UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 or 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2006
or
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period _____________ to _________________
Commission File Number 1-11454-03
vFinance, Inc.
(Exact name of small business issuer as specified in its charter)
Delaware 58-1974423
------------------------------- ------------------
State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3010 North Military Trail, Suite 300, Boca Raton, FL 33431
----------------------------------------------------------
(Address of principal executive offices)
(561) 981-1000
(Issuer's telephone number)
-----------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
Check whether the issuer (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Exchange Act of 1934 during the
preceding 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 [ ]
Indicate by check mark whether the registrant is a large accelerated
filer, an accelerated filer, or a non-accelerated filer. See
definition of "accelerated filer and large accelerated filer" in Rule
12-b-2 of the Exchange Act.
Large Accelerated Filer [ ] Accelerated Filer [ ] Non-Accelerated Filer [X]
Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [ X ]
State the number of shares outstanding of each of the issuer's classes
of common equity, as of May 15, 2006: 40,126,134 shares of Common
Stock $0.01 par value
vFinance, Inc.
FORM 10-Q
QUARTERLY PERIOD ENDED MARCH 31, 2006
INDEX
PART I - FINANCIAL INFORMATION Page
Item 1 - Consolidated Financial Statements
Consolidated Balance Sheets
As of March 31, 2006 (Unaudited) and December 31, 2005...............4
Consolidated Statements of Operations
For the Three Months Ended March 31, 2006 and 2005 (Unaudited).......5
Consolidated Statements of Cash Flows
For the Three Months Ended March 31, 2006 and 2005 (Unaudited).......6
Notes to Unaudited Consolidated Financial Statements..................7
Item 2 - Management's Discussion and Analysis or Plan of Operation...18
Item 3 - Quantitative & Qualitative Disclosures About Market Risk ...25
Item 4 - Controls and Procedures.....................................25
PART II - OTHER INFORMATION
Item 6 - Exhibits....................................................26
Signatures...........................................................27
FORWARD-LOOKING STATEMENTS
This Form 10-Q for vFinance, Inc. (the "Company") includes statements
that may constitute "forward-looking" statements, usually containing
the words "believe", "estimate", "intend", "expect", or similar
expressions. These statements are made pursuant to the safe harbor
provisions of the Private Securities Litigation Reform Act of 1995.
Forward looking statements inherently involve risks and uncertainties
that could cause actual results to differ materially from the
forward-looking statements. Factors that would cause or contribute to
such differences include, but are not limited to, the inability of our
broker-dealer operations to operate profitably in the face of intense
competition from larger full service and discount brokers, a general
decrease in merger and acquisition activities and our potential
inability to receive success fees as a result of transactions not
being completed, our potential inability to implement our growth
strategy through acquisitions or joint ventures, our potential
inability to secure additional debt or equity financing to support our
growth strategies and other risks detailed in the Company's periodic
report filings with the Securities and Exchange Commission.
By making these forward-looking statements, the Company undertakes no
obligation to update these statements for revisions or changes after
the date of this Form 10-Q.
vFinance, Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEETS
Assets: March 31, 2006 December 31, 2005
(unaudited)
------------------- --------------------
Current Assets:
Cash and cash equivalents $ 4,944,771 $ 4,427,406
Due from clearing broker 884,740 705,097
Investments in trading securities 694,793 870,306
Accounts receivable less allowance for doubtful
accounts ($3,500 in 2006, $0 in 2005) 455,506 408,841
Notes receivable - employees 65,930 67,588
Prepaid expenses and other current assets 143,501 130,033
------------------- --------------------
Total current assets 7,189,241 6,609,271
Furniture and equipment, at cost:
Furniture and equipment 1,435,421 1,383,878
Software 173,890 173,890
------------------- --------------------
1,609,311 1,557,768
Less accumulated depreciation (950,439) (865,130)
------------------- --------------------
Furniture and equipment, net 658,872 692,638
Intangible assets, net 1,373,513 1,446,848
Other assets 242,828 313,327
------------------- --------------------
Total assets $ 9,464,454 $ 9,062,084
=================== ====================
Liabilities and stockholders' equity:
Current liabilities:
Accounts payable $ 611,052 $ 714,197
Accrued payroll 2,297,891 1,678,632
Other accrued liabilities 473,826 825,594
Securities sold, not yet purchased 32,510 42,421
Capital lease obligations 191,602 187,775
Other 46,021 118,781
------------------- --------------------
Total current liabilities 3,652,902 3,567,400
Capital lease obligations, long term 175,702 225,067
Stockholders' equity:
Common stock $0.01 par value, 75,000,000 shares
authorized, 40,126,134 issued and outstanding 401,266 401,266
Additional paid-in-capital 26,934,626 26,821,557
Accumulated deficit (21,700,042) (21,953,206)
------------------- --------------------
Total stockholders' equity 5,635,850 5,269,617
------------------- --------------------
Total liabilities and stockholders' equity $ 9,464,454 $ 9,062,084
=================== ====================
See accompanying notes to unaudited consolidated financial statements.
4
vFinance, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF OPERATIONS
Three months ended Three months ended
March 31, 2006 March 31, 2005
(unaudited) (unaudited)
---------------------- ----------------------
Revenues:
Commissions - agency $ 4,755,333 $ 3,811,391
Trading profits 1,501,034 1,368,765
Success fees 1,383,426 343,941
Consulting fees 151,401 243,294
Other brokerage related income 792,436 638,398
Other 171,193 85,368
---------------------- ----------------------
Total revenues 8,754,823 6,491,157
---------------------- ----------------------
Cost of revenues:
Commissions 4,323,625 3,740,813
Clearing and transaction costs 793,249 564,739
Success 789,317 133,186
Consulting and retainers 130,346 159,620
---------------------- ----------------------
Total cost of revenues 6,036,537 4,598,358
---------------------- ----------------------
Gross profit 2,718,286 1,892,799
---------------------- ----------------------
Other expenses:
General and administrative 2,019,870 1,842,483
Professional fees 58,988 74,555
Provision for bad debt 3,500 31,890
Legal Fees 130,243 49,178
Depreciation and amortization 158,645 60,707
Amounts forgiven under forgivable loans - 6,250
Stock based compensation 113,069 1,324
---------------------- ----------------------
Total other expenses 2,484,315 2,066,387
---------------------- ----------------------
Income(loss) from operations 233,971 (173,588)
Total other income, net 19,193 19,060
---------------------- ----------------------
Pre-tax net income (loss) 253,164 (154,528)
Income tax benefit (provision) - -
---------------------- ----------------------
Net income (loss) $ 253,164 $ (154,528)
====================== ======================
Net income (loss) per share: basic $ 0.01 $ (0.00)
====================== ======================
Weighted average number of shares
outstanding: basic 40,126,133 39,815,966
====================== ======================
Net income (loss) per share: diluted $ 0.01 $ (0.00)
====================== ======================
Weighted average number of shares
outstanding: diluted 42,231,218 39,815,966
====================== ======================
See accompanying notes to unaudited consolidated financial statements.
5
vFinance, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Three months ended Three months ended
March 31, 2006 March 31, 2005
(unaudited) (unaudited)
------------------------- ------------------------
Cash flows from operating activities:
Net income (loss) $ 253,164 $ (154,528)
Adjustments to reconcile net income (loss) to
net cash provided (used) in operating activities:
Non-cash fees received (576,250) -
Depreciation and amortization 158,645 60,707
Provision for doubtful accounts 3,500 30,890
Unrealized loss on investments, net 243,583 7,666
Unrealized loss on warrants 9,191 112,113
Amount forgiven under forgivable loans - 6,250
Stock based compensation 113,069 1,324
Changes in operating assets and liabilities:
(Increase) decrease
Accounts receivable (29,774) (230,372)
Forgivable loans - -
Due from clearing broker (249,076) 148,318
Notes receivable - employees 1,658 84,590
Investments in trading securities 498,988 (210,117)
Other assets and liabilities 64,064 107,653
Increase (decrease)
Accounts payable and accrued liabilities 133,595 (507,382)
Securities, sold not yet purchased (9,912) -
------------------------- ------------------------
Net cash provided by (used in) operating activities 614,445 (542,888)
Cash Flows from investing activities:
Purchase of capital lease equipment - (117,020)
Purchase of equipment (51,543) (16,728)
------------------------- ------------------------
Net cash used in investing activities (51,543) (133,748)
Cash flows from financing activities:
Proceeds from capital leases - 117,020
Repayments on capital leases (45,538) (21,752)
Proceeds from exercise of common stock options - 113,550
------------------------- ------------------------
Net cash (used in) provided by financing activities (45,538) 208,818
Increase (decrease) in cash and cash equivalents 517,364 (467,818)
Cash and cash equivalents at beginning of year 4,427,407 5,256,308
------------------------- ------------------------
Cash and cash equivalents at end of period $ 4,944,771 $ 4,788,490
========================= ========================
See accompanying notes to unaudited consolidated financial statements.
6
vFinance, Inc. and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
March 31, 2006
NOTE 1 - DESCRIPTION OF BUSINESS
vFinance, Inc. is a holding company engaged in the financial services
business where our strategic focus is servicing the needs of high
net-worth and institutional investors and high growth companies.
Through our principal operating subsidiary, vFinance Investments,
Inc., a licensed broker-dealer, we provide investment banking, retail
and institutional brokerage services in all 50 states and the District
of Columbia. The Company also operates a second broker-dealer,
EquityStation, Inc. ("EquityStation") which offers institutional
traders, hedge funds and professional traders a suite of services
designed to enhance their trading capabilities by offering services
such as trading and routing software, hedge fund incubation, capital
introduction and custodial services.
NOTE 2 - BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
Basis of presentation
The unaudited consolidated financial statements include the accounts
of the Company and its wholly owned subsidiaries. All intercompany
accounts have been eliminated in consolidation.
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles
for interim financial information. Accordingly, they do not include
all of the information and footnotes required by generally accepted
accounting principles for complete financial statements. In the
opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been
included. The results of operations for the three-month period ended
March 31, 2006 are not necessarily indicative of the results to be
expected for the year ended December 31, 2006. The interim financial
statements should be read in connection with the audited financial
statements and notes contained in the Company's Annual Report on Form
10-KSB for the year ended December 31, 2005.
Use of estimates
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 and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ
from these estimates. Furthermore, the Company, including its wholly
owned subsidiary vFinance Investments, Inc., has been named as a
defendant in various customer arbitrations. These claims result from
the actions of brokers affiliated with vFinance Investments, Inc. In
addition, under the vFinance Investments, Inc. registered
representatives contract, each registered representative has
indemnified the Company for these claims. In accordance with Statement
of Financial Accounting Standards ("SFAS") No. 5 "Accounting for
Contingencies," the Company has established liabilities for potential
losses from such complaints, legal actions, investigations and
proceedings. In establishing these liabilities, the Company's
management uses its judgment to determine the probability that losses
have been incurred and a reasonable estimate of the amount of losses.
In making these decisions, we base our judgments on our knowledge of
the situations, consultations with legal counsel and our historical
experience in resolving similar matters. In many lawsuits,
arbitrations and regulatory proceedings, it is not possible to
determine whether a liability has been incurred or to estimate the
amount of that liability until the matter is close to resolution.
However, accruals are reviewed regularly and are adjusted to reflect
our estimates of the impact of developments, rulings, advice of
counsel and any other information pertinent to a particular matter.
Because of the inherent difficulty in predicting the ultimate outcome
of legal and regulatory actions, we cannot predict with certainty the
eventual loss or range of loss related to such matters. If our
judgments prove to be incorrect, our liability for losses and
contingencies may not accurately reflect actual losses that result
from these actions, which could materially
7
vFinance, Inc. and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
March 31, 2006
NOTE 2 - BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (Continued)
Use of estimates
affect results in the period when expenses are ultimately determined.
As of March 31, 2006, the Company has accrued approximately $225,000
for these matters. The Company has recently acquired an errors and
omissions insurance policy, wherein future claims may be covered in
excess of the policy's $75,000 per claim deductible up to an aggregate
of $1 million. While the Company will vigorously defend itself in
these matters, and will assert insurance coverage and indemnification
to the maximum extent possible, there can be no assurance that these
lawsuits and arbitrations will not have a material adverse impact on
its financial position.
Accounts receivable
Accounts receivable consist of receivables incurred in the ordinary
course of our business. The Company has a policy of establishing an
allowance for uncollectible accounts based on its best estimate of the
amount of probable credit losses in its existing accounts receivable.
The Company periodically reviews its accounts receivable to determine
whether an allowance is necessary based on an analysis of past due
accounts and other factors that may indicate that the realization of
an account may be in doubt. The allowance for uncollectible
receivables at March 31, 2006 was $3,500 and as of December 31, 2005
was $0.
A receivable from one independent contractor in the amount of $157,096
accounted for 35% of the Company's accounts receivable balance at
March 31, 2006. A receivable from one customer in the amount of
$73,847, accounted for 18% of the Company's receivable balance at
December 31, 2005.
Property and equipment
Property and equipment are carried at cost. The cost of repairs and
maintenance is expensed as incurred; major replacements and
improvements are capitalized. When assets are retired or disposed of,
the cost and accumulated depreciation are removed from the accounts,
and any resulting gains or losses are included in income in the year
of disposition. In accordance with Statement of Financial Accounting
Standards (SFAS) No. 144, "Accounting for the Impairment or Disposal
of Long-Lived Assets", the Company examines the possibility of
decreases in the value of fixed assets when events or changes in
circumstances reflect the fact that their recorded value may not be
recoverable.
Intangible assets
Intangible assets consist of assets acquired in connection with
acquisitions and includes a customer list. The Company accounts for
intangible assets in accordance with SFAS 142. The asset is
capitalized and is being amortized using the straight-line method over
an expected useful life of five years.
Impairment of long-lived assets
In accordance with Statement of Financial Accounting Standards (SFAS)
No. 144, "Accounting for the Impairment or Disposal of Long-Lived
Assets," the Company periodically reviews its long-lived assets for
impairment whenever events or changes in circumstances indicate that
the carrying amount of the assets may not be fully recoverable. The
Company recognizes an impairment loss when the sum of expected
undiscounted future cash flows is less than the carrying amount of the
asset. The amount of impairment is measured as the difference between
the asset's estimated fair value and its book value.
8
vFinance, Inc. and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
March 31, 2006
NOTE 2 - BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (Continued)
Revenue recognition
The Company follows the guidance of the Commission's Staff Accounting
Bulletin 104 for revenue recognition. In general, the Company records
revenue when persuasive evidence of an arrangement exists, services
have been rendered or product delivery has occurred, the sales price
to the customer is fixed or determinable, and collectibility is
reasonably assured.
We earn revenue from brokerage and trading which are recognized on the
day of the trade. We also earn revenue from investment banking and
consulting. Monthly consulting fees for investment banking are
recognized as earned. Investment banking success fees are generally
based on a percentage of the total value of a transaction and are
recognized upon successful completion.
We do not require collateral from our customers. Revenues are not
concentrated in any particular region of the country or with any
individual or group.
We periodically receive equity instruments which include stock
purchase warrants and common and preferred stock from companies as
part of our 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 #11 "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 stock purchase warrants received are typically restricted as to
resale, though the Company generally receives a registration right
within one year. Company policy is to sell these securities in
anticipation of short-term market movements. We recognize revenue for
these stock purchase warrants when received based on the Black Scholes
valuation model. The revenue recognized related to 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. On a monthly basis, we recognize
unrealized gains or losses in the statement of operations based on the
changes in value in the stock purchase warrants and other equity
instruments. Realized gains or losses are recognized in the statement
of operations when the related stock purchase warrant or other equity
instrument is sold.
Occasionally, we receive 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.
On occasion, we distribute equity instruments or proceeds from the
sale of equity instruments to our employees as compensation for their
investment banking successes. These distributions comply with
compensation agreements which vary on a "banker by banker" basis.
Ac`cordingly, unrealized gains or losses recorded in the statement of
operations related to securities held by us at each period end may
also impact compensation expense and accrued compensation.
9
vFinance, Inc. and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
March 31, 2006
NOTE 2 - BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (Continued)
Cost of revenue
The cost of revenue primarily consists of commissions paid (including
those paid on success and consulting revenue), finder's fees and
direct clearing and other transaction related costs including the
costs associated with trading systems and fees imposed by electronic
communications networks and various exchanges. Allocated overhead is
not included in cost of revenue.
Concentrations of credit risk
The Company maintains its cash in bank and brokerage deposit accounts,
which, at times, are either uninsured or may exceed federally insured
limits. As of March 31, 2006, the Company had approximately $4,944,771
in United States bank deposits, which exceeded federally insured
limits. The Company has not experienced any losses in such accounts
through March 31, 2006.
Stock-based compensation
Effective January 1, 2006, the Company adopted Statement of Financial
Accounting Standards No. 123 (revised 2004), Share Based Payment
("SFAS No. 123R"). SFAS No. 123R establishes the financial accounting
and reporting standards for stock-based compensation plans. As
required by SFAS No. 123R, the Company recognized the cost resulting
from all stock-based payment transactions including shares issued
under its stock option plans in the financial statements.
Prior to January 1, 2006, the Company accounted for stock-based
employee compensation plans (including shares issued under its stock
option plans) in accordance with APB Opinion No. 25 and followed the
pro forma net income, pro forma income per share, and stock-based
compensation plan disclosure requirements set forth in the Statement
of Financial Accounting Standards No. 123, Accounting for Stock-Based
Compensation ("SFAS No. 123").
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. Net operating loss carry
forwards totaled approximately $11.6 million at March 31, 2006 and
$11.9 million at December 31, 2005. Each quarter the Company weighs
the available positive and negative evidence and determines the extent
to which the net operating loss carry forwards is realizable.
Utilization of the Company's net operating loss carry-forwards are
limited based on changes in ownership as defined in Internal Revenue
Code Section 382.
10
vFinance, Inc. and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
March 31, 2006
NOTE 2 - BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (Continued)
Recent accounting pronouncements
In February 2006, the Financial Accounting Standards Board issued
Statement No. 155 ("SFAS No. 155"), "Accounting for Certain Hybrid
Instruments: An Amendment of FASB Statements No. 133 and 140".
Management does not believe that this statement will have a
significant impact as the Company does not use such instruments.
Other accounting standards that have been issued or proposed by the
FASB or other standards-setting bodies that do not require adoption
until a future date are not expected to have a material impact on the
consolidated financial statements upon adoption.
Reclassifications
Certain items in the 2005 consolidated financial statements have been
reclassified to conform to the presentation in the 2006 consolidated
financial statements. Such reclassifications did not have a material
impact on the presentation of the overall financial statements.
11
vFinance, Inc. and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
March 31, 2006
NOTE 3 - PROPERTY AND EQUIPMENT
At March 31, 2006 and December 31 , 2005 respectively, property and
equipment consisted of the following:
March 31,
Useful Life 2006 December 31,
Description (Years) (unaudited) 2005
------------------------------ ----------- ----------------------- ---------------------
Furniture & fixtures 5 $ 85,132 $ 85,132
Equipment 5 611,047 559,504
Capital leases-equipment 3 572,535 572,535
Leasehold improvements 4 166,707 166,707
Software 5 173,890 173,890
----------------------- ----------------------
Less accumulated depreciation (950,439) (865,130)
----------------------- ----------------------
Total fixed assets $ 658,872 $ 692,638
======================= ======================
NOTE 4 - INTANGIBLE ASSETS
At March 31, 2006 and December 31 , 2005 respectively, Intangible
assets consisted of the following:
March 31,
Useful Life 2006 December 31,
Description (Years) (unaudited) 2005
------------------------------ ----------- ----------------------- --------------------
Customer list 5 1,466,700 $ 1,466,700
----------------------- --------------------
Accumulated amortization (93,187) (19,852)
----------------------- --------------------
Total intangible assets $ 1,373,513 $ 1,446,848
======================= ====================
For the period ended March 31, 2006 amortization expense of $73,335
was recorded by the Company. During the period ended December 31, 2005
the Company performed an impairment analysis of it's goodwill and in
accordance with FAS 142 paragraph 20 noted that the carrying amount of
the intangible assets exceeded the implied fair value of the assets
and thus recorded an impairment charge of $420,000.
12
vFinance, Inc. and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
March 31, 2006
NOTE 5 - MATERIAL AGREEMENTS
On or about January 15, 2006 vFinance Investments, Inc entered into
two new clearing agreements with Fortis Securities, LLC and Legent
Clearing, LLC to facilitate new business anticipated as the result of
a select asset purchase agreement with Sterling Financial Investments,
Inc and Sterling Financial Group of Companies, Inc. (See Subsequent
Events footnote) The purchase transaction closed in escrow on May 11,
2006, and as a result these two clearing agreements are in effect as
of the issuance of this report. The agreement with Fortis Securities,
LLC will be used to clear the fixed income transactions and the
agreement with Legent Clearing, LLC will be used in the clearing of
certain retail accounts obtained in the acquisition of Sterling's
business lines.
13
vFinance, Inc. and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
March 31, 2006
NOTE 6 - STOCKHOLDERS' EQUITY
The pro forma net earnings per share amounts as if the fair value
method had been used are presented below for the three months ended
March 31, 2005, and the actual net earnings per share is presented
below for the three months ended March 31, 2006 in accordance with the
Company's adoption of SFAS 123(R) effective January 1, 2006.
Prior to January 1, 2006, the Company accounted for stock-based
employee compensation plans (including shares issued under its stock
option plans) in accordance with APB Opinion No. 25 and followed the
pro forma net income, pro forma income per share, and stock-based
compensation plan disclosure requirements set forth in the Statement
of Financial Accounting Standards No. 123, Accounting for Stock-Based
Compensation ("SFAS No. 123").
During the quarter ended March 31, 2006, the Company issued 1,006,250
options to purchase common stock for compensation to employees and
independent contractors. The fair market value of these options was
valued on the grant date using the Black-Scholes option-pricing model
using the following weighted average assumptions: dividend yield of
0%, expected volatility of 72.4%, risk free interest rate of 4.75% and
a term of five years. For the quarter ended March 31, 2006, the net
income and earnings per share reflect a non cash compensation expense
of $113,069.
Three Months Ended
March 31,
2006 2005
------------ -------------
Net income (loss) - as reported 366,233 (252,781)
Less: stock based employee compensation determined under the
Fair value method, net of income tax effect 113,069 98,253
------------ -------------
Net income (loss) 253,164 (154,528)
============ =============
Basic and diluted earnings (loss) per share - as reported $ 0.01 $ 0.00
Basic and diluted earnings (loss) per share - pro forma n/a $(0.01)
A summary of the stock option activity for the three months ended March
31, 2006 is as follows:
Weighted Average Number of Exercise Price
Exercise Price Shares Per Option
--------------------- --------------- ----------------------
Outstanding options at December 31, 2005 $ 0.23 14,614,839 $ 0.15 $ 2.25
--------------------- --------------- ---------- ----------
Granted $ 0.18 1,006,250 $ 0.17 $ 0.26
Exercised $ - - - -
Cancelled $ 0.36 (1,298,660) $ 0.16 $ 2.25
--------------------- --------------- ---------- ----------
Outstanding options at March 31, 2006 $ 0.21 14,322,429 $ 0.15 $ 1.00
===================== =============== ========== ==========
A summary of the stock purchase warrant activity for the three months
ended March 31, 2006 is as follows:
Weighted Average Number of Exercise Price
Exercise Price Warrants Per Warrant
--------------------- -------------- ---------------------
Outstanding warrants at December 31, 2005 $ 1.12 7,659,589 $ 0.15 $ 7.20
--------------------- -------------- --------- ----------
Granted $ - - - -
Exercised $ - - - -
Cancelled $ 2.25 (585,000) $ 2.25 $ 2.25
--------------------- -------------- --------- ----------
Outstanding warrants at March 31, 2006 $ 1.02 7,074,589 $ 0.15 $ 7.20
===================== ============== ========= ==========
14
vFinance, Inc. and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
March 31, 2006
NOTE 6 - STOCKHOLDERS' EQUITY
(Continued)
The following table summarizes information concerning stock options outstanding
at March 31, 2006.
Exercise Options
Price Outstanding
---------------------------
0.150 260,000
0.155 4,495,000
0.170 1,635,000
0.180 270,000
0.190 1,667,502
0.200 480,000
0.205 360,000
0.210 1,733,962
0.220 60,000
0.230 902,500
0.245 750,000
0.250 43,750
0.260 5,000
0.270 5,000
0.280 97,500
0.320 310,000
0.330 2,500
0.350 484,215
0.363 120,000
0.500 100,000
0.625 522,500
1.000 18,000
------------------
14,322,429
==================
15
vFinance, Inc. and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
March 31, 2006
NOTE 6 - STOCKHOLDERS' EQUITY
(Continued)
The following table summarizes information concerning warrants outstanding at
March 31, 2006.
Exercise Warrants
Price Outstanding
------------------------------
0.150 750,000
0.160 2,427,923
0.200 1,000,000
0.350 1,673,500
0.630 400,000
2.250 20,000
6.000 103,166
7.200 700,000
------------------
7,074,589
==================
16
vFinance, Inc. and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
March 31, 2006
NOTE 7 - SUBSEQUENT EVENTS
On May 11, 2006, vFinance, Inc.'s (the "Company") wholly-owned
subsidiary, vFinance Investments, Inc. ("vFinance Investments"),
completed an asset purchase whereby it purchased certain assets of
Sterling Financial Investment Group, Inc. ("SFIG") and Sterling
Financial Group of Companies, Inc. ("SFGC" and together with SFIG,
"Sterling Financial"). These transactions were approved by the
National Association of Securities Dealers, Inc. on April 28, 2006.
The assets acquired from Sterling Financial include Sterling
Financial's businesses as a going concern, certain intellectual
property, client accounts and revenues, computer equipment, and a
certain real property lease. vFinance Investments did not assume any
liabilities of Sterling Financial except an office lease and select
office services contracts directly relating to the operation of the
business that arise and are to be paid, performed or discharged from
and after the closing date. Charles Garcia, one of the principals of
Sterling Financial, entered into an employment agreement with vFinance
Investments that provides for an annual base salary of $262,000 and
certain performance bonuses and options to be granted in the sole
discretion of vFinance Investments.
In accordance with the terms of an escrow agreement entered into on
May 11, 2006, vFinance Investments has agreed to place thirteen
million shares of the Company's common stock in escrow until (i)
Sterling Financial has paid all commissions due to traders and retail
brokers of SFIG for the month of April 2006 and due to Foreign
Contractors of SFIG; (ii) Sterling Financial has paid to vFinance
Investments a good faith estimate of the net profit owed under the
management agreement; and (iii) certain of Sterling Financial's
brokers have executed an agreement with vFinance Investments. The
escrowed shares represent the full purchase price for the assets
acquired by the Company. If Sterling Financial's obligations are not
satisfied by May 31, 2006, the transaction with Sterling Financial
will be rescinded and the thirteen million shares of the Company's
common stock will be canceled. The Company has granted SFGC certain
registration rights with respect to the shares.
The Company and vFinance Investments entered into a standstill
agreement with each of SFGC, SFIG, Charles Garcia and Alexis Korybut
to provide restrictions on certain actions for a defined time period.
The Company and vFinance Investments also entered into a voting and
lockup agreement with each of SFIG, SFGC, Charles Garcia, Leonard
Sokolow and Timothy Mahoney, pursuant to which Leonard Sokolow and
Timothy Mahoney agreed to vote for a designee of Charles Garcia to
serve as a director of the Company. The voting and lockup agreement
also prohibits the sale, transfer, or disposition to any person
(including, without limitation, SFGC's stockholders) by SFGC of the
shares issued in full or in part for the 12-month period following the
closing of the transactions.
17
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
CRITICAL ACCOUNTING POLICIES
Financial Reporting Release No. 60, which was 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 audited consolidated financial statements dated December
31, 2005 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. We earn revenue from brokerage and trading
activities which are recognized on the day of the trade. We also earn
revenue from investment banking and consulting. Monthly retainer fees
for investment banking and consulting are recognized as earned.
Investment banking success fees are generally based on a percentage of
the total value of a transaction and are recognized upon successful
completion.
We do not require collateral from our customers. Revenues are not
concentrated in any particular region of the country or with any
individual or group.
We periodically receive equity instruments which include stock
purchase warrants and common and preferred stock from companies as
part of our 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 #11 "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 stock purchase warrants received are typically restricted as to
resale, though the Company generally receives a registration right
within one year. Company policy is to sell these securities in
anticipation of short-term market movements. We recognize revenue for
these stock purchase warrants when received based on the Black Scholes
valuation model. The revenue recognized related to 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. On a monthly basis, we recognize
unrealized gains or losses in the statement of operations based on the
changes in value in the stock purchase warrants and other equity
instruments.. Realized gains or losses are recognized in the statement
of operations when the related stock purchase warrant or other equity
instrument is sold.
Occasionally, we receive 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.
18
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations (Continued)
REVENUE RECOGNITION.
(Continued)
On occasion, we distribute equity instruments or proceeds from the
sale of equity instruments to our employees as compensation for their
investment banking successes. These distributions comply with
compensation agreements which vary on a "banker by banker" basis.
Accordingly, unrealized gains or losses recorded in the statement of
operations related to securities held by us at each period end may
also impact compensation expense and accrued compensation.
As of March 31, 2006, certain transactions in process may result in us
receiving equity instruments or stock purchase warrants in subsequent
periods as discussed above. In this event, we will recognize revenue
related to the receipt of such equity instruments consistent with the
aforementioned policies. In addition, we 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
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 firms provide the clearing and depository
operations for our proprietary securities transactions. These
activities may expose the Company to off-balance-sheet risk in the
event that customers do not fulfill their obligations with the
clearing broker, as our subsidiary has agreed to indemnify our
clearing firm.
NET CAPITAL REQUIREMENT. As of March 31, 2006, the minimum amount of
net capital required to be maintained by vFinance Investments was
$1,000,000 and the minimum amount of net capital required to be
maintained by EquityStation was $100,000.
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 March 31, 2006
and 2005, no amounts were owed to employees of the Company in
connection with equity investments received as compensation.
19
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations (Continued)
FAIR VALUE. "Investments in trading securities" and "Securities sold,
not yet purchased" on our consolidated balance sheet 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,
discounted by a factor reflective of the expected holding period for a
particular equity instrument. 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.
INVESTMENTS. Investments are classified as trading securities and are
held for resale in anticipation of short-term market movements or
until such securities are registered or are otherwise unrestricted.
Any unregistered securities received generally contain a registration
right within one year. Trading account assets, consisting of
marketable equity securities and stock purchase warrants, are stated
at fair value. Realized gains or losses are recognized in the
statement of operations when the related underlying shares of a stock
purchase warrant or other equity instruments are sold. Unrealized
gains or losses are recognized in the statement of operations on a
monthly basis based on changes in the fair value of the security as
quoted on national or inter-dealer stock exchange, discounted by a
factor reflective of the expected holding period for the particular
equity instrument.
GOODWILL AND OTHER INTANGIBLE ASSETS ("FAS 142"). The provisions of
FAS 141 eliminated the pooling-of-interests method of accounting for
business combinations consummated after September 30, 2001. We adopted
FAS 141 on July 1, 2001 and it did not have a significant impact on
our financial position or results of operations. Under the provisions
of FAS 142, goodwill and indefinite lived intangible assets are no
longer amortized, but are reviewed annually for impairment. Separable
intangible assets that are not deemed to have an indefinite life will
continue to be amortized over their useful lives. The Company adopted
the new accounting rules, as required, effective January 1, 2002.
The value of the Company's goodwill is exposed to future adverse
changes if the Company experiences declines in operating results or
experiences significant negative industry or economic trends or if
future performance is below historical trends. The Company
periodically reviews intangible assets and goodwill for impairment
using the guidance of applicable accounting literature. We are subject
to financial statement risk to the extent that the goodwill and other
intangible assets become impaired.
20
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations (Continued)
The following table and discussion summarizes the changes in the major
revenue and expense categories for the past two years.
vFinance, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF OPERATIONS
For the three months ended March 31,
-----------------------------------------------------------------------
2006 % of Revenues 2005 % of Revenues
-------------------- ------------- --------------------- ------------
Revenues:
Commissions - agency $ 4,755,333 54% $ 3,811,391 44%
Trading profits 1,501,034 17% 1,368,765 16%
Success fees 1,383,426 16% 343,941 4%
Consulting fees 151,401 2% 243,294 3%
Other brokerage related income 792,436 9% 638,398 7%
Other 171,193 2% 85,368 1%
-------------------- ------------- --------------------- ------------
Total revenues 8,754,823 100% 6,491,157 74%
-------------------- ------------- --------------------- ------------
Cost of revenues:
Commissions 4,323,625 49% 3,740,813 43%
Clearing and transaction costs 793,249 9% 564,739 6%
Success 789,317 9% 133,186 2%
Consulting and retainers 130,346 1% 159,620 2%
-------------------- ------------- --------------------- ------------
Total cost of revenues 6,036,537 69% 4,598,358 53%
-------------------- ------------- --------------------- ------------
Gross profit 2,718,286 31% 1,892,799 29%
Other expenses:
General and administrative 2,019,870 23% 1,842,483 21%
Professional fees 58,988 1% 74,555 1%
Provision for bad debt 3,500 0% 31,890 0%
Legal fees 130,243 1% 49,178 1%
Depreciation and amortization 158,645 2% 60,707 1%
Amounts forgiven under forgivable loans - 0% 6,250 0%
Stock based compensation 113,069 1% 1,324 0%
-------------------- ------------- --------------------- ------------
Total other expenses 2,484,315 28% 2,066,387 32%
-------------------- ------------- --------------------- ------------
Income (loss) from operations 233,971 3% (173,588) -3%
Other income (expense)
Interest and dividend income 19,193 0% 19,060 0%
-------------------- ------------- --------------------- ------------
Total other income 19,193 0% 19,060 0%
-------------------- ------------- --------------------- ------------
Pre-tax net income (loss) 253,164 3% (154,528) -2%
-------------------- ------------- --------------------- ------------
Income tax benefit (provision) 0 0% 0 0%
-------------------- ------------- --------------------- ------------
Net Income (loss) $ 253,164 3% $ (154,528) -2%
==================== ============= ===================== ============
21
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations (Continued)
THREE MONTHS ENDED MARCH 31, 2006 COMPARED TO THE THREE MONTHS ENDED
March 31, 2005
STATEMENTS OF OPERATIONS
Operating revenues were $8,754,823 for the three months ended March
31, 2006 as compared to $6,491,157 for the three months ended March
31, 2005, an increase of $2,263,666 or 35%. The primary reason for the
increase was significantly higher revenues from success fees from
investment banking transactions, higher agency commissions, trading
profits, and other brokerage related income. Retail brokerage
revenues, which includes commissions and other brokerage related
income, which comprised 63% of total revenues, increased by $1,097,980
or 25%, trading profits, which comprised 17% of total revenues,
increased by $132,269 or 10% and investment banking, comprised of
success fees and consulting and retainers, equaled 18% of total
revenues, increased by $947,592 or 161%.
Cost of revenues were $6,036,537 for the three months ended March 31,
2006 as compared to $4,598,358 for the three months ended March 31,
2005, an increase of $1,438,179 or 31%. The increase was primarily due
to increased revenues and the corresponding increase to commission
expense and transaction costs.
Gross profit amounted to $2,718,826 for the three months ended March
31, 2006 as compared to $1,892,799 for the corresponding period last
year, an increase of $826,027 or 44%. The increase in gross profit
resulted from the increase in revenues and margin. Gross profit margin
was 31% for the three months ended March 31, 2006 and 29% for the
three months ended March 31, 2005. The increase in gross profit margin
resulted from achieving a higher proportion of revenue from success
fees which carry generally higher gross profit margins.
General and administrative expenses were $2,019,870 for the three
months ended March 31, 2006 as compared to $1,842,483 for the three
months ended March 31, 2005, an increase of $177,387, or 10%. This
increase is primarily related to an increase in salary expense and
associated payroll taxes and health insurance. These increased costs
were offset by reductions in email service fees due to installing
onsite email servers and eliminating offsite service centers,
reductions in temporary and contract labor as well as savings achieved
by hosting our own website and reducing the need for certain other
communication costs.
Professional fees were $58,988 for the three months ended March 31,
2006 as compared to $74,555 for the three months ended March 31, 2005,
a decrease of $15,567, or 21%.
Bad debt expense was $3,500 for the three months ended March 31, 2006
as compared to $31,890 for the three months ended March 31, 2005, a
decrease of $28,390 or 89%. The decrease was primarily due to fewer
billings of services that require collections and better
communications with customers to ensure more timely collections.
Litigation and arbitration expense was $130,243 for the three months
ended March 31, 2006 as compared to $49,178 for the three months ended
March 31, 2005, an increase of $81,065, or 165%. Litigation and
arbitration expense is primarily a function of the number of customer
claims in any given period. The Company's cost of defending itself
varies depending on the volume of claims which are in process at any
given time.
Depreciation and amortization was $158,645 for the three months ended
March 31, 2006 as compared to $60,707 for the three months ended March
31, 2005, an increase of $97,938, or 161%. The increase in
depreciation and amortization was primarily attributable to the
Company's decision to reclassify goodwill to an amortizable intangible
asset resulting in an expense of $73,335. Additional investment in its
technological infrastructure and facilities also caused an increase
in depreciation expense.
22
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations (Continued)
STATEMENTS OF OPERATIONS
(Continued)
The amount forgiven under forgivable loans was $0 for the three months
ended March 31, 2006 as compared to $6,250 for the three months ended
March 31, 2005, a decrease of $6,250, or 100%.
Stock based compensation was $113,069 for the three months ended March
31, 2006 as compared to $1,324 for the three months ended March 31,
2005. The increase in stock based compensation expense is due to the
Company's adoption the Statement of Financial Accounting Standards No.
123 (revised 2004), Share Based Payment ("SFAS No. 123R") on January
1, 2006.
23
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations (Continued)
LIQUIDITY AND CAPITAL RESOURCES
The Company had $4,944,771 of unrestricted cash at March 31, 2006 as
compared to $4,788,490 of unrestricted cash as of March 31, 2005.
Net cash provided by operating activities for the three months ending
March 31, 2006, was $614,441 as compared to net cash used by
operations of $542,888 for the three months ending March 31, 2005. The
increase in cash provided by operating activities is primarily
attributable to a lower investment in trading securities in addition
to the net profit for the period offset by higher non cash fess
received in investment banking activity and higher depreciation and
amortization expense and non-cash stock compensation expense.
Net cash used in investing activities for the three months ending
March 31, 2006, was $51,543 as compared to $133,748 for the three
months ending March 31, 2005. The primary reason for the decrease was
the lack of additions to our fixed asset base under capital leases
during the first quarter of 2006. In 2005, the Company invested in its
disaster recovery plan by implementing communication redundancy
systems that enables us to continuously service our clients. In order
to finance these capital expenditures, the Company entered into
capital lease agreements (discussed below under cash provided by
financing).
Net cash used by financing activities for the three months ending
March 31, 2006, was $45,538 as compared to net cash provided by
financing activities of $208,818 for the three months ending March 31,
2005. The decrease is due to the Company not entering into any new
capital lease agreements during the first quarter of 2006 and not
receiving proceeds from the issuance of common stock related to stock
option exercises as was the case in the first quarter of 2005.
The Company believes that its cash on hand is sufficient to meet its
working capital requirements over the next 12 months. However, the
Company anticipates that it may need additional debt or equity
financing in order to carry out its long-term business strategy. Such
funding may be a result of bank borrowings, public offerings, private
placements of equity or debt securities, or a combination of the
foregoing.
We do not have any material commitments for capital expenditures over
the course of the next fiscal year.
The Company's operations are not affected by seasonal fluctuations but
they are affected by the overall performance of the U.S. economy and
to some extent reliant on the continued execution of the Company's
mergers and acquisitions strategy and related financings.
24
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company has exposure to market risk, and does periodically hedge
against that risk. The Company does not hold or issue any derivative
financial instruments for trading or other speculative purposes. The
Company is exposed to market risk associated with changes in the fair
market value of the marketable securities that it holds. The Company's
revenue and profitability may be adversely affected by declines in the
volume of securities transactions and in market liquidity, which
generally result in lower revenues from trading activities and
commissions. Lower securities price levels may also result in a
reduced volume of transactions, as well as losses from declines in the
market value of securities held by the Company in trading and
investment positions. Sudden sharp declines in market values of
securities and the failure of issuers and counterparts to perform
their obligations can result in illiquid markets in which the Company
may incur losses in its principal trading activities.
ITEM 4. 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.
25
Part II. OTHER INFORMATION
ITEM 6. EXHIBITS.
(a) EXHIBITS
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 302
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.
26
SIGNATURES
In accordance with the requirements of the Exchange Act, the Registrant has
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Signature Title Date
--------- ----- ----
By: /s/ Leonard J. Sokolow Chief Executive Officer May 15, 2006
------------------ and President
Leonard J. Sokolow (Principal Executive Officer)
By: /s/ Sheila C. Reinken Chief Financial Officer and May 15, 2006
--------------------- (Principal Financial and
Sheila C. Reinken Accounting Officer)