UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB/A-1
(MARK ONE)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2001
OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD _____________ TO _________________
COMMISSION FILE NUMBER 1-11454-03
VFINANCE.COM, INC.
(EXACT NAME OF SMALL BUSINESS ISSUER AS SPECIFIED IN ITS CHARTER)
DELAWARE 58-1974423
-------------------------------- -------------------------
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
3010 North Military Trail, Suite 300, Boca Raton, FL 33431
(Address of principal executive offices)
(561) 981-1000
(Issuer's telephone number)
(Former name, former address and former fiscal year,
if changed since last report)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes [X] No [ ]
State the number of shares outstanding of each of the issuer's classes
of common equity, as of September 30, 2001:
20,050,667
Transitional Small Business Disclosure Format (Check one): Yes [X]; No [ ]
INDEX
VFINANCE.COM, INC.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets - December 31, 2000 and September 30, 2001
(Unaudited).
Consolidated Statements of Operations for the three months and nine months ended
September 30, 2000 and 2001 (Unaudited).
Consolidated Statements of Cash Flows for the nine months ended September 30,
2000 and 2001 (Unaudited).
Notes to Consolidated Financial Statements (Unaudited).
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Item 2. Changes in Securities
Item 3. Defaults upon Senior Securities
Item 4. Submission of Matters to a Vote of Security Holders
Item 5. Other Information
Signatures
FORWARD-LOOKING STATEMENTS.
In connection with the safe harbor provisions of the Private Securities
Litigation Reform Act of 1995 (the Reform Act), we are hereby providing
cautionary statements identifying important factors that could cause our actual
results to differ materially from those projected in forward-looking statements
made herein. Any statements that express, or involve discussions as to,
expectations, beliefs, plans, objectives, assumptions or future events or
performance (often, but not always, identified through the use of words or
phrases such as we or our management believes, expects, anticipates, hopes,
words or phrases such as will result, are expected to, will continue, is
anticipated, estimated, projection and outlook, and words of similar import) are
not statements of historical facts and may be forward-looking. These
forward-looking statements are based largely on our expectations and are subject
to a number of risks and uncertainties, including but not limited to, economic,
competitive, regulatory, growth strategies, available financing and other
factors discussed elsewhere in this report and in the documents filed by us with
the Securities and Exchange Commission (SEC). Many of these factors are beyond
our control. Actual results could differ materially from the forward-looking
statements made. 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 will, in fact, occur.
These forward-looking statements involve estimates, assumptions, and
uncertainties, and, accordingly, actual results may differ materially from those
expressed in the forward-looking statements. These uncertainties include, among
others, the following: (i) our potential inability to receive success fees as a
result of transactions not being completed, (ii) a general decrease in merger
and acquisition activities, (iii) increased competition from business
development portals, management consultants and investment banks, (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 and factor, or combination of
factors, may cause actual results to differ materially from those contained in
any forward-looking statements.
VFINANCE.COM, INC.
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
DECEMBER 31, SEPTEMBER 30,
2000 2001
------------ ------------
ASSETS:
Cash and cash equivalents $ 5,454,071 $ 861,722
Restricted cash -- 200,000
Due from clearing broker -- 959,675
Investments in trading securities 350,074 741,030
Accounts receivable, net of allowance for doubtful
accounts of $10,769 and $159,662 respectively 269,010 284,711
Forgivable loans - employees, current portion -- 376,095
Notes receivable - employees 149,666 226,216
Prepaid expenses and other current assets 62,041 78,290
------------ ------------
Total Current Assets 6,284,862 3,727,739
Furniture and equipment, at cost:
Furniture and equipment 158,326 1,437,076
Internal use software 113,080 146,834
------------ ------------
271,406 1,583,910
Less accumulated depreciation (120,719) (806,692)
------------ ------------
Net furniture and equipment 150,687 777,218
Forgivable loans - employees -- 893,092
Goodwill, net of accumulated amortization
of $16,324 and $480,062, respectively 17,624 9,047,672
Deferred tax asset -- 97,537
Other assets 218,671 199,982
------------ ------------
TOTAL ASSETS $ 6,671,844 $ 14,743,240
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY:
Accounts payable $ 344,783 $ 1,071,522
Accrued liabilities 242,704 1,705,894
Securities sold, not yet purchased -- 19,417
Lines of credit -- 297,656
Subordinated promissory notes -- 650,000
Notes payable, current portion -- 782,304
Capital lease obligations, current portion -- 34,139
Other -- 27,647
------------ ------------
Total Current Liabilities 587,487 4,588,579
Commitments and contingencies -- 200,000
Capital lease obligations -- 3,150
Deferred tax liability -- 145,000
Shareholders' Equity:
Preferred stock, $0.01 par value, 2,500,000 shares
authorized; none and 172,500 issued and
outstanding, respectively -- 1,725
Common stock, $0.01 par value, 25,000,000 shares
authorized; 14,982,178 and 23,062,178 shares issued,
respectively, and 14,982,178 and 20,050,667
outstanding, respectively 149,822 230,622
Additional paid-in-capital on preferred stock -- 1,631,400
Additional paid-in-capital on common stock 12,441,008 20,158,650
Deferred compensation (127,206) (107,406)
Accumulated deficit (4,212,499) (9,931,320)
------------ ------------
8,251,125 11,983,671
Less treasury stock (2,166,768) (2,177,160)
------------ ------------
Total Shareholders' Equity 6,084,357 9,806,511
------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 6,671,844 $ 14,743,240
============ ============
VFINANCE.COM, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
-------------------------------- --------------------------------
2000 2001 2000 2001
------------ ------------ ------------ ------------
REVENUES:
Commissions - agency $ -- $ 1,084,051 $ -- $ 4,478,526
Commissions - principal -- 1,332,681 -- 3,931,802
Success fees 1,227,189 245,750 2,196,189 2,185,085
Consulting and retainers 714,764 144,500 1,580,130 580,706
Other brokerage related income -- 124,540 -- 428,255
Other 106,038 64,933 239,817 300,628
------------ ------------ ------------ ------------
TOTAL REVENUES 2,047,991 2,996,455 4,016,136 11,905,002
------------ ------------ ------------ ------------
COST OF REVENUES:
Commissions -- 1,326,702 -- 5,018,421
Clearing and transaction costs -- 253,088 -- 1,491,129
Success 1,221,238 134,358 2,186,462 786,334
Consulting and retainers 286,556 -- 524,329 46,000
Other -- 12,145 -- 39,355
------------ ------------ ------------ ------------
TOTAL COST OF REVENUES 1,507,794 1,726,293 2,710,791 7,381,239
------------ ------------ ------------ ------------
GROSS PROFIT 540,197 1,270,162 1,305,345 4,523,763
------------ ------------ ------------ ------------
OTHER EXPENSES:
General and administrative 374,830 2,327,820 884,147 6,683,405
Net loss on trading securities -- 48,510 -- 132,918
Professional fees 129,247 131,030 351,049 709,879
Provision for bad debts 30,000 110,198 45,000 233,913
Net unrealized loss on investments held
for trading and stock purchase warrants -- 273,688 -- 1,423,336
Depreciation and amortization 10,530 222,188 36,348 683,708
Amounts forgiven under forgivable loans -- 89,613 -- 449,181
Stock based compensation 217,249 15,000 3,677,215 104,500
------------ ------------ ------------ ------------
Total other expenses 761,856 3,218,047 4,993,759 10,420,840
------------ ------------ ------------ ------------
Loss from operations (221,659) (1,947,885) (3,688,414) (5,897,077)
Loss on sale of property -- -- -- (16,180)
Interest and dividend income (expense) 50,868 (10,668) 79,477 194,261
------------ ------------ ------------ ------------
NET LOSS (170,791) (1,958,553) (3,608,937) (5,718,996)
============ ============ ============ ============
Less: Preferred stock dividend -- 30,625 -- 91,875
------------ ------------ ------------ ------------
LOSS AVAILABLE TO COMMON STOCKHOLDERS $ (170,791) $ (1,989,178) $ (3,608,937) $ (5,810,871)
============ ============ ============ ============
Loss per share:
Basic ($0.02) ($0.10) ($0.38) ($0.30)
============ ============ ============ ============
Weighted average number of common
shares used in computing basic loss
per share 10,768,201 19,758,380 9,608,584 19,474,872
============ ============ ============ ============
Diluted ($ 0.02) ($0.10) ($0.38) ($0.30)
============ ============ ============ ============
Weighted average number of common
shares used in computing diluted loss
per share 10,768,201 19,758,380 9,608,584 19,474,872
============ ============ ============ ============
vFinance.com, Inc.
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(UNAUDITED)
PREFERRED STOCK COMMON STOCK
---------------------- -------------------------
Shares Amount Shares Amount
--------- --------- -------------------------
BALANCES AT DECEMBER 31, 1999 -- -- 9,099,400 90,994
Issuance of common shares in connection with private placement
(net of cash issuance costs of $1,071,342 and non cash issuance
costs of $361,333) -- -- 2,333,334 23,334
Purchase of treasury stock -- -- -- --
Issuance of common shares in connection with services rendered -- -- 538,333 5,383
Change in per share fair value of common shares under restricted
stock performance plan (First Tranche Shares) -- -- -- --
Amortization of deferred compensation under restricted stock
performance plan (First Tranche Shares) -- -- -- --
Issuance of common shares under the restricted stock performance
plan (Second Tranche Shares) -- -- 3,011,111 30,111
Change in per share fair value of common shares under restricted
stock performance plan (Second Tranche Shares) -- -- -- --
Rescission of common shares under the restricted stock
performance plan (Second Tranche Shares) -- -- -- --
Issuance of compensatory stock options and stock purchase warrants -- -- -- --
Amortization of deferred compensation (Second Tranche Shares) -- -- -- --
Amortization of deferred compensation -- -- -- --
Net loss -- -- -- --
--------------------------------------------------
BALANCES AT DECEMBER 31, 2000 -- -- 14,982,178 149,822
Issuance of shares in conjunction with acquisition of NW Holdings, Inc 172,500 1,725 1,700,000 17,000
Issuance of shares in conjunction with acquisition of Colonial -- -- 5,750,000 57,500
Accrued dividends payable on preferred shares -- -- -- --
Net loss -- -- -- --
--------------------------------------------------
BALANCES AT MARCH 31, 2001 172,500 1,725 22,432,178 224,322
Issuance of common shares in connection with Giachetti settlement -- -- 50,000 500
Issuance of common shares in connection with Murray settlement -- -- 80,000 800
Issuance of common shares in connection with Katz settlement -- -- 50,000 500
Private placement post effective amendment issuance costs -- -- -- --
Accrued dividends payable on preferred shares -- -- -- --
Amortization of deferred compensation -- -- -- --
Purchase of treasury stock -- -- -- --
Net loss -- -- -- --
--------------------------------------------------
BALANCES AT JUNE 30, 2001 172,500 1,725 22,612,178 226,122
==================================================
Issuance of shares in conjunction with acquisition of Critical
Infrastructure -- -- 400,000 4,000
Issuance of common shares in connection with services rendered -- -- 50,000 500
Private placement post effective amendment issuance costs -- -- -- --
Accrued dividends payable on preferred shares -- -- -- --
Net loss -- -- -- --
--------------------------------------------------
BALANCES AT SEPTEMBER 30, 2001 172,500 1,725 23,062,178 230,622
==================================================
Additional Additional
Paid-in Paid-in
Capital Capital Deferred Accumulated
Common Preferred Compensation Deficit
---------- --------- ------------ -----------
Balances at December 31, 1999 5,097,410 -- (4,760,452) (300,850)
Issuance of common shares in connection with private placement
(net of cash issuance costs of $1,071,342 and non cash issuance
costs of $361,333) 5,905,324 -- -- --
Purchase of treasury stock -- -- -- --
Issuance of common shares in connection with services rendered 2,539,361 -- (280,000) --
Change in per share fair value of common shares under restricted
stock performance plan (First Tranche Shares) (3,740,872) -- 3,740,872 --
Amortization of deferred compensation under restricted stock
performance plan (First Tranche Shares) -- -- 675,813 --
Issuance of common shares under the restricted stock performance
plan (Second Tranche Shares) 7,498,667 -- (7,528,778) --
Change in per share fair value of common shares under restricted
stock performance plan (Second Tranche Shares) (4,987,665) -- 4,987,665 --
Rescission of common shares under the restricted stock
performance plan (Second Tranche Shares) -- -- 2,159,946 --
Issuance of compensatory stock options and stock purchase warrants 128,783 -- (128,783) --
Amortization of deferred compensation (Second Tranche Shares) -- -- 381,167 --
Amortization of deferred compensation -- -- 625,344 --
Net loss -- -- -- (3,911,649)
-------------------------------------------------------
BALANCES AT DECEMBER 31, 2000 12,441,008 -- (127,206) (4,212,499)
Issuance of shares in conjunction with acquisition of NW Holdings,Inc 1,697,750 -- -- --
Issuance of shares in conjunction with acquisition of Colonial 5,631,050 1,723,275 -- --
Accrued dividends payable on preferred shares -- (30,625) -- --
Net loss -- -- -- (1,379,719)
-------------------------------------------------------
BALANCES AT MARCH 31, 2001 19,769,808 1,692,650 (127,206) (5,592,218)
Issuance of common shares in connection with Giachetti settlement 17,000 -- -- --
Issuance of common shares in connection with Murray settlement 26,400 -- -- --
Issuance of common shares in connection with Katz settlement 24,500 -- -- --
Private placement post effective amendment issuance costs (8,401) -- -- --
Accrued dividends payable on preferred shares -- (30,625) -- --
Amortization of deferred compensation -- -- 19,800 --
Purchase of treasury stock -- -- -- --
Net loss -- -- -- (2,380,549)
-------------------------------------------------------
BALANCES AT JUNE 30, 2001 19,829,307 1,662,025 (107,406) (7,972,767)
=======================================================
Issuance of shares in conjunction with acquisition of Critical
Infrastructure 320,000 -- -- --
Issuance of common shares in connection with services rendered 14,500 -- -- --
Private placement post effective amendment issuance costs (5,157) -- -- --
Accrued dividends payable on preferred shares -- (30,625) -- --
Net loss -- -- -- (1,958,553)
-------------------------------------------------------
BALANCES AT SEPTEMBER 30, 2001 20,158,650 1,631,400 (107,406) (9,931,320)
=======================================================
Treasury Shareholders'
Stock Equity
Balances at December 31, 1999 -- 127,102
Issuance of common shares in connection with private placement
(net of cash issuance costs of $1,071,342 and non cash issuance
costs of $361,333) -- 5,928,658
Purchase of treasury stock (6,822) (6,822)
Issuance of common shares in connection with services rendered -- 2,264,744
Change in per share fair value of common shares under restricted
stock performance plan (First Tranche Shares) -- --
Amortization of deferred compensation under restricted stock
performance plan (First Tranche Shares) -- 675,813
Issuance of common shares under the restricted stock performance
plan (Second Tranche Shares) -- --
Change in per share fair value of common shares under restricted
stock performance plan (Second Tranche Shares) -- --
Rescission of common shares under the restricted stock
performance plan (Second Tranche Shares) (2,159,946) --
Issuance of compensatory stock options and stock purchase warrants -- --
Amortization of deferred compensation (Second Tranche Shares) -- 381,167
Amortization of deferred compensation -- 625,344
Net loss -- (3,911,649)
-----------------------------
BALANCES AT DECEMBER 31, 2000 (2,166,768) 6,084,357
Issuance of shares in conjunction with acquisition of NW Holdings,Inc -- 1,716,475
Issuance of shares in conjunction with acquisition of Colonial -- 7,411,825
Accrued dividends payable on preferred shares -- (30,625)
Net loss -- (1,379,719)
-----------------------------
BALANCES AT MARCH 31, 2001 (2,166,768) 13,802,313
Issuance of common shares in connection with Giachetti settlement -- 17,500
Issuance of common shares in connection with Murray settlement -- 27,200
Issuance of common shares in connection with Katz settlement -- 25,000
Private placement post effective amendment issuance costs -- (8,401)
Accrued dividends payable on preferred shares -- (30,625)
Amortization of deferred compensation -- 19,800
Purchase of treasury stock (10,392) (10,392)
Net loss -- (2,380,549)
-----------------------------
BALANCES AT JUNE 30, 2001 (2,177,160) 11,461,846
=============================
Issuance of shares in conjunction with acquisition of Critical
Infrastructure -- 324,000
Issuance of common shares in connection with services rendered -- 15,000
Private placement post effective amendment issuance costs -- (5,157)
Accrued dividends payable on preferred shares -- (30,625)
Net loss -- (1,958,553)
-----------------------------
BALANCES AT SEPTEMBER 30, 2001 (2,177,160) 9,806,511
=============================
VFINANCE.COM, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30
-------------------------------
2000 2001
----------- -----------
OPERATING ACTIVITIES:
Net loss $(3,608,937) $(5,718,996)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization 39,962 683,708
Bad debts 45,000 233,913
Amounts forgiven under forgivable loans -- 449,181
Compensation expense in connection with forgivable loans -- 400,173
Repayment of notes receivable, employees -- 92,445
Unrealized loss on trading securities -- 1,671,451
Unrealized gain on trading securities -- (285,615)
Unrealized loss on stock purchase warrants -- 40,050
Unrealized gain on stock purchase warrants -- (2,550)
Realized loss on sale of trading securities -- 204,273
Realized gain on sale of trading securities -- (71,355)
Stock based compensation expense 3,677,215 104,500
Loss on sale of equipment -- 16,180
Changes in assets and liabilities:
Due from clearing broker -- (8,549)
Securities owned, market value (597,388) (74,324)
Accounts receivable (146,102) (58,575)
Forgivable loans -- 75,322
Notes receivable -- (25,000)
Prepaids and other current assets (34,326) (73,093)
Other assets and liabilities (8,227) (204,269)
Accounts payable and accrued liabilities 903,938 (500,165)
Advanced client costs (14,735) --
Securities sold, not yet purchased -- (17,339)
Deferred revenues (7,063) --
----------- -----------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES 249,337 (3,068,634)
INVESTING ACTIVITIES:
Purchase of equipment (115,257) (211,646)
Proceeds from sale of equipment -- 11,500
Purchase of businesses -- (1,433,954)
----------- -----------
NET CASH USED IN INVESTING ACTIVITIES (115,257) (1,634,100)
FINANCING ACTIVITIES:
Borrowings under line of credit -- 63,504
Payment of long-term debt -- (66,790)
Proceeds from issuance of common stock,
net of registration costs 5,934,708 --
Payment of capital lease obligations -- (25,937)
Repayment of shareholders loans -- (50,000)
Purchase of treasury stock -- (10,392)
Proceeds from letter of credit -- 200,000
Distributions to partners (172,586) --
----------- -----------
NET CASH PROVIDED BY FINANCING ACTIVITIES 5,762,122 110,385
Increase (decrease) in cash and cash equivalents 5,896,202 (4,592,349)
Cash and cash equivalents at beginning of year 228,484 5,454,071
----------- -----------
Cash and cash equivalents at end of period $ 6,124,686 $ 861,722
=========== ===========
SEE ACCOMPANYING NOTES.
vFinance.com, Inc.
Notes to Condensed Consolidated Financial Statements
September 30, 2001
(unaudited)
1. BASIS OF PRESENTATION
Our Company, vFinance.com, Inc. (doing business as vFinance, Inc.), is a "new
breed" financial services enterprise committed to building a worldwide audience
of individuals looking to create wealth through their equity investments and
businesses. Our Company's website (www.vfinance.com) is one of the Internet's
leading destinations for entrepreneurs, owners of small and medium sized
businesses (SME), private (i.e. Angel) and institutional investors looking for
capital or 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 40,000 high net worth individuals and
institutional investors.
Utilizing the Internet and other traditional communication mediums, our Company
generates income by providing our audience access to products and services that
assist them in achieving their financial goals. Our Company's business model is
scalable as the website provides sales leads to our Company's "bricks and
mortar" businesses in the areas of investment banking, management consulting,
brokerage and asset management. We provide these services through our
wholly-owned operating subsidiaries, vFinance Investments, Inc., First Level
Capital, Inc., vFinance Holdings, Inc., vFinance Advisors LLC, vFinance
Investors LLC, Union Atlantic LC and vFinance Capital, L.C.
All significant intercompany balances and transactions have been eliminated in
consolidation. Certain information and footnote disclosures which are normally
included in financial statements prepared in accordance with generally accepted
accounting principles have been omitted pursuant to the rules of the Securities
and Exchange Commission. In the opinion of management, all adjustments are of a
normal recurring nature unless otherwise disclosed and are considered necessary
for a fair presentation of the financial position and the results of operations
of the Company for the interim periods presented herein. The financial data at
December 31, 2000 is derived from audited financial statements, which are
included in the Company's Form 10-KSB/A and should be read in conjunction with
the audited financial statements and notes thereto. Interim results are not
necessarily indicative of the results for the full year.
2. DESCRIPTION OF BUSINESS
vFinance Investments, Inc. ("VFI"), the principal operating subsidiary of
Colonial Direct Financial Group, Inc. ("Colonial"), which is wholly owned by
vFinance.com, Inc., is a full service securities firm that has served the
investment community since 1990 and is engaged in securities brokerage,
investment banking, securities trading and other related financial services
activities. VFI's clientele is primarily composed of high net worth individuals
throughout the United States and small to mid-sized institutions (such as hedge
funds, money managers, mutual funds and pension funds). VFI also maintains a
sales department of seasoned financial consultants, a research department and an
equity syndicate department. VFI conducts its securities business out of 20
offices, three of which are corporate owned and from which the vast majority of
its securities business is generated. VFI's remaining 17 offices are operated
under operating agreements with independent contractors. VFI is registered as a
broker-dealer with the SEC, is a member of the NASD, and is a market maker in
more than 200 U.S. securities.
First Level Capital, Inc. ("LVL") provides investment banking services to small
and medium sized companies and retail brokerage services to companies, financial
institutions and high net worth investors. LVL is licensed to conduct activities
as a broker-dealer in 49 states and has offices in New York, New Jersey and
Florida. LVL commenced operations in 1998. LVL is registered as a broker-dealer
with the SEC and is a member of the NASD.
vFinance.com, Inc.
Notes to Condensed Consolidated Financial Statements (Continued)
September 30, 2001
(unaudited)
2. DESCRIPTION OF BUSINESS (CONTINUED)
vFinance Holdings, Inc. ("VFH") a Florida corporation, operates a branded
Investment Banking Channel on the Web located at www.vfinance.com. The website
is focused on providing business development tools, information, products and
services to assist entrepreneurs and executives of small and medium sized
enterprises to organize and grow their businesses. The website provides the
small or medium business executive or entrepreneur with access to financing
sources, ancillary service providers and information about the venture capital
industry in general.
Union Atlantic LC ("UAL") is a management consulting firm which has been in
operation for six years and provides corporations and high net worth individuals
with management consulting services for the purpose of expediting corporate
development. UAL works with senior management in assessing market conditions,
and evaluating the client's assets (tangible and intangible) and its operational
capabilities. UAL then identifies alternative strategies, establishes a process
to build consensus and creates a strategy for effectively implementing change.
All of this is formalized in a report that serves as a tactical tool to ensure
communication and consistency in planning and coordination of efforts. UAL
specializes in the technology and healthcare markets.
vFinance Capital, L.C. ("VFC") is a three-year old investment banking firm and
is a broker-dealer registered with the SEC, a member of the NASD and registered
as a broker-dealer in 14 states. It operates primarily from its headquarters in
Boca Raton, Florida, as well as one branch office located in New York, NY. VFC
provides a range of investment banking services with an emphasis on private
placements of both debt and equity securities with institutional investors and
merger and acquisition advisory services. VFC also performs market research,
valuations, offering memoranda and fairness opinions.
Colonial Direct Retirement Services, Inc. ("CDRS"), a wholly owned subsidiary of
Colonial, is a third party administrator of employee benefits and retirement
plans and provides plan design, implementation and consulting, communication to
employees, ongoing administration and compliance testing and offers expert
technical advice. CDRS's pension business is comprised of three main areas: the
legal and design area of setting up the formalized qualified plans and
configuring a plan to meet the specific needs of the client, the annual
administration of the plan (including required governmental compliance), and the
financial management of the plan itself. The full range of retirement plans
available include: ESOPs, 401(k) plans, Profit Sharing and Defined Benefit
Pension plans and Cafeteria plans.
The Critical Infrastructure Fund, L.P. (the "Fund") was founded in 1999 by
individuals who possess extensive corporate finance and regulatory experience.
The New York-based Fund invests in equities and bonds of companies in regulated
industries such as telecommunications, Internet, cable television and electric
utilities infrastructure. It conducts all of its investment and trading
activities through Critical Infrastructure BVI. The Company owns vFinance
Investors LLC ("Investors", formerly known as Critical Investments, L.L.C.),
which is the sole general partner and 20% owner of the Fund, and vFinance
Advisors LLC ("Advisors", formerly known as Critical Advisors, L.L.C.), the sole
management company of the Fund.
VFI, LVL, UAL and VFC earn revenue from retainers and success fees. Retainers
are deferred when received and recognized when services are rendered, generally
on a straight-line basis over the life of an agreement. Success fees are agreed
upon amounts based on the percentage of the total value of a transaction and are
contingent on the successful completion of a specified transaction. These fees
are recognized at the completion of the transaction, per the terms of the
contracts.
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.
vFinance.com, Inc.
Notes to Condensed Consolidated Financial Statements (Continued)
September 30, 2001
(unaudited)
3. REVENUE RECOGNITION AND OTHER MATTERS
The Company periodically receives equity instruments and stock purchase warrants
from companies as part of their compensation for investment banking services.
Primarily all of the equity instruments are received from small public
companies. Such stock purchase warrants are considered derivatives. The Company
adopted Financial Accounting Standards Board Statement No. 133, Accounting for
Derivative Instruments and Hedging Activities, ("SFAS No. 133") on January 1,
2000. The Company recognizes revenue for such equity instruments based on the
fair value of the stock and for stock purchase warrants 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 changes in
the value of the equity instruments and stock purchase warrants. Realized gains
or losses are recognized in the statement of operations when the related
investments are exercised and sold. For the three and nine months ended
September 30, 2001, the Company recognized $38,000 and $1,617,415, respectively,
in revenue in connection with the receipt of such investments. For the three and
nine months ended September 30, 2001, the Company recognized $48,510 and
$132,918, respectively, in net realized losses in connection with the sale of
certain securities and net unrealized losses of $273,688 and $1,423,336,
respectively, in connection with changes in the value of such investments.
Occasionally, the Company receives securities 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 illiquidity) 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.
The Company's policy is to periodically distribute proceeds from the sale of
equity instruments and stock purchase warrants to its employees. Accordingly,
unrealized gains or losses related to such investments held by the Company at
each period also impact compensation expense and accrued compensation.
As of September 30, 2001, certain transactions in process may result in the
Company receiving equity instruments or stock purchase warrants in subsequent
periods as discussed above. In such event, the Company will recognize revenue
related to the receipt of such equity instruments consistent with the
aforementioned policies. In addition, the Company would also record compensation
expense at fair value related to the distribution of some or all of such equity
instruments to employees or independent contractors involved with the related
transaction.
vFinance.com, Inc.
Notes to Condensed Consolidated Financial Statements (Continued)
September 30, 2001
(unaudited)
3. REVENUE RECOGNITION AND OTHER MATTERS (CONTINUED)
VFH sells two types of listings to its website: (i) perpetual listings to
venture capital vendors, who are interested in providing services to other
companies or individuals; and (ii) three-month listings to entrepreneurs who
have new business ideas to sell. Revenue related to the listings is generally
recognized over the terms of such listings. VFH also sells two type of tools off
its website: (i) "vSearch" a tool to help match entrepreneurs with venture
capital firms; and (ii) "Angel Search" a tool that matches entrepreneurs with
high net worth individuals. VFH's 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 fees" in the statements of operations.
Primarily all listing sales are consummated using an on-line credit card
processing service, which performs routine credit verification. VFH does not
require collateral and receives payment directly from the credit card company.
While there is potential for credit losses, credit losses have not been
significant.
4. ACQUISITIONS
On January 4, 2001, the Company closed on the merger of Colonial Direct
Financial Group, Inc. ("Colonial"), a Delaware corporation. All of the
outstanding capital stock of Colonial was acquired. The acquisition was
accounted for under the purchase method of accounting. The purchase price
consisted of the issuance of 5,750,000 common shares of stock, the issuance of
625,000 stock options, the conversion of 490,000 stock options, the issuance of
585,000 common stock purchase warrants and the issuance of 172,500 preferred
shares of stock for total consideration of $8,667,896. The purchase price was
allocated to the assets acquired and the liabilities assumed with the excess of
such purchase price of $7,631,340 allocated to goodwill, which is being
amortized over 15 years. The Colonial Merger Shares were issued on a pro rata
basis to the Shareholders based on their relative ownership of Colonial Common
Stock, except for twenty percent (20%) of the Majority Shareholders' pro rata
share of the Colonial Merger Shares which were placed in escrow for a term of
six months subject to offset by the Company to cover losses or damages to the
Company due to breaches by the Majority Shareholders of their representations,
warranties or covenants contained in the Colonial Merger Agreement. The Company
has made a claim of offset seeking a return of all such Colonial Merger Shares
held in such escrow to cover certain losses or damages to the Company due to
breaches by the Majority Shareholders of their representations, warranties or
covenants contained in the Colonial Merger Agreement.
On January 4, 2001, the Company closed on the merger of NW Holdings, Inc.
("NWH"), a Florida corporation. All of the outstanding capital stock of NWH was
acquired. The acquisition was accounted for under the purchase method of
accounting. The purchase price consisted of the issuance of 1,700,000 common
shares of stock, the issuance of 575,000 stock options and cash of $1,000,000
for total consideration of $2,715,750. The purchase price was allocated to the
assets acquired and the liabilities assumed with the excess of such purchase
price of $1,154,635 allocated to goodwill, which is being amortized over 15
years.
On August 20, 2001, the Company closed on the acquisitions of Critical
Investments, L.L.C. and Critical Advisors, L.L.C. The acquisitions were
immaterial to the financial statements of the Company taken as a whole.
Investors records its 20% investment in the net income of Critical
Infrastructure LP (the "Fund") under the equity method of accounting.
vFinance.com, Inc.
Notes to Condensed Consolidated Financial Statements (Continued)
September 30, 2001
(unaudited)
4. ACQUISITIONS (CONTINUED)
The following unaudited pro forma condensed financial information reflects the
results of operations and assets of the Company, Colonial and NWH as if the
transactions had taken place on January 1, 2000 and 2001. This unaudited pro
forma information does not purport to be indicative of the consolidated results
of operations or financial position of the combined entities if the transaction
had been consummated on the date indicated.
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
------------------------------------------- ------------------------------------------
2000 2001 2000 2001
----------- ----------- ----------- -----------
Revenues $7,489,936 $2,996,455 $23,532,906 $11,905,002
Net loss ($1,315,507) ($1,958,553) ($5,611,320) ($5,718,996)
Loss per share ($0.08) ($0.10) ($0.39) ($0.30)
Total assets $17,209,690 $14,743,240 $17,209,690 $14,743,240
5. STOCKHOLDER'S EQUITY
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 employees stock options and employee stock purchase
warrants because the alternative fair value accounting provided for under State
of Financial Accounting Standards No. 123, Accounting for Stock Based
Compensation ("SFAS 123"), requires the use of option valuation models that were
not developed for use in valuing employee stock options. Under APB 25, as
permitted, 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 recorded.
In connection with the Colonial Direct Financial Group, Inc. merger on January
4, 2001, the Company granted 625,000 options to certain employees, converted
certain Colonial options into 490,000 options of the Company and issued 585,000
warrants to certain individuals. The options and warrants were issued at an
exercise price of $2.25 and are exercisable over a four-year period, beginning
on January 4, 2002.
In connection with the NW Holdings, Inc. merger on January 4, 2001, the Company
granted 575,000 options to certain employees. The options were granted at an
exercise price of $2.25 and are exercisable over a four-year period, beginning
on January 4, 2002.
On July 6, 2001, the Company granted to each of Leonard J. Sokolow, President
and Chief Executive Officer, and Timothy Mahoney, Chairman of the Board of
Directors and Chief Operating Officer, 500,000 stock options in connection with
certain stock option agreements that were part of their respective employment
agreements. The stock options were granted at an exercise price of $.625 and are
exercisable over a three-year period, beginning on July 6, 2001. No compensation
expense was recognized related to these stock options as the exercise price was
in excess of the fair value.
vFinance.com, Inc.
Notes to Condensed Consolidated Financial Statements (Continued)
September 30, 2001
(unaudited)
5. STOCKHOLDER'S EQUITY (CONTINUED)
In connection with the Critical acquisition on August 20, 2001, the Company
issued 400,000 warrants to a former member and granted 100,000 options to a
certain employee. The warrants and options were granted at an exercise price of
$.63. The warrants were fully vested on the date of acquisition and have an
expiration date of ten (10) years from the closing date. The options vest to the
extent of one-half on December 31, 2001 and one-half on December 31, 2002 have
an expiration date of five (5) years from the closing date.
A summary of the stock option activity for the nine months ended September 30,
2001 is as follows:
Weighted Average Exercise Price
Exercise Price Number of Shares Per Option
-------------- ---------------- ----------
Outstanding options at December 31, 2000 $4.30 3,160,000 $1.00 - $6.00
Granted $0.84 11,371,567 $0.35 - $2.25
Canceled $2.20 (6,447,793) $0.66 - $5.85
-------------
Outstanding options at September 30, 2001 8,083,774
=============
A summary of the stock purchase warrant activity for the nine months ended
September 30, 2001 is as follows:
Weighted Average Exercise Price
Exercise Price Number of Shares Per Warrant
-------------- ---------------- -----------
Outstanding warrants at December 31, 2000 $ 5.81 2,296,666 $2.50 - $7.20
Granted $ 1.59 985,000 $.63 - $2.25
Canceled $ 3.00 (1,166,667) $3.00
--------------
Outstanding warrants at September 30, 2001 2,114,999
==============
vFinance.com, Inc.
Notes to Condensed Consolidated Financial Statements (Continued)
September 30, 2001
(unaudited)
5. STOCKHOLDER'S EQUITY (CONTINUED)
The following table summarizes information concerning stock options outstanding
at September 30, 2001:
Weighted Average Number
Exercise Price Outstanding
-------------- -----------
0.35 2,778,427
0.63 2,620,000
1.00 1,172,000
2.25 473,347
2.50 75,000
3.00 210,000
3.25 100,000
4.00 220,000
4.13 30,000
4.25 75,000
4.50 5,000
5.00 260,000
5.63 50,000
6.00 15,000
---------
8,083,774
=========
The following table summarizes information concerning stock purchase warrants
outstanding at September 30, 2001:
Weighted Average Number
Exercise Price Outstanding
-------------- -----------
0.63 400,000
2.25 585,000
2.50 300,000
6.00 129,999
7.20 700,000
---------
2,114,999
=========
vFinance.com, Inc.
Notes to Condensed Consolidated Financial Statements (Continued)
September 30, 2001
(unaudited)
6. EARNINGS PER SHARE
The Company calculates earnings per share in accordance with Statement of
Financial Accounting Standards No. 128, Earnings Per Share ("SFAS No. 128"). In
accordance with SFAS No. 128, basic earnings per share is computed using the
weighted average number of shares of common stock outstanding and diluted
earnings per share is computed using the weighted average number of shares of
common stock and the dilutive effect of options and warrants outstanding, using
the "treasury stock" method.
The following table sets forth the computation of basic and diluted earnings per
share (in thousands except per share amounts) for the three months and nine
months ended September 30, 2000 and 2001:
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------------ ------------ -----------
2000 2001 2000 2001
----------- ----------- ------------ -----------
Numerator:
Net loss $ (170,791) $(1,958,553) $ (3,608,937) $(5,718,996)
Less: Preferred stock -- 30,625 -- 91,875
----------- ----------- ------------ -----------
Loss available to common
Stockholders $ (170,791) $(1,989,178) $ (3,608,937) $(5,810,871)
=========== =========== ============ ===========
Denominator:
Denominator for basic
earnings per share-
weighted average shares 10,768,201 19,758,380 9,608,584 19,474,872
Effect of dilutive securities:
Options -- -- -- --
Warrants -- -- -- --
----------- ----------- ------------ -----------
Dilutive potential common shares -- -- -- --
----------- ----------- ------------ -----------
Denominator for diluted
earnings per share- adjusted
weighted average shares 10,768,201 19,758,380 9, 608,584 19,474,872
=========== =========== ============ ===========
Pro forma basic
loss per share $ (0.02) $ (0.10) $ (0.38) $ (0.30)
=========== =========== ============ ===========
Pro forma diluted
loss per share $ (0.02) $ (0.10) $ (0.38) $ (0.30)
=========== =========== ============ ===========
vFinance.com, Inc.
Notes to Condensed Consolidated Financial Statements (Continued)
September 30, 2001
(unaudited)
7. COMMITMENTS AND CONTINGENCIES
The Company is subject to legal proceedings and claims that have arisen in the
ordinary course of business. Although occasional adverse decisions or
settlements may occur, it is the opinion of the Company's management, based on
information available at this time, that the expected outcome of these matters,
individually or in the aggregate, would not reasonably be expected to have a
material adverse effect on the consolidated financial position, results of
operations or cash flows of the Company and its subsidiaries taken as a whole.
vFinance.com, Inc.
Notes to Condensed Consolidated Financial Statements (Continued)
September 30, 2001
(unaudited)
8. SEGMENT INFORMATION
The Company's operations consist of four principal business segments: brokerage,
investment banking, corporate and other. The brokerage segment provides retail
brokerage services to customers throughout the United States, the investment
banking segment provides services with an emphasis on private placements of both
debt and equity securities with institutional investors and merger and
acquisition advisory services. The investment banking segment also performs
market research, equity syndication, valuations, offering memoranda and fairness
opinions. The corporate segment provides corporate and management support to the
other segments. The other segment (i) provides business development tools,
information, products and services to assist entrepreneurs and executives of
small and medium sized enterprises to organize and grow their business, (ii)
provides corporations and high net worth individuals with management consulting
services for the purpose of expediting corporate development and (iii) reflects
20% of the net income of the Critical Infrastructure Fund, which invests in
equities and bonds of companies in regulated industries such as
telecommunications, Internet, cable television and electric utilities
infrastructure.
Operating income or loss includes all costs and expenses directly related to the
segment involved.
Three months ended Nine months ended
September 30, September 30,
--------------------------------- ---------------------------------
2000 2001 2000 2001
------------ ------------ ------------ ------------
Revenues:
Brokerage $ -- $ 2,541,272 $ -- $ 8,838,583
Investment banking 1,227,189 245,750 2,196,189 2,185,085
Other 820,802 209,433 1,819,947 881,334
------------ ------------ ------------ ------------
Total revenue $ 2,047,991 $ 2,996,455 $ 4,016,136 $ 11,905,002
============ ============ ============ ============
Net income (loss):
Brokerage $ -- $ (911,185) $ -- $ (2,343,367)
Investment banking (125,240) (72,261) (222,025) (98,016)
Corporate (205,296) (881,126) (3,683,143) (3,182,305)
Other 159,745 (93,981) 296,231 (95,308)
------------ ------------ ------------ ------------
Net loss $ (170,791) $ (1,958,553) $ (3,608,937) $ (5,718,996)
============ ============ ============ ============
Assets:
Brokerage $ -- $ 3,488,392 $ -- $ 3,488,392
Investment banking 192,495 370,515 192,495 370,515
Corporate 6,784,924 10,415,096 6,784,924 10,415,096
Other 260,740 469,237 260,740 469,237
------------ ------------ ------------ ------------
Total assets $ 7,238,159 $ 14,743,240 $ 7,238,159 $ 14,743,240
============ ============ ============ ============
vFinance.com, Inc.
Notes to Condensed Consolidated Financial Statements (Continued)
September 30, 2001
(unaudited)
9. NET CAPITAL AND RESERVE REQUIREMENTS
The broker-dealer subsidiaries of the Company are subject to the requirements of
Rule 15c3-1 under the Securities Exchange Act of 1934. This rule requires the
maintenance of minimal net capital and requires that aggregate indebtedness, as
defined, not exceed fifteen times net capital, as defined. As of September 30,
2001, the net capital positions of the Company's broker-dealer subsidiaries were
as follows:
September 30, 2001
------------------
vFinance Investments, Inc.
Ratio of aggregate indebtedness to net capital 406%
Net capital $301,793
Required net capital $227,500
First Level Capital, Inc.
Ratio of aggregate indebtedness to net capital 129%
Net capital $230,177
Required net capital $100,000
vFinance Capital, L.C
Ratio of aggregate indebtedness to net capital 143%
Net capital $ 19,750
Required net capital $ 5,000
VFI, LVL and VFC are exempt from the provisions of Rule 15c3-3, since they clear
all transactions with and for customers on a fully-disclosed basis with clearing
brokers.
Additionally, pursuant to Rule 15c3-1, all the firms must notify and obtain
approval from the National Association of Securities Dealers, Inc. for any
advances or loans to any other affiliate, if any such advances or loans would
exceed in the aggregate, in any 30 calendar day period, 30% of that company's
excess net capital or $500,000. Rule 15c3-1 also provides that capital may not
be withdrawn or cash dividends paid if resulting net capital would be less than
5% of aggregate debits or 120% of the minimum net capital required by rule.
10. RECENTLY ISSUED PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board Issued Statement of
Financial Accounting Standard No. 142, Goodwill and Other Intangible Assets,
effective for fiscal years beginning after December 15, 2001. Under the new
rules, goodwill and intangible assets deemed to have indefinite lives will no
longer be amortized but will be subject to annual impairment tests in accordance
with the Statement. Other intangible assets will continue to be amortized over
their useful lives.
The Company will adopt the new rules on accounting for goodwill and other
intangible assets beginning in the first quarter of 2002. During 2002, the
Company will apply the non-amortization provisions and perform the first of the
required impairment tests of goodwill and indefinite lived intangible assets as
of January 1, 2002. The Company has not yet determined what impact, if any, the
Statement will have on the financial statements of the Company.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 2001 COMPARED TO THE
THREE MONTHS ENDED SEPTEMBER 30, 2000
AND
NINE MONTHS ENDED SEPTEMBER 30, 2001 COMPARED TO THE
NINE MONTHS ENDED SEPTEMBER 30, 2000
STATEMENTS OF OPERATIONS
Operating revenues were $2,996,455 for the three months ended September 30,
2001, as compared to $2,047,991 for the comparable period in 2000, an increase
of $948,464, or 46%. Operating revenues were $11,905,002 for the nine months
ended September 30, 2001, as compared to $4,016,136 for the comparable period in
2000, an increase of $7,888,866, or 196%. The increases noted above were
primarily a result of the Colonial and NWH mergers, which were each consummated
on January 4, 2001
Cost of revenues were $1,726,293 for the three months ended September 30, 2001,
as compared to $1,507,794 for the comparable period in 2000, an increase of
$218,499, or 14%. Cost of revenues were $7,381,239 for the nine months ended
September 30, 2001, as compared to $2,710,791 for the comparable period in 2000,
an increase of $4,670,448, or 172%. The increases in cost of revenues are
primarily attributed to the Colonial and NWH mergers.
General and administrative expenses were $2,327,820 and $6,683,405 for the three
and nine months ended September 30, 2001, as compared to $374,830 and $884,147
for the comparable periods in 2000, reflecting increases of $1,952,990 and
$5,799,258, respectively. The increases in general and administrative expenses
are primarily attributed to the Colonial and NWH mergers
The net loss on trading securities was $48,510 and $132,918 for the three and
nine months ended September 30, 2001, as compared to none for the comparable
periods in 2000. The increases were primarily due to the sale of certain
securities at prices less than the fair value in prior periods.
Professional fees were $131,030 and $709,879 for the three and nine months ended
September 30, 2001, as compared to $129,247 and $351,049 for the comparable
periods in 2000, reflecting increases of $1,783 and $358,830, respectively. The
increases were primarily due to an increase in legal and accounting fees in
association with the preparation of various regulatory filings, and certain
ongoing legal matters.
The provision for bad debts was $110,198 and $233,913 for the three and nine
months ended September 30, 2001, as compared to $30,000 and $45,000 for the
comparable periods in 2000, reflecting increases of $80,198 and $188,913,
respectively. The Company provides for credit losses at the time it believes
accounts receivable may not be collectible. Such evaluation is made and recorded
on a monthly basis. Credit losses have not exceeded management's expectations.
The net unrealized loss on investments held for trading and stock purchase
warrants was $273,688 and $1,423,336 for the three and nine months ended
September 30, 2001, as compared to none for the comparable periods in 2000. The
increases were primarily due to a decrease in the market value of certain
investments held by the Company in conjunction with equity instruments received
from various investment banking clients.
Depreciation and amortization was $222,188 and $683,708 for the three and nine
months ended September 30, 2001, as compared to $10,530 and $36,348 for the
comparable periods in 2000, reflecting increases of $211,658 and $647,360,
respectively. The increases were primarily due to goodwill amortization expense
of $157,854 and $463,738, respectively, for three and nine months ended
September 30, 2001 in connection with the Colonial and NWH mergers.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
STATEMENTS OF OPERATIONS (CONTINUED)
Stock based compensation expense was $15,000 and $104,500 for the for the three
and nine months ended September 30, 2001, as compared to $217,249 and $3,677,215
for the comparable periods in 2000, reflecting decreases of $202,249 and
$3,572,715, respectively. The decreases were primarily a result of certain
deferred compensation being fully amortized in 2000.
Interest and dividend income was ($10,668) and $194,261 for the three and nine
months ended September 30, 2001, as compared to $50,868 and $79,477 for the
comparable periods in 2000, reflecting a decrease of $61,536 and an increase of
$114,784, respectively. These fluctuations primarily relate to more or less
proceeds earned on the Company's asset balances held with various financial
institutions.
LIQUIDITY AND CAPITAL RESOURCES
The Company had $861,722 of cash and cash equivalents at September 30, 2001. For
the nine months ended September 30, 2001, net cash used in operating activities
was $3,068,634 as compared to net cash provided by operating activities of
$249,337 for the nine months ended September 30, 2000. Net cash used in
operating activities for the nine months ended September 30, 2001 primarily
resulted from the Company's net loss of $5,718,996, which included net
unrealized losses on trading securities and warrants of $1,423,336 and
depreciation and amortization of $683,708, and a decrease in accounts payable
and accrued liabilities of $500,165, whereas net cash provided by operating
activities for the nine months ended September 30, 2000 primarily resulted from
net income (excluding stock based compensation expense, depreciation and
amortization) of $108,240.
Net cash used in investing activities was $1,634,100 for the nine months ended
September 30, 2001, as compared to $115,257 for the nine months ended September
30, 2000. In the nine months ended September 30, 2001, net cash used in
investing activities primarily related to $1,433,954 in cash paid for the
Colonial and NWH mergers and the purchase of $211,646 of equipment. In the nine
months ended September 30, 2000, net cash used in investing activities related
to the purchase of equipment.
Net cash provided by financing activities was $110,385 for the nine months ended
September 30, 2001, as compared to net cash provided by financing activities of
$5,762,122 for the nine months ended September 30, 2000. In the nine months
ended September 30, 2001, such increase primarily related to proceeds of
$200,000 from a letter of credit offset by the payment of certain debt
obligations of $142,727. In the nine months ended September 30, 2000, net cash
provided by financing activities was primarily a result of proceeds from the
Company's private placement.
The Company anticipates that it will need additional debt or equity financing in
order to carry out its long-term business strategy. Such strategy may be
financed by bank borrowings, public offerings, or private placements of equity
or debt securities, or a combination of the foregoing. There are no assurances
that the Company will be able to attract such debt or equity financing.
The Company does not have any material commitments for capital expenditures.
The Company's operations are not affected by seasonal fluctuations; however,
they are to some extent reliant on the continuation of mergers and acquisitions
and related financings in the entrepreneurial marketplace.
PART II. OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
On May 1, 2001, Michael Golden ("Golden") filed an initial complaint
against the Company in the Circuit Court of the 15th Judicial Circuit in
and for Palm Beach County, Florida (the "Court"), alleging that the
Company breached its January 5, 2001 employment agreement with Golden,
which was entered into as a result of the merger between the Company and
Colonial Direct Financial Group, Inc. ("Colonial Direct"). Mr. Golden
claims that he terminated the agreement for "good reason," as defined in
the agreement, and that the Company has failed to pay him severance
payments and other benefits as well as accrued commissions and
unreimbursed 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 July 13, 2001, the Company filed its answer and affirmative defenses
and counterclaims with the 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 the board of
directors of the Company and for breaches of fiduciary duty to the
Company. The Company also alleged that both Golden and Lichtenberg
violated the merger agreement between Colonial Direct and the Company by
breaching certain of the representations and warranties set forth in the
merger agreement by, among other things, failing to advise the Company of
certain loan agreement defaults, improperly withdrawing approximately
$400,000 of capital from Colonial Direct, failing to deliver a closing
balance sheet and failing to disclose significant liabilities of Colonial
Direct. Claiming that the activities of Golden and Lichtenberg constituted
violations of Florida's Securities Investor Protection Act, common law
fraud, breach of fiduciary duty, breach of contract, intentional
interference with advantageous business relationships, and breach of the
implied covenant of good faith and dealing, the Company is seeking
indemnification under the merger agreement and additional monetary damages
against Golden and Lichtenberg in excess of $15,000.
In response to the Company's answer, affirmative defenses and
counterclaims, on or about September 1, 2001, Golden filed an amended
complaint with the Court against the Company, Leonard Sokolow ("Sokolow"),
the President and Chief Executive Officer of the Company, and Timothy
Mahoney ("Mahoney"), the Chairman of the Board of Directors of the
Company. In the amended complaint, Golden alleges that Sokolow and Mahoney
made various false representations which induced Golden to enter into the
merger agreement and his employment agreement. Golden is seeking monetary
damages from the Company, Sokolow and Mahoney in excess of $4.6 million.
The Company, Sokolow and Mahoney believe that Golden's claims are entirely
without merit and they intend vigorously to defend themselves against such
claims and to prosecute the Company's claims against Golden and
Lichtenberg.
Item 2. CHANGES IN SECURITIES
Acquisition of Critical Investments and Critical Advisors
On August 20, 2001, the Company closed on the acquisition of Critical
Investments and Critical Advisors. The Company purchased all of the
outstanding membership interests of Critical Investments and Critical
Advisors in exchange for: (i) 400,000 unregistered shares of the Company's
common stock, par value $.01 per share, (ii) 400,000 stock purchase
warrants, which have an exercise price of $.625 per share and an
expiration date of ten (10) years from the closing date and (iii) options
to purchase 100,000 shares of the Company's common stock which have an
exercise price of $.625 per share and an expiration date of five (5) years
from the closing date.
The above noted securities issued to the two investors were exempt from
registration pursuant to Section 4(2) of the Securities Act of 1933, as
amended, because the securities were acquired in a privately negotiated
transaction by sophisticated investors.
Item 3. DEFAULTS UPON SENIOR SECURITIES
None
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
Item 5. OTHER INFORMATION
The disclosure included in Item 2, Part II. of this Form 10-QSB/A-1
relating to the Company's acquisition of Critical Investments, L.L.C. and
Critical Advisors, L.L.C. is incorporated herein by reference.
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant has
caused this amended report to be signed on its behalf by the undersigned,
thereunto duly authorized.
Signature Title Date
--------------------- --------------------- -------------
By: /s/ Leonard J. Sokolow Chief Executive Officer and President November 20, 2001
------------------------------
Leonard J. Sokolow (Principal Executive Officer)
By: /s/ D. Carr Moody Chief Financial Officer and Secretary November 20, 2001
------------------------------
D. Carr Moody (Principal Financial and Chief Accounting
Officer)