Retirement of Treasuary Stock 2,171,429 -
Net Loss (2,235,298) (2,235,298)
----------------------------------------------------------
Balance at December 31, 2002 (12,420) (23,901,658) - 521,240
Issuance of shares in conjunction with
share purchase agreement 130,000
Amortization of Deferred Compensation 12,420 12,420
Acquisition of JSM 80,000
Issuance of stock purchase warrants in
conjunction with lease agreement (30,000) -
Amortization of Deferred Compensation 5,295 5,295
Net Income 311,415 311,415
------------------------------------------------------------
Balance at December 31, 2003 $ (24,705) $ (23,590,243) $ - $1,060,370
============================================================
See Accompanying Notes
F-4
vFinance, Inc.
Consolidated Statements of Cash Flows
Years Ended December 31,
----------------------------------------
2003 2002
------------------ ------------------
Operating Activities
Net income (loss) $ 311,415 $ (2,235,298)
Adjustments to reconcile net income (loss) to
net cash provided by (used) in operating activities:
Non-cash fees received (777,669) (1,233,687)
Depreciation 118,619 203,897
Provision for doubtful accounts 146,672 586,109
Non-cash compensation 395,961 622,495
Income tax receivable write off - 139,513
Imputed interest 73,393 117,820
Unrealized loss on investments, net 80,348 123,865
Unrealized loss (gain) on warrants 43,292 (32,055)
Amount forgiven under forgiveable loan 152,902 229,597
Stock based compensation 17,714 70,560
Changes in operating assets and liabilities, net
Accounts receivable (39,638) (363,065)
Forgivable loans - 177,132
Due from clearing broker (72,995) (79,838)
Notes receivable from employees (17,365) (76,343)
Investments in trading securities 497,932 296,923
Other current assets - 30,018
Other assets and liabilities (103,471) 233,997
Accounts payable and accrued liabilities 643,066 (391,714)
Securities, sold not yet purchased 14,211 15,588
----------------- -------------------
Net cash provided by (used in) operating activities 1,484,387 (1,564,486)
Investing Activities
Purchase of equipment (57,734) (105,677)
Disposal of businesses cash effect - 1,659
------------------ ------------------
Net cash used in investing activities (57,734) (104,018)
Financing Activities
Changes in capital leases - (16,166)
Changes in current debt - (31,875)
Proceeds from credit agreement - 1,500,000
Proceeds from issuance of common stock 130,000 134,750
Payment of long term debt - (68,500)
------------------ ------------------
Net cash provided by financing activities 130,000 1,518,209
Increase (decrease) in cash and cash equivalents 1,556,653 (150,295)
Cash and cash equivalents at beginning of year 2,227,161 2,377,456
------------------ ------------------
Cash and cash equivalents at end of year $ 3,783,814 $ 2,227,161
================== ==================
See Accompanying Notes
F-5
vFinance, Inc.
Notes to the Consolidated Financial Statements
1. DESCRIPTION OF BUSINESS
vFinance, Inc. (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. The Company, through its
principal operating subsidiary vFinance Investments, Inc., principally operates
in one business segment, investment management services. This segment consists
primarily of financial services, including retail brokerage and investment
banking. vFinance Investments is licensed to conduct activities as a
broker-dealer in 50 states and has offices in New York, New Jersey and Florida.
In addition to its principal subsidiary, vFinance Investments, the Company 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.
Revenue Recognition
The Company earns revenue (commissions) from brokerage and trading which are
recognized on the day of the trade - trade date basis. The Company also earns
revenue from investment banking and consulting. Monthly retainer fees for
investment banking and consulting are recognized as services are provided.
Investment banking success fees are generally based on a percentage of the total
value of a transaction and are recognized upon successful completion.
The Company does not require collateral from its customers. Revenues are not
concentrated in any particular region of the country or with any individual or
group.
F-6
vFinance, Inc.
Notes to Consolidated Financial Statements (continued)
2. SIGNIFICANT ACCOUNTING POLICIES AND OTHER MATTERS (CONTINUED)
Revenue Recognition (continued)
The Company may receive equity instruments which include stock purchase warrants
and common and preferred stock from companies as part of its compensation for
investment-banking services that are classified as investments in trading
securities on the balance sheet, if still held at the financial reporting date.
These instruments are stated at fair value in accordance with SFAS #115
"Accounting for certain investments in debt and equity securities". Primarily
all of the equity instruments are received from small public companies. The
Company recognizes revenue for such stock purchase warrants, when received,
based on the Black Scholes valuation model. The revenue recognized related to
the other equity instruments is determined based on available market
information, discounted by a factor reflective of the expected holding period
for those particular equity instruments. For the years ended December 31, 2003
and 2002, the Company recognized $777,669 and $1,233,687, respectively, of
revenue in connection with the receipt of equity instruments. On a monthly basis
the Company recognizes unrealized gains or losses in its statement of operations
based on the changes in value of equity instruments. Realized gains or losses
are recognized in the statement of operations when the related equity instrument
is sold.
Occasionally, the Company receives equity instruments in private companies with
no readily available market value. Equity interests and warrants for which there
is not a public market are valued based on factors such as significant equity
financing by sophisticated, unrelated new investors, history of positive cash
flow from operations, the market value of comparable publicly traded companies
(discounted for liquidity) and other pertinent factors. Management also
considers recent offers to purchase a portfolio company's securities and the
filings of registration statements in connection with a portfolio company's
initial public offering when valuing equity instruments received from a private
company.
Upon the consummation of an advisory, consulting, capital or other similar
transactions the Company may distribute equity instruments or proceeds from the
sale of equity instruments to its employees. These distributions are made at the
Company's discretion on a case by case basis as determined by the role of the
employee and the nature of the transaction. At December 31, 2003 and 2002, no
amounts were owed to current employees of the Company in connection with equity
investments received as compensation.
As of December 31, 2003, certain transactions in process may result in the
Company receiving equity instruments or stock purchase warrants in subsequent
periods as discussed above. In such event, the Company will recognize revenue
related to the receipt of such equity instruments consistent with the
aforementioned policies.
The Company sells two types of listings through its website: (i) perpetual
listings to venture capital vendors, who are interested in providing services to
other companies or individuals; and (ii) three-month listings to entrepreneurs
who have new business ideas to sell. Revenue related to the listings is
generally recognized over the terms of such listings. Website revenues are
concentrated primarily in the United States but are not concentrated in any
particular region of the country or with any individual or group. Fees related
to such listings are included in "other" in the statements of operations for the
years ended December 31, 2003 and 2002.
Reclassifications
Certain prior period balances have been reclassified to conform to the current
period's financial statement presentation. These reclassifications had no impact
on previously reported results of operations or shareholders' equity.
Use of Estimates
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the amounts reported in the accompanying financial
statements. Actual results may differ from those estimates, and such differences
may be material to the financial statements.
Cash and Cash Equivalents
Cash and cash equivalents include all highly liquid investments with maturities
of three months or less when purchased.
Accounts and Notes Receivable
Accounts and notes receivable balances are reviewed monthly to determine the
collectible of such receivables. The Company records both a specific and general
reserve on such balances as deemed appropriate.
F-7
vFinance, Inc.
Notes to Consolidated Financial Statements (continued)
2. SIGNIFICANT ACCOUNTING POLICIES AND OTHER MATTERS (CONTINUED)
Investments
Investments are classified as investments in trading securities and are held for
resale in anticipation of short-term market movements or until such securities
are registered or are otherwise unrestricted. Investments in trading securities
include both trading account assets and equity instruments which the Company has
received as part of its compensation for investment banking services. At
December 31, 2003, investments consisted of common stock, corporate bonds and
common stock purchase warrants held for resale.
Trading account assets, consisting of marketable equity securities, are stated
at fair value. Unrealized gains or losses are recognized in the statement of
operations on a monthly basis based on changes in the fair value of the security
as quoted on national or inter-dealer stock exchanges. Realized gains or losses
are recognized in the statement of operations as trading profits when the equity
instruments are sold.
As mentioned above, the Company periodically receives equity instruments which
include stock purchase warrants and common and preferred stock from companies as
part of its compensation for investment-banking services. These instruments are
stated at fair value in accordance with SFAS #115 "Accounting for certain
investments in debt and equity securities" and EITF 00-8 "Accounting by a
grantee for an equity instrument to be received in conjunction with providing
goods or services." Primarily all of the equity instruments are received from
small public companies. The stock and the stock purchase warrants received are
typically restricted as to resale, although, the company generally receives a
registration right within one year. Company policy is to resell these securities
in anticipation of short-term market movements. The Company recognizes revenue
for such equity instruments based on the fair value of the stock at the time
equity instruments are granted and for stock purchase warrants based on the
Black-Scholes valuation model. Unrealized gains or losses are recognized in the
statement of operations on a monthly basis based on changes in the fair value of
the security as quoted on national or inter-dealer stock exchanges, discounted
by a factor to address the remaining period which the equity instrument is
restricted as to resale.
Net unrealized gains related to investments in trading securities as of
December 31, 2003, and 2002, aggregated $123,640 and $91,810, respectively. Net
realized gains related to investments in trading securities as of December 31,
2003 and 2002 aggregated $485,302 and $22,682, respectively.
Investments in trading securities and securities sold, not yet purchased,
consist of trading and investment securities at market values at December 31,
2003, as follows:
Sold, not yet
Owned Purchased
------------------------------------
Corporate Bonds $ 65,625 $ -
Corporate Stocks 649,279 83,780
Warrants 287,129 -
------------------------------------
Total $1,002,033 $83,780
====================================
At December 31, 2003, restricted equity securities had an aggregate fair value
of $243,634.
Securities Transactions
Proprietary securities transactions in regular-way trades are accrued and
recorded on the trade date, as if they had settled. Profit and loss arising from
all securities and commodities transactions entered into for the account and
risk of the Company are recorded on a trade date basis. Customers' securities
and commodities transactions are reported on a settlement date basis with
related commission income and expense reported on a trade date basis.
Amounts receivable and payable for securities transactions that have not reached
their contractual settlement date are recorded net on the balance sheet.
F-8
vFinance, Inc.
Notes to Consolidated Financial Statements (continued)
2. SIGNIFICANT ACCOUNTING POLICIES AND OTHER MATTERS (CONTINUED)
Financial Instruments with Off-Balance Sheet Risk
The securities transactions of the Company's customers are introduced on a fully
disclosed basis with a clearing broker-dealer. The Company holds no customer
funds or securities. The clearing broker-dealer is responsible for execution,
collection of and payment of funds, and receipt and delivery of securities
relative to customer transactions. Off-balance sheet risk exists with respect to
these transactions due to the possibility that customers may be unable to
fulfill their contractual commitments wherein the clearing broker-dealer may
charge any related losses to the Company. The Company seeks to minimize this
risk through procedures designed to monitor the creditworthiness of its
customers and to ensure that customer transactions are executed properly by the
clearing broker-dealer.
Stock Based Compensation
The Company has elected to follow Accounting Principles Board Opinion No. 25,
ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES ("APB 25"), and related interpretations
in accounting for its employee stock options and employee stock purchase
warrants because the alternative fair value accounting provided for under
Statement of Financial Accounting Standards No. 123, ACCOUNTING FOR STOCK BASED
COMPENSATION ("SFAS 123") and SFAS 148 ACCOUNTING FOR STOCK BASED COMPENSATION
TRANSITION AND DISCLOSURE, AN AMENDMENT OF SFAS 123, requires the use of option
valuation models that were not developed for use in valuing employee stock
options. Under APB 25, if the exercise price of the Company's employee stock
options or stock purchase warrants equals or exceeds the market price of the
underlying stock on the date of grant no compensation expense is recognized.
Fair Value of Financial Instruments
The fair values of the Company's financial instruments, which includes cash and
cash equivalents, accounts and notes receivable, investments, accounts payable,
and accrued expenses approximate their carrying values.
The Company's financial instruments that are exposed to concentrations of credit
risk consist primarily of cash and cash equivalents and accounts receivable. The
Company places its cash with high quality insured financial institutions.
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, 2003 and 2002, totaled $118,619 and $203,897,
respectively.
Goodwill
The carrying value of goodwill as well as other long-lived assets are reviewed
if the facts and circumstances suggest that they may be impaired. If this review
indicates that the assets will not be recoverable, as determined based on the
undiscounted estimated cash flows of the Company over the remaining amortization
period, the Company's carrying values of the assets would be reduced to their
estimated fair values in accordance with Statement of Financial Accounting
Standards No. 144, ACCOUNTING FOR THE IMPAIRMENT OR DISPOSAL OF LONG-LIVED
ASSETS ("FAS 144"). Among other factors considered in such evaluation is the
historical and projected operating performance of business operations, the
operating environment and business strategy, competitive information and market
trends. Accodingly, the Company believes that there has not been an impairment
of its Goodwill or long-lived assets as of December 31, 2003.
Income Taxes
The Company accounts for income taxes under the liability method in accordance
with Statement of Financial Accounting Standards No. 109, ACCOUNTING FOR INCOME
TAXES. Under this method, deferred income tax assets and liabilities are
determined based on differences between the financial reporting and tax bases of
assets and liabilities and are measured using the enacted tax rates and laws
that will be in effect when the differences are expected to reverse.
F-9
vFinance, Inc.
Notes to Consolidated Financial Statements (continued)
2. SIGNIFICANT ACCOUNTING POLICIES AND OTHER MATTERS (CONTINUED)
Statement of Cash Flows
Supplemental disclosure of cash flow information:
2003 2002
---------- ------------
Cash paid for interest
during the year $125,717 $91,929
Non-cash items affecting investing and
financing activities:
Conversion of Preferred A & B Stock $ - $1,439,000
Retirement of Treasury Stock $ - $2,171,428
Earnings per Share
The Company calculates earnings per share in accordance with Statement of
Financial Accounting Standards No. 128, EARNINGS PER SHARE ("SFAS No. 128"). In
accordance with SFAS No. 128, basic earnings per share is computed using the
weighted average number of shares of common stock outstanding and diluted
earnings per share is computed using the weighted average number of shares of
common stock and the dilutive effect of options and warrants outstanding, using
the "treasury stock" method.
Forgivable Loans
In order to remain competitive in the marketplace, the Company previously
granted forgivable loans to certain employees. The terms of the loans ranged
from two to five years with scheduled maturity dates from 2002 to 2005. For each
year the employee is in good standing with the Company, the Company forgives a
ratable portion of the loan and charges this amount to compensation expense. If
the employee is terminated, the principal balance is due and payable within 120
days. The loans do not bear interest and interest is not imputed as
collectibility of any such interest would not be probable. As of December 31,
2003, the balance of the forgivable loans was $86,758, of which $80,161 is
classified as current. The remaining long-term portion of $6,597 is scheduled
for forgiveness in 2005.
Due from Clearing Broker
Receivables from brokers and dealers consist primarily of amounts due from the
Company's clearing organization, which provides clearing and depository services
for brokerage transactions on a fully disclosed basis.
F-10
vFinance, Inc.
Notes to Consolidated Financial Statements (continued)
3. ACQUISITIONS
On May 29, 2002, the Company entered into a select asset purchase agreement (the
"Agreement"), as amended on June 17, 2002 (the "Amendment"), with Somerset
Financial Partners, Inc., ("Somerset") a Delaware corporation to acquire certain
of its assets. Through its subsidiaries, Somerset acted as a registered broker
dealer and was engaged in other financial services. Pursuant to the Agreement
and Amendment, the Company received the transfer of all agreed upon brokerage
customers and client accounts as well as the registration of approximately 25
registered personnel of Somerset. As of June 17,2002, the Company began
reflecting in its financial statements the applicable revenue production and
other associated costs. Under the escrow agreement signed in conjunction with
the Agreement and Amendment, the Company instructed its transfer agent to
deliver to and in the name of its escrow agent a total of 3,000,000 shares of
the Company's common stock (the "Escrowed Shares"). The Escrowed Shares were to
be delivered to Somerset when Somerset achieves all the closing conditions. In
August 2002, as all closing conditions of the Agreement and Amendment were not
met by Somerset, the Company issued a default letter to Somerset (the "Default
Letter"). Among other things, the Default Letter provided formal notice to
Somerset of its default under the Agreement and Amendment. In October 2002, a
formal termination notice was executed by the Company and Somerset and the
Escrowed Shares were returned to the Company and cancelled.
In accordance with Financial Interpretation No. 44 "Accounting for Certain
Transactions Involving Stock Compensation" we have included all vested stock
options issued by the Company in exchange for outstanding awards held by
employees of the acquired company as part of the purchase price.
4. NET CAPITAL REQUIREMENT
vFinance Investments is subject to the Securities and Exchange Commission
Uniform Net Capital Rule (rule 15c3-1), which requires the maintenance of
minimum net capital and requires that the ratio of aggregate indebtedness to net
capital, both as defined, shall not exceed 15 to 1 (and the rule of the
"applicable" exchange also provides that equity capital may not be withdrawn or
cash dividends paid if the resulting net capital ratio would exceed 10 to 1). At
December 31, 2003, vFinance Investments had net capital of $1,832,331, which was
$832,331 in excess of its required net capital of $1,000,000.
vFinance Investments' aggregate indebtedness to net capital ratio was to 1.2 to
1 in 2003.
vFinance Investments qualifies under the exemptive provisions of Rule 15c3-3
under Section (k)(2)(ii) of the Rule, as it does not carry security accounts of
customers or perform custodial functions related to customer securities.
F-11
vFinance, Inc.
Notes to Consolidated Financial Statements (continued)
5. RELATED PARTY TRANSACTIONS
On November 8, 1999, the Company entered into three year employment agreements
(the "Agreements") with the Company's Chief Executive Officer and President, who
is the beneficial owner of 19.7% and 20.8% of the total outstanding common
shares of the Company at December 31, 2003 and 2002, respectively, and the
Company's Chief Operating Officer and Chairman, who is the beneficial owner of
19.7% and 20.8% of the total outstanding common shares of the Company at
December 31, 2003 and 2002, respectively (collectively the "Primary
Shareholders"). Under the terms of the Agreements, which are automatically
extended unless we have provided a non-renewal notice as directed by a majority
vote of the board of directors, each 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, July 2, 2001 and January 7,
2002 and the salary was increased to $208,000 per annum beginning in January
2002. The Company made payments to each of the Primary Shareholders aggregating
$249,165 and $226,000 for the years ended December 31, 2003 and 2002,
respectively, in connection with these Agreements.
On December 2002, each of the Primary Shareholders forfeited a total of 734,802
outstanding options by signing an Options Cancellation Agreement. Accordingly,
at December 31, 2002 there were no stock options held by the Primary
Shareholders. On July 1, 2003, the Company granted the Primary Shareholders a
total of 734,802 options at a price of $0.21.
On January 1, 2003, the Company entered into an eighteen (18) month employment
agreement with John S. Mathews in the capacity of President of vFinance
Investments, Inc., Retail Brokerage Division. The Agreement shall automatically
be extended for additional one-year periods beginning at the initial eighteen
(18) month anniversary, unless the Company or Matthews provides notice of
non-renewal ninety (90) days prior to an anniversary date. Under the terms of
this Agreement, Matthews will receive a base salary, discretionary bonuses and a
certain amount of stock options subject to a specified vesting period. The
Agreement also contains provisions related to severance and change of control
upon the occurrence of certain events.
On January 1, 2003, the Company entered into a Joint Venture Agreement with JSM
Capital Holding Corp. ("JSM"), a retail brokerage operations headquartered in
New York and founded by John S. Matthews. The Company issued JSM 1,000,000
warrants to purchase its common stock at an exercise price of $0.20 in exchange
for a 19% equity position in JSM. The warrants were valued using the
Black-Scholes valuation method which calculated the value to be $0.08 per
warrant, or $80,000. The Company accounts for this investment using the cost
method. Effective May 1, 2003, vFinance merged its "company-owned" retail
branches into JSM. Effective upon such merger JSM became an independent
contractor of the Company.
F-12
vFinance, Inc.
Notes to Consolidated Financial Statements (continued)
6. INCOME TAXES
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,
---------------------------------
2003 2002
----------- -----------
Net operating loss carryforwards $ 4,250,848 $ 4,201,834
Unrealized losses 45,906 34,265
Goodwill impairment 2,775,663 2,775,663
Other -- 75,017
Allowance for doubtful accounts 74,522 54,098
Depreciation (6,613) 10,114
----------- -----------
Gross deferred income tax assets 7,140,326 7,150,991
Deferred income tax asset valuation
allowance (7,140,326) (7,150,991)
----------- -----------
Net deferred income tax assets $ -- $ --
=========== ===========
Net operating loss carryforwards totaled approximately $11,000,000 at December
31, 2003. 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, 2003 and
2002, due to the uncertainty of realizing the deferred income tax assets.
The reconciliation of the income tax computed at the U.S. Federal statutory rate
to income tax expense for the period ended December 31, 2003 and 2002:
Year Ended December 31,
---------------------------------
2003 2002
----------- -----------
Tax expense(benefit)at federal
rate (34%) $ 106,000 $ (760,000)
Nondeductible expenses (116,665) ( 45,000)
Change in valuation allowance 10,665 805,000
----------- -----------
Net income tax benefit $ -- $ --
=========== ===========
F-13
7. SHAREHOLDERS' EQUITY
The Company is authorized to issue up to 2,500,000 shares of preferred stock. As
part of the Colonial transaction (i) 122,500 shares were designated as Series A
Convertible Preferred Stock, par value $0.01 per share, and (ii) 50,000 shares
were designated as Series B Convertible Preferred Stock, par value $0.01 per
share. All of the Series A and Series B shares were delivered to Colonial
shareholders. The Series A and Series B Preferred Stock accrued annual dividends
of 10% and 7%, respectively, on a quarterly basis.
On June 28, 2002 the Company's Board of Directors approved a dividend to the
Company's Series A Preferred Shareholders of all the common stock of Colonial.
The impact of the dividend on the Company's net book value was an increase of
$2,219,328.
Series A and Series B accrued unpaid dividends but earned no interest. The
Company accrued $157,500 of such dividends during both 2001 and 2002 ($315,000
total). This amount was reversed at December 31, 2002 through the transactions
noted below.
On November 6, 2002, the Company proposed that the Series A Convertible
shareholders fully redeem their shares, including any unpaid or undeclared
dividends, into common shares of the Company. Under the original terms, one (1)
share of Series A preferred was convertible into approximately 3.85 shares of
the Company's common stock. However, under the proposal, the Company offered to
convert one (1) share of Series A preferred into ten (10) unregistered shares of
the Company's common stock. The majority of the Series A Convertible Preferred
F-14
vFinance, Inc.
Notes to Consolidated Financial Statements (continued)
7. SHAREHOLDERS' EQUITY (CONTINUED)
shareholders approved the Company's proposal. Accordingly, effective November 6,
2002, the Company redeemed 122,500 Shares of Series A Preferred stock in
exchange for 1,225,000 unregistered common shares of the Company. As a result of
this transaction, there are no Series A Preferred shares outstanding as of
year-end.
Under the terms of the settlement agreement with Michael Golden (a former
director of the Company, see Note 9; Commitments and Contingencies) signed on
December 30, 2002, Golden and the Company entered into a full general release of
any and all outstanding obligations between Golden and the Company. In
consideration, the Company redeemed the 50,000 Shares of Series B Preferred
Stock Golden owned in exchange for 3,000,000 unregistered common shares of the
Company. As a result of this transaction, there are no Series B Preferred shares
outstanding as of December 31, 2002.
Series A and B Preferred Stock had the following rights, preferences, privileges
and restrictions:
LIQUIDATION PREFERENCE. In the event of any liquidation or winding up of the
Company, the holders of the Series A and B Preferred Stock were entitled to
receive, in preference to the holders of Common Stock, an amount equal to $10
per share, plus unpaid dividends, if any. A consolidation or merger would have
been deemed a liquidation or winding up for purposes of the liquidation
preference.
DIVIDEND RIGHTS. The holders of Series A and B Preferred Stock were entitled to
receive cumulative dividends in preference to holders of Common Stock at the
rate of $1 and $0.70 per share annum (10% and 7% of the liquidation preference
price) for Series A and B, respectively, whether or not earned or declared.
CONVERSION PRICE ADJUSTMENTS. The conversion price of the Series A and B
Preferred Stock were subject to adjustments to prevent dilution, on the weighted
average basis, in the event the Company issued additional shares, at a purchase
price of $2.60 per share.
VOTING RIGHTS. The holders of Series A and B Preferred Stock had no voting
rights.
REDEMPTION RIGHTS. The Company, at its option, could have redeemed, in whole or
in part, the shares of Series A and B Preferred Stock outstanding, at any time,
upon notice given, at a redemption price of $11 and $10 per share, respectively.
If the Company received proceeds from a single sale of its equity securities of
at least $500,000, the holders of Series A and B Preferred Stock could have
required the Company to redeem all, but not less than all, the Series B
Preferred Stock at a redemption price equal to $10 per share.
On November 28, 2001, the Company entered into a Note Purchase Agreement, as
amended by subsequent letter agreements dated November 30, 2001, December 14,
2001, and December 28, 2001, February 13, 2002 and March 4, 2002 (collectively,
the "Note Purchase Agreement"), with SBI Investments (USA) Inc. ("SBI"). Under
the terms of the Note Purchase Agreement, SBI may provide a subordinated loan to
the Company of up to $1,500,000 in the form of a 48-month non-interest bearing,
convertible note (the "Note"). As of December 31, 2002, the Company had received
$975,000 under the Note Purchase Agreement and was entitled to receive, at SBI's
option alone, an additional $525,000 no later than June 30, 2002. The additional
$525,000 was not funded. The Note is convertible, at SBI's option, into as many
as 3,421,053 shares of the Company's common stock at $0.285 per share. The
Company, at any time during the first three years of the agreement, can call for
redemption of the Note at a price equal to 116.67% of the then outstanding
principal amount of the Note, in whole (but not in part), or force the
conversion of the Note into shares of the Company's common stock.
In July 2002, certain SBI Note holders converted $177,500 of principal into
622,807 shares of common stock of the Company. The Company reflected an
adjustment to its par value of Common Stock equal to $6,228 and reduced its note
payable and unamortized beneficial conversion/imputed interest amount by
$177,500.
F-15
vFinance, Inc.
Notes to Consolidated Financial Statements (continued)
7. SHAREHOLDERS' EQUITY (CONTINUED)
In November 2002, an SBI Note holder converted $47,500 of principal into 166,667
shares of common stock of the Company. The Company reflected an adjustment to
its par value of Common Stock equal to $1,667 and reduced its note payable and
unamortized beneficial conversion/imputed interest amount by $47,500.
In accordance with EITF Issue No. 00-27, (APPLICATION OF ISSUE NO. 98-5),
ACCOUNTING FOR CONVERTIBLE SECURITIES WITH BENEFICIAL CONVERSION FEATURES OF
CONTINGENTLY ADJUSTABLE CONVERSION RATIOS, IN CERTAIN CONVERTIBLE INSTRUMENTS,
and APB # 21 (INTEREST ON RECEIVABLES AND PAYABLES) the Company recorded an
imputed interest factor related to the Note Purchase Agreement of $563,000. The
Company fully expensed the beneficial conversion factor due to the fact that the
SBI Note was immediately convertible. The net one time charge to the financial
statements was $412,000. The imputed interest will be accreted ratably over the
term of the loan as additional interest expense. Amortization of the imputed
interest began in January 2002.
As of December 31, 2003 the SBI note payable balance was $750,000 and was netted
against the $146,787 corresponding asset imputed interest, therefore $603,213
appears on the face of the balance sheet.
On December 18, 2001, Critical Infrastructure Fund (BVI), LP, a limited
partnership controlled by us, purchased, at a discount to the then market price
of our common stock, 877,193 shares of common stock at $0.285 per share for
$250,000 and received piggyback registration rights with respect to these
shares. In January 2002, Critical Infrastructure Fund (BVI), LP sold to Messrs.
Sokolow, Mahoney (two executive officers of our company) and Williamson (former
executive of the Company), 61,403 shares, 61,403 shares and 150,000 shares,
respectively, of our common stock at a price of $0.285 per share, the price at
which the shares were purchased from us by Critical Infrastructure Fund (BVI),
LP.
On January 7, 2002 the Company sold 350,878 unregistered shares at a price of
$0.285 per share for a total consideration of $100,000 to AMRO International,
S.A.
On January 17, 2002 the Company sold 83,334 unregistered shares at a price of
$0.285 per share for a total consideration of $23,750 to WorldVentures Fund I,
LLC.
On November 8, 2002 the Company sold 100,000 unregistered shares at a price of
$0.11 per share for a total consideration of $11,000 to Pittsford Capital
Warrant Partners, LLC.
On February 27, 2003, the Company entered into an agreement whereby Arend
Verweij and Hoss Bozorgzad, independent contractors of the Company, purchased
1,500,000 unregistered common shares at a price of $0.0867 for a total
consideration of $130,000.
The above noted securities issued to the investors were exempt from registration
pursuant to Section 4(2) of the Securities Act of 1933, as amended, and Rule 506
of Regulation D promulgated thereunder because the securities were acquired in a
privately negotiated transaction by sophisticated investors.
At December 31, 2002 the Company made a decision to retire all of the treasury
stock outstanding as of that date, which resulted in a decrease to the number of
common shares of 3,211,511, and a corresponding reduction in the par value
amount of common stock of $32,111, as well as an increase to additional
paid-in-capital, common, in the amount of $2,139,317.
During the first quarter of 2003, the Company granted stock options to purchase
an aggregate of 1,390,000 shares of the Company 's common stock to five
employees of the Company. The exercise prices of these options range from $.15
to $.20. During the second quarter of 2003, the Company granted stock options to
purchase an aggregate of 1,010,000 shares of the Company's common stock to two
employees of the Company. The exercise price of these options was $0.15. During
the third quarter of 2003, the Company granted stock options to purchase an
aggregate of 4,980,349 shares of the Company 's common stock to certain
employees of the Company. The exercise prices of these options range from $0.15
to $0.22. During the fourth quarter of 2003, the Company granted stock options
to purchase an aggregate of 255,000 shares of the Company 's common stock to
four employees of the Company. The exercise prices of these options range from
$0.20 to $0.21. The option grants were exempt from registration pursuant to
Section 4(2) of the Securities Act of 1933, as amended, because the individuals
receiving the options are sophisticated investors who have knowledge of all
material information about the Company
F-16
vFinance, Inc.
Notes to Consolidated Financial Statements (continued)
7. SHAREHOLDERS' EQUITY (CONTINUED)
The Company has elected to follow Accounting Principle Board Opinion No. 25,
Accounting for Stock Issued to Employees ("APB 25"), and related interpretations
in accounting for its employee stock options because the alternative fair value
accounting provided under FASB Statement No. 123, ACCOUNTING FOR STOCK-BASED
COMPENSATION, ("SFAS 123") and SFAS 148 ACCOUNTING FOR STOCK BASED COMPENSATION
TRANSITION AND DISCLOSURE, AN AMENDMENT OF SFAS 123, requires the use of option
valuation models that were not developed for use in valuing employee stock
options. 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, 2003 and
2002 is as follows:
Weighted
Average
Exercise Number of Exercise Price
Price Shares Per Option
--------- ---------- ---------------
Outstanding Options at December 31, 2001 0.98 9,687,050 0.35 - 6.00
Granted 0.40 4,202,117 0.15 - 2.25
Forfeited 0.93 (9,417,503) 0.32 - 6.00
-----------
Outstanding Options at December 31, 2002 0.50 4,471,664 0.15 - 6.00
Granted 0.20 7,635,349 0.15 - 0.22
Forfeited 0.49 (1,760,802) 0.21 - 4.13
-----------
Outstanding Options at December 31, 2003 0.29 10,346,211 0.15 - 6.00
===========
The following table summarizes information concerning stock options outstanding
at December 31, 2003
Weighted
Average
Exercise Number
Price Outstanding
-------- ----------
$0.15 1,430,000
0.20 1,180,000
0.21 4,570,997
0.22 50,000
0.32 1,170,000
0.35 1,389,215
0.50 100,000
0.55 69,000
0.63 142,500
0.70 39,000
1.00 18,000
2.25 157,499
4.00 10,000
5.00 10,000
6.00 10,000
---------
10,346,211
=========
F-17
vFinance, Inc.
Notes to Consolidated Financial Statements (continued)
7. SHAREHOLDERS' EQUITY (CONTINUED)
A summary of the warrant activity for the years ended December 31, 2003 and 2002
is as follows:
Weighted
Average
Exercise Number of Exercise Price
Price Shares Per Option
-------- ---------- --------------
Outstanding Warrants at December 31, 2001 2.73 3,108,499 0.35 - 7.20
Granted 0.35 1,000,000 0.35
-----------
Outstanding Warrants at December 31, 2002 2.15 4,108,499 0.35 - 7.20
Granted 0.25 1,290,000 0.15 - 2.25
-----------
Outstanding Warrants at December 31, 2003 1.70 5,398,499 0.35 - 7.20
===========
The following table summarizes information concerning warrants outstanding at
December 31, 2003.
Weighted
Average
Exercise Number
Price Outstanding
-------- -----------
0.15 250,000
0.20 1,000,000
0.35 1,993,500
0.63 400,000
2.25 625,000
2.50 300,000
6.00 129,999
7.20 700,000
---------
5,398,499
=========
The weighted average grant-date fair value of warrants granted equaled $0.25 and
$0.35 for the years ended December 31, 2003 and 2002, respectively. The weighted
average grant-date fair value of options granted during the year equaled $0.20
and $0.40 for the years ended December 31, 2003 and 2002, respectively. For
purposes of pro forma disclosures, the estimated fair value of the options and
warrants is amortized to expense over their respective vesting periods.
Options granted to employees are exercisable according to the terms of each
agreement, ranging from one month to four years. At December 31, 2003 and 2002,
4,916,608 and 1,119,703 options outstanding were exercisable with weighted
average exercise prices of $.37 and $.89, respectively. At December 31, 2003 and
2002, 4,745,999 and 3,349,749 warrants outstanding were exercisable with
weighted average exercises prices of $1.75 and $2.31, respectively.
F-18
vFinance, Inc.
Notes to Consolidated Financial Statements (continued)
7. SHAREHOLDERS' EQUITY (CONTINUED)
Pro forma information regarding net income (loss) is required by SFAS 123, which
also requires that the information be determined as if the Company has accounted
for its employee stock options under the fair value method. The fair value for
options and warrants granted was estimated at the date of grant using the Black
Scholes option pricing model with the following weighted-average assumptions:
for 2003 risk-free interest rates of 3.28%; no dividend yields; volatility
factor of the expected market price of the Company's common stock of 2.13 for
options and warrants and an expected life of the options and warrants of 4-5
years; for 2002: risk-free interest of 4.875%; no dividend yields; volatility
factor of the expected market price of the Company's common stock of 1.523; 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, 2003 and 2002 was $128,971, and
$2,555,978, respectively. The Company's pro forma basic and diluted net loss per
share for the years ended December 31, 2003 and 2002 was $0.00 and $0.10,
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 $17,714 and $29,340 during the
years ended December 31, 2003 and 2002, respectively, in connection with the
grants of stock options, primarily to outside consultants, with exercise prices
lower than the deemed fair value per share of the Company's common stock on the
date of the grants. The Company had an unamortized balance of $ 82,657 at
December 31, 2001 of which $19,800 was amortized during 2002 and the remaining $
62,857 was reversed. The Company had an unamortized balance of $ 12,420 at
December 31, 2002 fully amortized during 2003. In addition, during 2003 the
Company granted 250,000 warrants, valued at $30,000, to its landloard in
relation to the renegotiation of the lease on its headquarters. This balance is
being amortized over the term of the lease. At December 31, 2003 the remaining
unamortized balance was $24,706.
8. DEBT
On January 25, 2002, the Company entered into a Credit Agreement with UBS
Americas, Inc. ("UBS"). Under the terms of the Credit Agreement, UBS will
provide a revolving credit facility of $3,000,000 to the Company for the purpose
of supporting the expansion of its brokerage business or investments in
infrastructure to expand its operations and its broker-dealer operations. The
loan has a term of 3 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.
The Company must make early repayments under the Credit Agreement if it acquires
a new broker dealer firm, enters a new line of business, or hires more than 4
brokers in a single or related transaction. This repayment is made by adding
$1.00 to the cost of each incremental clearing transaction the Company makes
through CSC, a wholly owned subsidiary of Paine Webber which is a wholly owned
subsidiary of UBS. All determinations as to required early repayment shall be
made by UBS, in its reasonable judgment. To date, UBS has not notified the
Company of any such determination. The Company borrowed $1,500,000 under the
credit facility in January 2002. The Credit Agreement does not provide for
conversion of the debt into equity securities. During March 2004, the Company
entered into an agreement with a new clearing firm, National Financial Services,
LLC ("NFS"). In connection with this agreement, NFS paid off the balance due UBS
on the Company's behalf. Also as part of the agreement with NFS, there is a
termination fee of $1,700,000 which is reduced ratably over a five year period,
should the agreement remain intact.
As discussed in Note 7, the Company entered in to a Note Purchase Agreement with
SBI Investments (USA), Inc. ("SBI"). As of December 31, 2003 the SBI note
payable balance was $750,000 and was netted against the $146,787 corresponding
asset imputed interest, therefore $603,213 appears on the face of the balance
sheet.
9. COMMITMENTS AND CONTINGENCIES
The Company leases office space under the terms of operating leases. The
following chart shows lease obligations including rental of real property and
equipment.
Year Amount
---- ----------
2004 $ 654,518
2005 326,660
2006 304,237
2007 302,349
Thereafter 194,753
----------
Total $1,782,517
==========
F-19
Total rent expense under operating leases, including space rental, totaled
approximately $700,464 and $871,828 for the years ended December 31, 2003 and
2002.
vFinance, Inc.
Notes to Consolidated Financial Statements (continued)
9. COMMITMENTS AND CONTINGENCIES (CONTINUED)
From time to time the Company, and/or one of its subsidiaries, is named as a
party to a lawsuit that has arisen in the ordinary course of business. Although
it is possible that losses exceeding amounts already recorded may be incurred
upon ultimate resolution of these existing legal proceedings, we believe that
such losses, if any, will not have a material adverse effect on our business,
results of operations or financial position; however, unfavorable resolution of
each matter individually or in the aggregate could affect the consolidated
results of operations for the quarterly and annual periods in which they are
resolved.
The business of vFinance Investments involves substantial risks of liability,
including exposure to liability under federal and state securities laws in
connection with the underwriting or distribution of securities and claims by
dissatisfied customers for fraud, unauthorized trading, churning, mismanagement
and breach of fiduciary duty. In recent years, there has been an increasing
incidence of litigation involving the securities industry, including class
actions that generally seek rescission and substantial damages.
In the ordinary course of business, the Company and/or its subsidiaries may be
parties to other legal proceedings and regulatory inquiries, the outcome of
which, either singularly or in the aggregate, is not expected to be material.
There can be no assurance however that any sanctions will not have a material
adverse effect on the financial condition or results of operations of the
Company and/or its subsidiaries. The following is a brief summary of certain
matters pending against or involving the Company and its subsidiaries.
On or about May 17, 2001, Michael Golden ("Golden"), (a former Director of the
Company and former President of the Company's broker dealer and the controlling
shareholder of Colonial Direct Financial ("Colonial Direct"), a former
wholly-owned subsidiary of the Company) filed an initial complaint against the
Company in the Circuit Court of the 17th Judicial Circuit in and for Broward
County, Florida, alleging that the Company breached its January 5, 2001
employment agreement with Golden, which was entered into as a result of the
merger between Colonial Direct and the Company. Mr. Golden claims that he
terminated the agreement for "good reason," as defined in the agreement, and
that we have failed to pay him severance payments and other benefits as well as
accrued commissions and un-reimbursed expenses. In the initial complaint, Golden
sought monetary damages from the Company in excess of $50,000 together with
interest, attorney's fees and costs. On or about July 18, 2001, the Company
filed its answer and affirmative defenses and counterclaims with the Circuit
Court against Golden and Ben Lichtenberg ("Lichtenberg"), Golden's partner in
Colonial Direct, denying all material allegations in the complaint,
affirmatively alleging that Golden is not entitled to any severance payments
because he was terminated for cause for his insubordination, failure to follow
directives of our board of directors and for breaches of fiduciary duty to the
Company. The Company also alleged certain other breaches.
As of October 23, 2002 the Company has settled its dispute with Lichtenberg, and
as of December 30, 2002, the Company entered into a definitive settlement
agreement with Golden. Under the terms of the settlement with Lichtenberg, a
full mutual general release and covenant not to sue was entered into with no
payments to or by the Company. The settlement agreement with Golden brings to
closure all lawsuits between the parties. Specifically, under the terms of the
agreement, Golden and the Company have entered into a full general release of
any and all outstanding obligations between the parties, and in consideration,
the Company redeemed 50,000 Shares of Series B Preferred Stock having an
aggregate par value of $500,000 in exchange for 3,000,000 unregistered common
shares of the Company subject to a one year lock-up. In addition, Golden will
receive from the Company $7,000 per month for 12 months and thereafter, $5,000
per month for approximately 34 months. In a separate settlement agreement,
Leonard Sokolow, the Company's President and Chief Executive Officer, and
Timothy Mahoney, the Company's Chief Operating Officer and Chairman, privately
purchased 4,500,000 shares of Golden's vFinance, Inc. common stock.
F-20
On August 20, 2001, we entered into a Securities Exchange Agreement by means of
which we acquired the membership interests in two related companies, Critical
Investments, LLC, a Delaware limited liability company ("Critical Investments"),
and Critical Advisors, L.L.C., a Virginia limited liability company ("Critical
Advisors"). Critical Investments manages Critical Infrastructure Fund, L.P.
("Critical Infrastructure LP"), a Delaware limited partnership. Critical
Advisors manages Critical Infrastructure Fund, Ltd. ("Critical Infrastructure
Ltd."), an international business company organized and existing under the laws
of the British Virgin Islands and receives (i) a management fee equal to 1% of
the net asset value of Critical Infrastructure Ltd. and (ii) a performance fee
equal to 20% of the increase in net asset value of Critical Infrastructure Ltd.
Critical Infrastructure LP and Critical Infrastructure Ltd. are the sole general
partners in, owning 96% and 4%, respectively, and conduct their investment and
trading activity through Critical Infrastructure Fund (BVI), LP, a limited
partnership organized and existing under the laws of the British Virgin Islands,
which holds a portfolio of securities. A determination has been made to
liquidate the funds. The SEC has commenced a non-public investigation relating
to Critical Infrastructure LP, Critical Investments and Critical Advisors. The
Company is cooperating with this investigation. Critical Investments and
Critical Advisors changed their names to vFinance Investors, LLC and vFinance
Advisors, LLC, respectively, subsequent to the acquisition.
On August 14, 2002, Henry S. Snow and Sandra L. Snow filed a complaint against
Colonial Direct and vFinance, Inc. in the Circuit Court of the 15th Judicial
Circuit in Palm Beach County, Florida. The claim alleges "Breach of Contract"
and "Unjust Enrichment" and seeks damages of $250,000 plus interest and court
costs. It is alleged that Colonial Direct defaulted on a Promissory Note in the
principal amount of $250,000. The Company believes their claim is without merit
and is vigorously defending the action.
On October 23, 2002, Henry Shoemaker, III, filed a claim with the NASD against
First Level Securities, now known as vFinance Investments, Inc., stating among
other things, that there was a breach of fiduciary duties resulting in a loss of
$570,000. This matter went to the arbitration panel during 2004 and Mr.
Shoemaker was awarded $15,000.
On January 12, 2003, MP 830 Third Avenue LLC ( the Landlord), filed a claim
against First Colonial, vFinance, Inc. and vFinance Investments Inc. in the
Supreme Court of the State of New York, alleging the abandonment of leased
facilities and seeking payment of the related rent. The lease was for a term of
seven years expiring on December 31, 2006. First Colonial allegedly ceased
paying rent as of July 1, 2002. After applying First Colonial's security deposit
of $200,000, the Landlord is seeking $59,868 plus any further rent due until
such time as they can successfully relet the premises at a similar rate. The
Company believes that the Landlord's claim is without merit and is vigorously
defending the action.
On October 23, 2002, Henry Shoemaker, III, filed a claim with the NASD against
First Level Securities, now known as vFinance Investments, Inc., stating among
other things, that there was a breach of fiduciary duties resulting in a loss of
$570,000. This matter went to the arbitration panel during 2004 and Mr.
Shoemaker was awarded $15,000.
On April 15, 2003, Ms. Madeline Moore filed a claim with the NASD against
vFinance Investments, Inc. in the amount of $150,527 claiming a breach of
fiduciary duties. vFinance Investments has accrued $125,000 in connections with
this matter. This matter was settled on February 27, 2004 in the amount of
$125,000.
On May 6, 2003, an Answer and Counterclaim was filed by FreeStar Technology
Corporation and Paul Egan (collectively, the "Defendants") in response to a
complaint, as amended, previously filed against the Defendants in the United
States District Court, Southern District of New York by the Plaintiffs, Boat
Basin Investors, LLC, Papell Holdings, Ltd., Marc Siegel, David Stefansky and
Richard Rosenblum. In the Answer and Counterclaim, Defendants counteclaimed
against the Plaintiffs and also named vFinance Investments, Inc. as a
counterdefendant on such counterclaim. Defendants' claims against vFinance
Investments, Inc. included rescission, breach of fiduciary dury, breach of
contract, negligence, and negligent misrepresentation and omission, and
securities fraud. Defendants sought judgment against vFinance Investments, Inc.
for general and special damages in an amount of at least $10 million and
punitive damages in an amount of at least $6 million. vFinance Investments, Inc.
replied to the counterclaims by denying any wrongdoing in response to the
material allegations, asserted a number of affirmative defenses, and
counterclaimed for breach of contract and defamation. During 2004, vFinance
Investments, Inc. and the Defendants settled their dispute by exchanging mutual
releases without the payment or any other consideration to either party.
F-21
On September 4, 2003, Mr.Gabriel filed a claim with the NASD against vFinance
Investments, Inc. (which is claimed to be the successor firm to Somerset)
alleging, among other things, unsuitable recommendations, breach of fiduciary
duty and fraud. The claim alleges damages of $195,000, plus interest and
punitive damages. The Company believes that Mr. Gabriel's claim is without merit
and is vigorously defending the action.
On September 10, 2003, Mr.Tavares filed a claim with the NASD against vFinance
Investments, Inc. (which is claimed to be the successor firm to Somerset)
alleging, among other things, unsuitable recommendations, breach of fiduciary
duty and fraud. The claim alleges damages of $210,000, plus interest and
punitive damages. The Company believes that Mr. Tavares's claim is without merit
and is vigorously defending the action.
On October 17, 2003, we were advised by the staff of the SEC that it intended to
recommend that the SEC institute enforcement proceedings against vFinance
Investments and one of its former employees. We have been informed by the staff
of the SEC that they would claim that the vFinance Investments and its former
employee failed reasonably to supervise the alleged illegal trading activities
over a period of approximately two months of one of our broker/dealer's former
securities traders with respect to one publicly traded security that resulted in
vFinance Investments earning $11,000 in commissions related to that one security
over the two month period. vFinance Investments has retained counsel and is
actively engaged in discussions with the staff of the SEC. The Company believes
that it will be able to resolve this matter in a manner which will not have a
material adverse affect on its business and operations.
On November 13, 2003, UBUY Holdings, Inc., f/k/a E-PAWN.COM, Inc., and Steven
Bazuly, and for and on behalf of all of the shareholders of UBUY Holdings, Inc.
filed an amended complaint for damages and consequential damages against
vFinance Investments, Inc. and approximately 60 other defendants in the United
States District Court for the Southern District of Florida stating, among other
things, that there were violations of certain securities rules and regulations.
The Company has not yet been served with this complaint, but in the event it is,
the Company believes that their claim is without merit and will vigorously
defend this action.
On November 20, 2003, Mr.Hughes filed a claim with the NASD against vFinance
Investments, Inc. (which is claimed to be the successor firm to Somerset)
alleging, among other things, unsuitable recommendations, breach of fiduciary
duty and fraud. The claim alleges damages of $285,000, plus interest and
punitive damages. The Company believes that Mr. Hughes' claim is without merit
and is vigorously defending the action.
On February 3, 2004, Ms. Elizabeth Redden filed a claim against vFinance
Investments, Inc., Somerset Financial Group, Inc., Somerset Financial Partners,
Inc., Leonard J. Sokolow, and certain other individuals in the amount of
$191,845 plus interest and court costs and consequential and punitive damages in
the United States District Court, District of New Jersey, stating among other
things, that there was a fraudulent or wrongful transfer of Somerser's assets.
The Company and Mr. Sokolow believe that Ms.Redden's claim is without merit and
is vigorously defending the action.
We are engaged in a number of other legal proceedings incidental to the conduct
of our business. These claims aggregate a range of $150,000 to $938,000. In the
opinion of our management, the Company is adequately insured against the claims
relating to such proceedings, and any ultimate liability arising out of such
proceedings will not have a material adverse effect on the financial condition
or results of operations of the Company.
10. DEFINED CONTRIBUTION PLAN
The Company maintains a defined contribution savings plan in which substantially
all employees are eligible to participate. The Company may match up to 25% of
the employee's salary. The Company made no contributions to the plan for the
years ended December 31, 2003 and 2002, respectively.
11. SUBSEQUENT EVENTS
During March 2004, the Company entered into an agreement with a new clearing
firm; National Financial Services LLC, Member NYSE/SIPC, a Fidelity Investments
company ("NFS"). In connection with this agreement NFS paid, on vFinance's
behalf, $1,500,000 that the Company owed to UBS under an existing credit
facility. The amount was paid to UBS by NFS in March 2004. The new clearing
agreement also requires NFS to provide the Company with $200,000 to assist us
with the transition. This amount was paid to vFinance in March 2004. The
operating terms of the new clearing agreement are competitive. It is anticipated
that the Company will convert to, and begin clearing through, NFS during May
2004.
During February and March of 2004, $623,775 of the SBI Note was converted into
3,001,403 shares of the Company's common stock. Of this amount, $545,000 was
converted into 2,725,000 shares of the Company's common stock at a discounted
rate of $0.20 per share under a special arrangement offered by the Company to
encourage further equity participation by SBI. The remainder was converted at
the stated conversion rate of $0.28 per share.
F-22
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
The Company dismissed its independent auditors, Ernst & Young LLP, on May 10,
2002 to reduce expenses. During the two fiscal years that were audited by Ernst
& Young LLP's, their report on the Company's financial statements for each of
the two fiscal years ended December 31, 2000 and 2001 did not contain an adverse
opinion or disclaimer of opinion, nor was it modified as to uncertainty, audit
scope, or accounting principles. The decision to dismiss Ernst & Young, LLP was
recommended and approved by the Board of Directors.
During each of the Company's fiscal years ended December 31, 2000 and 2001 and
the interim period preceding the dismissal, there were no disagreements with
Ernst & Young LLP on any matter of accounting principles or practices, financial
statement disclosure, or auditing scope or procedure, which, if not resolved to
the satisfaction of Ernst & Young LLP, would have caused Ernst & Young LLP to
make reference to the subject matter of the disagreements in connection with its
reports.
On May 10, 2002, the Company engaged the firm of Feldman, Sherb & Co., P.C.
("Feldman") as its new independent auditors. At the time of such engagement, the
Company was aware of Feldman's planned merger into Grassi & Co., CPA's, P.C. as
well as the planned departure of certain of the principal accountants at Feldman
who subsequently formed their own firm, Sherb & Co., LLP ("Sherb").
The Company dismissed Feldman, on August 9, 2002. The decision to dismiss
Feldman was recommended and approved by the Board of Directors. During the
interim period preceding the dismissal, there were no disagreements with Feldman
on any matter of accounting principles or practices, financial statement
disclosure, or auditing scope or procedure, which, if not resolved to the
satisfaction of Feldman, would have caused Feldman to make reference to the
subject matter of the disagreements in connection with its reports. Feldman was
not required to issue any reports on the Company's financial statements during
the period prior to Feldman's dismissal.
On August 10, 2002, the Company engaged the firm Sherb as its new independent
auditors. The Company has authorized Feldman to respond fully to the inquiries
of Sherb with regard to any accounting or financial matters relating to the
Company. Since their engagement as the Company's auditors Sherb, has re-audited
the December 31, 2001 and 2000 financial statements originally audited by Ernst
& Young LLP, and audited the 2002 financial statements.
ITEM 8A. CONTROLS AND PROCEDURES.
Our Chief Executive Officer and Chief Financial Officer (collectively, the
"Certifying Officers") are responsible for establishing and maintaining
disclosure controls and procedures for us.Such officers have concluded (based
upon such officers' evaluation of these controls and procedures as of the end of
the period covered by this report) that our disclosure controls and procedures
are effective to ensure that information required to be disclosed by us in this
report is accumulated and communicated to management, including our principal
executive officers as appropriate, to allow timely decisions regarding required
disclosure.
The Certifying Officers have also indicated that there were no significant
changes in our internal controls or other factors that could significantly
affect such controls subsequent to the date of their evaluation, and there were
no corrective actions with regard to significant deficiencies and material
weaknesses.
Our management, including each of the Certifying Officers, does not expect that
our disclosure controls or our internal controls will prevent all error and
fraud. A control system, no matter how well conceived and operated, can provide
only reasonable, not absolute, assurance that the objectives of the control
system are met. In addition, the design of a control system must reflect the
fact that there are resource constraints, and the benefits of controls must be
considered relative to their costs. Because of the inherent limitations in all
control systems, no evaluation of controls can provide absolute assurance that
all control issues and instances of fraud, if any, within a company have been
detected. These inherent limitations include the realities that judgments in
decision-making can be faulty, and that breakdowns can occur because of simple
error or mistake. Additionally, controls can be circumvented by the individual
acts of some persons, by collusion of two or more people or by management
override of the control. The design of any systems of controls also is based in
part upon certain assumptions about the likelihood of future events, and their
can be no assurance that any design will succeed in achieving its stated goals
under all potential future conditions. Because of these inherent limitations in
a cost-effective control system, misstatements due to error or fraud may occur
and not be detected.
-30-
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE
WITH SECTION 16(a) OF THE EXCHANGE ACT.
The following table sets forth the names, ages and positions of our executive
officers and directors as of March 27, 2003. Under our bylaws, each director
holds office until the election and qualification of his successor or until his
earlier resignation or removal.
Name Age Position
---- --- ------------------------------------------
Leonard J. Sokolow 47 Director, Chief Executive Officer
and President
Timothy E. Mahoney 47 Director, Chief Operating Officer
and Chairman
David A. Spector 38 Executive Vice President, Marketing
and Web Operations
Richard Campanella 53 Secretary
Mark Kacer 47 Chief Financial Officer, Executive
Vice President - Administration
LEONARD J. SOKOLOW has been a director since November 8, 1997, our Chief
Executive Officer since November 8, 1999, and our President since January 5,
2001. From November 8, 1999 through January 4, 2001, Mr. Sokolow was Vice
Chairman of the Board. Since September 1996, Mr. Sokolow has been President of
Union Atlantic LC, a merchant, banking and strategic consulting firm
specializing domestically and internationally in technology industries that is a
wholly-owned subsidiary of our company. Since August 1993, Mr. Sokolow has been
President of Genesis Partners, Inc., a private financial business-consulting
firm. Genesis Partners, Inc. has been inactive since December 31, 2002. From
August 1994 through December 1998, Mr. Sokolow was the Chairman and Chief
Executive Officer of the Americas Growth Fund, Inc., a public closed-end
management investment company. Mr. Sokolow presently serves as a director of
AESP, Inc., a worldwide distributor and manufacturer of active and passive
networking components traded on Nasdaq. Mr. Sokolow received a B.A. degree with
majors in Economics and Accounting from the University of Florida in 1977, a
J.D. degree from the University of Florida School of Law in 1980 and an LL.M.
(Taxation) degree from the New York University Graduate School of Law in 1982.
Mr. Sokolow is a Certified Public Accountant.
TIMOTHY E. MAHONEY has been a director since November 8, 1999 and since November
8, 1999, Chairman of the Board and our Chief Operating Officer. Since September
1996, Mr. Mahoney has been a partner of Union Atlantic LC. From 1994 through
1995, Mr. Mahoney was President of the Highlands Group. Mr. Mahoney was a
founder of the consumer products business for SyQuest Technology. In 1986, Mr.
Mahoney founded and was the President of Rodime Systems, a computer disk drive
sub-system manufacturer. In addition, Mr. Mahoney was the Vice President of
Marketing and Sales for Tecmar, the first PC add-in board company and spent
eight years in marketing and sales management in the computer timesharing
business with Computer Sciences Corporation, Automatic Data Processing and
General Electric Information Services. Mr. Mahoney presently serves as a
director of FOCUS Enhancements, Inc., a developer and marketer of advanced,
proprietary video scan conversion products traded on the Nasdaq SmallCap market.
Mr. Mahoney received a B.A. degree with majors in Computer Science and Business
from the West Virginia University in 1978. Mr. Mahoney received a Masters of
Business Administration from George Washington University in 1983.
DAVID A. SPECTOR has been a Vice President of our company since November 8,
1999. From 1995 through 1999, Mr. Spector served as Vice President and regional
creative director of Green Advertising, a division of London-based WPP Group plc
managing the creative efforts of the agency. Prior to that, Mr. Spector was a
copywriter with Greenstone Roberts Advertising, with responsibilities for Royal
Caribbean Cruise Lines and Radisson Hotels.
RICHARD CAMPANELLA has been Secretary of the Company since December 18, 2001.
Mr. Campanella currently serves as the Chief Operating Officer of vFinance
Investments, Inc. From February 1994 until April 2001, Mr. Campanella was a
partner of Commonwealth Associates, a registered broker dealer where he served
as the Director of Compliance. He has a degree in Business Administration from
the College of Staten Island.
MARK KACER has been the CFO of the Company since February 3, 2003. Mr. Kacer was
the President of Mangowood Advisors, a financial consulting firm, from January
2001 until January 2003. Prior to that, Mr. Kacer was the CFO and a director of
Equinox Systems Inc., a publicly traded technology company, from June 1986 until
December 2000. Mr. Kacer was a senior auditor with Arthur Andersen from July
1981 until January 1986. He has a B.S degree in Accounting from Florida State
University.
AUDIT COMMITTEE
The Company's board of directors serves as the audit committee. Leonard J.
Sokolow is an "audit committee financial expert" as such term is defined in the
SEC's rules.
CODE OF ETHICS
The Company has adopted a Code of Ethics for the Chief Executive Officer and
Chief Financial Officer, which is filed as Exhibit 14 to this Annual Report.
-31-
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Exchange Act requires our directors and executive officers,
and persons who beneficially own more than ten percent (10%) of a registered
class of our company's equity securities, to file with the Securities and
Exchange Commission (SEC) initial reports of ownership and reports of changes in
ownership of Common Stock and the other equity securities of the Company.
Officers, directors and persons who beneficially own more than ten percent (10%)
of a registered class of our company's equity securities are required by the
regulations of the SEC to furnish the Company with copies of all Section 16(a)
forms they file.
To our knowledge, based solely on review of these filings and written
representations from the directors and officers, there are no transactions
during the fiscal year ended December 31, 2003 for which the officers, directors
and significant stockholders have not timely filed the appropriate form under
Section 16(a) of the Exchange Act.
ITEM 10. EXECUTIVE COMPENSATION.
The following table provides information concerning the annual and long term
compensation earned by our chief executive officer and each of the other most
highly compensated executive officers of the Company during the fiscal years
ended December 31, 2003, 2002 and 2001:
SUMMARY COMPENSATION TABLE
Securities
Annual Other Underlying
Name/position Year Salary Bonus Compensation Options
------------- ---- ------ ----- ------------ ----------
Leonard J. Sokolow 2003 $230,265 $0 $18,900 734,802 (3)
CEO, President (1)(2)(3) 2002 $208,000 $0 18,000 0 (3)
2001 $169,500 $150,000 $7,289 734,802 (3)
Timothy E. Mahoney 2003 $230,265 $0 $18,900 734,802 (3)
COO, Chairman (1)(2)(3) 2002 $208,000 $0 $18,000 0 (3)
2001 $169,500 $150,000 $7,289 734,802 (3)
Marc Siegel 2003 $0 0 $0 0
President, vFinance 2002 $125,000 0 $229,437 0
Investments, Inc. (4) 2001 $120,000 0 $92,000 565,000
Richard Campanella 2003 $125,000 0 0 75,000
Chief Operating Officer 2002 $125,000 0 0 75,000
vFinance Investments, Inc. 2001 $125,000 0 0 25,000
David Spector 2003 $100,000 0 0 550,000
Vice President 2002 $100,000 0 0 25,000
2001 $100,000 0 $1,902 25,000
Mark Kacer 2003 $115,993 $13,750 0 500,000
Vice President (5) 2002 $0 0 0 0
2001 $0 0 0 0
(1) Messrs. Sokolow and Mahoney each received $150,000 in 2001, $0 in 2002, and
$0 in 2003 of annual incentive compensation based on the performance of the
Company during the respective years. These amounts are reflected in the
corresponding table as bonuses.
(2) Messrs. Sokolow and Mahoney each received a $12,000 car allowance during
2001, $18,000 in 2002 and $18,900 in 2003, which are reflected in the
corresponding table as other annual compensation.
(3) Cancellation of 500,000 options in January 2001 and reissuance in July 2001
per employment agreement. Subsequently all options were cancelled in 2002.
During 2003, they were each granted 734,802 options.
(4) Mr.Siegel's employment with the Company was terminated during fiscal year
2002.
(5) Mr. Kacer's employment with the Company began in February 2003.
-32-
OPTION GRANTS IN LAST FISCAL YEAR
The following table provides information with respect to the chief executive
officer and each of the other named executive officers listed in the Summary
Compensation Table concerning stock options granted on our common stock in
fiscal year 2003:
Number of Percent of Total
Securities Options Granted to
Underlying Options Employees in Fiscal Exercise or Base
Name Granted Year Price ($/Share) Expiration Date
---- ------------------ ------------------ --------------- ---------------
Leonard Sokolow 734,802 10% $0.21 July 6, 2005
Timothy Mahoney 734,802 10% $0.21 July 6, 2005
Richard Campanella 75,000 1% $0.21 July 6, 2005
David Spector 550,000 7% $0.19-$0.21 July 6, 2005
Mark Kacer 500,000 7% $0.21 February 1, 2008
No options wer exercised in 2003 by the Chief Executive Officer or the other
named executive officers of the Company.
COMPENSATION OF DIRECTORS
Directors do not receive any compensation for serving on our Board of Directors.
EMPLOYMENT AGREEMENTS
On January 5, 2001, we entered into a three-year employment agreement, as
subsequently amended, with each of Mr. Sokolow, our Chief Executive Officer and
President, and Mr. Mahoney, our Chairman and Chief Operating Officer. Under the
terms of these agreements, which are automatically extended unless we have
provided a non-renewal notice as directed by a majority vote of the board of
directors, each of Messrs. Sokolow and Mahoney are entitled to receive:
- An initial base salary of $208,000 per annum for the first year with a 5%
increase per annum beginning one year from the date of the agreements (our board
of directors may increase such salaries at its discretion); - Discretionary
bonuses as determined by the board of directors primarily based on each
employee's performance; - Four weeks paid vacation per annum and an automobile
expense allowance of $1,575 per month; and - Incentive compensation paid
quarterly from distributions of "Division Available Income" and "Division
Non-Cash consideration" as such terms are defined in an exhibit to each of the
employment agreements, primarily based on the performance of our company and our
operating divisions.
-33-
The employment agreements also contain severance and change of control
provisions.
Under the terms of the employment agreements, as of July 6, 2001, Leonard J.
Sokolow and Timothy Mahoney were each granted 500,000 stock options. These stock
options are exercisable for five years at an exercise price of $.625 per share.
Of the 500,000 stock options granted to each of Messrs. Sokolow and Mahoney,
125,000 options vested for each of them on July 6, 2001 and the balance of the
options vest for each of them at the rate of 125,000 per year thereafter. On the
date these options were granted, the closing per share sale price of our common
stock was $.32 as reported by the OTC Bulletin Board. These options have been
cancelled in 2002.
CANCELLATION AND REISSUANCE OF STOCK OPTIONS
In December 2002, Messrs. Sokolow and Mahoney each forfeited a total of 734,802
outstanding options by signing an Options Cancellation Agreement. This was in
conjunction with a stock option exchange program which was made available to all
employees who were option holders at the time. The cancelled options for Messrs.
Sokolow and Mahoney consisted of two grants. The first grant was for 500,000
options at an exercise price of $0.625, exercisable until July, 2005. The other
grant was for 234,802 options at an exercise price of $0.35, exercisable until
August, 2006. Accordingly, at December 31, 2002 there were no stock options held
by Messrs. Sokolow and Mahoney.
In conjunction with the stock option exchange program, Messrs. Sokolow and
Mahoney were each granted a total of 734,802 stock options on July 1, 2003 at an
exercise price of $0.21, the fair market value as of that date. This was exactly
six (6) months and one (1) day after the cancellation, consistent with the terms
of the exchange program. According to the terms of the exchange program, the new
options were vested to the same extent they would have been if the the old
options had been retained and the expiration dates of the new options also
remained unchanged. No compensation expense was recognized related to these
stock options.
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ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth common stock ownership information as of March
22, 2004 with respect to:
- Each person known to us to be the beneficial owner of more than 5% of our
common stock;
- Each of our officers and directors; and
- All directors and officers as a group.
This information as to beneficial ownership was furnished to us by or on behalf
of the persons named. Unless otherwise indicated, the business address of each
person listed is 3010 North Military Trail, Suite 300, Boca Raton, Florida.
Information with respect to the percent of class is based on outstanding shares
of common stock as of March 22, 2004. Except as otherwise indicated, to our
knowledge, each stockholder has sole power to vote and dispose of all the shares
of common stock listed opposite his name.
For purposes of this table, each person is deemed to have beneficial ownership
of any shares of our common stock such person has the right to acquire on or
within 60 days after March 22, 2004.
Amount of Shares
Name of Beneficial Owner Beneficially Owned Percent of Class
------------------------ ------------------ ----------------
Leonard J. Sokolow(1) 5,883,010 17.90%
Timothy E. Mahoney(2) 5,883,009 17.90%
Highlands Group Holdings, Inc. (3) 2,175,000 6.62%
David A. Spector (4) 25,000 *
Richard Campanella (5) 25,000 *
Mark Kacer - -
All executive officers and directors
as a group (4 persons)(6) 11,816,019 36.00%
* Denotes less than 1% ownership.
(1) Includes 5,883,010 shares of common stock issued in the names of Mr. Sokolow
and his wife.
(2) Includes 2,175,000 shares of common stock issued in the name of Highlands
Group Holdings, Inc., 3,708,009 shares of common stock issued in the name of Mr.
Mahoney.
(3) Highlands Group Holdings, Inc., whose address is 68 Cayman Place, Palm Beach
Gardens, Florida 33418, is wholly owned by Mr. Timothy Mahoney, Chairman and
Chief Operating Officer. Mr. Mahoney, as the owner of Highlands Group Holdings,
Inc., is deemed to beneficially own the 2,175,000 shares held by Highlands Group
Holdings, Inc.
(4) Includes 25,000 shares of common stock issued in the name of Mr. Spector.
(5) Includes 25,000 shares of common stock issued in the name of Mr. Campanella.
(6) See footnotes (1) through (5) of this table.
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The following table sets forth certain information as of December 31, 2003, with
respect to compensation plans (including individual compensation arrangements)
under which our equity securities are authorized for issuance under:
- all compensation plans previously approved by our security holders; and
- all compensation plans not previously approved by our security holders.
Number of securities remaining available for
to be issued upon Weighted average future issuance under
exercise of exercise price of equity compensation plans
outstanding options, outstanding options, (excluding securities
Plan category warrants and rights warrants and rights reflected in column (a))
(a) (b) (c)
Equity compensation
plans approved by
security holders - - -
Equity compensation
plans not approved by
security holders * 15,744,711 0.77 -
-----------------------------------------------------------------
Total 15,744,711 0.77 -
* For a description of the plans See Note 7 to the Consolidated Financial
Statements included elsewhere herein.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
On December 18, 2001, Critical Infrastructure Fund (BVI), LP, a limited
partnership controlled by us, purchased 877,193 shares of our common stock from
us for $250,000 and received piggyback registration rights with respect to these
shares. In January 2002, Critical Infrastructure Fund (BVI), LP sold to Messrs.
Sokolow, Mahoney and Williamson, three executive officers of our company, 61,403
shares, 61,403 shares and 150,000 shares, respectively, of our common stock at a
price of $0.285 per share, the same price at which the shares were purchased
from us by Critical Infrastructure Fund (BVI), LP.
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ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
Number of
Exhibit Exhibit Description
--------- --------------------------------------------------------------------
2.1 Share Exchange Agreement among the Company, vFinance Holdings, Inc.,
certain shareholders of vFinance Holdings, Inc. and Union Atlantic
LC, dated November 8, 1999 (incorporated by reference to the
Company's Current Report on Form 8-K filed with the SEC on
November 8, 1999).
2.2 Amendment to Share Exchange Agreement dated November 29, 1999
(incorporated by reference to the Company's Annual Report on Form
10-KSB filed with the SEC on March 30, 2000).
2.3 Agreement and Plan of Merger dated as of December 22, 2000, by and
among the Company, NW Holdings, Inc., and Alvin S. Mirman,
Ilene Mirman, Marc N. Siegel, Richard L. Galterio, Vincent W.
Labarbara, Eric M. Rand, and Mario Marsillo, Jr. (incorporated by
reference to the Company's Current Report on Form 8-K filed with
the SEC on January 17, 2001).
2.4 Agreement and Plan of Merger, dated as of January 3, 2001, by and
among the Company, Colonial Acquisition Corp., Colonial Direct
Financial Group, Inc., and Michael Golden and Ben Lichtenberg
(incorporated by reference to the Company's Current Report on Form
8-K filed with the SEC on January 17, 2001).
3.1 Certificate of Incorporation as filed with the Delaware Secretary of
State on February 12, 1992 (incorporated by reference to the
Company's Registration Statement on Form S-18 filed with the SEC on
July 24, 1992).
3.2 Certificate of Renewal and Revival of Certificate of Incorporation
as filed with the Delaware Secretary of State on March 15, 1996
(incorporated by reference to the Company's Annual Report on Form
10-KSB filed with the SEC on March 30, 2000).
3.3 Certificate of Amendment to the Certificate of Incorporation as
filed with the Delaware Secretary of State on April 28, 1999
(incorporated by reference to the Company's Annual Report on Form
10-KSB filed with the SEC on March 30, 2000).
3.4 Certificate of Amendment to Certificate of Incorporation as filed
with the Delaware Secretary of State on March 13,2000 (incorporated
by reference to the Company's Annual Report on Form 10-KSB filed
with the SEC on March 30, 2000).
3.5 Certificate of Amendment to Certificate of Incorporation as filed
with the Delaware Secretary of State on November 28, 2001.
3.6 Certificate of Designation of Series A Convertible Preferred Stock
of the Company as filed with the Delaware Secretary of State on
January 3, 2001 (incorporated by reference to the Company's Current
Report on Form 8-K filed with the SEC on January 17, 2001).
3.7 Certificate of Designation of Series B Convertible Preferred Stock
of the Company as filed with the Delaware Secretary of State on
January 3, 2001 (incorporated by reference to the Company's Current
Report on Form 8-K filed with the SEC on January 17, 2001).
3.8 Bylaws of the Company (incorporated by reference to the Company's
Registration Statement on Form S-18 filed with the SEC on July 24,
1992).
3.9 Unanimous Written Consent of the Company's Board of Directors dated
January 24, 1994, amending the Bylaws (incorporated by reference to
the Company's Annual Report on Form 10-KSB filed with the SEC on
March 30, 2000).
3.10 Unanimous Written Consent of the Company's Board of Directors,
effective as of January 24, 1994, amending the Bylaws (incorporated
by reference to the Company's Annual Report on Form 10-KSB filed
with the SEC on March 30, 2000).
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10.1 Purchase Agreement between the Company and Steven Jacobs and
Mauricio Borgonovo, dated December 24, 1999, for the purchase of
Pinnacle Capital Group,LLC (incorporated by reference to the
Company's Annual Report on Form 10-KSB filed with the SEC on March
30, 2000).
10.2 Asset Purchase Agreement among the Company, Steven Jacobs and
Mauricio Borgonovo dated January 3, 2000 (incorporated by reference
to the Company's Annual Report on Form 10-KSB filed with the SEC on
March 30, 2000).
10.3 Stock Purchase Agreement between the Company and River Rapids Ltd.,
dated September 27, 1999 (incorporated by reference to the Company's
Annual Report on Form 10-KSB filed with the SEC on March 30, 2000).
10.4 Amendment to Stock Purchase Agreement between the Company and River
Rapids Ltd. dated December 22, 1999 (incorporated by reference to
the Company's Annual Report on Form 10-KSB filed with the SEC on
March 30, 2000).
10.5 Common Stock and Warrants Purchase Agreement among the Company, AMRO
International, S.A., CALP II Limited Partnership, a Bermuda Limited
partnership, Celeste Trust Reg, Balmore SA, Sallee Investments LLLP,
worldVentures Fund I, LLC and RBB Bank Aktiengesellschaft, dated
March 31, 2000 (incorporated by reference to the Company's Current
Report on Form 8-K filed with the SEC on April 13, 2000).
10.6 Registration Rights Agreement among the Company, AMRO International,
S.A., CALP II Limited Partnership, a Bermuda limited partnership,
Celeste Trust Reg, Balmore SA, Sallee Investments LLLP,
worldVentures Fund I, LLC, RBB Bank Aktiengesellschaft and Thomas
Kernaghan & Co., Ltd., dated March 31,2000(incorporated by reference
to the Company's Current Report on Form 8-K filed with the SEC on
April 13, 2000).
10.7 Form of Warrant issued to AMRO International, S.A. (to purchase
100,000 shares), CALP II Limited Partnership, a Bermuda limited
partnership (to purchase 350,000 shares), Celeste Trust Reg (to
purchase 5,000 shares), Balmore SA (to purchase 35,000 shares),
Sallee Investments LLLP (to purchase 25,000 shares), worldVentures
Fund I, LLC (to purchase 25,000 shares), RBB Bank Aktiengesellschaft
(to purchase 130,000 shares) and Thomas Kernaghan & Co., Ltd. (to
purchase 58,333 shares) (incorporated by reference to the Company's
Current Report on Form 8-K filed with the SEC on April 13, 2000).
10.8 Escrow Agreement among the Company, AMRO International, S.A., CALP
II Limited Partnership, a Bermuda limited partnership, Celeste Trust
Reg, Balmore SA, Sallee Investments LLLP, worldVentures Fund I, LLC,
RBB Bank Aktiengesellschaft and Epstein Becker & Green, P.C., dated
March 31, 2000 (incorporated by reference to Amendment No. 1 to the
Company's Registration (Statement on Form SB-2 filed with the SEC on
July 14, 2000).
10.9 Amended and Restated Employment Letter Agreement dated December 18,
2000, between the Company and David Spector (incorporated by
reference to the Company's Annual Report on Form 10-KSB filed with
the SEC on March 20, 2001).
10.10 Employment Agreement dated as of January 5, 2001, between the
Company and Leonard J. Sokolow (incorporated by reference to the
Company's Annual Report on Form 10-KSB filed with the SEC on March
20, 2001).
10.11 Employment Agreement dated as of January 5, 2001, between the
Company and Timothy Mahoney (incorporated by reference to the
Company's Annual Report on Form 10-KSB filed with the SEC on March
20, 2001).
10.12 Options Cancellation Agreement dated January 1, 2001 by Leonard J.
Sokolow (incorporated by reference to the Company's Annual Report on
Form 10-KSB filed with the SEC on March 20, 2001).
10.13 Options Cancellation Agreement dated January 1, 2001 by Timothy
Mahoney (incorporated by reference to the Company's Annual Report on
Form 10-KSB filed with the SEC on March 20, 2001).
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10.14 Securities Exchange Agreement, dated as of August 15, 2001, among
Kathleen Wallman, Steven Wallman, Joseph Daniel and vFinance.com,
Inc. (n/k/a vFinance, Inc.) (Incorporated by reference to the
Company's Quarterly Report on Form 10-QSB filed on August 14, 2001).
10.15 Registration Rights Agreement, dated as of August 15, 2001, among
Kathleen Wallman, Joseph Daniel and vFinance.com, Inc. (n/k/a
vFinance, Inc.)(Incorporated by reference to the Company's Quarterly
Report on Form 10-QSB filed on August 14, 2001).
10.16 Stock Purchase Warrant, dated August 15, 2001, issued to Kathleen
Wallman to purchase 400,000 shares of common stock of vFinance, Inc.
(incorporated by reference to the Company's Quarterly Report on Form
10-QSB filed on August 14, 2001).
10.17 Letter Agreement, dated August 15, 2001, from vFinance.com, Inc. to
Joseph Daniel re employment of Joseph Daniel by vFinance.com, Inc.
(incorporated by reference to the Company's Quarterly Report on Form
10-QSB filed on August 14, 2001).
10.18 Note Purchase Agreement by and between vFinance.com, Inc. d/b/a
vFinance, Inc. (n/k/a vFinance, Inc.) and Best Finance Investments
Limited (n/k/a SBI Investments (USA), Inc.) dated November 28, 2001
(incorporated by reference to the Company's Annual Report on Form
10-KSB filed April 16, 2002).
10.19 Letter Agreement dated November 30, 2001 amending Note Purchase
Agreement (incorporated by reference to the Company's Annual Report
on Form 10-KSB filed April 16, 2002).
10.20 Letter Agreement dated December 14, 2001 amending Note Purchase
Agreement (incorporated by reference to the Company's Annual Report
on Form 10-KSB filed April 16, 2002).
10.21 Letter Agreement dated December 28, 2001 amending Note Purchase
Agreement (incorporated by reference to the Company's Annual Report
on Form 10-KSB filed April 16, 2002).
10.22 Letter Agreement dated February 13, 2002 amending Note Purchase
Agreement (incorporated by reference to the Company's Annual Report
on Form 10-KSB filed April 16, 2002).
10.23 Letter Agreement dated March 4, 2002 amending Note Purchase
Agreement (incorporated by reference to the Company's Annual Report
on Form 10-KSB filed April 16, 2002).
10.24 Credit Facility by and between vFinance, Inc. and UBS Americas, Inc.
dated as of January 25, 2002 (incorporated by reference to the
Company's Annual Report on Form 10-KSB filed April 16, 2002).
10.25 Subordination Agreement by and among vFinance, Inc., UBS Americas,
Inc., and SBI Investments (USA), Inc. dated as of January 25, 2002
(incorporated by reference to the Company's Annual Report on Form
10-KSB filed April 16, 2002).
10.26 Cancellation Agreement/Conditional Right to Option Grant dated April
2, 2001 by Leonard J. Sokolow (incorporated by reference to the
Company's Annual Report on Form 10-KSB filed April 16, 2002).
10.27 Employment Agreement Amendment dated as of July 2, 2001 by and
between vFinance.com, Inc. and Leonard J. Sokolow (incorporated by
reference to the Company's Annual Report on Form 10-KSB filed April
16, 2002).
10.28 Stock Option Agreement dated as of July 6, 2001 by and between
Leonard J. Sokolow and vFinance.com, Inc. (incorporated by reference
to the Company's Annual Report on Form 10-KSB filed April 16, 2002).
10.29 Employment Agreement Amendment No. 3 dated as of January 7, 2002 by
and between vFinance, Inc. and Leonard J. Sokolow (incorporated by
reference to the Company's Annual Report on Form 10-KSB filed April
16, 2002).
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10.30 Cancellation Agreement/Conditional Right to Option Grant dated April
2, 2001 by Timothy Mahoney (incorporated by reference to the
Company's Annual Report on Form 10-KSB filed April 16, 2002)
(incorporated by reference to the Company's Annual Report on Form
10-KSB filed April 16, 2002).
10.31 Employment Agreement Amendment dated as of July 2, 2001 by and
between vFinance.com, Inc. and Timothy Mahoney (incorporated by
reference to the Company's Annual Report on Form 10-KSB filed April
16, 2002).
10.32 Stock Option Agreement dated as of July 6, 2001 by and between
Timothy Mahoney and vFinance.com, Inc. (incorporated by reference to
the Company's Annual Report on Form 10-KSB filed April 16, 2002).
10.33 Employment Agreement Amendment No. 3 dated as of January 7, 2002 by
and between vFinance, Inc. and Timothy Mahoney (incorporated by
reference to the Company's Annual Report on Form 10-KSB filed April
16, 2002).
10.34 Consulting Agreement effective as of August 20, 2001 by and between
vFinance.com, Inc. and Insight Capital Consultants Corporation
(incorporated by reference to the Company's Annual Report on Form
10- KSB filed April 16, 2002).
10.35 Letter Agreement dated February 5, 2002 executed by vFinance, Inc.
and Robert F. Williamson, Jr. containing terms and conditions of Mr.
Williamson's employment (incorporated by reference to the Company's
Annual Report on Form 10-KSB filed April 16, 2002).
10.36 Amendment to Credit Agreement dated April 12, 2002 by and between
vFinance, Inc. and UBS Americas Inc. (incorporated by reference to
the Company's Annual Report on Form 10-KSB filed April 16, 2002).
10.37 Selected Asset Purchase Agreement dated as of May 29, 2002 among
vFinance Investments, Inc., Somerset Financial Partners, Inc.,
Somerset Financial Group, Inc., Douglas Toth and Nicholas Thompson
(the "Select Asset Purchase Agreement") (incorporated by reference
to the Company's Form 10-QSB filed August 14, 2002).
10.38 Amendment to Select Asset Purchase Agreement dated June 17, 2002
(the "Amendment") (incorporated by reference to the Company's Form
10-QSB filed August 14, 2002).
10.39 Escrow Agreement executed in conjunction with the Amendment
(incorporated by reference to the Company's Form 10-QSB filed August
14, 2002).
10.40 Termination Agreement (incorporated by reference to the Company's
Form 10-QSB/A filed November 14, 2002)
10.41 Branch Agreement between the Company and JSM Holding Corp
(incorporated by reference to the Company's Annual Report on form
10-KSB filed March 31, 2003).
10.42 Employment Agreement between the Company and John S. Matthews.
(incorporated by reference to the Company's Annual Report on form
10-KSB filed March 31, 2003).
10.43 Employment agreement dated January 21, 2003 between the Company and
Mark Kacer.
10.44 Lease agreement on the Company's headquarters in Boca Raton, FL.
dated January 1, 2003 between the Company and Zenith Professional
Center, LTD.
10.45 Stock warrant agreement between the Company and Zenith Professional
Center, LTD.
14 Code of Ethics
21 List of Subsidiaries
31.1 Certification by Chief Executive Officer pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.
31.2 Certification by Chief Financial Officer pursuant to Section 1350 of
the Sarbanes-Oxley Act of 2002.
32.1 Certification by Chief Executive Officer pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.
32.2 Certification by Chief Financial Officer pursuant to Section 906 of
the Sarbanes-Oxley act of 2002.
(b) REPORTS ON FORM 8-K
Form 8-K filed on November 17, 2003 pursuant to item 12 thereof.
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ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
During 2003 and 2002, the Company incurred the following fees for professional
services rendered by the principal accountant:
2003 2002
Fees for audit services $ 90,000 $130,000
Fees for audit-related services - -
Tax fees for taxes related to corporate
tax compliance and advice related thereto $ 5,000 $ 28,300
All other fees - -
Fees for audit services were approximately $90,000 for 2003, including fees
associated with the annual audit, the reviews of the Company's quarterly reports
on Form 10-QSB, fees related to filings with the Securities and Exchange
Commission ("SEC") and accounting consultations. Before any audit or non-audit
services are performed by any independent accountant, such services must be
approved in advance by the Company's board of directors.
-41-
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant has
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
vFinance, Inc.
By: /s/ Leonard J. Sokolow
-------------------------------------
LEONARD J. SOKOLOW, DIRECTOR,
CHIEF EXECUTIVE OFFICER AND PRESIDENT
Date: March 30, 2004
In accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
Signature Capacity Date
-------------------------------- --------- --------------------
/s/ Leonard J. Sokolow Director, Chief Executive Officer and
-------------------------------- President (Principal Executive Officer) March 30,2004
Leonard J. Sokolow
/s/ Mark Kacer. Chief Financial Officer and (Principal
-------------------------------- Financial and Accounting Officer) March 30, 2004
Mark Kacer
/s/ Timothy E. Mahoney Director, Chairman of the Board and March 30, 2004
-------------------------------- Chief Operating Officer
Timothy E. Mahoney
INDEX OF DOCEMENTS FILED WITH THIS ANNUAL REPORT
Number of Exhibit Exhibit Description
----------------- -------------------
10.43 Employment agreement dated January 21, 2003 between the Company and
Mark Kacer.
10.44 Lease agreement on the Company's headquarters in Boca Raton, FL.
dated January 1, 2003 between the Company and Zenith Professional
Center, LTD.
10.45 Stock warrant agreement between the Company and Zenith Professional
Center, LTD.
14 Code of Ethics
21 List of Subsidiaries
31.1 Certification by Chief Executive Officer pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.
31.2 Certification by Chief Financial Officer pursuant to Section 1350 of
the Sarbanes-Oxley Act of 2002.
32.1 Certification by Chief Executive Officer pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.
32.2 Certification by Chief Financial Officer pursuant to Section 906 of
the Sarbanes-Oxley act of 2002.