UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2006
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to _________
Commission File Number: 1-11454-03
vFinance, Inc.
(Exact Name of Registrant as Specified in its Charter)
DELAWARE 58-1974423
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
3010 NORTH MILITARY TRAIL, SUITE 300,
BOCA RATON, FLORIDA 33431
(Address of Principal Executive Offices) (Zip Code)
(561) 981-1000
(Registrant's Telephone Number, Including Area Code)
Securities Registered Pursuant to Section 12(b) of the Act: None
Securities Registered Pursuant to Section 12(g) of the Act:
Title of Each Class Name of Each Exchange on Which Registered
------------------- -----------------------------------------
Common Stock, Par Value $.01 Per Share OTC Bulletin Board of the NASD
Indicate by check mark if the registrant is a well-known seasoned issuer, as
defined in Rule 405 of the Securities Act. Yes [ ] No |X|
Indicate by check mark if the registrant is not required to file reports
pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes [ ] No |X|
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities 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 if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. |X|
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 12b-2 of the 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|
As of December 31, 2006, the aggregate market value of the common stock of the
registrant held by non-affiliates was approximately $4,843,094 based on the
closing price of the common stock on OTC Bulletin Board of the National
Association of Securities Dealers, Inc. on such date.
As of March 26, 2007, the registrant had 54,429,876 shares of common stock
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE: None
INDEX TO FORM 10-K
PART I
ITEM 1. BUSINESS..............................................................1
ITEM 1A. RISK FACTORS.........................................................13
ITEM 2. PROPERTIES...........................................................25
ITEM 3. LEGAL PROCEEDINGS ...................................................25
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS..................27
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES .......28
ITEM 6. SELECTED FINANCIAL DATA..............................................30
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATION.............................................31
ITEM 7A QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK.................................................................42
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA..........................43
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE.............................................78
ITEM 9A. CONTROLS AND PROCEDURES..............................................78
ITEM 9B. OTHER INFORMATION....................................................78
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE...............79
ITEM 11. EXECUTIVE COMPENSATION...............................................81
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.......96
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE.........................................................98
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES...............................99
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES.............................100
SIGNATURES...................................................................108
PART 1
FORWARD-LOOKING STATEMENTS
The following information provides cautionary statements under the safe
harbor provisions of the Private Securities Litigation Reform Act of 1995 (the
Reform Act). We identify important factors that could cause our actual results
to differ materially from those projected in forward-looking statements we make
in this report or in other documents that reference this report. All statements
that express or involve discussions as to: expectations, beliefs, plans,
objectives, assumptions or future events or performance (often, but not always,
identified through the use of words or phrases such as we or our management
believes, expects, anticipates or hopes and words or phrases such as will
result, are expected to, will continue, is anticipated, estimated, projection
and outlook, and words of similar import) are not statements of historical facts
and may be forward-looking. These forward-looking statements are based largely
on our expectations and are subject to a number of risks and uncertainties
including, but not limited to, economic, competitive, regulatory, growth
strategies, available financing and other factors discussed elsewhere in this
report and in the documents filed by us with the Securities and Exchange
Commission ("SEC"). Many of these factors are beyond our control. Actual results
could differ materially from the forward-looking statements we make in this
report or in other documents that reference this report. In light of these risks
and uncertainties, there can be no assurance that the results anticipated in the
forward-looking information contained in this report or other documents that
reference this report will, in fact, occur.
These forward-looking statements involve estimates, assumptions and
uncertainties, and, accordingly, actual results could differ materially from
those expressed in the forward-looking statements. These uncertainties include,
among others, the following: (i), the inability of our broker-dealer operations
to operate profitably in the face of intense competition from larger full
service and discount brokers; (ii) a general decrease in merger and acquisition
activities and our potential inability to receive success fees as a result of
transactions not being completed; (iii) increased competition from business
development portals; (iv) technological changes; (v) our potential inability to
implement our growth strategy through acquisitions or joint ventures; and (vi)
our potential inability to secure additional debt or equity financing.
Any forward-looking statement speaks only as of the date on which such
statement is made, and we undertake no obligation to update any forward-looking
statement or statements to reflect events or circumstances after the date on
which such statement is made or to reflect the occurrence of unanticipated
events. New factors emerge from time to time and it is not possible for our
management to predict all of such factors, nor can our management assess the
impact of each such factor on the business or the extent to which any factor, or
combination of factors, may cause actual results to differ materially from those
contained in any forward-looking statements.
ITEM 1. BUSINESS.
vFinance, Inc. ("vFinance") is a global financial services holding company which
specializes in high growth opportunities. Our expertise into this marketplace
flows from three principal lines of business: providing investment banking and
advisory services to micro, small and mid-cap high growth companies; making
markets in over 3,000 micro and small cap stocks; and offering information
services on our website, which is a leading destination for emerging companies
seeking capital and investors seeking opportunities. Due to our focus, we are
uniquely positioned to offer alternative investments to institutional and
high-net worth investors seeking to outperform market indices in addition to
offering a full range of investment options. With over 40 locations in the U.S.
and other parts of the world, we serve more than 12,000 corporate, institutional
and high net worth clients. vFinance Investments, Inc. ("vFinance Investments")
and EquityStation, Inc. ("EquityStation"), both our subsidiaries, are
broker-dealers registered with the SEC, and members of the National Association
of Securities Dealers ("NASD") and Securities Investor Protection Corporation
("SIPC"). vFinance Investments is also a member of the National Futures
Association ("NFA"). In all 50 states, the District of Columbia, Latin America
and other parts of the world, vFinance Investments provides investment banking,
retail and institutional brokerage services. EquityStation offers a suite of
services, including trading technology, routing software, hedge fund incubation,
capital introduction and custodial services, to institutional traders, hedge
funds and professional traders designed to enhance their trading performance.
-1-
We own a financial services website or "channel" on the World Wide Web
located at http://www.vfinance.com. Clients, investors, shareholders and other
stakeholders may access us through this website. With an estimated 500,000
unique visitors annually, our website reaches a global audience of
entrepreneurs, CEOs, and private and institutional investors in over 150
countries. The website provides sales leads to our investment banking, brokerage
and institutional divisions. The website is the premier destination for the
search phrases "venture capital" and "raising capital." Website visitors have
convenient access to a variety of financial services, proprietary business
development tools, searchable databases and daily news. The website has over
60,000 "opted in" subscribers that receive a newsletter on private funding
several times a week. The website features our database of venture capital firms
and angel investors accessible with vSearch, a proprietary web-based data mining
tool that allows entrepreneurs to search potential funding sources by different
criteria, including geography, amount of funds required, industry, stage of
corporate development, or keyword. Much of the information on the website is
provided free of charge, however, users are charged nominal fees for the use of
proprietary search engines and premium services such as our business planning
services.
Restatement and Revision of Financial Statements
As discussed in Note 1 to our Consolidated Financial Statements included in
Item 8 to this Annual Report on Form 10-K, we have restated certain amounts in
our 2005, 2004, 2003 and 2002 Consolidated Financial Statements as a result of
comments we received from the staff of the Securities and Exchange Commission.
Our History
We were incorporated in the state of Delaware in February 1992. On November
8, 1999, we acquired vFinance Holdings, Inc., a Florida corporation, and Union
Atlantic LC, a Florida limited liability company, through a Share Exchange
Agreement. We received all the outstanding capital stock of vFinance Holdings,
Inc. and all the outstanding membership interests of Union Atlantic LC in
exchange for a total of approximately 7.0 million shares of our common stock.
On January 4, 2001, we closed the merger of NW Holdings, Inc. ("NWH"), a
Florida corporation, into us where we were the surviving corporation. On the
closing date of the merger, NWH was the parent company of and wholly owned First
Level Capital, Inc., a Florida corporation. First Level Capital, Inc. is now
known as vFinance Investments, which has offices in New York, New Jersey and
Florida. In addition to these offices, we have relationships with certain
independent contractors located throughout the United States.
Also, on January 4, 2001, we completed the merger of Colonial Direct
Financial Group, Inc., a Delaware corporation, with and into Colonial
Acquisition Corp., our wholly owned subsidiary, with Colonial Direct Financial
Group, Inc. as the surviving corporation and as our wholly owned subsidiary. At
the time of the merger, Colonial Direct Financial Group, Inc. was a holding
company comprised of two diversified financial services companies, including
First Colonial Securities Group, Inc. and Colonial Direct Retirement Services,
Inc., and a company that provides administrative support to these financial
service companies, Colonial Direct Capital Management, Inc. Although Colonial
Direct Financial Group, Inc. is no longer one of our subsidiaries, the majority
of the personnel, client accounts and client assets of First Colonial Securities
Group, Inc. still remain with vFinance Investments.
On November 2, 2004, our wholly-owned subsidiary, vFinance Investments
completed its acquisition of certain assets of Global Partners Securities, Inc.
("Global") and 100% of the issued and outstanding equity securities of
EquityStation, Inc. ("EquityStation"), all of which were owned by Level2.com,
Inc. ("Level2"), a subsidiary of Global (together, the "Global Acquisition").
The assets acquired in the Global Acquisition consisted primarily of
customer accounts and some older computer equipment. Business lines acquired
included wholesale market-making in selected equities for institutional clients
and direct market access equity trading. vFinance Investments assumed no
liabilities in connection with the acquisition of Global's assets. Two of the
principals of Global and Equity Station each entered into employment agreements
with us, which provided an annual base salary of $144,000, certain incentive
bonuses, and options to purchase 350,000 shares of our common stock. The options
are exercisable at $0.19 per share and vest ratably over a three year period.
-2-
EquityStation is a broker-dealer registered with the SEC and is a member of
the NASD. The company is a Florida corporation incorporated on July 22, 1999.
EquityStation offers institutional traders, hedge funds and professional traders
a suite of services designed to advance their trading through cutting-edge
trading technologies and routing software, hedge fund incubation, capital
introduction and custodial services.
In May 2006, vFinance Investments completed the acquisition of certain
assets of Sterling Financial Investment Group, Inc. ("SFIG") and Sterling
Financial Group of Companies, Inc. ("SFGC" and together with SFIG, "Sterling
Financial"). The assets acquired from Sterling Financial include customer
relationships associated with Sterling Financial's Institutional Fixed Income
and Latin American businesses. These transactions were approved by the NASD on
April 28, 2006.
In connection with this acquisition, we established new divisions to focus
on the rapidly-growing U.S. Hispanic and Latin American investment markets and
to provide investment advisory services relating to fixed income products and
execution of fixed income investment transactions.
Industry Overview
In the last decade, the U.S. investment banking industry has been
characterized and influenced by the following trends:
o increased levels of industry consolidation, particularly involving
smaller regional investment banks that primarily provided investment
banking and brokerage services to middle-market companies and their
institutional investors;
o the tendency for global competitors and acquired firms, once part of
larger organizations, to focus on larger market capitalization
companies and larger transactions; and
o the emergence of smaller boutique investment banking firms focused
exclusively on growth industries, particularly technology and
healthcare.
In recent years, there have been a number of acquisitions by larger
financial services institutions of U.S. brokerage and investment banking firms
that offer similar products and services to those that we provide. These larger
financial institutions have generally allocated capital and resources toward
larger market capitalization companies and transactions. This shift of focus
away from smaller market capitalization companies has led to a decline in
service to these companies, including investment banking and research coverage,
and as a result such companies have reduced access to capital.
Additionally, because the United States securities industry has also been
subjected to increased regulation and governmental scrutiny, including certain
mandated changes, many larger firms have restructured their businesses and
market-making activities away from companies whose market capitalization is
below certain thresholds. Research and capital markets resources previously
dedicated to smaller market capitalization companies were either reassigned to
larger companies or eliminated. These circumstances have contributed to both
companies in, and investors focused on, the growth and middle-market sectors
seeking the services of boutique investment banking professionals who have a
high degree of applicable industry knowledge. This increase in regulation has
also made it more expensive for smaller firms to remain in business thus
accelerating the consolidation of these firms.
-3-
To facilitate access to capital markets and to industry and company
specific research, smaller boutique financial services firms have emerged to
offer investment banking and research support to small- and middle-market
capitalization companies.
Our Market Opportunity
We view ourselves as a strategically positioned financial services holding
company recognized for our insight into alternative investments to institutional
and high-net worth investors seeking to outperform market indices. The market
opportunity available to us is significant due to the following factors:
Market Consolidation Opportunities
Our industry continues to consolidate. During the past several years, we
have successfully acquired industry related businesses.
Our Targeted Addressable Market Continues to Grow
High growth middle market or small capitalization companies not serviced by
the larger firms will continue to seek out capital. Institutions and high net
worth investors looking for alternative investments in order to outperform
market indices will continue to seek out investment opportunities. Additional
opportunities continue to arise in the U.S., Latin America, Canada, Mexico,
Europe, China and India.
Our Extensive Insight from and traffic to the our website into High Growth
Companies and Institutional and High Net Worth Investors
Through our website, we are in a unique position to generate a lot of
information about high growth companies who are seeking capital and
institutional and high net worth investors who are seeking investments. Our
website generates leads for our institutional and retail business units.
Our Competitive Strengths
Highly Regarded Investment Banking, Retail Brokerage, and Institutional
Equity and Fixed Income Trading
We believe that we are widely recognized for the quality of the services we
provide to our institutional and retail clients. We analyze each material aspect
of client's business, develop strong professional relationships with management
and related industry professionals, and effectively communicate with investors
and institutions.
Experienced Professionals
We believe that our team of professionals, including our executive
management team, has diverse and extensive experience, ranging from 8 to 15
years in the financial service industries. Our sales and trading professionals
have developed long-term client relationships with hedge funds, pension funds,
state and local municipalities, banks, insurance companies and high net worth
individuals, and these core clients have historically made up a significant
portion of our revenues.
-4-
Focus on Under-Served Business Opportunities
We seek out under-served business opportunities where there is a market
need that is not being addressed by the larger firms.
Entrepreneurial Culture
We have fully embraced an entrepreneurial culture. Our employees own our
common stock or may be granted options as an incentive, which, when coupled with
our competitive compensation packages, enables our employees to directly benefit
from their individual production as well as our overall performance. Every
employee has the incentive to generate ideas and communicate them to management
to maximize client returns and our overall profitability.
Our Growth Strategies
Our goal is to become a leading financial services company providing
brokerage, trading, investment banking, financial and operational services, and
insight into market place opportunities to our clients. In order to achieve this
goal, we plan on implementing the following strategies:
o expand investment banking efforts to include additional
capabilities and markets including the U.S. Hispanic Markets,
Europe, Canada, Mexico, China, Latin America and India;
o capitalize on trading resources by leveraging technology and increasing
the size and asset class of brokered transactions;
o expanding retail brokerage through recruiting initiatives and market
expansion including growth in Latin America and other emerging markets;
o grow through acquisitions and mergers; and
o diversify revenues.
Financial Arrangements with Clearing Brokers
vFinance Investments entered into a clearing agreement with National
Financial Services LLC, Member New York Stock Exchange ("NYSE")/SIPC, a Fidelity
Investments company ("NFS") in 2004 (the "Clearing Agreement"), for NFS to serve
as vFinance Investment's primary clearing broker. The Clearing Agreement
requires NFS to pay a monthly incentive bonus to vFinance Investments up to
$25.0 thousand per month (up to an aggregate of $1.5 million) over the five-year
term of the Clearing Agreement. vFinance Investments also received a $200.0
thousand payment from NFS in 2004, as compensation for the transition costs
associated with migrating to a new clearing firm. As consideration for these
incentives, NFS required a termination fee of $1.7 million in the event vFinance
Investments terminates the Clearing Agreement, reduced annually on a pro rata
basis over the five-year term of the Clearing Agreement. As of December 31,
2006, our contingent obligation in connection with the Clearing Agreement was
$1.0 million.
EquityStation and vFinance Investments have ancillary clearing agreements
with Merrill Lynch Pierce Fenner & Smith (Broadcoart Clearing Division), Fortis
Clearing, Legent Clearing and North American Clearing, providing services in the
areas NFS is not suited to handle. These clearing agreements contain customary
terms and conditions.
-5-
Our Business
Retail Brokerage
The largest portion of our revenues, 62%, 72% and 65% in 2006, 2005 and
2004, respectively was attributable to commissions and other brokerage-related
income generated by our retail brokerage activities.
vFinance Investments' retail brokerage division buys and sells securities
for its customers in exchange for a commission, or in exchange for a fee, based
on customer assets or as dictated by security placement agreements. Through our
brokers, we offer a wide variety of financial investments, including, but not
limited to, equities, corporate bonds, municipal securities, collateralized
mortgage obligations, mutual funds and insurance products. We are licensed in
all fifty states, plus the District of Columbia and Puerto Rico, and our
registered representatives are registered in those states where their customers
reside. vFinance Investments, Inc.'s relationship with its registered
representatives can be either as an employee, or in an independent contractor,
depending on how the broker chooses to conduct his business. As an employee, all
of the expenses of his operation are paid for by the company, and he is only
charged for certain fees such as special information services, insurance,
benefits and professional services. As an independent contractor, in exchange
for a higher overall payout, the broker would be responsible for all of the fees
associated with his business, including, but not limited to, rent,
telecommunications expenses, insurance, benefits, transactions fees, all
information services, state and regulatory registration fees and compliance
oversight.
Market Making
We generated 25%, 16% and 19% of our revenues from trading profits in our
market making activities in 2006, 2005 and 2004, respectively.
vFinance Investments provides liquidity by making markets in over 3,000
Over-the-Counter Bulletin Board, ("OTC Bulletin Board") National Market System,
Pink Sheet, and NASDAQ Small Cap stocks and American Depositary Receipts in
addition to providing this liquidity to our other business units. Our customers
are national and regional full-service broker-dealers, electronic discount
brokers and institutional investors that require fast and efficient executions
for each security. This expertise supports our investment banking strategy of
servicing high growth public companies that are looking for a financial services
firm that is capable of assisting them in building broad-based market support
for their securities. As a market maker, we use our capital and systems
resources to represent a stock and compete with other market makers. Operated
primarily by electronic execution, buyers and sellers meet via computer to make
bids and offers. Each market maker competes for "customer order flow" by
displaying buy and sell quotations for a guaranteed number of shares in a
security. Once an order is received, the market maker will immediately purchase
for or sell from its own inventory, or seek the other side of the trade until it
is executed, often in a matter of seconds. The market maker generates all of its
revenue from the difference between the price paid when a security is bought and
price received when that security is sold or the price received when the
security is shorted and the price received when the short is covered.
-6-
Investment Banking
We derived 13%, 11% and 14% of our revenues from our investment banking
activities in 2006, 2005 and 2004, respectively. We assist emerging growths,
private and public companies by (i) developing sound strategic plans, (ii)
obtaining equity, mezzanine, bridge, or acquisition capital, (iii) executing
strategically sound acquisitions or divestiture strategies, (iv) raising capital
in the public markets, and (v) maximizing shareholder value by conducting
recapitalizations or other liquidity transactions. As consideration for such
services, we are paid retainers and success fees, based on the percentage of the
total value of a transaction, which are contingent on the successful completion
of a specified transaction. As part of our success fees, we periodically receive
equity instruments and stock purchase warrants from companies for which we
perform services in addition to cash paid for such services.
In the area of corporate finance, vFinance Investments has been active as
an underwriter or selling group member in numerous public equity transactions.
Participation as a managing underwriter or in an underwriting syndicate involves
both economic and regulatory risks. An underwriter may incur losses if it is
unable to resell the securities it is committed to purchase. In addition, under
the federal securities laws, other laws and court decisions with respect to
underwriters' liabilities and limitations on the indemnification of underwriters
by issuers, an underwriter is subject to substantial potential liability for
misstatements or omissions of material facts in prospectuses and other
communications with respect to such offerings. Acting as a managing underwriter
increases these risks. Underwriting commitments constitute a charge against net
capital and our subsidiaries' ability to make underwriting commitments may be
limited by the requirement that they must at all times be in compliance with
regulations regarding their net capital.
Institutional Services
A critical element of our business strategy is to identify institutional
quality investments that offer above market returns. We support that mission by
providing institutional investment managers, primarily hedge fund managers, a
complete array of services designed to enhance portfolio performance. Hedge
funds represent the fastest growing segment of the money management market and
by definition are focused on achieving positive returns for their investors
while controlling risk. We offer fund managers access to direct market access
tradng platforms, investment opportunities and independent research products
that boost return on investment. Additionally, we offer fund managers the
ability to reduce their transaction costs by offering them access to our trading
desk for illiquid securities and automated trading systems for their liquid
transactions. We have a mutually beneficial relationship with our Investment
Banking Division ("IBD") as fund managers looking for investment opportunities
fund IBD's corporate clients and having relationships with fund managers creates
opportunities to increase the number and quality of IBD clients.
-7-
Internet Strategy
The Center for Innovative Entrepreneurship, dedicated to providing research
services to promote innovative entrepreneurship has been engaged by vFinance
Holdings, Inc., by means of a licensing arrangement, to operate its financial
services website or "channel" on the World Wide Web located at
http://www.vfinance.com. With an estimated 500,000 unique visitors annually, our
website reaches a global audience of entrepreneurs, CEOs, and private and
institutional investors in over 150 countries. The website provides sales leads
to our investment banking, brokerage and institutional services divisions. The
website is the premier destination for the search phrases "venture capital" and
"raising capital." Website visitors have convenient access to a variety of
financial services, proprietary business development tools, searchable databases
and daily news. The website has over 60,000 "opted in" subscribers that receive
a daily newsletter on private funding. The website features our database of
venture capital firms and angel investors accessible with vSearch, our
proprietary web-based data mining tool that allows entrepreneurs to search
potential funding sources by different criteria, including, geography, amount of
funds required, industry, stage of corporate development or keyword. Much of the
information on the website is provided free of charge, however, we do charge
nominal fees for the use of proprietary search engines and premium services such
as our business planning services.
Administration, Operations, Securities Transactions Processing and Customer
Accounts
Our operating subsidiaries, vFinance Investments and EquityStation, do not
hold any funds or securities for customers. Instead, they use the services of
clearing agents on a fully-disclosed basis. These clearing agents process all
securities transactions and maintain customer accounts on a fee basis. Customer
accounts are protected through the SIPC for up to $500,000, of which coverage
for cash balances is limited to $100,000. In addition, all customer accounts of
vFinance Investments are fully protected by an Excess Securities Bond providing
protection for the account's entire net equity (both cash and securities). The
services of our subsidiaries' clearing agents include billing and credit control
as well as receipt, custody and delivery of securities. The clearing agents
provide the operational support necessary to process, record and maintain
securities transactions for our subsidiary's brokerage activities. They provide
these services to our subsidiary's customers at a total cost that we believe is
less than it would cost us to process such transactions on our own. The clearing
agents also lend funds to our subsidiaries' customers through the use of margin
credit. These loans are made to customers on a secured basis, with the clearing
agents maintaining collateral in the form of saleable securities, cash or cash
equivalents. vFinance Investments and Equity Station have agreed to indemnify
the clearing brokers for losses they incur on these credit arrangements.
-8-
Competition
All aspects of our business are highly competitive. In our investment
banking activities, we compete with large Wall Street investment banks as well
as regional boutique banks that offer private placement services to small- and
middle-market companies. We compete for these investment banking transactions on
the basis of our relationships with the issuers and potential investors, our
experience in the industry and transactional fees. In our general brokerage
activities, we compete directly with numerous other broker-dealers, many of
which are large well-known firms with substantially greater financial and
personnel resources. We compete for brokerage transactions on the basis of our
experience in the industry, our ability to execute transactions and the strength
of our relationships with our clients. Many of our competitors for brokerage
service and investment banking transactions employ extensive advertising and
actively solicit potential clients in order to increase business. In addition,
brokerage firms compete by furnishing investment research publications to
existing clients, the quality and breadth of which are considered important in
the development of new business and the retention of existing clients. We also
compete with a number of smaller regional brokerage firms throughout the United
States. In our advisory activities, we compete with investment banking and
consulting firms on the basis of expertise in our broad variety of industries.
The securities industry has become considerably more concentrated and more
competitive since we were founded, as numerous securities firms have either
ceased operations or have been acquired by or merged into other firms. In
addition, companies not engaged primarily in the securities business, but with
substantial financial resources, have acquired leading securities firms. These
developments have increased competition from firms with greater capital
resources than ours.
Since the adoption of the Gramm-Leach-Bliley Act of 1999, commercial banks
and thrift institutions have been able to engage in traditional brokerage and
investment banking services, thus increasing competition in the securities
industry and potentially increasing the rate of consolidation in the securities
industry.
We also compete with other securities firms for successful sales
representatives, securities traders and investment bankers. Competition for
qualified employees in the financial services industry is intense. Our continued
ability to compete effectively depends on our ability to attract new employees
and to retain and motivate our existing employees.
Government Regulation
Regulation of the Securities Industry and Broker-Dealers
Our business is subject to extensive regulation applicable to the
securities industry in the United States and elsewhere. As a matter of public
policy, regulatory bodies in the United States and the rest of the world are
charged with safeguarding the integrity of the securities and other financial
markets and with protecting the interests of customers participating in those
markets. In the United States, the SEC is the federal agency responsible for the
administration of the federal securities laws. In general, broker-dealers are
required to register with the SEC under the Securities Exchange Act of 1934, as
amended (the "Exchange Act"). Under the Exchange Act, every registered
broker-dealer that does business with the public is required to be a member of
and is subject to the rules of the NASD. The NASD administers qualification
testing for all securities principals and registered representatives for its own
account and on behalf of the state securities authorities. vFinance Investments
and EquityStation are broker-dealers registered with the SEC and members of the
NASD.
-9-
Our broker-dealers are also subject to regulation under state law. vFinance
Investments and EquityStation are currently registered as broker-dealers in all
50 states and the District of Columbia. The NASD approved the change of
ownership to us of (i) Union Atlantic Capital, L.C. from Pinnacle Capital Group,
L.C., (ii) First Level Capital, Inc. from NWH, (iii) First Colonial Securities
Group, Inc., (iv) Global Partners and EquityStation; and (v) Sterling Financial.
A recent amendment to the federal securities laws prohibits the states from
imposing substantive requirements on broker-dealers that exceed those imposed
under federal law. The amendment, however, does not preclude the states from
imposing registration requirements on broker-dealers that operate within their
jurisdiction or from sanctioning these broker-dealers who have engaged in
misconduct.
The SEC, self-regulatory organizations such as the NASD and state
securities commissions may conduct administrative proceedings which can result
in censure, fine, the issuance of cease-and-desist orders, or the suspension or
expulsion of a broker-dealer, its officers, or its employees. The SEC and
self-regulatory organization rules cover many aspects of a broker-dealer's
business, including capital structure and withdrawals, sales methods, trade
practices among broker-dealers, use, and safekeeping of customers' funds and
securities, record-keeping, the financing of customers' purchases, broker-dealer
and employee registration, and the conduct of directors, officers, and
employees. Additional legislation, changes in rules promulgated by the SEC and
self-regulatory organizations, or changes in the interpretation or enforcement
of existing laws and rules, may directly affect the mode of operation and
profitability of broker-dealers.
The Uniform Net Capital Rule and NASD rules require prior notice to the SEC
and the NASD for certain withdrawals of capital and also provide that the SEC
may restrict for up to 20 business days any withdrawal of equity capital, or
unsecured loans or advances to shareholders, employees or affiliates if the
capital withdrawal, together with all other net capital withdrawals during a
30-day period, exceeds 30% of excess net capital and the SEC concludes that the
capital withdrawal may be detrimental to the financial integrity of the
broker-dealer.
In addition, the Uniform Net Capital Rule provides that the total
outstanding principal amount of a broker-dealer's indebtedness under certain
subordination agreements, the proceeds of which are included in its net capital,
may not exceed 70% of the sum of the outstanding principal amount of all
subordinated indebtedness included in net capital, par or stated value of
capital stock, paid in capital in excess of par, retained earnings and other
capital accounts for a period in excess of 90 days. A change in the Uniform Net
Capital Rule, the imposition of new rules or any unusually large charge against
net capital could limit those parts of our operations that require the intensive
use of capital and also could restrict our ability to pay dividends, repay debt
and repurchase shares of our outstanding stock.
-10-
As of the date of this Annual Report on Form 10-K, 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 our wholly owned
subsidiary, EquityStation was $100,000. A significant operating loss or any
unusually large charge against net capital could adversely affect our ability to
expand or even maintain our present levels of business, which could have a
material adverse affect on our business and operations. vFinance Investments and
EquityStation are members of SIPC which provides, in the event of the
liquidation of a broker-dealer, protection for clients' accounts up to $500,000,
subject to a limitation of $100,000 for claims for cash balances. vFinance
Investments' retail clients' accounts are carried on the books and records of
NFS and Legent Clearing. NFS has obtained additional insurance from a private
insurer, Customer Asset Protection Co. (CAPCO), for the full value of the
customer's account in excess of the standard SIPC coverage. The client accounts
for EquityStation are carried on the books and records of Merrill Lynch, Pierce,
Fenner & Smith.
Application of Laws and Rules to Internet Business and Other Online Services
Due to the increasing popularity and use of the Internet and other online
services, various regulatory authorities are considering laws and/or regulations
with respect to the Internet or other online services covering issues such as
user privacy, pricing, content copyrights and quality of services. In addition,
the growth and development of the market for online commerce may prompt more
stringent consumer protection laws that may impose additional burdens on those
companies conducting business online. When the Securities Act of 1933, as
amended ("the "Securities Act"), which governs the offer and sale of securities,
and the Exchange Act, which governs, among other things, the operation of the
securities markets and broker-dealers, were enacted, such acts did not
contemplate the conduct of a securities business through the Internet and other
online services. The recent increase in the number of complaints by online
traders could lead to more stringent regulations of online trading firms and
their practices by the SEC, NASD and other regulatory agencies.
Although the SEC, in releases and no-action letters, has provided guidance
on various issues related to the offer and sale of securities and the conduct of
a securities business through the Internet, the application of the laws to the
conduct of a securities business through the Internet continues to evolve.
Furthermore, the applicability to the Internet and other online services of
existing laws in various jurisdictions governing issues such as property
ownership, sales and other taxes and personal privacy is uncertain and may take
years to resolve. Uncertainty regarding these issues may adversely affect the
viability and profitability of our business.
As our services, through our subsidiaries, are available over the Internet
in multiple jurisdictions, and as we, through our subsidiaries, have numerous
clients residing in these jurisdictions, these jurisdictions may claim that our
subsidiaries are required to qualify to do business as a foreign corporation in
each such jurisdiction. While vFinance Investments and EquityStation are
currently registered as broker-dealers in the jurisdictions described in this
report, vFinance Investments, EquityStation and our non-broker dealer
subsidiaries are qualified to do business as corporations in only a few
jurisdictions. Failure to qualify as an out-of-state or foreign corporation in a
jurisdiction where we are required to do so could subject us to taxes and
penalties for the failure to qualify. Intellectual Property
We own the following federally registered marks: vFinance, Inc.(R),
vFinance.com, Inc.(R), AngelSearch(R), Direct2Desk(R) and Hedge Fund
Accelerator(R).
-11-
Employees
At December 31, 2006, we employed the following personnel:
Position Salaried Contract Total
---------------------------- -------------- --------------- -----------
Officers 12 - 12
Administration 28 20 48
Brokers 28 119 147
Traders 21 3 24
Investment Bankers 6 14 20
Web Operations 3 - 3
-------------- --------------- -----------
Totals 98 156 254
============== =============== ===========
None of our personnel are covered by a collective bargaining agreement. We
consider our relationships with our employees to be good. Any future increase in
the number of employees will depend upon the growth of our business. Our
registered representatives are required to take examinations administered by the
NASD and state authorities in order to qualify to transact business and are
required to enter into agreements with us obligating them, among other things,
to adhere to industry rules and regulations, our supervisory procedures and not
to solicit customers in the event of termination.
Seasonality and Backlog
Our business is not subject to significant seasonal fluctuations, and there
are no material backlogs in our business.
Research and Development and Environmental Matters
We did not incur any research and development expenses during the last
three fiscal years. We do not incur any significant costs or experience any
significant effects as a result of compliance with federal, state and local
environmental laws.
Available Information
Our web site address is www.vfinance.com. You may obtain free electronic
copies of our annual reports on Form 10-K, quarterly reports on Form 10-Q,
current reports of Form 8-K, and all amendments to those reports on the
"Investor Relations" portion of our web site, under the heading "SEC Filings."
These reports are available on our website as soon as reasonably practicable
after we electronically file them with the SEC. We are providing the address to
our Internet site solely for the information of investors. We do not intend the
address to be an active link nor are we incorporating the contents of the
website into this report.
-12-
ITEM 1A. RISK FACTORS.
In addition to other information in this report, the following risks should
be considered in evaluating our condition and prospects. These risks may have a
material effect on our operating results.
Risks Related to Our Company
We have a limited operating history and as a result, it may be difficult to
evaluate our business and prospects.
We have a limited operating history despite the fact that we commenced our
broker-dealer operations in 1999. As a result of acquisitions of Colonial Direct
Financial Group Inc. and First Level Capital, now know as vFinance Investments
in 2001, EquityStation and select assets of Global in 2004, and select assets of
Sterling Financial in 2006, our business has remained in flux. Our business and
prospects must be considered in light of the risks, expenses and difficulties
frequently encountered by companies in the early stages of development. These
risks are particularly severe among companies in new and rapidly evolving
markets such as online business development services and those in regulated
industries such as the securities industry. It may be difficult or impossible to
accurately forecast our operating results and to evaluate our business and
prospects based on our historical results.
We have had substantial losses since inception.
Prior to 2004, we had sustained substantial losses in each year since our
inception due to ongoing operating expenses and a lack of revenues sufficient to
offset those operating expenses. We have raised capital to fund ongoing
operations by private sales of our securities, some of which sales have been
highly dilutive and involved considerable expense. For the year ended December
31, 2004, when we earned a substantial profit for the first time in our history,
our results amounted to net income of $2.6 million, including a $1.5 million
non-cash gain on debt forgiveness. For the years ended December 31, 2006 and
2005, however, our results amounted to net losses of $2.1 million and $1.0
million, respectively.
The net losses generated in 2006 and 2005 resulted primarily from increased
costs from expanded facilities and staff, as well as amortization expense
associated with the Global Acquisition and the acquisition of Sterling
Financial, non-cash impairment charges in 2005 and stock option expense in 2006.
We expect to continue to make significant capital expenditures to enhance our
products and technologies, and to expand domestic and international sales and
operations. As a result, we will need to continue to generate significant
additional revenue to achieve profitability and generate sufficient working
capital to fund our planned spending. Even if we do achieve profitability, we
may not be able to maintain or increase profitability on a quarterly or annual
basis. If we do not achieve, maintain or increase our profitability, the market
price for our common stock may further decline.
-13-
Obtaining future financing may be costly and could be dilutive to existing
stockholders. If we are not able to obtain financing when and in the amounts
needed, and on terms that are acceptable, our operations, financial condition
and prospects could be materially adversely affected, and we could be forced to
curtail our operations or sell part or all of our assets.
We may need to raise additional funds, which may not be available when we need
them.
Based on our current spending plans and our projected working capital, we
believe that our cash on hand and cash generated from our operations will be
sufficient to fund our operations for at least the next 12 months. However, we
may attempt to raise additional capital to operate the business, support
expansion plans, develop new or enhanced services and products, respond to
competitive pressures, acquire complementary businesses or technologies or
respond to unanticipated events. We can provide no assurances that additional
financing will be available when needed on favorable terms, if at all. If these
funds are not available when we need them, we may need to change our business
strategy or reduce our operations or investment activities. In addition, any
issuance of additional equity securities will dilute the ownership interest of
our existing stockholders and the issuance of additional debt securities may
increase the perceived risk of investing in us.
If we do not secure substantial additional funding to meet our capital needs, we
may have to issue additional shares of common stock. If additional funds are
raised through the issuance of equity or convertible debt securities, the
percentage ownership of our current stockholders will be reduced and these
securities may have rights and preferences superior to those of our current
stockholders. If we raise capital through debt financing, we may be forced to
accept restrictions affecting our liquidity, including restrictions on our
ability to incur additional indebtedness or pay dividends.
We are currently subject to extensive securities regulation and the failure to
comply with these regulations could subject us to penalties or sanctions.
The securities industry and our business are subject to extensive
regulation by the SEC, state securities regulators and other governmental
regulatory authorities. We are also regulated by industry self-regulatory
organizations, including the NYSE, the NASD, the NFA and the Municipal
Securities Rulemaking Board. The regulatory environment is also subject to
change, and we may be adversely affected as a result of new or revised
legislation or regulations imposed by the SEC, other federal or state
governmental regulatory authorities, or self-regulatory organizations. We also
may be adversely affected by changes in the interpretation or enforcement of
existing laws and rules by these governmental authorities and self-regulatory
organizations.
vFinance Investments and EquityStation are registered broker-dealers with the
SEC and members of the NASD. Broker-dealers are subject to regulations which
cover all aspects of the securities business, including:
o sales methods and supervision;
o trading practices among broker-dealers;
o use and safekeeping of customers' funds and securities;
o capital structure of securities firms;
o record keeping; and
o the conduct of directors, officers and employees.
-14-
Compliance with many of the regulations applicable to us involves a number of
risks, particularly in areas where applicable regulations may be subject to
varying interpretation. The requirements imposed by these regulators are
designed to ensure the integrity of the financial markets and to protect
customers and other third parties who deal with us. Consequently, these
regulations often serve to limit our activities, including through net capital,
customer protection and market conduct requirements. Much of the regulation of
broker-dealers has been delegated to self-regulatory organizations, principally
NASD Regulation, Inc., the regulatory arm of the NASD, NYSE Regulation, which
will soon undergo a merger, both of which are overseen by the SEC. We are
primarily regulated by the NASD and SEC. NASD Regulation Inc. and the NYSE adopt
rules, subject to approval by the SEC, that govern their members and conduct
periodic examinations of member firms' operations.
If we are found to have violated any applicable regulation, formal
administrative or judicial proceedings may be initiated against us that may
result in:
o censure;
o fine;
o civil penalties, including treble damages in the case of insider
trading violations;
o the issuance of cease-and-desist orders; o the deregistration or
suspension of our broker-dealer activities;
o the suspension or disqualification of our officers or employees; and/or
o other adverse consequences.
The imposition of any of these or other penalties could have a material adverse
effect on our operating results and financial condition.
We are subject to various risks associated with the securities industry.
As securities broker-dealers, we are subject to uncertainties that are common in
the securities industry. These uncertainties include:
o the volatility of domestic and international financial, bond and
stock markets, as demonstrated by past disruptions in the financial
markets;
o extensive governmental regulation;
o litigation;
o intense competition;
o substantial fluctuations in the volume and price level of securities; and
o dependence on the solvency of various third parties.
As a result of these risks, revenues and earnings may vary significantly
from quarter to quarter and from year to year. We are much smaller and have much
less capital than many of our competitors in the securities industry.
Accordingly, we could be impacted by these risks to a larger degree. In the
event of a market downturn, our revenues would likely decline and, if we were
unable to reduce expenses at the same pace, our profit margins would quickly
erode.
-15-
Our business could be adversely affected by a breakdown in the financial
markets.
As a securities broker-dealer, our business is materially affected by conditions
in the financial markets and economic conditions in general, both in the United
States and elsewhere around the world. Many factors or events could lead to a
breakdown in the financial markets including war, terrorism, natural
catastrophes and other types of disasters. These types of events could cause
people to begin to lose confidence in the financial markets and their ability to
function effectively. If the financial markets are unable to effectively prepare
for these types of events and ease public concern over their ability to
function, our revenues may decline and our operations could be adversely
affected.
We have incurred, and may in the future incur, significant losses from trading
and investment activities due to market fluctuations and volatility.
We generally maintain trading and investment positions in the equity markets. To
the extent that we own assets, i.e., have long positions, a downturn in those
markets could result in losses from a decline in the value of such long
positions. Conversely, to the extent that we have sold assets that we do not
own, i.e., have short positions in any of those markets, an upturn could expose
us to potentially unlimited losses as we attempt to cover our short positions by
acquiring assets in a rising market.
We may, from time to time, have a trading strategy consisting of holding a long
position in one asset and a short position in another from which we expect to
earn revenues based on changes in the relative value of the two assets. If,
however, the relative value of the two assets changes in a direction or manner
that we did not anticipate or against which we are not hedged, we might realize
a loss in those paired positions. In addition, we maintain trading positions
that can be adversely affected by the level of volatility in the financial
markets, i.e., the degree to which trading prices fluctuate over a particular
period, in a particular market, regardless of market levels.
Our revenues may decline in adverse market or economic conditions.
Unfavorable financial or economic conditions may reduce the number and size of
the transactions in which we provide underwriting services, merger and
acquisition consulting and other services. Our investment banking revenues, in
the form of financial advisory and underwriting fees, are directly related to
the number and size of the transactions in which we participate and would
therefore be adversely affected by a sustained market downturn. Additionally, a
downturn in market conditions could lead to a decline in the volume of
transactions that we execute for our customers and, therefore, to a decline in
the revenues we receive from commissions and spreads.
Customer relationship intangible assets comprised approximately 35% of our total
assets as of December 31, 2006. We must review customer relationships for
impairment whenever events or circumstances indicate that impairment may be
present, which may result in a material, non-cash write down of customer
relationships.
A significant decrease in revenues or cash flows derived from acquired customer
relationships could result in a material, non-cash write-down of customer
relationships. Such impairment would have a material adverse impact on our
results of operations and shareholders' equity.
-16-
Our risk management policies and procedures may leave us exposed to unidentified
risks or an unanticipated level of risk.
The policies and procedures we employ to identify, monitor and manage risks may
not be fully effective. Some methods of risk management are based on the use of
observed historical market behavior. As a result, these methods may not
accurately predict future risk exposures, which could be significantly greater
than the historical measures indicate. Other risk management methods depend on
evaluation of information regarding markets, clients or other matters that are
publicly available or otherwise accessible by us. This information may not be
accurate, complete, up-to-date or properly evaluated. Management of operational,
legal and regulatory risks requires, among other things, policies and procedures
to properly record and verify a large number of transactions and events. We
cannot be assured that our policies and procedures will effectively and
accurately record and verify this information.
We seek to monitor and control our risk exposure through a variety of
separate, but complementary financial, credit, operational and legal reporting
systems. We believe that we are able to evaluate and manage the market, credit
and other risks to which we are exposed. Nonetheless, our ability to manage risk
exposure can never be completely or accurately predicted or fully assured. For
example, unexpectedly large or rapid movements or disruptions in one or more
markets or other unforeseen developments can have a material adverse effect on
our results of operations and financial condition. The consequences of these
developments can include losses due to adverse changes in inventory values,
decreases in the liquidity of trading positions, higher volatility in earnings,
increases in our credit risk to customers as well as to third parties and
increases in general systemic risk.
Credit risk exposes us to losses caused by financial or other problems
experienced by third parties.
We are exposed to the risk that third parties that owe us money, securities or
other assets will not perform their obligations. These parties include:
o trading counterparties;
o customers;
o clearing agents;
o exchanges;
o clearing houses; and
o other financial intermediaries as well as issuers whose securities we hold.
These parties may default on their obligations owed to us due to bankruptcy,
lack of liquidity, operational failure or other reasons. This risk may arise,
for example, from:
o holding securities of third parties;
o executing securities trades that fail to settle at the required
time due to non-delivery by the counterparty or systems failure by
clearing agents, exchanges, clearing houses or other financial
intermediaries; and
o extending credit to clients through bridge or margin loans or other
arrangements.
Significant failures by third parties to perform their obligations owed to us
could adversely affect our revenues and perhaps our ability to borrow in the
credit markets.
-17-
We may have difficulty retaining or recruiting our independent contractors.
We are dependent upon the independent contractor model for our retail brokerage
business. As such, approximately 81% of our retail registered representatives
are independent contractors. We are exposed to the risk that a large group of
independent contractors leave the firm or decide to affiliate with another firm
and that we are unable to recruit suitable replacements. A loss of a large group
of our independent contractors could have a material adverse impact on our
ability to generate revenue in the retail brokerage business.
We may have difficulty effectively managing our growth.
Over the past several years, we have experienced significant growth in our
business activities through a variety of transactions. We expect our business to
continue to grow through similar transactions as well as organically. Future
growth through mergers, acquisitions and other such transactions involves
numerous risks such as:
o difficulties and expenses incurred in connection with the
subsequent assimilation of the operations and services or products
of the acquired company;
o the potential loss of key employees of the acquired company; and
o the diversion of management's attention from other business concerns.
If we are unable to effectively address these risks, we may be required to
restructure the acquired business or write off the value of some or all of the
assets of the acquired business. Further, this type of growth requires increased
investments in management personnel, financial and management systems and
controls as well as facilities. We cannot be assured that we will experience
parallel growth in these areas. If these areas do not grow at the same time, our
operating margins may decline from current levels.
Additionally, as is common in the securities industry, we will continue to be
highly dependent on the effective and reliable operation of our communications
and information systems. We believe that our current and anticipated future
growth will require implementation of new and enhanced communications and
information systems and training of our personnel to operate such systems. Any
difficulty or significant delay in the implementation or operation of existing
or new systems or the training of personnel could adversely affect our ability
to manage our growth.
Intense competition from existing and new entities may adversely affect our
revenues and profitability.
The securities industry is rapidly evolving, intensely competitive and has few
barriers to entry. We expect competition to continue to intensify in the future.
Many of our competitors have significantly greater financial, technical,
marketing and other resources than we do. They may also offer a wider range of
services and financial products and have greater name recognition and a larger
client base than we do. These competitors may be able to respond more quickly to
new or changing opportunities, technologies and client requirements. They may
also be able to undertake more extensive promotional activities, offer more
attractive terms to clients, and adopt more aggressive pricing policies. We may
not be able to compete effectively with current or future competitors and
competitive pressures faced by us may harm our business.
-18-
The precautions we take to prevent and detect employee misconduct may not be
effective, and we could be exposed to unknown and unmanaged risks or losses.
We run the risk that employee misconduct could occur. Misconduct by employees
could include:
o employees binding us to transactions that exceed authorized limits or present
unacceptable risks to us;
o employees hiding unauthorized or unsuccessful activities from us; or
o the improper use of confidential information.
These types of misconduct could result in unknown and unmanaged risks or losses
to us including regulatory sanctions and serious harm to our reputation. The
precautions we take to prevent and detect these activities may not be effective.
If employee misconduct does occur, our business operations could be materially
adversely affected.
We may experience losses associated with securities laws violations and
litigation.
Many aspects of our business involve substantial risks of liability. An
underwriter is exposed to substantial liability under federal and state
securities laws, other federal and state laws, and court decisions, including
decisions with respect to underwriters' liability and limitations on
indemnification of underwriters by issuers. For example, a firm that acts as an
underwriter may be held liable for material misstatements or omissions of fact
in a prospectus used in connection with the securities being offered or for
statements made by its securities analysts or other personnel. In recent years,
there has been an increasing incidence of litigation involving the securities
industry, including class actions that seek substantial damages. Our
underwriting activities will usually involve offerings of the securities of
smaller companies, which often involve a higher degree of risk and are more
volatile than the securities of more established companies. In comparison with
more established companies, smaller companies are also more likely to be the
subject of securities class actions, not to carry directors and officer's
liability insurance or policies with lower limits, and to become insolvent. Each
of these factors increases the likelihood that an underwriter of smaller
companies' securities will be required to contribute to an adverse judgment or
settlement of a securities lawsuit.
In the normal course of business, our operating subsidiaries have been and
continue to be the subject of numerous civil actions and arbitrations arising
out of customer complaints relating to our activities as a broker-dealer and as
a result of other business activities. In general, the cases involve various
allegations that our employees mishandled customer accounts. We believe that,
based on our historical experience and the reserves established by us, the
resolution of the claims presently pending will not have a material adverse
effect on our financial condition. However, although we typically reserve an
amount we believe will be sufficient to cover any damages assessed against us,
we have in the past been assessed damages that exceeded our reserves. If we
misjudged the amount of damages that may be assessed against us from pending or
threatened claims or if we are unable to adequately estimate the amount of
damages that will be assessed against us from claims that arise in the future
and fail to appropriately reserve, our financial condition may be materially
adversely affected.
-19-
Our directors, executive officers and senior managers control over 60% of our
common stock voting rights and may have interests differing from those of other
stockholders.
Our directors, executive officers and senior managers control over 60% of
our outstanding common stock, directly as stockholders and indirectly through
control relationships with other stockholders. There is no supermajority vote
required by our Certificate of Incorporation with regard to matters requiring
stockholder approval. These directors and executive officers, if acting
together, would be able to significantly influence all matters requiring
approval by our stockholders, including the election of directors and approval
of significant corporate transactions including mergers, consolidations and the
sale of substantially all of our assets. This control could have the effect of
delaying or preventing a third party from acquiring or merging with us, which
could hinder stockholders' ability to receive a premium for their shares.
Our "vFinance" brand may not achieve the broad recognition necessary to succeed.
We believe that broader recognition and positive perception of the "vFinance"
brand is essential to our future success. Accordingly, we intend to continue to
pursue an aggressive brand enhancement strategy, which will include multimedia
advertising, promotional programs and public relations activities. These
initiatives will require significant expenditures. If our brand enhancement
strategy is unsuccessful, these expenses may never be recovered and we may be
unable to increase future revenues. Successful positioning of our brand will
depend in a large part on:
o the success of our advertising and promotional efforts;
o an increase in the number of users and page views of our website; and
o the ability to continue to provide a website and services useful to our
clients.
If we do not continue to develop and enhance our services in a timely manner,
our business may be harmed.
Our future success will depend on our ability to develop and enhance our
services and add new services. We operate in a very competitive industry in
which the ability to develop and deliver advanced services through the Internet
and other channels is a key competitive factor. There are significant risks in
the development of new or enhanced services, including the risks that we will be
unable to:
o effectively use new technologies;
o adapt our services to emerging industry or regulatory standards; or
o market new or enhanced services.
If we are unable to develop and introduce new or enhanced services quickly
enough to respond to market or customer requirements or to comply with emerging
industry standards, or if these services do not achieve market acceptance, our
business could be seriously harmed.
-20-
Internet and internal computer system failures or compromises of our systems or
security could damage our reputation and harm our business.
Although a significant portion of our business is conducted using traditional
methods of contact and communications such as face-to-face meetings, a portion
of our business is conducted through the Internet. We could experience system
failures and degradations in the future. We cannot assure you that we will be
able to prevent an extended system failure if any of the following events occur:
o human error;
o subsystem, component, or software failure;
o a power or telecommunications failure;
o an earthquake, fire, or other natural disaster or act of God;
o hacker attacks or other intentional acts of vandalism; or
o terrorists acts or war.
Failure to adequately protect the integrity of our computer systems and
safeguard the transmission of confidential information could harm our business.
The secure transmission of confidential information over public networks is a
critical element of our operations. We rely on encryption and authentication
technology to provide the security and authentication necessary to effect secure
transmission of confidential information over the Internet. To the best of our
knowledge, to date, we have not experienced any security breaches in the
transmission of confidential information. Moreover, we continually evaluate
advanced encryption technology to ensure the continued integrity of our systems.
However, we cannot assure you that advances in computer capabilities, new
discoveries in the field of cryptography or other events or developments will
not result in a compromise of the technology or other algorithms used by our
vendors and us to protect client transaction and other data. Any compromise of
our systems or security could harm our business.
We depend on a limited number of key executives who would be difficult to
replace.
Our success depends significantly on the continued services of our senior
management, especially Leonard J. Sokolow, our Chairman and Chief Executive
Officer. Losing Mr. Sokolow or any of our subsidiaries' other key executives
could seriously harm our business. We cannot assure you that we will be able to
retain our key executives or that we would be able to replace any of our key
executives if we were to lose their services for any reason. Competition for
these executives is intense. If we had to replace any of these key executives,
we would not be able to replace the significant amount of knowledge that these
key executives have about our operations. We do not maintain "key person"
insurance policies on any of our executives.
-21-
Our operating broker-dealer subsidiaries extend credit to their clients and are
subject to risks as a result.
Our broker-dealers, vFinance Investments and EquityStation, clear all
transactions for customers on a fully-disclosed basis with their clearing
brokers, NFS, Jefferies, Merrill Lynch Pierce Fenner & Smith (Broadcoart
Clearing Division, Fortis Clearing, Legent Clearing and North American Clearing.
These clearing brokers carry and clear all customer securities accounts. A
limited portion of the customer securities activities for both broker-dealers
are transacted on a "margin" basis, pursuant to which credit is extended to
customer. The credit extended to customers (a) is secured by cash and securities
in customer accounts, or (b) involves (i) "short sales" (i.e., the sale of
securities not yet purchased) or (ii) the purchase and sale of commodity futures
contracts, substantially all of which are transacted on a margin basis. These
risks are increased during periods of volatile markets in which the value of the
collateral held could fall below the amount borrowed by clients. If margin
requirements are not sufficient to cover losses, our broker-dealers may be
required to sell or buy securities at prevailing market prices and incur losses
to satisfy their client obligations.
We may underwrite securities through vFinance Investments and are subject to
losses relating to a decline in the market value of securities that we hold in
inventory and to potential liability for engaging in underwriting activities.
The underwriting activities of vFinance Investments involve the purchase, sale
or short sale of securities as a principal. As an underwriter, vFinance
Investments purchases securities on a "firm commitment" basis and is subject to
risk that it may be unable to resell securities or be required to dispose of
securities at a loss. In connection with our investment-banking activities in
which vFinance Investments acts as a manager or co-manager of public offerings
of securities, we expect to make increased commitments through vFinance
Investments of capital to market-making activities in securities of those
issuers. Any additional concentration of capital in the securities of those
issuers held in inventory will increase the risk of loss from possible declines
in the market price of those securities. In addition, under federal securities
laws, other laws and court decisions with respect to underwriters' liabilities
and limitations on the indemnification of underwriters by issuers, an
underwriter is subject to substantial potential liability for misstatements or
omissions of material facts in prospectuses and other communications with
respect to securities offerings. Our potential liability through vFinance
Investments as an underwriter is generally not covered by insurance. Moreover,
underwriting commitments constitute a charge against net capital and the ability
of vFinance Investments to make underwriting commitments may be limited by the
requirement that it must at all times be in compliance with the net capital
rule.
Our success and ability to compete depend to a significant degree on our
intellectual property.
We rely on copyright and trademark law, as well as confidentiality arrangements,
to protect our intellectual property. We own the following federally registered
marks: vFinance, Inc.(R), vFinance.com, Inc.(R), AngelSearch(R), Direct2Desk(R)
and Hedge Fund Accelerator(R). We currently do not have any patents. The
concepts and technologies we use may not be patentable. Our competitors or
others may adopt product or service names similar to "vFinance.com," thereby
impeding our ability to build brand identity and possibly leading to client
confusion. Our inability to adequately protect the name "vFinance.com" would
seriously harm our business. Policing unauthorized use of our intellectual
property is made especially difficult by the global nature of the Internet and
the inherent difficulty in controlling the ultimate destination or security of
software or other data transmitted on it.
-22-
The laws of other countries may afford us little or no effective protection for
our intellectual property. We cannot assure you that the steps we take will
prevent misappropriation of our intellectual property or that agreements entered
into for that purpose will be enforceable. In addition, litigation may be
necessary in the future to:
o enforce our intellectual property rights;
o determine the validity and scope of the proprietary rights of others; or
o defend against claims of infringement or invalidity.
Such litigation, whether successful or unsuccessful, could result in substantial
costs and diversions of resources, either of which could seriously harm our
business.
Our Board of Directors can issue shares of "blank check" preferred stock without
further action by our stockholders.
Our Board of Directors has the authority, without further action by the
stockholders, to issue up to 2.5 million shares of preferred stock in one or
more series and to fix the rights, preferences, privileges and restrictions in
each series of the preferred stock, including:
o dividend rights;
o conversion rights;
o voting rights, which may be greater or lesser than the voting rights
of the common stock;
o rights and terms of redemption;
o liquidation preferences; and
o sinking fund terms.
The issuance of shares of preferred stock could adversely affect the voting
power of holders of our common stock and the likelihood that these holders will
receive dividends and payments upon our liquidation and could have the effect of
delaying, deferring or preventing a change in control of the Company. We have no
current plans to issue any additional preferred stock in the next twelve months.
Although the issuance of preferred stock may be necessary in order to raise
additional capital.
Our stock price has been and continues to be volatile.
The market price for our common stock could fluctuate due to various factors.
These factors include:
o announcements regarding developments in our business, acquisitions and
financing transactions;
o announcements by us or our competitors of new contracts, technological
innovations or new products;
o changes in government regulations;
o fluctuations in our quarterly and annual operating results; and
o general market conditions.
In addition, the stock markets have, in recent years, experienced significant
price fluctuations. These fluctuations often have been unrelated to the
operating performance of the specific companies whose stock is traded. Market
fluctuations, as well as economic conditions, have adversely affected, and may
continue to adversely affect, the market price of our common stock.
-23-
There are risks associated with our stock trading on the OTC Bulletin Board
rather than a national exchange.
There are significant consequences associated with our stock trading on the OTC
Bulletin Board rather than a national exchange. The effects of not being able to
list our securities on a national exchange include:
o limited release of the market prices of our securities;
o limited news coverage;
o limited interest by investors in our securities;
o volatility of our stock price due to low trading volume;
o increased difficulty in selling our securities in certain states due
to "blue sky" restrictions; and
o limited ability to issue additional securities or to secure additional
financing.
Because our common stock is subject to penny stock rules, a stockholder may have
greater difficulty selling shares.
The Securities Enforcement and Penny Stock Reform Act of 1990 applies to
stocks characterized as "penny stocks," and requires additional disclosure
relating to the market for penny stocks in connection with trades in any stock
defined as a penny stock. The SEC has adopted regulations that generally define
a penny stock to be any equity security that has a market price of less than
$5.00 per share, subject to certain exceptions.
The exceptions include exchange-listed equity securities and any equity security
issued by an issuer that has:
o net tangible assets of at least $2.0 million, if the issuer has been in
continuous operation for at least three years;
o net tangible assets of at least $5.0 million, if the issuer has been in
continuous operation for less than three years; or
o average annual revenue of at least $6.0 million for the last three years.
Unless an exception is available, the regulations require the delivery, prior to
any transaction involving a penny stock, of a disclosure schedule explaining the
penny stock market and the associated risks.
If our financial condition does not meet the above tests, then trading in the
common stock will be covered by Rules 15g-1 through 15g-6 and 15g-9 promulgated
under the Securities Exchange Act. Under those rules, broker-dealers who
recommend such securities to persons other than their established customers and
institutional accredited investors must make a special written suitability
determination for the purchaser and must have received the purchaser's written
agreement to a transaction prior to sale. These regulations would likely limit
the ability of broker-dealers to trade in our common stock and thus would make
it more difficult for purchasers of common stock to sell their securities in the
secondary market. The market liquidity for the common stock could be severely
affected.
-24-
Stockholders holdings may be diluted as a result of additional stock issuances.
As of March 26, 2006, we had outstanding approximately 54.4 million shares
of common stock, options to purchase an approximate total of 15.6 million shares
of common stock and warrants to purchase an approximate total of 3.9 million
shares of common stock. We are authorized to issue up to 100.0 million shares of
common stock and are therefore able to issue additional shares without being
required to obtain stockholder approval. If we issue additional shares, or if
our existing stockholders exercise or convert their outstanding options or
notes, our other stockholders may own a smaller percentage of the Company.
ITEM 2. PROPERTIES.
Our corporate headquarters are located in Boca Raton, Florida. This
property and our other three locations in New York, New York, Mt. Laurel, New
Jersey and Boca Raton, Florida are leased. We consider these facilities to be
reasonably insured and adequate for the foreseeable needs of our Company.
ITEM 3. LEGAL PROCEEDINGS.
From time to time we, and/or one of our subsidiaries, are named as a party
to a lawsuit that has arisen in the ordinary course of business. Although it is
possible that losses exceeding amounts already recorded may be incurred upon
ultimate resolution of these existing legal proceedings, we believe that such
losses, if any, will not have a material adverse effect on our business, results
of operations or financial position; however, unfavorable resolution of each
matter individually or in the aggregate could affect the consolidated results of
operations for the quarterly and annual periods in which they are resolved.
The businesses of vFinance Investments and EquityStation involve
substantial risks of liability, including exposure to liability under federal
and state securities laws in connection with the underwriting or distribution of
securities and claims by dissatisfied customers for fraud, unauthorized trading,
churning, mismanagement and breach of fiduciary duty. In recent years, there has
been an increasing incidence of litigation involving the securities industry,
including class actions that generally seek rescission and substantial damages.
In the ordinary course of business, we and/or our subsidiaries may be
parties to other legal proceedings and regulatory inquiries, the outcome of
which, either singularly or in the aggregate, is not expected to be material.
There can be no assurance however that any sanctions will not have a material
adverse effect on our financial condition or results of operations and/or our
subsidiaries. The following is a brief summary of certain matters pending
against or involving us and our subsidiaries.
-25-
On or about February 28, 2005, Knight Equity Markets, LP ("Knight") filed
an arbitration action (NASD Case No. 05-01069) against vFinance Investments
claiming that vFinance Investments received roughly $6.5 million in dividends
that rightfully belong to Knight. vFinance Investments asserted that the
dividends actually went to two of its clients, Pearl Securities LLC ("Pearl
Securities") and Michael Balog, and that vFinance Investments has no liability.
vFinance Investments filed third party claims against Pearl Securities and
Michael Balog to bring all of the parties into the action. Knight is seeking
approximately $6.5 million in damages plus costs, attorney fees and punitive
damages. vFinance Investments denies any liability to Knight and intends to
vigorously defend against Knight's claims.
On or about September 27, 2005, John S. Matthews filed an arbitration
action (NASD Case No. 05-014991) against us, claiming that we wrongfully
terminated his independent contractor agreement with us and that we "stole" his
clients and brokers. Mr. Matthews has obtained a temporary restraining order and
an agreed upon injunction was issued by the NASD panel. Mr. Matthews and JMS
Capital Holding Corp. ("JMS"), a plaintiff in the arbitration action, also
request unspecified damages resulting from our alleged improper activity. The
full hearing on the merits was postponed and has not yet been rescheduled. We
intend to vigorously defend this matter. In addition to contesting and defending
against JSM's and Mr. Matthews claims, we filed a counterclaim for indemnity
based upon the contractual agreement between the parties.
On or about April 2005 Gregory F. and Ruth A. Whitten filed an arbitration
action (NASD Case No. 05-02103) with NASD naming vFinance Investments, Inc., as
a Co-Respondent. The Statement of Claim filed in this action alleges, negligent
and intentional misrepresentations, breach of fiduciary duty, violation of
Washington State Securities Act, and violation of the Washington Consumer
Protection Act , in connection with the handling of claimants' brokerage
accounts by Robert Agriogianis. The Statement of Claim alleges compensatory
damages in excess of $445,000 plus interest, costs, and attorney's fees.
vFinance has filed an Answer and Affirmative Defenses with NASD and discovery is
substantially complete. The Final Hearing is set for May 2, 3, & 4, 2007.
vFinance Investments denies any liability to Gregory F. and Ruth A. Whitten and
intends to vigorously defend against their claim.
We are engaged in a number of other legal proceedings incidental to the
conduct of our business. These claims aggregate withing the range of $50,000 to
$260,000.
-26-
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
At our annual meeting of shareholders held on November 28, 2006, our
shareholders voted on the following three matters:
1. The election of two directors to serve for a term expiring at the next annual
meeting or until their respective successors have been duly elected and
qualified.
2. To approve an amendment to our Certificate of Incorporation to increase
the number of authorized shares from 75 million to 100 million.
3. The ratification of the appointment of our independent registered accounting
firm for the year ending December 31, 2006.
Both of the director nominees were elected based on the following votes:
Name Votes Cast For Votes Withheld
Leonard J. Sokolow 35,262,875 336,434
Timothy E. Mahoney 34,523,875 1,075,434
On December 29, 2006, we entered into a resignation agreement with Mr.
Mahoney, pursuant to which Mr. Mahoney resigned from his positions as the
Chairman of our Board of Directors and Chief Operating Officer, effective
January 4, 2007. See "Directors, Executive Officers and Corporate Governance" in
Part III, Item 10 of this Annual Report of Form 10-K.
The approval of an amendment to our Certificate of Incorporation to
increase the number of authorized shares from 75 million to 100 million was
ratified based on the following votes.
Votes Cast For Votes Cast Against Votes Abstained
34,318,462 1,178,844 102,003
The approval of Sherb & Co., LLP as our independent registered public
accounting firm for the year ending December 31, 2006 was ratified based on the
following votes.
Votes Cast For Votes Cast Against Votes Abstained
35,278,547 320,762 -
-27-
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER
MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.
Market Information, Holders and Dividends
Our common stock, par value $0.01 per share, is traded on the OTC Bulletin
Board of the National Association of Securities Dealers, Inc. under the symbol
"VFIN."
The following table sets forth the closing high and low price information
for our common stock for the periods indicated below, as reported by the
National Quotation Bureau during such periods:
High Low
------------ ------------
2006:
Fourth Quarter $ 0.27 $ 0.18
Third Quarter $ 0.25 $ 0.18
Second Quarter $ 0.31 $ 0.18
First Quarter $ 0.28 $ 0.16
2005:
Fourth Quarter $ 0.21 $ 0.15
Third Quarter $ 0.22 $ 0.15
Second Quarter $ 0.33 $ 0.17
First Quarter $ 0.37 $ 0.23
The foregoing quotations supplied by the National Quotations Bureau reflect
inter-dealer prices, without retail mark-up, markdown or commission and may not
represent actual transactions.
On March 26, 2007, the closing price of our common stock was $0.19, as
reported on the OTC Bulletin Board of the NASD. The number of stockholders of
record for the common stock as of March 26, 2007 was 293.
We are authorized to issue 100 million shares of common stock, of which
54.4 million shares were issued and outstanding as of March 26, 2007. We are
authorized to issue up to 2.5 million shares of preferred stock, none of which
are currently issued or outstanding.
We have not paid any cash dividends since inception, and we do not
anticipate paying any cash dividends in the foreseeable future.
Our transfer agent is Continental Stock Transfer & Trust Company, New York,
New York 10004.
-28-
Recent Sales of Unregistered Securities
On October 16, 2006, we entered into a settlement agreement with Henry S.
Snow, Sandra L. Snow, Michael Golden and Ben Lichtenberg to settle a suit filed
against us alleging breach of contract and unjust enrichment and seeking damages
of $250,000 plus interest and court costs. Pursuant to the terms of the now
settlement agreement, we issued 1,000,000 shares of our common stock to Henry S.
Snow and Sandra L. Snow. The closing price of our common stock on October 16,
2006 was $0.20 per share. The transaction was exempt from registration under
Section 4(2) of the Securities Act.
In November 2004, in accordance with the terms of the Global Acquisition
agreements, we delivered into escrow 8,324,690 shares of our common stock, and
warrants to purchase 3,299,728 shares of our common stock at a price of $0.11
per share. After the shares and warrants were deposited in escrow, a dispute
arose among the parties over the amount of the shares and warrants that were
deposited in escrow and the value of such securities. On November 7, 2006, we
and vFinance Investments entered into a settlement and escrow release agreement,
pursuant to which the securities issued in the name of Global and Level2 were
cancelled. In lieu thereof, we issued 3,288,253 and 3,288,252 shares of our
common stock to Global and Level2, respectively. We also issued warrants to
purchase 1,303,393 and 1,303,392 shares of our common stock at a price of $0.11
per share to Global and Level2, respectively. The closing price of our common
stock on November 7, 2006 was $0.22 per share. We issued the shares and warrants
to Global and Level2 pursuant to the transactional exemption under Section 4(2)
of the Securities Act of 1933.
On May 11, 2006, under the terms of the asset purchase agreement with
Sterling Financial, we issued 13 million shares of our common stock to SFGC in
exchange for the acquired assets. The closing price of our common stock on May
11, 2006 was $0.25 per share. Such securities were issued pursuant to an
exemption provided by Section 4(2) of the Securities Act of 1933 and Rule 506 of
Regulation D promulgated thereunder.
Issuer Purchases of Equity Securities
None.
Performance Graph
The following graph and table compare the cumulative total stockholder
return on our common stock from December 31, 2001 through December 31, 2006 with
the performance of: (i) the Russell 2000 Index and (ii) the DJ Select Microcap
indices. We have created these comparisons using data derived from Yahoo!
Finance. The comparisons reflected in the graph and table are not intended to
forecast the future performance of our stock and may not be indicative of future
performance. The graph and table assume investments of $100 in our stock and
each index on December 31, 2001.
[GRAPHIC OMITTED]
Cumulative Total Return
2001 2002 2003 2004 2005 2006
----------- --------- ----------- ----------- ----------- -----------
vFinance, Inc. 100.00 15.79 33.33 43.86 29.82 36.84
Russell 2000 100.00 78.42 114.00 133.38 137.81 161.24
DJ Select Microcap 100.00 97.28 153.90 178.56 192.42 221.98
-29-
ITEM 6. SELECTED FINANCIAL DATA.
As of and for the Years Ended December 31,
------------------------------------------------------------------------------------------
2006 2005 2004 2003 2002
(Restated (Restated (Restated (Restated
and Revised) and Revised) and Revised) and Revised)
---------------- ---------------- ----------------- ----------------- --------------
(In thousands, except per share data)
Net revenues $ 38,594.9 $ 26,070.7 $ 26,500.0 $ 24,601.8 $ 19,399.7
Income (loss) from operations (2,258.4) (1,162.2) 1,517.8 493.5 (1,796.5)
Gain on forgiveness of debt - - 1,500.0 - -
Net income (loss) $ (2,133.5) $ (999.6) $ 2,454.8 $ 320.4 $ (2,431.9)
Net income (loss) per share: basic $ (0.04) $ (0.02) $ 0.07 $ 0.01 $ (0.09)
Wt. avg. shares outstanding: basic 48,714.8 40,049.7 33,773.3 29,609.1 26,716.4
Net income (loss) per share: diluted $ (0.04) $ (0.02) $ 0.07 $ 0.01 $ (0.09)
Wt. avg. shares outstanding: diluted 48,714.8 40,049.7 35,840.2 29,963.4 26,716.4
Total assets $ 11,643.2 $ 8,897.0 $ 9,814.1 $ 6,378.5 $ 5,129.2
Long-term debt including capital lease, 125.6 $ 225.1 $ - $ 1,889.6 $ 1,701.6
obligations, net of current portion
Shareholders' equity $ 6,899.7 $ 4,974.5 $ 6,085.7 $ 1,273.9 $ 849.4
See Notes 1, 4, 8 and 9 to our Consolidated Financial Statements in Part
II, Item 8 of this Annual Report of Form 10-K for discussions of the effect of
restating and revising certain items in our historical financial statements,
acquisitions, shareholders' equity and stock options, respectively, and their
effect on comparability of year-to-year data. See "Item 5. Market for the
Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of
Equity Securities" for a discussion of our dividend policy.
-30-
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.
You should read the following discussion in conjunction with Part I,
including matters set forth in the "Risk Factors" section of this Form 10-K, and
our Consolidated Financial Statements and notes thereto included elsewhere in
this Form 10-K.
We have restated and revised certain amounts in our 2005 and 2004
Consolidated Financial Statements as a result of comments we received from the
staff of the Securities and Exchange Commission. As a result of these
restatements and revisions, our total revenues and income (loss) from operations
increased (decreased) from previously reported amounts by $244.4 thousand and
$(137.7) thousand, respectively, in 2005 and $170.7 thousand and $(17.6)
thousand, respectively, in 2004. Additionally, our net income (loss) increased
(decreased) from previously reported amounts by $137.7 thousand ($0.01 per
share) and $(128.0) thousand ($0.01 per share) in 2005 and 2004, respectively.
See Note 1 to our Consolidated Financial Statements included in Item 8 of this
Annual Report on Form 10-K for additional discussion of the restatement and
revision.
In addition to the aforementioned restatement and revision, certain
reclassifications of amounts previously reported have been made to the
accompanying Consolidated Financial Statements in order to maintain consistency
and comparability between periods presented.
Overview
We are a global financial services company which specializes in high growth
opportunities. Our insight into this marketplace flows from three principal
lines of business: providing investment banking and advisory services to micro,
small and mid-cap high growth companies; making markets in over 3,000 micro and
small cap stocks; and offering information services on our website, a leading
destination for emerging companies seeking capital and investors seeking
opportunities. Due to our focus, we believe we are uniquely positioned to offer
alternative investments to institutional and high net-worth investors seeking to
outperform market indices in addition to offering a full range of investment
options. With over 40 offices in the U.S. and other parts of the world, we serve
more than 12,000 corporate, institutional and high net worth clients. vFinance
Investments, Inc. ("vFinance Investments, Inc.") and EquityStation, Inc.
("EquityStation"), both our subsidiaries, are broker-dealers registered with the
Securities and Exchange Commission ("SEC"), and members of National Association
of Securities Dealers ("NASD") and Securities Investor Protection Corporation
("SIPC"). vFinance Investments is also a member of the National Futures
Association ("NFA").
In May 2006, we completed the acquisition of select assets of Sterling
Financial Group (the "Sterling Financial Acquisition"), following the
acquisition of certain assets of Global Partners Securities, Inc. ("Global") and
100% of the issued and outstanding equity securities of EquityStation in
November 2004 (the "Global Acquisition"). These acquisitions are reflected in
our financial statements from their respective transaction dates, affecting the
comparability of our results of operations in the years ended December 31, 2006,
2005 and 2004, as discussed in the sections that follow. See Note 4,
"Acquisitions," to our Consolidated Financial Statements included in Item 8
contained in this Annual Report on Form 10-K for further information about the
Sterling Financial and Global Acquisitions.
-31-
The largest portion of our revenues, 62%, 72% and 65% in 2006, 2005 and
2004, respectively, was attributable to retail brokerage commissions and other
brokerage-related income generated by our wholly owned broker-dealer
subsidiaries, vFinance Investments and EquityStation. Our retail brokerage
operations buy and sell securities for our customers from other dealers on an
agency basis, and charge our customers a commission for our services. Such
commission revenue is derived from brokerage transactions in listed and
over-the-counter securities and mutual fund securities. We also generated 25%,
16% and 19% of our revenues through trading profits generated in our market
making activities in 2006, 2005 and 2004, respectively. The majority of our
remaining revenues are derived primarily from investment banking-related success
and consulting fees.
We reported a net loss of $2.1 million ($0.04 per basic and diluted share)
in 2006, compared to $1.0 million ($0.02 per basic and diluted share) in 2005.
Our revenues increased $12.5 million in 2006, or 48%, principally as a result of
the Sterling Financial Acquisition and improved market conditions for our
investment banking and trading businesses. Increases in compensation,
commissions and benefit expenses, clearing and transaction costs and occupancy
and equipment costs related to the increased revenues and the Sterling Financial
Acquisition offset these increased revenues. Additionally, we recorded $448.2
thousand of stock-based compensation expense in 2006 compared to $19.4 thousand
in 2005, as a result of the implementation of Statement of Financial Accounting
Standards No. 123 (revised 2004), "Share Based Payment" ("SFAS No. 123R"). Our
depreciation and amortization expense also increased by $512.4 thousand in 2006,
primarily as a result of amortization expense recorded in connection with the
Sterling Financial Acquisition.
We reported a net loss of $1.0 million ($0.02 per basic and diluted share)
in 2005, compared to net income of $2.4 million ($0.07 per basic and diluted
share) in 2004. During 2005, our revenues decreased $429.3 thousand, or 2%,
primarily as a result of less favorable market conditions for the investment
banking and trading businesses in 2005 than in 2004, while our clearing and
transaction costs increased $737.9 thousand in 2005, principally as a result of
the addition of the EquityStation platform business and increases in execution
fees for wholesale trading. Additionally, our depreciation and amortization
expense increased $280.2 thousand in 2005, primarily as a result of the Global
Acquisition, and we recorded a goodwill impairment charge of $420.0 thousand.
During 2004, we recorded a $1.5 million gain on forgiveness of debt, in
connection with the termination of a credit agreement.
-32-
Results of Operations
The following table and discussion summarizes the changes in the major
revenue and expense categories for the past three years, with 2005 and 2004
having been restated:
As of and for the Years Ended December 31,
------------------------------------------------------------------------------------------
2006 2005 Change % Change 2004 Change % Change
------------ ------------ ----------- ----------------------- ------------- ------------
Revenues:
Commissions - agency $ 20,323.7 $ 15,941.2 $ 4,382.5 27 % $ 14,571.9 $ 1,369.3 9 %
Trading profits 9,606.0 4,177.4 5,428.6 130 % 5,156.8 (979.4) (19)%
Success fees 4,523.5 2,250.5 2,273.0 101 % 3,395.6 (1,145.1) (34)%
Other brokerage related income 3,546.0 2,837.6 708.4 25 % 2,567.5 270.1 11 %
Consulting fees 375.4 523.6 (148.2) (28)% 370.8 152.8 41 %
Other 220.3 340.4 (120.1) (35)% 437.4 (97.0) (22)%
------------ ------------ ----------- --------- ------------- ------------- -----------
Total revenues 38,594.9 26,070.7 12,524.2 48 % 26,500.0 (429.3) (2)%
------------ ------------ ----------- --------- ------------- ------------- -----------
Compensation, commissions and benefits 31,232.0 20,313.3 10,918.7 54 % 19,791.0 522.3 3 %
Clearing and transaction costs 4,337.2 2,977.2 1,360.0 46 % 2,239.3 737.9 33 %
General and administrative costs 3,158.8 2,332.8 826.0 35 % 2,310.2 22.6 1 %
Occupancy and equipment costs 1,166.6 743.3 423.3 57 % 475.6 267.7 56 %
Depreciation and amortization 958.7 446.3 512.4 115 % 166.1 280.2 169 %
Goodwill impairment - 420.0 (420.0) 100 % - 420.0 nm
------------ ------------ ----------- --------- ------------- ------------- -----------
Total operating costs 40,853.3 27,232.9 13,620.4 50 % 24,982.2 2,250.7 9 %
------------ ------------ ----------- --------- ------------- ------------- -----------
Income (loss) from operations (2,258.4) (1,162.2) (1,096.2) 94 % 1,517.8 (2,680.0) (177)%
------------ ------------ ----------- --------- ------------- ------------- -----------
Other income (expenses):
Gain on forgiveness of debt - - - 0 % 1,500.0 (1,500.0) (100)%
Interest income 85.3 82.6 2.7 3 % 35.1 47.5 135 %
Interest expense (59.7) (30.7) (29.0) 94 % (394.4) 363.7 (92)%
Dividend income 22.5 5.9 16.6 281 % 27.3 (21.4) (78)%
Other income (expense), net 76.8 104.8 (28.0) (27)% (231.0) 335.8 nm
------------ ------------ ----------- --------- ------------- ------------- -----------
Total other income (expense) 124.9 162.6 (37.7) (23)% 937.0 (774.4) (83)%
------------ ------------ ----------- --------- ------------- ------------- -----------
Income (loss) before income taxes (2,133.5) (999.6) (1,133.9) 113 % 2,454.8 (3,454.4) (141)%
Income tax benefit (provision) - - - nm (40.0) 40.0 (100)%
------------ ------------ ----------- --------- ------------- ------------- -----------
Net income (loss) $ (2,133.5) $ (999.6) $ (1,133.9) 113 % $ 2,414.8 $ (3,414.4) (141)%
============ ============ =========== ========= ============= ============= ===========
nm - not meaningful
-33-
Revenues
As of and for the Years Ended December 31,
-------------------------------------------------------------------------------------
2006 2005 Change % Change 2004 Change % Change
(Restated (Restated
and Revised) and Revised)
------------ ----------- ------------ -------- ------------ ----------- ----------
Revenues:
Commissions - agency $ 20,323.7 $ 15,941.2 $ 4,382.5 27 % $ 14,571.9 $ 1.369.3 9 %
Trading profits 9,606.0 4,177.4 5,428.6 130 % 5,156.8 (979.4) (19)%
Success fees 4,523.5 2,250.5 2,273.0 101 % 3,395.6 (1,145.1) (34)%
Other brokerage related income 3,546.0 2,837.6 708.4 25 % 2,567.5 270.1 11 %
Consulting fees 375.4 523.6 (148.2) (28)% 370.8 152.8 41 %
Other 220.3 340.4 (120.1) (35)% 437.4 (97.0) (22)%
------------ ----------- ------------ -------- ------------ ----------- --------
Total revenues $ 38,594.9 $26,070.7 $ 12,524.2 48 % $ 26,500.0 (429.3) (2)%
============ =========== ============ ======== ============ =========== ========
In 2006, total revenues increased $12.5 million, or 48%, primarily as a
result of the Sterling Financial Acquisition and more favorable market
conditions. Approximately 43% of the $12.5 million increase is attributable to
increased trading profits, derived from the customer relationships acquired from
Sterling Financial in May 2006 and generally more favorable trading conditions
in our market making activities. An additional 35% of the 2006 revenue increase
resulted from higher agency commissions, attributable to the addition of new
brokers, through both the Sterling Financial Acquisition and other brokers hired
independently. The majority of the remaining increase was due to higher revenues
from success fees relating to investment banking transactions, resulting
primarily from more favorable market conditions in 2006. Non-cash revenues
derived from success fees increased to $2.0 million in 2006 from $487.5 thousand
in 2005.
Total revenues decreased 2% in 2005 compared to 2004, primarily as a result
of 19% and 34% decreases in trading profits and success fees, respectively,
resulting from less favorable market conditions in 2005 than in 2004 for the
trading and investment banking businesses, respectively. Partially offsetting
these factors, was a 9% increase in retail agency commissions, attributable to a
$1.6 million increase in revenues from the customer relationships recorded in
the Global Acquisition, derived from having a full year of operations in 2005,
compared to two months in 2004.
-34-
Operating Expenses
As of and for the Years Ended December 31,
----------------------------------------------------------------------------------------
2005 2004
(Restated % (Restated %
2006 and Revised) Change Change and Revised) Change Change
------------ ----------- ------------ --------- ----------------- ----------- --------
Compensation, commissions and benefits $ 31,232.0 $ 20,313.3 $ 10,918.7 54 % $ 19,791.0 $ 522.3 3 %
Clearing and transaction costs 4,337.2 2,977.2 1,360.0 46 % 2,239.3 737.9 33 %
General and administrative costs 3,158.8 2,332.8 826.0 35 % 2,310.2 22.6 1 %
Occupancy and equipment costs 1,166.6 743.3 423.3 57 % 475.6 267.7 56 %
Depreciation and amortization 958.7 446.3 512.4 115 % 166.1 280.2 169 %
Goodwill impairment - 420.0 (420.0) (100)% - 420.0 nm
------------ ----------- ------------ --------- ----------------- ----------- --------
Total operating costs $ 40,853.3 $ 27,232.9 $ 13,620.4 50 % $ 24,982.2 $ 2,250.7 9 %
============ =========== ============ ========= ================= =========== ========
nm - not meaningful
Compensation, commissions and benefits.
Compensation, commissions and benefits increased $10.9 million, or 54%, in
2006. Compensation, commissions and benefits are correlated with to our
revenues, which increased 48% in 2006, primarily as a result of the Sterling
Financial Acquisition. We also recorded $448.2 thousand of compensation expense
in connection with the adoption of SFAS No. 123R, effective January 1, 2006.
Additional increases in compensation, commissions and benefits are attributable
to increased benefit costs, particularly health insurance premiums. Non-cash
compensation paid increased to $1.4 million in 2006 from $158.1 thousand in
2005.
Compensation, commissions and benefits increased $522.3 thousand, or 3%, in
2005, primarily as a result of increased personnel to support our growth
resulting, in part, from the Global Acquisition, including the addition of a new
senior management positions and new staff positions.
Clearing and transaction costs.
Clearing and transaction costs increased $1.4 million in 2006, or 46%,
primarily as a result of an increase in transaction volume attributable to
customer relationships acquired in the Sterling Financial Acquisition and the
addition of other independent brokers.
Clearing and transaction costs increased $737.9 thousand in 2005, or 33%,
primarily as a result of the addition of the EquityStation trading platform
business and increases in execution fees for wholesale trading, resulting in
higher average transaction costs associated with trading activities.
General and administrative costs.
General and administrative expenses increased $826.0 thousand in 2006, or
35%, primarily as a result of (i) a $303.0 thousand increase in legal fees,
primarily associated with litigation and arbitration matters, (ii) $261.3
thousand of non-cash costs associated with the issuance of equity in connection
with arbitration settlements, and (iii) the forgiveness of $215.0 thousand due
from an unconsolidated affiliate.
General and administrative expenses increased $22.6 thousand in 2005, or
1%, primarily as a result of the addition of a disaster recovery site in Mt.
Laurel, New Jersey. In addition, we incurred non-cash expenses in 2005 of $80.0
thousand for the impairment of our investment in an unconsolidated affiliate.
-35-
Occupancy and equipment costs.
Occupancy and equipment expenses increased $423.3 thousand in 2006, or 57%,
primarily as a result of the occupancy and equipment costs associated with the
Sterling Financial Acquisition.
In 2005, occupancy and equipment expenses increased $267.7 thousand, or
56%, primarily as a result of increased rent expense due to expansion of our
leased facilities at the corporate offices in Boca Raton and New York City and
the addition of a disaster recovery leased location in Mt. Laurel, New Jersey.
Depreciation and amortization.
Depreciation and amortization increased $512.4 thousand in 2006, or 115%,
primarily as a result of the amortization expense associated with the customer
relationships from the Sterling Acquisition.
In 2005, depreciation and amortization increased $280.2 thousand, or 169%,
primarily as a result of the amortization expense associated with the customer
relationships from the EquityStation Acquisition.
Goodwill impairment.
In 2005, we recorded goodwill impairment charges of $420.0 thousand to
write-off goodwill from a prior period acquisition, when certain brokers left
the firm and we determined there was no longer value remaining in the goodwill
recorded in connection with the acquisition. We had no goodwill remaining at
December 31, 2006 or 2005.
Other Income (Expense)
As of and for the Years Ended December 31,
-----------------------------------------------------------------------------------------
2005 2004
(Restated % (Restated %
2006 and Revised) Change Change and Revised) Change Change
Other income (expenses): ------------ ----------- ------------ --------- ----------------- ----------- ---------
Gain on forgiveness of debt $ - $ - $ - nm $ 1,500.0 $(1,500.0) (100)%
Interest income 85.3 82.6 2.7 3 % 35.1 47.5 135 %
Interest expense (59.7) (30.7) (29.0) 94 % (394.4) 363.7 (92)%
Dividend income 22.5 5.9 16.6 281 % 27.3 (21.4) (78)%
Other income (expense), net 76.8 104.8 (28.0) (27)% (231.0) 335.8 nm
------------ ----------- ------------ --------- ----------------- ----------- ----------
Total other income (expense) $ 124.9 $ 162.6 $ (37.7) (23)% $ 937.0 $ (774.4) (83)%
============ =========== ============ ========= ================ ============ ==========
nm - not meaningful
During 2004, we recorded a $1.5 million gain on forgiveness of debt as a
result of an agreement between us and our clearing broker, pursuant to which our
clearing broker agreed to repay a credit facility under which we owed $1.5
million. See Note 11 to the Consolidated Financial Statements contained in Item
8 to this Annual Report on Form 10-K for additional discussion on this gain.
Interest expense increased $29.0 thousand in 2006, or 94% primarily as a
result of an increase in capital lease obligations arising from acquisitions of
computer equipment. Interest expense decreased $363.7 thousand in 2005, or 92%,
primarily as a result of the elimination of interest expenses associated with
the $1.5 million of debt forgiven in 2004.
-36-
Other income, net decreased $28.0 thousand in 2006, or 27%, primarily
because 2005 results included income from an arbitration settlement, which did
not recur in 2006, Partially offseting this factor was by sublease rental income
recorded in connection with the sublease of property assumed in connection with
the Sterling Financial Acquisition.
We recorded other income, net of $104.8 thousand in 2005, compared to other
expense, net of $231.0 thousand in 2004. Other income, net included $62.5
thousand received in the settlement of a legal matter in 2005. Other expenses,
net, were comprised primarily of $231.6 thousand of conversion premium expense
recorded in connection with a note conversion in 2004.
Income Tax Provision (Benefit)
We account for income taxes in accordance with the provision of SFAS No.
109, "Accounting for Income Taxes," which requires the recognition of deferred
tax assets and liabilities at tax rates expected to be in effect when these
balances reverse. Future tax benefits attributable to temporary differences are
recognized to the extent that the realization of such benefits is more likely
than not. We have concluded that it is more likely than not that our deferred
tax assets as of December 31, 2006 and 2005 will not be realized based on the
scheduling of deferred tax liabilities and projected taxable income. The amount
of the deferred tax assets actually realized, however, could vary if there are
differences in the timing or amount of future reversals of existing deferred tax
liabilities or changes in the actual amounts of future taxable income. Should we
determine that we will be able to realize all or part of the deferred tax asset
in the future, an adjustment to the deferred tax asset will be recorded in the
period such determination is made.
We did not record a provision for income taxes in 2006 or 2005 as a result
of the net loss we recorded in those periods.
We recorded a provision for income taxes of $40.0 thousand in 2004 as a
result of Alternative Minimum Taxes under the Internal Revenue Service Code.
Liquidity and Capital Resources
Historically, we have satisfied our liquidity and regulatory capital needs
through the issuance of equity and debt securities. As of December 31, 2006,
liquid assets consisted primarily of cash and cash equivalents of $4.2 million
and marketable securities of $1.4 million, for a total of $5.6 million, which is
approximately $300.0 thousand higher than $5.3 million in liquid assets as of
December 31, 2005. As of December 31, 2006, we had long-term capital lease
obligations of $125.6 thousand, net of current obligations of $210.8 thousand.
Both vFinance Investments and EquityStation are subject to the SEC Uniform
Net Capital Rule (rule 15c3-1), which requires the maintenance of minimum net
capital and requires that the ratio of aggregate indebtedness to net capital,
both as defined, shall not exceed 15 to 1 (and the rule of the "applicable"
exchange also provides that equity capital may not be withdrawn or cash
dividends paid if the resulting net capital ratio would exceed 10 to 1). At
December 31, 2006, vFinance Investments had net capital of $1.5 million, which
was $514.5 thousand in excess of its required net capital of $1.0 million.
EquityStation had net capital of $427.3 thousand that was $327.3 thousand in
excess of its required net capital of $100.0 thousand.
-37-
For the periods ended December 31, 2006 and 2005, we had gross deferred tax
assets of $5.3 million and $4.6 million, respectively, which were offset by 100%
valuation allowances. The valuation allowances were recorded against certain
deferred tax assets that were generated from net operating losses. In evaluating
whether we would recover these deferred tax assets, we have not assumed any
future taxable income in the jurisdictions associated with these carry-forwards.
Based on our history of generating operating losses, management believes the
ability to realize the benefit of net operating loss carry-forwards to offset
future taxable income is uncertain. However, future income generation and/or the
use of tax planning strategies to recover these deferred tax assets could lead
to the reversal of the valuation allowances and a reduction in future income tax
expense. We believe that our estimates for the valuation allowance are
appropriate, based on current facts and circumstances.
Cash and cash equivalents increased (decreased) by $(222.2) thousand,
$(828.9) thousand and $1.5 million during 2006, 2005 and 2004, respectively. The
major components of these changes are discussed below.
Cash provided by (used in) operating activities was $(55.6) thousand in
2006 compared to $(708.5) thousand in 2005 and $1,409.8 thousand in 2004. Cash
provided by (used in) operating activities includes net income adjusted for
non-cash items and the effects of changes in working capital including changes
in trading securities. Cash used in operating activities decreased by $652.9
million in 2006, primarily as a result of a $405.2 thousand decrease in amounts
due from clearing brokers and accounts receivable and a $716.0 thousand increase
in accrued compensation, partially offset by a $413.4 increase in trading
securities.
Cash used in operating activities was $708.5 thousand in 2005, compared to
cash provided by operating activities of $1.4 million in 2004, primarily as a
result of a $3.4 million reduction in net income, partially offset by the effect
of a $1.5 million non-cash gain on forgiveness of debt included in net income in
2004.
Cash provided by (used in) investing activities in 2006 was $41.9 thousand
compared to $(90.5) thousand in 2005 and $79.0 thousand in 2004. Cash used in
investing activities included capital expenditures of $222.7 thousand, $125.7
thousand and $245.8 thousand in 2006, 2005 and 2004, respectively, excluding
non-cash additions to property and equipment through capital leases. Cash
provided by investing activities includes the proceeds from sales of securities
we received as success fees for investment banking services of $426.5 thousand,
$35.2 thousand and $268.6 thousand in 2006, 2005 and 2004, respectively. Cash
used in investing activities in 2006 also included a $161.9 thousand investment
in an unconsolidated affiliate.
Cash used in financing activities in 2006 was $208.5 thousand compared to
$29.9 thousand in 2005 and $16.3 thousand in 2004. Cash used in financing
activities was comprised of repayments of capital lease obligations of $208.5
thousand, $143.4 thousand and $16.3 thousand in 2006, 2005 and 2004,
respectively, partially offset by proceeds from the exercise of stock options of
$113.5 thousand in 2005. Repayments of capital lease obligations increased in
2006 as a result of new capital lease agreements for computer equipment, which
we entered into during 2005 and 2006 in connection with the implementation of
our disaster recovery plan and growth.
-38-
We believe cash on hand is sufficient to meet our working capital
requirements over the next twelve months. However, we may seek additional debt
or equity financing in order to carry out our 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 thereof. We cannot be certain
that additional debt or equity financing will be available when required or, if
available, that we can secure it on terms satisfactory to us.
Contractual Obligations
The following table summarizes our future contractual commitments as of
December 31, 2006, consisting of debt payments related to capital leases and
future minimum lease payments under all non-cancelable operating leases with
initial or remaining terms in excess of one year.
(In thousands) Total 2007 2008 - 2009 2010 - 2011 2012 and later
------------- ------------ ------------ ------------ ----------------
Capital lease obligations $ 361.8 $ 242.4 $ 119.4 $ - $ -
Operating lease obligations 5,864.1 1,356.4 1,974.9 1,246.2 1,286.6
------------- ------------ ------------ ------------ ----------------
Total $ 6,225.9 $ 1,598.8 $ 2,094.3 $ 1,246.2 $ 1,286.6
============= ============ ============ ============ ================
Off Balance-Sheet Arrangements
We were not a party to any off-balance sheet arrangements during the three
years ended December 31, 2006. In particular, we do not have any interest in
so-called limited purpose entities, which include special purpose entities and
structured finance entities.
Critical Accounting Policies and Estimates
This discussion and analysis of financial condition and results of
operations is based on our Consolidated Financial Statements, which have been
prepared in accordance with United States generally accepted accounting
principles. The preparation of these financial statements requires our
management to make estimates and judgments that affect the reported amounts of
assets, liabilities, revenues, and expenses, as well as related disclosures of
contingent assets and liabilities. We evaluate our estimates on an ongoing basis
and we base our estimates on historical experience and various other assumptions
we deem reasonable to the situation. These estimates and assumptions form the
basis for making judgments about the carrying values of assets and liabilities
that are not readily apparent from other sources. Changes in our estimates could
materially impact our results of operations and financial condition in any
particular period. Note 1 to our Consolidated Financial Statements includes a
summary of the significant accounting policies and methods used in the
preparation of our Consolidated Financial Statements. Based on the high degree
of judgment or complexity in their application, we consider our critical
accounting policies and estimates to be:
-39-
REVENUE RECOGNITION. We periodically receive equity instruments, which
include stock purchase warrants and common and preferred stock from companies as
part of compensation for investment-banking services, which are classified as
available-for-sale securities in the accompanying Consolidated Balance Sheets.
Primarily all such equity instruments are received from small public companies
and are typically restricted as to resale, generally receiving registration
rights within one year. When we receive equity instruments as compensation for
investment banking services, revenue is recognized based on the fair value of
these instruments, in accordance with SFAS No. 115 "Accounting for Certain
Investments in Debt and Equity Securities" and EITF 00-8 "Accounting by a
Grantee for an Equity Instrument to be received in Conjunction with Providing
Goods or Services." 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. The actual amount of cash proceeds
realized from the disposition of these securities may differ materially from the
amount of revenue recorded, as a result of changes in market values between the
date of receipt and the date the security 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.
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 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 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.
FAIR VALUE. "Investments in trading securities" and "Securities sold, not
yet purchased" on our Consolidated Balance Sheets are carried at fair value or
amounts that approximate fair value, with related unrealized gains and losses
recognized in our results of operations. The estimates of fair value are
fundamental to our financial condition and results of operations and, in certain
circumstances, require complex judgments. vFinance Investments relies upon its
clearing firms to provide us with these fair values, because the clearing firms
use market data services that provide fair values of securities based on current
market prices. In the case of restricted securities, we further adjust the fair
values of securities received to reflect the restrictions.
-40-
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 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.
New Accounting Pronouncements
In December 2004, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 123R, and in March 2005 the SEC issued Staff Accounting Bulletin
("SAB") 107 regarding its interpretation of SFAS No. 123R. The standard requires
companies to expense the grant-date fair value of stock options and other
equity-based compensation issued to employees and is effective for annual
periods beginning after June 15, 2005. Effective January 1, 2006, we adopted
SFAS No. 123R and related interpretive guidance issued by the FASB and SEC using
the modified prospective transition method. Under the modified prospective
transition method, SFAS No. 123R applies to new awards modified, repurchased or
cancelled after the required effective date. Additionally, compensation cost for
the portion of the awards for which the requisite service period has not been
rendered as of the required effective date is recognized as the requisite
service is rendered on or after the required effective date. Accordingly, our
Consolidated Financial Statements have not been restated for prior periods to
reflect the adoption of SFAS No. 123R.
In May 2005, the FASB issued SFAS No. 154, "Accounting Changes and Error
Corrections -A Replacement of APB Opinion No. 20 and FASB Statement No. 3." SFAS
No. 154 requires that a voluntary change in accounting principle be applied
retroactively with all prior period financial statements presented on the new
accounting principle, unless it is impractical to do so. This statement also
provides that a change in method of depreciating or amortizing a long-lived
non-financial asset be accounted for as a change in estimate (prospectively)
that was effected by a change in accounting principle. Additionally, correction
of errors in previously issued financial statements should be termed a
"restatement." The new standard is effective for accounting changes and
corrections of errors made in fiscal years beginning after December 15, 2005. We
adopted SFAS No. 154 effective January 1, 2006, which did not have a material
impact on our Consolidated Financial Statements. See Notes 1 and 9 to our
Consolidated Financial Statements included in Item 8 of this Annual Report on
Form 10-K for additional discussion of SFAS No. 123R.
In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements."
SFAS No. 157 defines fair value, establishes a framework for measuring fair
value under generally accepted accounting principles, and expands disclosures
about fair value measurements. This statement is effective for financial
statements issued for fiscal years beginning after November 15, 2007, and
interim periods within those fiscal years. The adoption of SFAS No. 157 is not
expected to have a material impact on our Consolidated Financial Statements.
In September 2006, the SEC issued SAB 108 to address diversity in practice
in quantifying financial statement misstatements and the potential for the build
up of improper amounts on the balance sheet. SAB 108 identifies the approach
that registrants should take when evaluating the effects of unadjusted
misstatements on each financial statement, the circumstances under which
corrections of misstatements should result in a revision to financial statements
and disclosures related to the correction of misstatements. SAB 108 is effective
for any report for an interim period of the first fiscal year ending after
November 16, 2006. The adoption of SAB 108 did not have a material impact on our
Consolidated Financial Statements.
-41-
In September 2006, the SEC issued SAB 108, to address diversity in practice
in quantifying financial statement misstatements and the potential for the build
up of improper amounts on the balance sheet. SAB 108 identifies the approach
that registrants should take when evaluating the effects of unadjusted
misstatements on each financial statement, the circumstances under which
corrections of misstatements should result in a revision to financial
statements, and disclosures related to the correction of misstatements. SAB 108
is effective for any report for an interim period of the first fiscal year
ending after November 16, 2006. The adoption of SAB 108 did not have a material
impact on our Consolidated Financial Statements.
In June 2006, the FASB issued FASB Interpretation No. ("FIN") 48,
"Accounting for Uncertainty in Income Taxes." This interpretation applies to all
tax positions accounted for in accordance with SFAS No. 109, Accounting for
Income Taxes. FIN 48 clarifies the application of FASB Statement No. 109 by
defining the criteria that an individual tax position must meet in order for the
position to be recognized within the financial statements. It also provides
guidance on measurement, de-recognition, classification, interest and penalties,
accounting in interim periods, disclosure and transition for tax positions. This
interpretation is effective for fiscal years beginning after December 15, 2006,
with earlier adoption permitted. The adoption of FIN 48 is not expected to have
a material impact on our Consolidated Financial Statements.
In February 2006, the FASB issued SFAS No. 155, "Accounting for Certain
Hybrid Financial Instruments" which amends SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities" and SFAS No. 140, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities."
SFAS No. 155 simplifies the accounting for certain derivatives embedded in other
financial instruments by allowing them to be accounted for as a whole if the
holder elects to account for the whole instrument on a fair value basis. SFAS
No. 155 also clarifies and amends certain other provisions of SFAS No.133 and
SFAS No.140. SFAS No.155 is effective for all financial instruments acquired,
issued or subject to a remeasurement event occurring in fiscal years beginning
after September 15, 2006. The adoption of SFAS No. 155 is not expected to have a
material impact on our Consolidated Financial Statements.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
We have exposure to market risk, and periodically hedge against that risk.
We do not hold or issue any derivative financial instruments for trading or
other speculative purposes. We are exposed to market risk associated with
changes in the fair market value of the marketable securities that we hold. Our
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 we hold 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 we may incur losses in its principal trading activities.
-42-
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Registered Public Accounting Firm .................... 44
Audited Financial Statements:
Consolidated Balance Sheets as of December 31, 2006 and 2005 ............... 45
Consolidated Statements of Operations for the years ended
December 31, 2006, 2005 and 2004 ...................................... 46
Consolidated Statements of Shareholders' Equity for the years ended
December 31, 2006, 2005 and 2004 ...................................... 47
Consolidated Statements of Cash Flows for the years ended
December 31, 2006, 2005 and 2004 ...................................... 48
Notes to Consolidated Financial Statements ................................. 49
-43-
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders vFinance Inc., & Subsidiaries
We have audited the accompanying consolidated balance sheet of vFinance Inc., &
Subsidiaries, as of December 31, 2006 and 2005 (as restated) and the related
consolidated statements of operations, shareholders' equity and cash flows for
the years ended December 31, 2006, 2005 (as restated) and 2004 (as restated).
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of vFinance Inc., &
Subsidiaries, at December 31, 2006 and 2005 (as restated), and the results of
its operations and its cash flows for the years ended December 31, 2006, 2005
(as restated) and 2004 (as restated), in conformity with accounting principles
generally accepted in the United States.
/s/ Sherb & Co., LLP
Certified Public Accountants
Boca Raton, Florida
March 23, 2007
-44-
vFINANCE, INC.
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31,
(In thousands, except share and per share data)
2006 2005
(Restated and
Revised)
------------- -----------
Assets:
Current assets:
Cash and cash equivalents $ 4,205.2 $ 4,427.4
Due from clearing broker 299.9 705.1
Marketable investment securities:
Trading securities 1,009.4 596.0
Available-for-sale securities 414.6 274.3
Accounts receivable 123.8 408.8
Forgivable loans - employees, current portion 58.8 -
Notes receivable - employees 128.1 67.6
Prepaid expenses and other current assets 184.0 130.0
------------- -----------
Total current assets 6,423.8 6,609.2
------------- -----------
Property and equipment, net 661.0 692.6
Customer relationships, net 4,115.4 1,281.8
Other assets 443.0 139.5
Due to/from related parties - 173.9
------------- -----------
Total assets $ 11,643.2 $ 8,897.0
============= ===========
Liabilities and stockholders' equity:
Current liabilities:
Accounts payable $ 821.7 $ 714.2
Accrued compensation 2,394.6 1,678.6
Other accrued liabilities 800.7 825.6
Securities sold, not yet purchased 41.6 42.4
Capital lease obligations, current portion 210.8 187.8
Other 348.5 248.8
------------- -----------
Total current liabilities 4,617.9 3,697.4
------------- -----------
Capital lease obligations, long term 125.6 225.1
Shareholders' Equity:
Series A Convertible Preferred Stock $0.01 par value,
122,500 shares authorized, 0 shares issued and outstanding - -
Series B Convertible Preferred Stock $0.01 par value,
50,000 shares authorized, 0 shares issued and outstanding - -
Common stock $0.01 par value, 100,000,000 shares authorized
54,429,876 and 40,126,133 shares issued and outstanding 544.3 401.2
Additional paid-in capital 31,147.4 27,175.0
Accumulated deficit (24,149.5) (22,016.0)
Accumulated other comprehensive income (loss) (642.5) (585.7)
------------- -----------
Total shareholders' equity 6,899.7 4,974.5
------------- -----------
Total liabilities and shareholders' equity $ 11,643.2 $ 8,897.0
============= ===========
The accompanying notes are an integral component of these financial statements.
-45-
vFINANCE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31,
(In thousands, except per share data)
2006 2005 2004
(Restated and (Restated and
Revised) Revised)
------------- ------------ ------------
Revenues:
Commissions - agency $20,323.7 $15,941.2 $14,571.9
Trading profits 9,606.0 4,177.4 5,156.8
Success fees 4,523.5 2,250.5 3,395.6
Other brokerage related income 3,546.0 2,837.6 2,567.5
Consulting fees 375.4 523.6 370.8
Other 220.3 340.4 437.4
------------- ------------ ------------
Total revenues 38,594.9 26,070.7 26,500.0
------------- ------------ ------------
Compensation, commissions and benefits 31,232.0 20,313.3 19,791.0
Clearing and transaction costs 4,337.2 2,977.2 2,239.3
General and administrative costs 3,158.8 2,332.8 2,310.2
Occupancy and equipment costs 1,166.6 743.3 475.6
Depreciation and amortization 958.7 446.3 166.1
Goodwill impairment - 420.0 -
------------- ------------ ------------
Total operating costs 40,853.3 27,232.9 24,982.2
------------- ------------ ------------
Income (loss) from operations (2,258.4) (1,162.2) 1,517.8
------------- ------------ ------------
Other income (expenses):
Gain on forgiveness of debt - - 1,500.0
Interest income 85.3 82.6 35.1
Interest expense (59.7) (30.7) (394.4)
Dividend income 22.5 5.9 27.3
Other income (expense), net 76.8 104.8 (231.0)
------------- ------------ ------------
Total other income (expense) 124.9 162.6 937.0
------------- ------------ ------------
Income (loss) before income taxes (2,133.5) (999.6) 2,454.8
Income tax benefit (provision) - - (40.0)
------------- ------------ ------------
Net income (loss) $(2,133.5) $ (999.6) $ 2,414.8
============= ============ ============
Net income (loss) per share: basic $ (0.04) $ (0.02) $ 0.07
============= ============ ============
Weighted average number of shares
outstanding: basic 48,714.8 40,049.7 33,773.3
============= ============ ============
Net income (loss) per share: diluted $ (0.04) $ (0.02) $ 0.07
============= ============ ============
Weighted average number of shares
outstanding: diluted 48,714.8 40,049.7 35,840.2
============= ============ ============
The accompanying notes are an integral component of these financial statements.
-46-
vFINANCE, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY AND COMPREHENSIVE INCOME
FOR THE YEARS ENDED DECEMBER 31, 2006, 2005 and 2004
(In thousands)
Common Common Additional Deferred
Stock Stock Paid-In Compensation Accumulated
Shares Amount Capital Deficit
----------- ----------- -------------- ----------- ---------------------
Balance at December 31, 2003 (Restated and Revised) 29,851.6 $ 298.5 $ 24,601.8 $ (24.7) $ (23,431.2)
Net income (Restated and Revised) - - - - 2,414.8
Other comprehensive income:
Unrealized losses on available-for-sale
marketable securities (Note 2) - - - - -
Comprehensive income
Issuance of shares in conjunction with acquisition
of Global Partners and EquityStation, Inc. (Note 4) 6,275.2 62.8 1,518.0 - -
Promissory note conversions (Note 8) 3,444.3 34.4 715.6 - -
Conversion premium on promissory note (Note 8) - - 231.6 - -
Amortization of deferred compensation - - - 5.3 -
----------- ----------- -------------- ----------- ---------------------
Balance at December 31, 2004 (Restated and Revised) 39,571.1 395.7 27,067.0 (19.4) (21,016.4)
----------- ----------- -------------- ----------- ---------------------
Net loss (Restated and Revised) - - - - (999.6)
Other comprehensive loss:
Unrealized losses on available-for-sale
marketable securities (Note 2) - - - - -
Comprehensive loss
Exercise of stock options 555.0 5.5 108.0 - -
Amortization of deferred compensation - - - 19.4 -
----------- ----------- -------------- ----------- ---------------------
Balance at December 31, 2005 (Restated and Revised) 40,126.1 401.2 27,175.0 - (22,016.0)
----------- ----------- -------------- ----------- ---------------------
Net loss - - - - (2,133.5)
Other comprehensive loss:
Unrealized losses on available-for-sale
marketable securities (Note 2) - - - - -
Comprehensive loss
Stock-based compensation expense - - 448.2 - -
Issuance of shares in conjunction with acquisition
of Sterling Financial Group (Note 4) 13,000.0 130.0 3,276.0 - -
Issuance of shares in arbitration settlements (Note 13) 1,303.8 13.1 248.2 - -
----------- ----------- -------------- ----------- ---------------------
Balance at December 31, 2006 54,429.9 $ 544.3 $ 31,147.4 $ - $ (24,149.5)
=========== =========== ============== =========== =====================
vFINANCE, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY AND COMPREHENSIVE INCOME
FOR THE YEARS ENDED DECEMBER 31, 2006, 2005 and 2004
(In thousands)
(CONTINUED)
Accumulated
Other Total
Comprehensive Comprehensive Shareholders'
Income Income Equity
-----------------------------------------------
Balance at December 31, 2003 (Restated and Revised) $ (170.5) $ 1,273.9
Net income (Restated and Revised) - $ 2,414.8 2,414.8
Other comprehensive income:
Unrealized losses on available-for-sale
marketable securities (Note 2) (170.7) (170.7) (170.7)
-----------
Comprehensive income $ 2,244.1
===========
Issuance of shares in conjunction with acquisition
of Global Partners and EquityStation, Inc. (Note 4) - 1,580.8
Promissory note conversions (Note 8) - 750.0
Conversion premium on promissory note (Note 8) - 231.6
Amortization of deferred compensation - 5.3
----------- -------------
Balance at December 31, 2004 (Restated and Revised) (341.2) 6,085.7
----------- -------------
Net loss (Restated and Revised) - $ (999.6) (999.6)
Other comprehensive loss:
Unrealized losses on available-for-sale
marketable securities (Note 2) (244.5) (244.5) (244.5)
-----------
Comprehensive loss $ (1,244.1)
===========
Exercise of stock options - 113.5
Amortization of deferred compensation - 19.4
----------- -------------
Balance at December 31, 2005 (Restated and Revised) (585.7) 4,974.5
----------- -------------
Net loss - $ (2,133.5) (2,133.5)
Other comprehensive loss:
Unrealized losses on available-for-sale
marketable securities (Note 2) (56.8) (56.8) (56.8)
-----------
Comprehensive loss $ (2,190.3)
===========
Stock-based compensation expense - 448.2
Issuance of shares in conjunction with acquisition
of Sterling Financial Group (Note 4) - 3,406.0
Issuance of shares in arbitration settlements (Note 13) - 261.3
----------- -------------
Balance at December 31, 2006 $ (642.5) $ 6,899.7
=========== =============
The accompanying notes are an integral component of these financial statements.
-47-
vFINANCE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31,
(In thousands)
2006 2005 2004
(Restated (Restated
and Revised) and Revised)
--------------- ----------- ------------
CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES:
Net income (loss) $ (2,133.5) $ (999.6) $ 2,414.8
Adjustments to reconcile net income (loss) to
net cash provided by (used in) operating activities:
Non-cash fees received (1,974.1) (487.5) (419.4)
Non-cash compensation paid 1,350.5 158.1 286.3
Gain on forgiveness of debt - - (1,500.0)
Depreciation and amortization 958.7 446.3 166.1
Issuance of equity in arbitration settlements 261.3 - -
Provision for doubtful accounts - 69.7 79.8
Beneficial conversion feature expense - - 360.4
Conversion premium expense - - 231.6
Stock-based compensation 448.2 19.4 5.3
Goodwill impairment - 420.0 -
Forgiveness of amount due from unconsolidated affiliate 215.0 - -
Impairment of investment in unconsolidated affilitate - 80.0 -
Amounts forgiven under forgivable loans 36.3 6.6 80.2
Changes in operating assets and liabilities:
(Increase) decrease in:
Accounts receivable 285.0 (393.4) 30.7
Forgivable loans (95.1) - -
Due from clearing broker 405.2 (38.0) (332.1)
Notes receivable - employees (60.5) 101.1 14.5
Investments in trading securities (413.4) 95.7 (220.4)
Other current assets (54.0) (32.1) (18.2)
Other assets and liabilities, net (83.0) (79.6) 189.4
Increase (decrease) in:
Accounts payable and accrued liabilities 798.6 (50.1) 57.1
Securities sold, not yet purchased (0.8) (25.1) (16.3)
--------------- ----------- ------------
Cash provided by (used in) operating activities (55.6) (708.5) 1,409.8
--------------- ----------- ------------
CASH USED IN INVESTING ACTIVITIES:
Purchase of property and equipment (222.7) (125.7) (245.8)
Proceeds from sales of investments in securities available-for-sale 426.5 35.2 268.6
Cash acquired in acquisition - - 56.2
Investment in unconsolidated affiliate (161.9) - -
--------------- ----------- ------------
Cash provided by (used in) investing activities 41.9 (90.5) 79.0
--------------- ----------- ------------
CASH PROVIDED BY (USED IN) FINANCING ACTIVTIES:
Repayments of capital lease obligations (208.5) (143.4) (16.3)
Proceeds from exercise of common stock options - 113.5 -
--------------- ----------- ------------
Cash used in financing activities (208.5) (29.9) (16.3)
--------------- ----------- ------------
Increase (decrease) in cash and cash equivalents (222.2) (828.9) 1,472.5
Cash and cash equivalents at beginning of year 4,427.4 5,256.3 3,783.8
--------------- ----------- ------------
Cash and cash equivalents at end of year $ 4,205.2 $ 4,427.4 $ 5,256.3
=============== =========== ============
The accompanying notes are an integral component of these financial statements.
-48-
vFINANCE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All tables in thousands, except per share data)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Business
vFinance, Inc. (the "Company") is a global financial services company which
specializes in high growth opportunities. The Company's expertise into this
marketplace flows from three principal lines of business: providing investment
banking and advisory services to micro, small and mid-cap high growth companies;
making markets in over 3,000 micro and small cap stocks; and, offering
information services on its website, a leading destination for emerging
companies seeking capital and investors seeking opportunities. Due to its focus,
the Company believes it is uniquely positioned to offer alternative investments
to institutional and high net-work investors seeking to outperform market
indices in addition to offering a full range of investment options. With over 40
offices in the U.S. and other parts of the world, the Company serves more than
12,000 corporate, institutional and high net worth clients. vFinance
Investments, Inc. ("vFinance Investments") and EquityStation, Inc.
("EquityStation"), both subsidiaries of vFinance, Inc., are broker-dealers
registered with the Securities and Exchange Commission ("SEC"), and members of
National Association of Securities Dealers ("NASD") and Securities Investor
Protection Corporation ("SIPC"). vFinance Investments is also a member of the
National Futures Association ("NFA").
Basis of Presentation
The Consolidated Financial Statements include the accounts of the Company
and its wholly owned subsidiaries. All intercompany accounts have been
eliminated in consolidation.
Reclassifications
Certain amounts in the 2005 and 2004 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.
Restatement and Revision
After review of comments received from the staff of the SEC, the Company's
Chief Executive Officer and Chief Financial Officer concluded that the
Consolidated Balance Sheets as of December 31, 2005, 2004, 2003 and 2002 and the
Consolidated Statements of Operations and Shareholders' Equity for the years
then ended should no longer be relied upon because of certain errors in those
Consolidated Financial Statements, as reported on the Form 8-K filed by the
Company with the SEC on March 6, 2007. Therefore, in accordance with Financial
Accounting Standards Board ("FASB") Statement of Financial Accounting Standards
("SFAS") No. 154, "Accounting Changes and Error Corrections -A Replacement of
APB Opinion No. 20 and FASB Statement No. 3", these Consolidated Financial
Statements have been restated for the following corrections of errors:
-49-
vFINANCE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
Reclassification of Securities from Trading to Available-for-Sale
The Company occasionally receives equity securities from small public
companies in exchange for services the Company provides. The Company previously
classified these securities as trading securities because the Company's intent
was to sell them in the near future. However, due to the absence of an active
market for and frequent buying and selling of these securities, they have been
reclassified as available-for-sale in accordance with SFAS No. 115, "Accounting
for Certain Investments in Debt and Equity Securities". The Company has restated
its 2005 and 2004 Consolidated Financial Statements to reflect this change in
marketable security classification, which resulted in the reclassification of
unrealized gains and losses on these securities from the determination of net
income to accumulated other comprehensive loss, a component of shareholders'
equity.
Amortization of Customer Relationships
In connection with the acquisition of certain assets of Global Partners
Securities, Inc. ("Global") and 100% of the issued and outstanding equity
securities of EquityStation, all of which were owned by Level2, a subsidiary of
Global (the "Global Acquisition") in November 2004, the Company recorded
goodwill of $1.4 million. Subsequent to the preliminary purchase price
allocation, the Company determined that the purchase price should have been
allocated to the acquired customer relationships rather than goodwill. The
Company did not record amortization of this intangible asset from the date of
acquisition through December 31, 2005. The Company has restated its 2005 and
2004 Consolidated Financial Statements to reflect amortization of this
intangible asset since the acquisition date and to classify this intangible
asset as customer relationships rather than goodwill in the Consolidated Balance
Sheets.
As of March 31, June 30 and September 30, 2006, the Company recorded
amortization of the intangible asset related to customer lists using a useful
life of 5 years. However, management reconsidered this life based on factors
including the turnover rate of brokers, the expected longevity of the brokers'
relationship with the Company and retention of customer accounts after brokers
terminate. After this review, management determined that the intangible asset's
useful life should be 10 years. The Company's restated Consolidated Financial
Statements reflect amortization expense from the date of acquisition using a
useful life of 10 years.
Amortization of Beneficial Conversion Feature
The Company allocated the proceeds from the SBI Note Purchase Agreement of
$975.0 thousand to an imputed interest factor of $563.0 thousand and to a
beneficial conversion feature of $412.0. The imputed interest factor was
recognized over the term of the SBI Note, and the beneficial conversion feature
was immediately expensed. The Company has restated its 2004 Consolidated
Financial Statements by reversing all imputed interest associated with the SBI
Note and recording a beneficial conversion feature of $975.0 thousand. Such
beneficial conversion feature was recognized over the term of the SBI Note in
accordance with Emerging Issues Task Force ("EITF") Issue No. 00-27,
"Application of Issue No. 98-5 to Certain Convertible Instruments", and EITF
Issue No. 98-5, "Accounting for Convertible Securities with Beneficial
Conversion Features or Contingently Adjustable Conversion Ratios".
-50-
Deferral of Transition Payment
In March, 2004, the Company entered into a five-year clearing agreement.
Under this agreement, the clearing firm made a $200.0 thousand transition
payment to the Company to mitigate the costs of transitioning to the new firm.
The Company recognized this transition payment as a reduction to clearing and
transaction costs in the year ended December 31, 2004. The Company has restated
its 2004 and 2005 Consolidated Financial Statements to recognize the transition
fee ratably since its receipt in 2004 through the end of the clearing agreement
term, since the Company must repay a portion of the transition payment if the
clearing agreement is terminated. See Note 13 to the Consolidated Financial
Statements.
The net effect of the restatements on the beginning accumulated deficit,
accumulated other comprehensive income and total stockholders' equity are as
follows:
Beginning Equity - December 31, 2003
Effect of Restatements
Reclassification of Beneficial Conversion Feature
Securities from Trading to Expense Recognition
Available-for-Sale
----------------------------------------- -----------------------------------------------------------
As Reported 2003 2002 Cumulative 2003 2002 2001 Cumulative Cumulative Net Restated
Total Total Effect and Revised
------------ ------- ------- ----------- ------- -------- ------ ----------- ------------ -----------
Additional paid-in
capital $ 24,376.8 - - - - 225.0 - 225.0 225.0 $ 24,601.8
Accumulated deficit $ (23,590.3) 123.6 46.9 170.5 (114.6) (288.5) 391.7 (11.4) 159.1 $ (23,431.2)
Accumulated other
comprehensive loss $ - (123.6) (46.9) (170.5) - - - - (170.5) $ (170.5)
Total stockholders'
equity $ 1,060.3 - - - (114.6) (63.5) 391.7 213.6 213.6 $ 1,273.9
-51-
vFINANCE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
The following tables present a summary of the effects from each of these
adjustments on the revised and restated Consolidated Financial Statements in
2005 and 2004:
2005
------------------------------------------------------------------------------------
Effect of Restatements
------------------------------------------------------------------------------------
Reclass-
ication of Amortiz-
Securities Amortiz- ation of
Trading to ation of Beneficial
Reclass- Available for Intagible Conversion
As Reported ifications As Revised Sale Asset Feature
-------------- ------------- --------------- ------------- -------- -------------
Statement of Operations:
Total revenues $ 25,826.3 - $ 25,826.3 244.4 - -
Clearing and transaction costs* $ 1,905.2 1,112.0 $ 3,017.2 - - -
Depreciation and amortization $ 80.7 218.9 $ 299.6 - 146.7 -
Total operating expenses $ 27,021.5 104.7 $ 27,126.2 - 146.7 -
Income (loss) from operations $ (1,195.2) (104.7) $ (1,299.9) 244.4 (146.7) -
Other income (expenses) $ - 162.6 $ 162.6 - - -
Net income (loss) $ (1,137.3) - $ (1,137.3) 244.4 (146.7) -
Net income (loss) per share $ (0.03)
==============
Wt. avg. shares outstanding -
basic and diluted 40,049.7
==============
Balance Sheet:
Trading securities $ 870.3 - $ 870.3 (274.3) - -
Investment securities
available-for-sale $ - - $ - 274.3 - -
Customer relationships, net $ 1,446.9 - $ 1,446.9 - (165.1) -
Total assets $ 9,062.1 - $ 9,062.1 - (165.1) -
Other current liabilities $ 118.8 - $ 118.8 - - -
Total current liabilities $ 3,567.4 - $ 3,567.4 - - -
Additional paid-in capital $ 26,821.6 - $ 26,821.6 - - 353.4
Accumulated deficit $(21,953.2) - $(21,953.2) 585.7 (165.1) (353.4)
Accumulated other
comprehensive loss $ - - $ - (585.7) - -
Total stockholders' equity $ 5,269.6 - $ 5,269.6 - (165.1) -
2005 CONTINUED
Effect of Restatements
Net
Deferral of Effect
Transition Restate- Restated
Payment ments and Revised
------------ ------------- ---------------
Statement of Operations:
Total revenues - 244.4 $ 26,070.7
Clearing and transaction costs* (40.0) (40.0) $ 2,977.2
Depreciation and amortization - 146.7 $ 446.3
Total operating expenses (40.0) 106.7 $ 27,232.9
Income (loss) from operations 40.0 137.7 $ (1,162.2)
Other income (expenses) - - $ 162.6
Net income (loss) 40.0 137.7 $ (999.6)
Net income (loss) per share $ 0.01 $ (0.02)
=========== ================
Wt. avg. shares outstanding -
basic and diluted 40,049.7
===============
Balance Sheet:
Trading securities - (274.3) $ 596.0
Investment securities
available-for-sale - 274.3 $ 274.3
Customer relationships, net - (165.1) $ 1,281.8
Total assets - (165.1) $ 8,897.0
Other current liabilities 130.0 130.0 $ 248.8
Total current liabilities 130.0 130.0 $ 3,697.4
Additional paid-in capital - 353.4 $ 27,175.0
Accumulated deficit (130.0) (62.8) $(22,016.0)
Accumulated other
comprehensive loss - (585.7) $ (585.7)
Total stockholders' equity (130.0) (295.1) $ 4,974.5
* The Company reclassified certain amounts in the 2005 and 2004
Consolidated Statements of Operations from general and administrative costs to
clearing and transaction costs, to conform to the presentation in the 2006
Consolidated Statement of Operations.
-52-
vFINANCE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
2004
------------------------------------------------------------------------------------
Effect of Restatements
------------------------------------------------------------------------------------
Reclass-
ication of Amortiz-
Securities Amortiz- ation of
Trading to ation of Beneficial
Reclass- Available for Intagible Conversion
As Reported ifications As Revised Sale Asset Feature
-------------- ------------- --------------- ------------- -------- -------------
Statement of Operations:
Total revenues $ 26,329.3 - $ 26,329.3 170.7 - -
Clearing and transaction costs* $ 1,030.1 1,039.2 $ 2,069.3 - - -
Depreciation and amortization $ 147.8 - $ 147.8 - 18.3 -
Total operating expenses $ 24,793.0 0.9 $ 24,793.9 - 18.3 -
Income from operations $ 1,536.1 (0.7) $ 1,535.4 170.7 (18.3) -
Other income (expense) $ 1,278.3 (230.9) $ 1,047.4 - - (110.4)
Net income (loss) $ 2,774.4 (231.6) $ 2,542.8 170.7 (18.3) (110.4)
Net income per share - basic $ 0.08
===========
Wt. avg. shares outstanding - basic 33,773.3
===========
Net income per share - diluted $ 0.08
===========
Wt. avg. shares outstanding - diluted 35,840.2
===========
Stockholders' Equity:
Additional paid-in capital $ 6,713.6 - $ 26,713.6 - - 353.4
Accumulated deficit $(20,815.9) - $ (20,815.9) 341.2 (18.3) (353.4)
Accumulated other
comprehensive loss $ - - $ - (341.2) - -
Total stockholders' equity $ 6,274.0 - $ 6,274.0 - (18.3) -
2004 CONTINUED
Effect of Restatements
-------------------------------------------
Net
Deferral of Effect
Transition Restate- Restated
Payment ments and Revised
------------ ------------- ---------------
Statement of Operations:
Total revenues - 170.7 $ 26,500.0
Clearing and transaction costs* 170.0 170.0 $ 2,239.3
Depreciation and amortization - 18.3 $ 166.1
Total operating expenses 170.0 188.3 $ 24,982.2
Income from operations (170.0) (17.6) $ 1,517.8
Other income (expense) - (110.4) $ 937.0
Net income (loss) (170.0) (128.0) $ 2,414.8
Net income per share - basic $ (0.01) $ 0.07
========= ===========
Wt. avg. shares outstanding - basic 33,773.3
===========
Net income per share - diluted $ 0.07
===========
Wt. avg. shares outstanding - diluted 35,840.2
===========
Stockholders' Equity:
Additional paid-in capital - 353.4 $ 27,067.0
Accumulated deficit (170.0) (200.5) $ (21,016.4)
Accumulated other
comprehensive loss - (341.2) $ (341.2)
Total stockholders' equity (170.0) (188.3) $ 6,085.7
As a result of the reclassification of Securities from Trading to
Available-for-Sale, the Company also reclassified the proceeds from the sale of
Securities Available-for-Sale from Operating Activities to Investing Activities
in the Consolidated Statements of Cash Flows. As a result of this
reclassification, cash used in operating activities and investing activities
increased (decreased) from amounts previously reported by $(35.2) thousand and
$35.2 thousand, respectively, in 2005. Additionally, cash provided by operating
activities and investing activities increased (decreased) from amounts
previously reported by $(268.6) thousand and $268.6 thousand, respectively, in
2004.
-53-
vFINANCE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
In May 2005, the FASB issued SFAS No. 154, which requires that a voluntary
change in accounting principle be applied retroactively with all prior period
financial statements presented on the new accounting principle, unless it is
impractical to do so. This statement also provides that a change in method of
depreciating or amortizing a long-lived non-financial asset be accounted for as
a change in estimate (prospectively) that was effected by a change in accounting
principle. Additionally, correction of errors in previously issued financial
statements should be termed a "restatement". The new standard is effective for
accounting changes and corrections of errors made in fiscal years beginning
after December 15, 2005. The Company adopted SFAS No. 154 effective January 1,
2006, which did not have a material impact on the Company's Consolidated
Financial Statements.
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.
Cash and Cash Equivalents
Cash and cash equivalents include all highly liquid investments with
maturities of three months or less when purchased.
Accounts and Notes Receivable
Accounts receivable consist of receivables incurred in the ordinary course
of business including but not limited to investment banking and consulting fees.
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 was $0
at December 31, 2006 and 2005.
Due from and Payable to Clearing Brokers
Receivables from brokers and dealers consist primarily of amounts due from
the Company's clearing organization, which provides clearing and depository
services for brokerage transactions on a fully disclosed basis.
The Company clears certain of its proprietary and customer transactions
through another broker-dealer on a fully disclosed basis. The amount payable to
the clearing broker relates to the aforementioned transactions and is
collateralized by securities owned by the Company. Due to Clearing Brokers
totaled $30.7 thousand and $85.5 thousand at December 31, 2006 and 2005,
respectively, and is included in Other Current Liabilities in the Consolidated
Balance Sheets.
Investments
Investments consist primarily of marketable equity securities the Company
buys and sells in market-making activities and marketable equity securities
received as compensation for investment banking services. At December 31, 2006
and 2005, investments consisted of common stock, corporate bonds, municipal
securities, collateralized mortgage-backed securities and common stock purchase
warrants held for resale.
-54-
Investments the Company buys and sells in its market-making activities are
classified as investments in trading securities and are held for resale in
anticipation of short-term market movements or until such securities are
registered or are otherwise unrestricted. Trading securities, consisting
primarily of marketable equity securities, municipal securities, collateralized
mortgages obligations and corporate bonds, are stated at fair value, based on
information obtained from the Company's clearing firms. In cases where a stock
is traded, but the shares the Company holds are restricted, the Company reduces
this fair value by 25% to reflect this restriction. When a stock has not traded,
its fair value is deemed to be zero until it begins to trade again. Unrealized
gains or losses are recognized as trading profits in the Consolidated Statements
of Operations, based on changes in the fair value of the security. Realized
gains or losses are recognized in the Consolidated Statement of Operations as
trading profits when the equity instruments are sold.
The Company classifies marketable securities received as compensation for
investment banking services as investments available-for-sale.
Available-for-sale securities are stated at fair value, with unrealized gains or
losses reflected as Other Comprehensive Income (Loss), a component of
Comprehensive Income (Loss) and Accumulated Other Comprehensive Income (Loss) in
the accompanying Consolidated Statements of Shareholders' Equity.
The fair values of the Company's marketable securities are based on quoted
market prices. The fair value of trading securities and securities
available-for-sale, which are traded but restricted as to resale, is reduced by
25% to reflect this restriction. When a stock has not traded, its fair value is
deemed to be zero by the Company's clearing firms until it begins to trade
again.
The cost of securities sold is based on the specific identification method.
Proprietary securities transactions in regular-way trades are accrued and
recorded on the trade date, as if they had settled. Profit and loss arising from
all securities and commodities transactions entered into for the account and
risk of the Company are recorded on a trade date basis. Customers' securities
and commodities transactions are reported on a settlement date basis with
related commission income and expense reported on a trade date basis. Amounts
receivable and payable for securities transactions that have not reached their
contractual settlement date are recorded net on the balance sheet.
Financial Instruments with Off-Balance Sheet Risk
The securities transactions of the Company's customers are introduced on a
fully disclosed basis with a clearing broker-dealer. The Company holds no
customer funds or securities. The clearing broker-dealer is responsible for
execution, collection of and payment of funds, and receipt and delivery of
securities relative to customer transactions. Off-balance sheet risk exists with
respect to these transactions due to the possibility that customers may be
unable to fulfill their contractual commitments wherein the clearing
broker-dealer may charge any related losses to the Company. The Company seeks to
minimize this risk through procedures designed to monitor the creditworthiness
of its customers and to ensure that customer transactions are executed properly
by the clearing broker-dealer.
-55-
vFINANCE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
Property and Equipment
Property and equipment are stated on the basis of cost less accumulated
depreciation and consists primarily of computer equipment. Depreciation is
computed using the straight-line method over the estimated useful lives of the
assets, 3-7 years, for financial reporting purposes. Included in Property and
Equipment is approximately $704.6 thousand of computer equipment acquired under
capital leases.
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 of the asset and related accumulated depreciation are
removed from the accounts and any resulting gains and losses are included in the
determination of net income in the period of disposition.
Leases
The Company has three operating leases for its office space, at its
corporate headquarters in Boca Raton, Florida, a branch office in New York City,
New York and its disaster recovery center in Mount Laurel, New Jersey.
Additionally, the Company has an operating lease for additional office space in
Boca Raton, Florida, which is currently subleased through the end of the
remaining lease term. These leases generally require the Company to pay costs,
such as real estate taxes, common area maintenance costs and utilities. In
addition, these leases generally include scheduled rent increases and may
include rent holidays. The Company accounts for material escalations and rent
holidays on a straight-line basis over the initial terms of the leases,
commencing on the date the Company can take possession of the leased facility.
Resulting liabilities are recorded as short-term or long-term deferred rent
liabilities as appropriate. These liabilities are then amortized as a reduction
of rent expense on a straight-line basis over the life of the related lease.
Intangible Assets
The Company accounts for business combinations using the purchase method of
accounting, in accordance with SFAS No. 141, "Business Combinations". Under SFAS
No. 141, intangible assets are separately recognized if the benefit of the
intangible asset is obtained through contractual or other legal rights, or if
the intangible asset can be sold, transferred, licensed, rented, or exchanged,
regardless of the Company's intent to do so. The Company accounts for
acquisition of intangible assets, which are acquired individually or within a
group of assets (but not those acquired in a business combination), in
accordance with SFAS No. 142, "Goodwill and Other Intangible Assets". SFAS No.
141 and SFAS No. 142 require acquired intangible assets to be initially
recognized and measured based on fair value, amortized over their expected
useful lives and examined for impairment in accordance with SFAS No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets", whenever
indications of impairment are present.
The Company's principal identifiable intangible assets consist of acquired
customer relationships, which are amortized on a straight-line basis over their
useful lives, ranging from five to ten years.
-56-
vFINANCE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
Goodwill
During 2005, the final contributing brokers from First Level Capital, a
prior period acquisition, departed the firm. As a result, the discounted
expected future cash flows associated with the goodwill no longer exceeded the
book value of the goodwill, resulting in goodwill impairment charges of $420.0
thousand in 2005. There was no goodwill included in the Consolidated Balance
Sheets as of December 31, 2006 or 2005.
Impairment of Long-Lived Assets
In accordance with SFAS No. 144, the Company periodically reviews its
long-lived assets, including customer relationship intangible 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.
Other Accrued Liabilities
As of December 31, 2006 and 2005, other accrued liabilities were comprised
primarily of (i) $70.0 thousand and $280.0 thousand, respectively, in settlement
reserves for open litigation, (ii) $306.0 thousand and $185.0 thousand,
respectively, in accrued bonus payable and (iii) $76.0 thousand and $93.6
thousand, respectively, in accrued audit fees.
Revenue Recognition
The Company follows the guidance of the SAB 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.
The Company earns brokerage commissions and trading profits, which are
recognized at the time of transaction execution, along with related clearing and
other costs. The Company also earns revenue from investment banking and
consulting. Monthly consulting fees for investment banking are recognized as
earned. Investment banking success fees are revenues that are paid only upon
successful completion of a capital raise or other transaction and are generally
based on a percentage of the total transaction value. Success fees are
recognized when earned as a result of successfully completing a transaction.
Other brokerage related income includes revenues related to various investment
banking services, which is recognized as services are provided.
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.
-57-
vFINANCE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
The Company periodically receives equity instruments which include stock
purchase warrants and common and preferred stock from companies as part of
compensation for investment banking services, which are classified as
available-for-sale securities in the accompanying Consolidated Balance Sheets.
Primarily all such equity instruments are received from small public companies
and are typically restricted as to resale, with the Company generally receiving
registration rights within one year. When the Company receives equity
instruments as compensation for investment banking services, revenue is
recognized based on the fair value of these instruments, in accordance with SFAS
No. 115 "Accounting for Certain Investments in Debt and Equity Securities" and
EITF Issue No. 00-8 "Accounting by a Grantee for an Equity Instrument to be
Received in Conjunction with Providing Goods or Services." The Company
recognizes revenue for stock purchase warrants 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.
Occasionally, the Company receives equity instruments in private companies
with no readily available market value. Equity instruments 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 company's securities and the filings of
registration statements in connection with a company's initial public offering
when valuing warrants.
The Company also occasionally distributes equity instruments or the
proceeds from the sale of equity instruments to its employees, as compensation
for their investment banking success. The distributions are made in accordance
with individual compensation agreements, which vary on a banker by banker basis.
Accordingly, unrealized gains and losses recorded in the Consolidated Statements
of Operations related to securities held by us at the end of each period also
impact compensation expense and accrued compensation for the portion to be
distributed.
Stock Based Compensation
The Company has a stock option plan under which options to purchase shares
of the Company's common stock may be granted to key employees and directors of
the Company, which are more fully described in Note 9 below. Options granted
under the plans are non-qualified and are granted at a price equal to the
closing market price of the common stock on to the date of grant. Generally,
options granted have a term of 5 years from the date of grant and will vest in
increments of 25% per year over a 4-year period on the annual anniversary of the
grant date.
-58-
vFINANCE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
In December 2004, the FASB issued SFAS No. 123 (revised 2004), "Share Based
Payment" ("SFAS No. 123R") and in March 2005, the SEC issued SAB 107 regarding
its interpretation of SFAS No. 123R. The standard requires companies to expense
the grant-date fair value of stock options and other equity-based compensation
issued to employees and is effective for annual periods beginning after June 15,
2005. Effective January 1, 2006, the Company adopted SFAS No. 123R and related
interpretive guidance issued by the FASB and SEC using the modified prospective
transition method. Under the modified prospective transition method, SFAS No.
123R applies to new awards modified, repurchased or cancelled after the required
effective date. Additionally, compensation cost for the portion of the awards
for which the requisite service period has not been rendered as of the required
effective date is recognized as the requisite service is rendered on or after
the required effective date. Accordingly, the Company's Consolidated Financial
Statements have not been restated for prior periods to reflect the adoption of
SFAS No. 123R.
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 SFAS No. 123, "Accounting for Stock-Based
Compensation".
2005 2004
------------- -------------
Net income (loss), as reported $ (999.6) $ 2,414.8
Pro forma stock-based compensation expense, net of taxes (544.0) (167.6)
------------- -------------
Pro forma net income (loss) $ (1,543.6) $ 2,247.2
============= =============
Basic net income (loss) per share, as reported $ (0.02) $ 0.07
Pro forma stock-based compensation expense $ (0.02) $ -
Pro forma net income earnings (loss) per share $ (0.04) $ 0.07
Diluted net income (loss) per share, as reported $ (0.02) $ 0.07
Pro forma stock-based compensation expense $ (0.02) $(0.01)
Pro forma diluted net income (loss) per share $ (0.04) $ 0.06
Risk-free interest rate 4.25% 3.31%
Expected dividend yield - -
Expected term 4-5 years 4-5 years
Expected volatility 72% 112%
Forgivable Loans
In order to remain competitive in the marketplace, the Company has granted
forgivable loans to certain employees, primarily registered representatives, as
part of their compensation package in order to attract them to join the firm.
The terms of the loans generally range from one to three years. For each year
the employee is in good standing with the Company, the Company forgives a
ratable portion of the loan and charges this amount to compensation expense. If
the employee is terminated, the principal balance is due and payable
immediately.
-59-
vFINANCE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
The Company makes every effort to collect any monies due on forgivable
loans. The loans do not bear interest and interest is not imputed because the
amounts of imputed interest would be immaterial to the Company's Consolidated
Financial Statements and because the Company's ability to collect such interest
would not be probable. As of December 31, 2006 and 2005, the balance of the
forgivable loans was $58.8 thousand and $0, respectively.
Income Taxes
The Company accounts for income taxes under the liability method in
accordance with SFAS 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.
Fair Value of Financial Instruments
The carrying amounts of the Company's financial instruments, which include
cash and cash equivalents, accounts and notes receivable, accounts payable and
accrued expenses approximate their fair values. The fair values of the Company's
marketable securities is primarily based on quoted market prices.
New Accounting Pronouncements
In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements".
SFAS No. 157 defines fair value, establishes a framework for measuring fair
value under generally accepted accounting principles, and expands disclosures
about fair value measurements. This statement is effective for financial
statements issued for fiscal years beginning after November 15, 2007, and
interim periods within those fiscal years. The adoption of SFAS No. 157 is not
expected to have a material impact on the Company's Consolidated Financial
Statements.
In September 2006, the SEC issued SAB 108, to address diversity in practice
in quantifying financial statement misstatements and the potential for the build
up of improper amounts on the balance sheet. SAB 108 identifies the approach
that registrants should take when evaluating the effects of unadjusted
misstatements on each financial statement, the circumstances under which
corrections of misstatements should result in a revision to financial
statements, and disclosures related to the correction of misstatements. SAB 108
is effective for any report for an interim period of the first fiscal year
ending after November 16, 2006. The adoption of SAB 108 did not have a material
impact on the Company's Consolidated Financial Statements.
-60-
vFINANCE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
In June 2006, the FASB issued FASB Interpretation No. ("FIN") 48,
"Accounting for Uncertainty in Income Taxes". This interpretation applies to all
tax positions accounted for in accordance with SFAS No. 109, Accounting for
Income Taxes. FIN 48 clarifies the application of FASB Statement No. 109 by
defining the criteria that an individual tax position must meet in order for the
position to be recognized within the financial statements. It also provides
guidance on measurement, de-recognition, classification, interest and penalties,
accounting in interim periods, disclosure and transition for tax positions. This
interpretation is effective for fiscal years beginning after December 15, 2006,
with earlier adoption permitted. The adoption of FIN 48 is not expected to have
a material impact on the Company's Consolidated Financial Statements.
In February 2006, the FASB issued SFAS No. 155, "Accounting for Certain
Hybrid Financial Instruments" which amends SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities" and SFAS No. 140, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities".
SFAS No. 155 simplifies the accounting for certain derivatives embedded in other
financial instruments by allowing them to be accounted for as a whole if the
holder elects to account for the whole instrument on a fair value basis. SFAS
No. 155 also clarifies and amends certain other provisions of SFAS No.133 and
SFAS No.140. SFAS No.155 is effective for all financial instruments acquired,
issued or subject to a remeasurement event occurring in fiscal years beginning
after September 15, 2006. The adoption of SFAS No. 155 is not expected to have a
material impact on the Company's Consolidated Financial Statements.
2. INVESTMENTS
Net realized and unrealized gains (losses) related to investments in
trading securities were $9.6 million, $4.2 million and $5.2 million in 2006,
2005 and 2004, respectively.
Investments in marketable securities classified as available-for-sale are
comprised of equity securities and warrants received in connection with
investment banking services. The cost basis of the equity securities classified
as available-for-sale at December 31, 2006 and 2005 was $1,057.1 thousand and
$860.0 thousand, respectively, and the net unrealized losses were $642.5
thousand and $585.7 thousand, respectively. The estimated fair value of these
securities was $414.6 thousand and $274.3 thousand at December 31, 2006 and
2005, respectively. Net unrealized losses related to available-for-sale
securities are classified as Other Comprehensive Income, a component of
Comprehensive Income (Loss) and Accumulated Other Comprehensive Loss in the
accompanying Consolidated Statements of Shareholders' Equity.
At December 31, 2006, substantially all equity securities classified as
available-for-sale were restricted.
-61-
vFINANCE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
3. PROPERTY AND EQUIPMENT
At December 31, 2006 and 2005, property and equipment, net, consisted of
the following:
2006 2005
------------- -------------
Furniture and fixtures $ 90.8 $ 85.1
Equipment 727.5 559.5
Capital leases - computer equipment 704.5 572.5
Leasehold improvements 174.8 166.7
Software 214.8 173.9
------------- -------------
1,912.4 1,557.7
Less: accumulated depreciation (1,251.4) (865.1)
------------- -------------
Property and equipment, net $ 661.0 $ 692.6
============= =============
The Company recorded depreciation expense of $386.3 thousand, $299.6
thousand and $147.8 thousand in the years ended December 31, 2006, 2005 and
2004, respectively.
4. ACQUISITIONS
Sterling Financial Acquisition
On May 11, 2006, vFinance Investments purchased certain assets of Sterling
Financial Investment Group, Inc. ("SFIG") and Sterling Financial Group of
Companies, Inc. ("SFGC" and together with SFIG, "Sterling Financial"). The
assets acquired from Sterling Financial consisted primarily of client accounts
from Sterling Financial's Institutional Fixed Income and Latin American
businesses. These transactions were approved by the National Association of
Securities Dealers, Inc. on April 28, 2006.
Purchase price consideration consisted of 13.0 million shares of the
Company's common stock, to which the Company has granted certain registration
rights. The assets acquired in this transaction were the Sterling Financial
customer relationships, which were capitalized as an intangible asset, customer
relationships, at the time of acquisition in accordance with SFAS No. 142. This
allocation is preliminary and subject to final adjustments. The purchase price
of the customer relationships was determined to be $3.4 million, based on the
average closing price of the Company's stock for the five days prior to
completing the acquisition, to be amortized over an expected useful life of five
years. The results of operations derived from the acquired customer
relationships are included in the Company's results of operations since the
acquisition in May 2006.
-62-
vFINANCE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
Global Acquisition
On November 2, 2004, vFinance Investments completed its acquisition of
certain assets of Global Partners Securities, Inc. ("Global") and 100% of the
issued and outstanding equity securities of EquityStation, Inc.
("EquityStation"), all of which were owned by Level2, a subsidiary of Global
(the "Global Acquisition").
Purchase price consideration consisted of 6.3 million shares of the
Company's common stock, to which the Company has granted certain registration
rights. The transaction was accounted for as a business combination, in
accordance with SFAS No. 141. The purchase price of the customer relationships
was determined to be $1.4 million, based on the average closing price of the
Company's stock for the five days prior to completing the acquisitions, and the
warrants were valued based upon a Black-Scholes valuation model. The customer
relationships were assigned a ten year useful life and the results of operations
of the acquired business are included in the Company's results of operations
since the acquisition in November 2004.
In accordance with Financial Interpretation No. 44 "Accounting for Certain
Transactions Involving Stock Compensation" the Company has included vested stock
options issued by the Company in exchange for outstanding awards held by
employees of acquired companies as part of the purchase price.
Pro Forma Financial Information
The following unaudited Pro Forma Combined Financial Statements of Sterling
and vFinance gives effect to the acquisition of certain assets of Sterling
Financial, as though the transactions occurred as of January 1, 2005. This
unaudited pro forma information is presented for informational purposes, based
upon available data and assumptions that management believes are reasonable, and
is not necessarily indicative of future results:
2006
-------------------------------------------------------------------------
vFinance Sterling Adjustments Pro Forma
----------------- ----------------- ----------------- -----------------
Total revenue $ 38,594.9 $ 3,759.4 $ - $ 42,354.3
Income (loss) from operations (2,258.4) 48.0 (340.6) (2,551.0)
Net income (loss) (2,133.5) 48.0 (340.6) (2,426.1)
----------------- ----------------- -----------------
Loss per share - basic and diluted $ (0.04) $ (0.03) $ (0.04)
================= ================= =================
Wt. avg. shares outstanding - basic and diluted 48,528.0 13,000.0 61,528.0
================= ================= =================
2005
-------------------------------------------------------------------------
vFinance Sterling Adjustments Pro Forma
----------------- ----------------- ----------------- -----------------
Total revenue $ 26,070.7 $ 9,954.5 $ - $ 36,025.2
Loss from operations (1,162.2) 447.6 (681.2) (1,395.8)
Net loss (999.6) 447.6 (681.2) (1,233.2)
----------------- ----------------- -----------------
Loss per share - basic and diluted $ (0.02) $ (0.05) $ (0.02)
================= ================= =================
Wt. avg. shares outstanding - basic and diluted 40,049.7 13,000.0 53,049.7
================= ================= =================
-63-
vFINANCE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
5. CUSTOMER RELATIONSHIPS
At December 31, 2006 and 2005, customer relationships totaled $4.1 million
and $1.3 million, net of accumulated amortization of $737.4 thousand and $165.0
thousand, respectively.
Acquired customer relationships are amortized using the straight-line
method over their estimated useful lives, which coincide with their expected
revenue-generating lives, which range from five to ten years. The Company
recorded amortization expense of $572.4 thousand, $146.7 thousand and $18.3
thousand in the years ended December 31, 2006, 2005 and 2004, respectively.
6. NET CAPITAL REQUIREMENT
Both vFinance Investments and EquityStation are subject to the Securities
and Exchange Commission Uniform Net Capital Rule (rule 15c3-1), which requires
the maintenance of minimum net capital and requires that the ratio of aggregate
indebtedness to net capital, both as defined, shall not exceed 15 to 1 (and the
rule of the "applicable" exchange also provides that equity capital may not be
withdrawn or cash dividends paid if the resulting net capital ratio would exceed
10 to 1). At December 31, 2006, vFinance Investments had net capital of $1.5
million, which was $514.5 thousand in excess of its required net capital of $1.0
million. EquityStation had net capital of $427.3 thousand that was $327.3
thousand in excess of its required net capital of $100.0 thousand.
vFinance Investments' aggregate indebtedness to net capital ratio was to
2.01 to 1 in 2006. Equity Station's aggregate indebtedness to net capital ratio
was 1 to 2.84. vFinance Investments and EquityStation qualify under the
exemptive provisions of Rule 15c3-3 under Section (k)(2)(ii) of the Rule, as
they do not carry security accounts of customers or perform custodial functions
related to customer securities.
7. RELATED PARTY TRANSACTIONS
Employment Agreements
On November 16, 2004, the Company entered into new agreements ("Employment
Agreements") amending and restating employment agreements dated November 8, 1999
with the Company's current Chairman and Chief Executive Officer and the
Company's former Chief Operating Officer and Chairman. Under the terms of the
Employment Agreements, which have three year terms and automatically extend for
a one year period on each anniversary date thereafter unless the Company has
provided a non-renewal notice thirty (30) days prior to an anniversary date as
directed by a majority vote of the Board of Directors, each individual shall
receive (i) an initial base salary of $257,000 per annum which shall increase 5%
per annum beginning January 1, 2005 and each year thereafter and will be
reviewed by the Board at least annually and may be increased (but not decreased)
from time to time as Board may determine; (ii) discretionary bonuses and/or
interim cash bonuses and/or other bonuses when and in such amounts as may be
determined by the Company's Board of Directors based on each individuals
performance, the Company's performance and/or other factors; provided that the
Board shall meet at least annually to review employees' bonus entitlements; and
(iii) incentive compensation paid quarterly no later than the 45th day following
the end of quarter primarily based on performance of the Company and its
respective subsidiaries. The Primary Employment Agreements also contain
provisions related to change of control.
-64-
vFINANCE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
On May 12, 2006, the Company an Mr. Sokolow entered into an amendment to
Mr. Sokolow's Employment Agreement to provide a base salary of $343,511. On
December 29, 2006, the Company and Mr. Sokolow entered into another amendment to
the Mr. Sokolow's Employment Agreement, pursuant to which Mr. Sokolow serves as
the Chairman of the Company's Board of Directors and the Company's Chief
Executive Officer. Mr. Sokolow's base salary was increased from $343,511 per
annum to $396,750 per annum, subject to an annual increase based on the reported
cost of living adjustment beginning January 1, 2008. None of the other terms of
the Sokolow Employment Agreement were modified in any material respect.
On December 29, 2006, the Company and Mr. Mahoney entered into a
Resignation Agreement (the "Resignation Agreement"), pursuant to which Mr.
Mahoney resigned from his positions as the Chairman of the Company's Board of
Directors and the Company's Chief Operating Officer effective January 3, 2007.
In accordance with the Resignation Agreement, the Company agreed to pay to Mr.
Mahoney, upon a Change in Control anytime from January 3, 2007 up to and
including January 3, 2010 an amount equal to: (a) twice the sum of Mr. Mahoney's
highest annual base salary during his employment with us, and (b) twice the
greater of (i) the highest bonus, incentive or other compensation payment
actually received by Mr. Mahoney during the three years preceding the Change in
Control and (ii) the highest bonus, incentive or other compensation payment Mr.
Mahoney was entitled to receive during the three years preceding the Change in
Control. In the event of a Change in Control, all stock options, warrants, stock
appreciation rights and other similar securities held by Mr. Mahoney will become
immediately and fully vested.
In connection with Mr. Mahoney's resignation, on December 29, 2006, the
Company and Mr. Mahoney jointly terminated Mr. Mahoney's Amended and Restated
Employment Agreement dated November 16, 2004, which termination was effective
January 3, 2007. The termination of the employment agreement prior to the
expiration of its term will not cause the Company to incur any early termination
penalties of any kind, and all post-employment matters between Mr. Mahoney and
the Company are governed by the Resignation Agreement.
Two of the principals of Global and Equity Station each entered into
employment agreements with the Company, which provided an annual base salary of
$144,000, certain incentive bonuses, and options to purchase 350,000 shares of
the Company's common stock. The options are exercisable at $0.19 per share, and
vest ratably over a three year period.
-65-
vFINANCE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
JSM Capital Holding Corp.
On January 1, 2003, the Company entered into an agreement with JSM Capital
Holding Corp. ("JSM"), a retail brokerage operations headquartered in New York
and founded by John S. Matthews (who was also, at the same time, named the
President of the Company's Retail Brokerage Division). The Company issued JSM
1,000,000 warrants to purchase its common stock at an exercise price of $0.20 in
exchange for a 19% equity position in JSM. The warrants were valued using the
Black-Scholes valuation method which calculated the value to be $0.08 per
warrant, or $80,000. The Company accounted for this investment using the cost
method. In August 2005, the relationship between the Company and JSM was
terminated, and the Company fully impaired the investment in JSM in the fourth
quarter of 2005, when it was determined that JSM has no remaining material
assets or operations.
8. SHAREHOLDERS' EQUITY
Common Stock
In 2006, the Company increased its authorized number of shares of common
stock from 75.0 million to 100.0 million.
Preferred Stock
The Company is authorized to issue up to 2.5 million shares of Preferred
Stock. 122.5 thousand shares were designated as Series A Convertible Preferred
Stock, par value $0.01 per share, and 50.0 thousand shares were designated as
Series B Convertible Preferred Stock, par value $0.01 per share. As of December
31, 2006 and 2005, there was no Preferred Stock outstanding.
SBI Note Conversion
In November 2001, the Company entered into a Note Purchase Agreement, as
amended, (the "Agreement") with SBI Investments (USA) Inc. ("SBI"). Under the
terms of the Agreement, SBI provided a loan to the Company in the amount of
$975,000 in the form of a 48-month non-interest bearing, convertible note (the
"SBI Note"), the proceeds of which were allocated to beneficial conversion
feature and amortized over the term of the note. The SBI Note was convertible at
SBI's option into as many as 3.4 million shares of the Company's common stock at
$0.285 per share. During 2002, the SBI Note was reduced by $225.0 thousand when
a portion of the SBI Note was converted into 789.5 thousand shares of the
Company's common stock. During 2004, the remaining balance on the SBI Note was
converted into 3.4 million shares of the Company's common stock. Of this amount,
$545.0 thousand was converted into 2.7 million shares of the Company's common
stock at a discounted rate of $0.20 per share under a special arrangement
offered by the Company, resulting in $231.6 thousand of conversion premium
expense at the time of conversion. The Company recorded $360.4 thousand of
beneficial conversion feature expense in the Consolidated Statements of
Operations in 2004, including $47.0 thousand of amortization and $313.4 thousand
written off upon final conversion.
-66-
vFINANCE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
Warrants
The Company has issued warrants to purchase shares of the Company's common
stock, primarily in connection with financing transactions, acquisitions and
litigation settlement. A summary of the warrant activity for the years ended
December 31, 2006 and 2005 is as follows:
Weighted
Average Range of
Number of Exercise Exercise
Shares Price Price Exercisable
------------------------------------------------------
Outstanding at December 31, 2003 5,398.5 $ 1.70 0.65 - 7.20 5,388.5
============
Issued 2,927.9 $ 0.16 0.15 - 0.16
Exercised - - -
Expired (230.0) $ 0.44 0.35 - 2.50
--------------
Outstanding at December 31, 2004 8,096.4 $ 1.18 0.15 - 7.20 8,086.4
============
Issued - - -
Exercised - - -
Expired (436.8) $ 2.21 0.35 - 6.00
--------------
Outstanding at December 31, 2005 7,659.6 $ 1.12 0.15 - 7.20 7,649.6
============
Issued 3,299.7 $ 0.11 0.11
Exercised - - -
Expired (6,999.6) $ 1.18 0.15 - 7.20
--------------
Outstanding at December 31, 2006 3,959.7 $ 0.16 0.11 - 0.63 3,949.7
============== ============
The following table summarizes information concerning warrants outstanding
at December 31, 2006:
Exercise Prices Number Outstanding Weighted Average Remaining Weighted Average
Contractual Life Exercise Price
------------------------ ------------------- --------------------------- -----------------
$ 0.11 3,299.7 2.84
$ 0.15 250.0 1.03
$ 0.625 400.0 4.63
$ 2.250 10.0 0.83
------------------
3,959.7 2.90 $0.16
================== =============
There were 3.3 million and 2.9 million warrants issued in 2006 and 2004,
respectively. There were no warrants issued in 2005. The weighted average
issue-date fair value of warrants issued equaled $0.13 and $0.16 in 2006 and
2004, respectively. As of December 31, 2006, the aggregate intrinsic value of
the Company's outstanding and exercisable warrants was $38.5 thousand.
-67-
vFINANCE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
9. STOCK OPTIONS
During 2006, the Company recorded $448.2 thousand of compensation expense
(included as Compensation, commission and benefits costs in the 2006
Consolidated Statement of Operations) attributable to stock options granted or
vested subsequent to December 31, 2005.
The Company uses the Black-Scholes valuation model to determine
compensation expense and amortizes compensation expense over the requisite
service period of the grants on a straight-line basis. The following table
summaries the assumptions used:
Risk-free interest rate ........................... 4.25% - 5.25%
Expected dividend yield ................................. -
Expected term ....................................... Five years
Expected volatility ............................... 72.4% - 80.7%%
The risk free investment rate is based on the U.S. Treasury yield curve at
the time of grant. The expected term of stock options grated is derived from
historical data and represents the period of time that stock options are
expected to be outstanding. The expected volatility is based on historical
volatility, implied volatility and other factors impacting the Company.
The following table summarizes the stock option activity during 2006:
Weighted-
Average
Weighted- Remaining Aggregate
Average Contractual Instinct
Exercise Term Value (in
Shares Price (Years) thousands)
------------------- ---------------- ------------- ---------------
Options outstanding at beginning of year 14,614.8 $ 0.23
Granted 7,215.0 $ 0.21
Exercised - $ -
Forfeited and expired (6,251.1) $ 0.29
----------------
Options outstanding at end of year 15,578.7 $ 0.20 4.0 $ 59.10
================
Options exercisable at end of year 4,532.3 $ 0.19 3.1 $ 25.20
The weighted-average grant-date fair value of stock options granted during
2006, 2005 and 2004 was $0.14, $0.13 and $0.16, respectively. The total
intrinsic value of stock options exercised during 2005 was $113.5 thousand.
There were no stock options exercised in 2006 or 2004.
-68-
vFINANCE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
A summary of non-vested stock option transactions is as follows for 2006:
Shares (in millions) Weighted-Average
Grant-Date Fair Value
(per share)
------------------- ------------------------
Nonvested at beginning of period 10,688.4 $ 0.13
Granted 7,215.0 $ 0.21
Vested (3,245.8) $ 0.11
Forfeited and expired (3,611.2) $ 0.32
-------------------
Nonvested at end of period 11,046.4 $ 0.13
===================
As of December 31, 2006, there was $1.4 million of total unrecognized
compensation cost related to non-vested stock options, which is expected to be
recognized over a period of four years. The total fair value of shares vested
during 2006 was $357.0 thousand.
During 2005 proceeds from the exercise of stock options were $113.5
thousand. There were no stock options exercised in 2006 or 2004.
10. EARNINGS PER SHARE
The Company calculates earnings per share in accordance with SFAS No. 128,
"Earnings per Share". 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, as follows:
2006 2005 2004
------------ ------------ ------------
Weighted average shares outstanding -
basic 48,714.8 40,049.7 33,773.3
Effect of dilutive stock options and
warrants - - 2,066.9
------------ ------------ ------------
Weighted average shares outstanding -
diluted 48,714.8 40,049.7 35,840.2
============ ============ ============
As of December 31, 2006 and 2005, the Company had 19.5 million and 22.3
million stock options and warrants outstanding, respectively, none of which have
been included in diluted earnings per share since they would have been
anti-dilutive as a result of the net losses in 2006 and 2005. As of December 31,
2004, 2.3 million options and warrants were not included in diluted earnings per
share because they would have been anti-dilutive.
-69-
vFINANCE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
11. DEBT AND CAPITAL LEASE OBLIGATIONS
Capital lease obligations at December 31, 2006 consisted of the following:
Obligations under capital leases 336.4
Less: current maturities (210.8)
------------
$ 125.6
============
Future minimum lease payments for equipment under capital leases at
December 31, 2006 are as follows:
Year Ending December 31: Amount
-------------------------------------------------- ------------
2007 $ 242.4
2008 87.8
2009 31.6
2010 -
2011 -
Thereafter -
------------
Total minimum lease payments 361.8
Less: amounts representing interest (25.4)
------------
Present value of net minimum lease payments 336.4
Less: current portion (210.8)
------------
$ 125.6
============
Debt Forgiveness
On January 25, 2002, the Company entered into a Credit Agreement, as
amended on April 12, 2002, with UBS Americas, Inc. ("UBS"). Under the terms of
the Credit Agreement, UBS provided the Company with a revolving credit facility
for up to $3.0 million for the purpose of supporting the expansion of the
Company's brokerage business or investments in infrastructure to expand the
Company's operations and broker-dealer operations. The loan had a term of 4
years, was required to be repaid in full by January 2005, and accrued interest
at LIBOR plus a LIBOR margin of 2% if the loan was repaid within a month or 5%
if it was outstanding more than a month. The Company borrowed $1.5 million under
the credit facility on January 28, 2002 leaving an additional $1.5 million
available.
In June 2003, Fidelity Investments, on behalf of its clearing division,
National Financial Services LLC, Member NYSE/SIPC, a Fidelity Investments
company ("NFS"), announced that it had acquired Correspondent Services Clearing
("CSC"), an affiliate of UBS and vFinance Investments' clearing firm at the
time. In connection with this transaction, the Company believed certain actions
constituted breaches under the Credit Agreement, including the Company's
preclusion from borrowing the $1.5 million remaining available under the credit
facility.
-70-
vFINANCE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
In March 2004, NFS agreed to extinguish the $1.5 million owed by the
Company under the Credit Agreement, pursuant to a guaranty Fidelity Investments
made to UBS as part of their original acquisition of the CSC clearing division.
In connection with this forgiveness, the Company recorded a $1.5 million gain on
debt forgiveness, relinquished any right to borrow the remaining $1.5 million
that should have been available under the Credit Agreement and waived any lender
liability claims for actual or consequential damages it may have had against
UBS. Additionally, the Company entered into a clearing agreement with NFS. See
Note 13 to the Consolidated Financial Statements.
12. INCOME TAXES
The components of the Company's tax provision for the years ended December
31, 2006, 2005 and 2004 were as follows:
2006 2005 2004
------------ ------------ ------------
Current income tax expense $ - $ - $ 40.0
Deferred income tax (benefit) - - (40.0)
------------ ------------ ------------
$ - $ - $ -
============ ============ ============
The reconciliation of the income tax computed at the U.S. Federal statutory
rate to income tax expense for the period ended December 31, 2006, 2005 and
2004:
2006 % 2005 % 2004 %
------------ --------- ------------ -------- ------------ ---------
Tax expense (benefit) at statutory rate of 35% (766.6) 35.0 $ (349.8) (35.0) $ 845.2 35.0
Nondeductible expenses 66.9 2,916.9 2,916.8
Alternative minimum tax - - 40.0
Change in valuation allowance 699.7 (2,567.10) (3,802.0)
------------ ------------ ------------
Net income tax expense (benefit) $ - $ - $ 0
============ ============ ============
The Company was not subject to any alternative minimum tax for the tax year
ending December 31, 2006 or 2005.
Deferred income taxes reflect the net income tax effect of temporary
differences between the carrying amounts of the assets and liabilities for
financial reporting purposes and amounts used for income taxes. The Company's
deferred income tax assets and liabilities consist of the following:
2006 2005
------------- -------------
Deferred tax assets:
Net operating loss carry-forwards $4,828.0 $ 4,688.7
Deferred rent 66.0 -
Stock options 171.0 -
Impairment of investment in JSM 30.0 30.9
Accrued bonuses 117.0 -
Depreciation and amortization 49.0 (97.3)
Deferred revenue 34.0 -
Reserve for settlements 37.0 -
------------- -------------
5,332.0 4,622.3
Valuation allowance (5,332.0) (4,622.3)
------------- -------------
Net deferred tax asset $ - $ -
============= =============
-71-
vFINANCE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
Net operating loss carry-forwards totaled approximately $12.6 million at
December 31, 2006. The net operating loss carry-forwards can be utilized or
expire if not utilized through the tax years 2021 through 2026. After
consideration of all the evidence, both positive and negative, management has
recorded a valuation allowance at December 31, 2006 and 2005, due to the
uncertainty of realizing the deferred tax assets.
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.
13. COMMITMENTS AND CONTINGENCIES
Clearing Agreement
vFinance Investments entered into a clearing agreement with NFS in 2004
(the "Clearing Agreement"). NFS acquired the vFinance Investment's prior
clearing firm and made a payment to extinguish $1.5 million owed by the Company
under a credit facility in connection with that acquisition. See Note 11 to the
Consolidated Financial Statements.
The new Clearing Agreement requires NFS to pay a monthly incentive bonus to
the Company up to $25.0 thousand per month over the five-year term of the
Clearing Agreement (to an aggregate of $1.5 million). The Company also received
a $200.0 thousand payment from NFS in 2004, as compensation for the transition
costs associated with migrating to a new clearing firm. As consideration for
these incentives, NFS required a termination fee of $1.7 million in the event
vFinance Investments terminates the Clearing Agreement. This fee is reduced
annually on a pro rata basis over the five year term of the Clearing Agreement.
As of December 31, 2006, the contingent obligation of the Company associated
with this Clearing Agreement was $1.0 million.
Operating Lease Commitments
The Company leases office space under the terms of operating leases. The
following chart shows lease obligations including rental of real property and
equipment.
Year Ending December 31: Amount
---------------------------------- ------------
2007 $ 1,356.4
2008 1,271.4
2009 703.5
2010 611.1
2011 635.1
Thereafter 1,286.6
------------
Total 5,864.1
Less: sublease rentals (3,992.8)
------------
$ 1,871.3
============
Total rent expense under operating leases, including space rental, totaled
$1,026.8 thousand, $726.3 thousand and $690.4 thousand for the years ended
December 31, 2006, 2005 and 2004, respectively.
-72-
vFINANCE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
Litigation
The Company, including its wholly owned subsidiary vFinance Investments,
has been named as a defendant in various lawsuits and customer arbitrations.
These claims result from the actions of brokers affiliated with vFinance
Investments. In addition, under the vFinance Investments, Inc. registered
representatives' contract, each registered representative has indemnified the
Company for these claims. In accordance with 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, the Company bases
its judgments on knowledge of the situations, consultations with legal counsel
and 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 the Company's 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, the Company cannot predict with certainty the
eventual loss or range of loss related to such matters. If the Company's
judgments prove to be incorrect, its liability for losses and contingencies may
not accurately reflect actual losses that result from these actions, which could
materially affect results in the period other expenses are ultimately
determined. As of December 31, 2006, the Company has accrued approximately $70.0
thousand for these matters. In 2005 the Company acquired an errors and omissions
policy for certain future claims in excess of the policy's $75.0 thousand per
claim deductible, up to an aggregate of $1.0 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.
The business of vFinance Investments and EquityStation involve substantial
risks of liability, including exposure to liability under federal and state
securities laws in connection with the underwriting or distribution of
securities and claims by dissatisfied customers for fraud, unauthorized trading,
churning, mismanagement and breach of fiduciary duty. In recent years, there has
been an increasing incidence of litigation involving the securities industry,
including class actions that generally seek rescission and substantial damages.
In the ordinary course of business, the Company and/or its subsidiaries may
be parties to other legal proceedings and regulatory inquiries, the outcome of
which, either singularly or in the aggregate, is not expected to be material.
There can be no assurance however that any sanctions will not have a material
adverse effect on the financial condition or results of operations of the
Company and/or its subsidiaries. The following is a brief summary of certain
matters pending against or involving the Company and its subsidiaries.
-73-
vFINANCE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
On October 16, 2006, the Company settled a lawsuit initiated by two
customers by agreeing to issue 1.0 million shares of the Company's common stock
to the customers. The common stock issuance was accounted for as general and
administrative expense, based on the average closing price of the Company's
common stock for the five days prior to issuance of these shares. As part of the
settlement, the Company agreed that if the customers sold the common stock after
October 16, 2007 at a sales price of less than $0.175 per share, the Company
would pay the customers the difference between $0.175 per share and the actual
net sales price of the common stock in a transaction with a bona fide third
party.
On or about February 28, 2005, Knight Equity Markets, LP ("Knight") filed
an arbitration action (NASD Case No. 05-01069) against vFinance Investments,
Inc. ("vFinance"), claiming that vFinance received roughly $6.5 million in
dividends that rightfully belong to Knight. vFinance asserts that the dividends
actually went to two of its clients, Pearl Securities LLC ("Pearl Securities")
and Michael Balog, and that vFinance has no liability. vFinance filed third
party claims against Pearl Securities and Michael Balog to bring all of the
parties into the action. vFinance's motion to amend the third party claim to
include these two clients is currently pending. Pearl and Balog have filed
motions to dismiss vFinance's claims and the motions are scheduled for hearing
on April 17, 2006. Knight is seeking approximately $6.5 million in damages plus
costs, attorney fees and punitive damages. vFinance denies any liability to
Knight and intends to vigorously defend against Knight's claims.
On or about September 27, 2005, John S. Matthews filed an arbitration
action (NASD Case No. 05-014991) against vFinance, claiming that vFinance
wrongfully terminated his independent contact with vFinance and that vFinance
"stole" his clients and brokers. Mr. Matthews has obtained a temporary
restraining order and an agreed upon injunction was issued by the NASD panel.
Matthews and JMS Capital Holding Corp., a plaintiff in the arbitration action
also request unspecified damages resulting from vFinance's alleged improper
activity. The full hearing on the merits was currently scheduled for August 30
through September 1, 2006, but was postponed and has not been rescheduled.
vFinance intends to vigorously defend this matter. In addition to contesting and
defending against JSM's and Mr. Matthews claims, vFinance filed a counterclaim
for indemnity based upon the contractual agreement between the parties.
The Company engaged in a number of other legal proceedings incidental to
the conduct of its business. These claims aggregate a range of $28,000 to
$260,000.
14. DEFINED CONTRIBUTION PLAN
The Company maintains a defined contribution savings plan in which
substantially all employees are eligible to participate. The Company may match
up to 25% of the employee's salary. The Company made no contributions to the
plan for the years ended December 31, 2006, 2005 and 2004, respectively.
-74-
vFINANCE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
15. CASH FLOW INFORMATION
Supplemental disclosure of cash flow information and non-cash items
affecting the statement of cash flows are as follows:
2006 2005 2004
------------ ------------ -------------
Supplemental cash flow disclosures:
Cash paid for interest during the year $ 59.7 $ 30.7 $ 34.0
============ ============ =============
Cash paid for income taxes during the year $ - $ - $ -
============ ============ =============
Non-cash items affecting investing and financing activities:
Acquisition of computer equipment under capital leases $ 132.0 $ 368.0 $ 204.6
============ ============ =============
Common stock issued for acquisition $ 3,406.0 $ - $ 1,580.8
============ ============ =============
Common stock issued for payment of note $ - $ - $ 750.0
============ ============ =============
Common stock issued to settle arbitration $ 261.3 $ - $ -
============ ============ =============
16. CONCENTRATIONS OF CREDIT RISK
The Company maintains its cash in bank and brokerage deposit accounts, the
majority of which, at times, are either uninsured or may exceed federally
insured limits. At December 31, 2006, the Company had $3.4 million in United
States bank deposits, which exceeded federally insured limits. The Company
places its cash with high quality insured financial institutions and has not
experienced any losses in such accounts through December 31, 2006.
The Company and its subsidiaries are engaged in various trading and
brokerage activities in which counterparties primarily include broker-dealers,
banks, and other financial institutions. The Company clears a substantial
portion of its retail, wholesale and market-making transactions through a single
clearing broker. Similarly, the Company clears most of its fixed income security
transactions through another clearing broker. In the event these or other such
counterparties do not fulfill their obligations, the Company may be exposed to
risk. The risk of default depends on the creditworthiness of the counterparty or
issuer of the instrument. It is the Company's policy to review, as necessary,
the credit standing of each counterparty.
-75-
vFINANCE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
18. QUARTERLY FINANCIAL DATA
As discussed in Note 1 to the Consolidated Financial Statements, the Company's
Consolidated Financial Statements have been restated in accordance with SFAS No.
154 to correct certain errors. The following tables present certain items in the
Company's Consolidated Statements of Income for each of the quarterly periods in
2006 and 2005.
Three Months Three Months Three Months Three Months
Ended March 31, Ended June 30, Ended September 30, Ended December 31,
2006 (Unaudited) 2006 (Unaudited) 2006 (Unaudited) 2006 (Unaudited)
(3) (3) (3) (4)
------------------ ------------------ ------------------- ------------------
Revenues, as reported (1) $ 8,754.8 $ 9,655.5 $ 9,545.5
Reclassifications to other income (expense), net (2) 141.1 (36.6) (62.3)
--------------- -------------- --------------
Revenues, revised 8,895.9 9,618.9 9,483.2
Restatement to reclassify securities
available-for-sale 111.7 35.6 46.2
--------------- -------------- --------------
Revenues - restated and revised $ 9,007.6 $ 9,654.5 $ 9,529.4 $ 10,403.4
=============== ============== =============== ==============
Income (loss) from operations, as reported (1) $ 234.0 $ (425.1) $ (478.6)
Reclassifications from revenue to other income
(expense), net (2) 141.1 (36.6) (62.3)
Reclassifications from operating expenses to other
income (expense), net (2) (145.1) 17.9 14.2
--------------- -------------- --------------
Income (loss) from operations, revised 230.0 (443.8) (526.7)
Restatement adjustments:
Reclassification of securities available-for-sale 111.7 35.6 46.2
Amortization of customer relationships 36.7 36.7 36.7
Recognition of transition payment 10.0 10.0 10.0
--------------- -------------- --------------
Net effect of restatement adjustments 158.4 82.3 92.9
--------------- -------------- --------------
Income (loss) from operations - restated and revised $ 388.4 $ (361.5) $ (433.8) $ (1,851.5)
=============== ============== ============== ==============
Net income (loss), as reported (1) $ 253.2 $ (425.1) $ (478.6)
Restatement adjustments:
Reclassification of securities available-for-sale 111.7 35.6 46.2
Amortization of customer relationships 36.7 36.7 36.7
Recognition of transition payment 10.0 10.0 10.0
--------------- -------------- --------------
Net effect of restatements 158.4 82.3 92.9
--------------- -------------- --------------
Net income (loss) - restated and revised $ 411.6 $ (342.8) $ (385.7) $ (1,816.6)
=============== ============== ============== ==============
Net income (loss) per share - basic, as reported (1) $ 0.01 $ (0.01) $ (0.01)
Net effect of adjustments 0.00 0.00 0.00
--------------- -------------- --------------
Net income (loss) per share - basic -
restated and revised $ 0.01 $ (0.01) $ (0.01) $ (0.03)
=============== ============== ============== ==============
Weighted avg. shares outstanding 40,126.1 47,269.0 53,126.1 53,357.6
=============== ============== ============== ==============
Net income (loss) per share - diluted as reported (1) $ 0.01 $ (0.01) $ (0.01)
Net effect of adjustments 0.00 0.00 0.00
=============== ============== ==============
Net income (loss) per share - diluted -
restated and revised $ 0.01 $ (0.01) $ (0.01) $ (0.03)
=============== ============== ============== ==============
Weighted avg. shares outstanding - diluted 42,231.2 47,269.0 53,126.1 53,357.6
(1) Amounts labeled "as reported" represent amounts reported in the
Company's quarterly reports on Form 10-Q for the quarterly periods ended March
31, June 30 and September 30, 2006.
(2) We reclassified certain amounts from revenues and operating expenses
to other income and expense, net during 2006.
-76-
vFINANCE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
(3) Revenues and operating expenses increased in the second, third and
fourth quarters of 2006 compared to the first quarter of 2006, primarily as a
result of the Sterling Financial acquisition.
(4) The Company's loss from operations and net loss increased during the
quarter ended December 31, 2006, primarily as a result of $261.3 thousand of
expenses recorded in connection with arbitration settlements, the forgiveness of
$215.0 thousand due from an unconsolidated affiliate, the accrual of incentive
compensation to be paid in 2007 and a decrease in success fee revenues derived
from investment banking services compared to prior quarters.
Three Months Three Months Three Months Three Months
Ended March 31, Ended June 30, Ended September Ended December
2005 (Unaudited) 2005 (Unaudited) 30, 2005 31, 2005
(Unaudited) (Unaudited) (3)
---------------- --------------- --------------- ---------------
Revenues, as reported (1) $ 6,491.2 $ 6,320.7 $ 6,593.9 $ 6,420.5
Reclassifications to other income (expense), net (2) (0.2) (19.5) (41.2) 60.9
--------------- ---------------- -------------- ---------------
Revenues, revised 6,491.0 6,301.2 6,552.7 6,481.4
Restatement to reclassify securities available-for-sale 119.9 10.4 38.5 75.6
--------------- ---------------- -------------- ---------------
Revenues - restated and revised $ 6,610.9 $ 6,311.6 $ 6,591.2 $ 6,557.0
=============== ================ ============== ===============
Loss from operations, as reported (1) $ (173.6) $ (69.5) $ (132.7) $ (819.4)
Reclassifications from revenue to other income
(expense), net (2) (0.2) (19.5) (41.2) 60.9
Reclassifications from operating expenses to
other income (expense), net (2) (18.4) 8.3 10.1 (104.7)
--------------- ---------------- -------------- ---------------
Loss from operations, revised (192.2) (80.7) (163.8) (863.2)
Restatement adjustments:
Reclassification of securities available-for-sale 119.9 10.4 38.5 75.6
Amortization of customer relationships (36.7) (36.7) (36.7) (36.6)
Recognition of transition payment 10.0 10.0 10.0 10.0
--------------- ---------------- -------------- ---------------
Net effect of restatement adjustments 93.2 (16.3) 11.8 49.0
--------------- ---------------- -------------- ---------------
Loss from operations - restated and revised $ (99.0) $ (97.0) $ (152.0) $ (814.2)
=============== ================ ============== ===============
Net loss, as reported (1) $ (154.5) $ (69.5) $ (132.7) $ (780.6)
Restatement to reclassify securities available-for-sale 119.9 10.4 38.5 75.6
Amortization of customer relationships (36.7) (36.7) (36.7) (36.6)
Recognition of transition payment 10.0 10.0 10.0 10.0
--------------- ---------------- -------------- ---------------
Net effect of restatements 93.2 (16.3) 11.8 49.0
--------------- ---------------- -------------- ---------------
Net loss - restated and revised $ (61.3) $ (85.8) $ (120.9) $ (731.6)
=============== ================ ============== ===============
Net loss per share - basic and diluted, as reported (1) $ (0.00) $ (0.00) $ (0.00) $ (0.02)
Net effect of adjustments 0.00 (0.00) 0.00 0.00
--------------- ---------------- -------------- ---------------
Net loss per share - basic and diluted - restated
and revised $ (0.00) $ (0.00) $ (0.00) $ (0.02)
=============== ================ ============== ===============
Weighted avg. shares outstanding - basic and diluted 39,816.0 40,126.0 40,123.1 40,049.7
=============== ================ ============== ===============
(1) Amounts labeled "as reported" represent amounts reported in the
Company's quarterly reports on Form 10-QSB for the quarterly periods ended March
31, June 30 and September 30, 2005.
(2) We reclassified certain amounts from revenues and operating expenses
to other income and expense, net to conform to the 2006 Statement of Operations
presentation. Included in those reclassification was approximately $70.0
thousand received in connection with a legal settlement, formerly classified as
a reduction in operating expenses.
(3) The Company's loss from operations and net loss increased during the
quarter ended December 31, 2005, primarily as a result of $420.0 thousand of
goodwill impairment recorded during the quarter ended December 31, 2005.
-77-
vFINANCE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE.
None.
ITEM 9A. CONTROLS AND PROCEDURES.
As required by Rule 13a-15(b) under the Exchange Act, as of the end of the
period covered by this Annual Report, our management conducted an evaluation
with the participation of our Chief Executive Officer and Chief Financial
Officer (collectively, the "Certifying Officers") regarding the effectiveness of
the design and operation of our disclosure controls and procedures (as defined
in Rules 13a-15(e) and 15d-15(e) under the Exchange Act). Our management with
the participation of the Certifying Officers also conducted an evaluation of our
internal control over financial reporting.
Based on this evaluation and in accordance with the requirements of
Auditing Standard No. 2 of the Public Company Accounting Oversight Board, our
Chief Executive Officer and Chief Financial Officer concluded that our
disclosure controls and procedures were effective and that we maintained
effective control over financial reporting as of December 31, 2006.
Our management, including the Certifying Officers, does not expect that our
disclosure controls and procedures will prevent all errors and all improper
conduct. 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. Further, 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 of a
cost-effective control system, misstatements due to error or fraud may occur and
may not be detected. Despite these limitations, the Certifying Officers have
concluded that our disclosure controls and procedures (1) are designed to
provided reasonable assurance of achieving their objectives and (2) do provide
reasonable assurance of achieving their objectives.
ITEM 9B. OTHER INFORMATION.
Not Applicable.
-78-
vFINANCE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE.
The following table sets forth the names, ages and positions of our
executive officers and directors as of March 26, 2007. Under our bylaws, each
director holds office until the election and qualification of his successor or
until his earlier resignation or removal:
Name Age Position
--------------------- ------------ -------------------------------------
Leonard J. Sokolow 50 Chairman* and Chief Executive Officer
Charles R. Modica 59 Director
Alan B. Levin 43 Chief Financial Officer
Richard Campanella 55 Secretary
Leonard J. Sokolow has been the chairman of our Board of Directors since
January 1, 2007, one of our directors since November 8, 1997 and our Chief
Executive Officer since November 8, 1999. From January 5, 2001 through December
31, 2006, Mr. Sokolow was our President. From November 8, 1999 through January
4, 2001, Mr. Sokolow was Vice Chairman of our Board. Since September 1996, Mr.
Sokolow has been President of Union Atlantic LC, a merchant, banking and
strategic consulting firm specializing domestically and internationally in
technology industries that is a wholly-owned subsidiary of our Company. Union
Atlantic LC has been inactive since September 16, 2005. Since August 1993, Mr.
Sokolow has been President of Genesis Partners, Inc., a private financial
business-consulting firm. Genesis Partners, Inc. has been inactive since
December 31, 2002. From August 1994 through December 1998, Mr. Sokolow was the
Chairman and Chief Executive Officer of the Americas Growth Fund, Inc., a public
closed-end management investment company. Mr. Sokolow received his B.A. degree
in Economics from the University of Florida in 1977, a J.D. degree from the
University of Florida Levin College of Law in 1980 and an LL.M. degree in
Taxation from the New York University Graduate School of Law in 1982. Mr.
Sokolow is a Certified Public Accountant. He is also a director of Consolidated
Water Co. Ltd., a position he has held since May 2006.
Charles R. Modica has been one of our directors since January 3, 2007. Mr.
Modica has served as Chairman of the Board of Trustees and Chancellor of St.
George's University located in Grenada, West Indies, since founding the
university as a School of Medicine in 1976. He has served on the Board of
Trustees of Barry University, Miami, Florida, since 1983, and as Chairman of
such Board of Trustees from 1997 - 2001. Additionally, he served on the Board of
Trustees of Rosarian Academy, West Palm Beach, Florida, from 1995 to 2001, and
as Chairman of such Board of Trustees from 1998 to 2001. Mr. Modica also has
served on the Board of Trustees of WXEL Public Radio and Television of Florida
since 1998. Mr. Modica received his B.S. degree in Biology from Bethany College
in 1970 and his J.D. degree from the Delaware Law School in 1975.
Alan B. Levin has been our Chief Financial Officer since January 2007. Mr.
Levin had been our Interim Chief Financial Officer since July 2006 and our
Controller since June 2005. Prior to joining us, Mr. Levin served as Chief
Financial Officer for United Capital Markets, Inc. from September 2000 to
January 2005. Mr. Levin has over 18 years serving in various industries in
accounting management roles. He has spent the last 8 years serving as Financial
and Operations Principal within the brokerage industry. He received a B.S.
degree in Economics with a concentration in Accounting from Southern Connecticut
State University in New Haven, Connecticut in 1986.
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vFINANCE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
Richard Campanella has been our Secretary since December 18, 2001. Mr.
Campanella currently serves as the President, Chief Operating Officer and Chief
Compliance Officer of vFinance Investments. He assumed the role of
President and Chief Operating Officer of vFinance Investments, Inc. as of
January 2006. From February 1994 to April 2001, Mr. Campanella was a partner of
Commonwealth Associates, a registered broker-dealer, where he served as the
director of Compliance. He received a B. A. degree in Business Administration
from the College of Staten Island in 1972.
*From November 8, 1999 through January 3, 2007, Mr. Timothy E. Mahoney
served as our Chairman of the Board and Chief Operating Officer. On December 29,
2006, we entered into a resignation agreement with Mr. Mahoney, pursuant to
which Mr. Mahoney resigned from his positions as the Chairman of our Board of
Directors and Chief Operating Officer, effective January 3, 2007. Effective upon
Mr. Mahoney's resignation, Mr. Sokolow assumed the position of Chairman of our
Board of Directors.
In connection with Mr. Mahoney's departure, Messrs. Mahoney and Sokolow
entered into a voting agreement dated December 29, 2006 (the "Voting
Agreement"). Under the terms of the Voting Agreement, as long as either party
owns 1.0 million shares of our common stock, as adjusted for stock splits and
other recapitalizations, each party will vote for the other party or his
designee to serve on our Board of Directors.
AUDIT COMMITTEE
Our Board of Directors serves as our audit committee. Leonard J. Sokolow
has been designated as an "audit committee financial expert" as such term is
defined in the SEC's rules.
CODE OF ETHICS
We have adopted a Code of Ethics for the Chief Executive Officer and Chief
Financial Officer, which was filed as Exhibit 14 to the Annual Report on Form
10-KSB for the fiscal year ended December 31, 2003, and is herein incorporated
by reference. If we make any substantive amendments to our code of ethics or
grant any waiver, including any implicit waiver, from a provision of the code to
the Chief Executive Officer or Chief Financial Officer, we will disclose the
nature of such amendment or waiver in a report on Form 8-K.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Exchange Act requires our directors and executive
officers, and persons who beneficially own more than ten percent (10%) of a
registered class of our equity securities, to file with the SEC initial reports
of ownership and reports of changes in ownership of our common stock and the
other of our equity securities.
Officers, directors and persons who beneficially own more than ten percent
(10%) of a registered class of our equity securities are required by the
regulations of the SEC to furnish us with copies of all Section 16(a) forms they
file.
To our knowledge, based solely on review of these filings and written
representations from the directors and officers, we believe that during the
fiscal year ended December 31, 2006, our officers, directors and significant
stockholders have timely filed the appropriate form under Section 16(a) of the
Exchange Act.
-80-
vFINANCE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
ITEM 11. EXECUTIVE COMPENSATION.
COMPENSATION DISCUSSION & ANALYSIS
In this section, we will give an overview and analysis of our compensation
program and policies, the material compensation decisions we have made under
those programs and policies, and the material factors that we considered in
making compensation decisions for our Named Executive Officers, as defined under
the heading "Additional Information Regarding Executive Compensation." Specific
information regarding the compensation earned by or paid to our Named Executive
Officers in 2006 is set forth in a series of tables under the heading
"Additional Information Regarding Executive Compensation." The discussion below
is intended to help you understand the detailed information provided in those
tables and put that information into context within our overall compensation
program.
Overview of Compensation Program
Our Board of Directors has responsibility for establishing, implementing
and continually monitoring adherence with our compensation philosophy,
maintaining competitive compensation and structuring compensation to achieve our
compensation objectives. Generally, the types of compensation and benefits we
provide to our Named Executive Officers are similar to those provided to our
other executive officers.
Compensation Philosophy and Objectives
Our Board believes that compensation paid to our Named Executive Officers
should be aligned with our performance, and that compensation should be
structured to ensure that our Named Executive Officers' compensation
opportunities are related to achievement of our financial and operational goals,
such as meeting targets for profitability, revenue, cash flow, acquisitions and
mergers, recruiting, balance sheet objectives and operating within the capital
expenditures budget, all of which impact stockholder value. Our Board evaluates
both performance and compensation to ensure that we maintain our ability to
attract and retain highly skilled and motivated employees in key positions and
that compensation provided to key employees remains competitive relative to the
compensation paid to similarly situated executives of our peer companies, which
include Sanders Morris Harris Group, Siebert Financial Corp., MCF Corporation,
Ladenburg Thalman Financial Services, Paulson Capital Corp., First Montauk
Financial, Empire Financial Holding Company, Investors Capital Holdings Ltd. and
National Holdings Corporation. To that end, our Board believes that the
executive compensation packages we provide to our executives, including our
Named Executive Officers, should include a mix of base salary and equity-based
and incentive-based compensation.
Our compensation decisions with respect to our Named Executive Officer
compensation opportunities are influenced by (a) the executive's level of
responsibility and function within the Company, (b) our overall performance and
profitability, and (c) our assessment of the competitive marketplace, including
our Peer Companies located in our geographical business area.
-81-
vFINANCE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
Setting Executive Compensation
Based on the foregoing philosophy and objectives, our Board has structured
our Named Executive Officers' base salary and equity-based and incentive-based
compensation to motivate executives to achieve our business goals and reward the
executives for achieving such goals. In furtherance of this, our Board plans to
reassess our compensation program as the employment agreements of our Named
Executive Officers come up for renewal to ensure that our goals and objectives
are achieved.
In determining the compensation of our Named Executive Officers as set
forth in their most recent employment agreements, our Board reviewed (i) the
Report on Compensation of Top Management in Small and Regional Firms - 2005,
prepared by the Securities Industry Association, which covered compensation paid
to executive officers of 43 member firms; (ii) the Report on Management and
Professional Earnings in the Securities Industry - 2006, prepared by the
Securities Industry Association, which covered compensation information for 188
middle-management and professional positions; and (iii) the Report on Office
Salaries in the Securities Industry - 2006, prepared by the Securities Industry
Association, which provides compensation information for 95 non-exempt
positions. Using this information, our Board determined the total compensation
of our Named Executive Officers, pursuant to their current employment
agreements.
2006 Executive Compensation Components
For the fiscal year ended December 31, 2006, the principal components of
compensation for our Named Executive Officers were:
o base salary;
o equity-based compensation;
o incentive-based compensation; and
o benefits.
Base Salary
Base salaries for our executives are established based on the scope of
their responsibilities and their prior relevant background, training, and
experience, taking into account competitive market compensation paid by the
companies represented in the compensation data our Board reviewed for similar
positions and the overall market demand for such executives at the time of hire
or entry into employment agreements. As with total compensation, we believe that
executive base salaries should be competitive with the salaries paid to
executives in similar positions and with similar responsibilities in the
companies of comparable size to us represented in the compensation data
reviewed. An executive's base salary is also evaluated together with other
components of the executive's other compensation to ensure that the executive's
total compensation is in line with our overall compensation philosophy and
objectives.
Base salaries are reviewed annually and increased based upon (i) a need to
realign base salaries with market levels for the same positions in the companies
of similar size to us represented in the compensation data reviewed; (ii) an
internal review of the executive's compensation, both individually and relative
to other executive officers; (iii) the individual performance of the executive
and (iv) an assessment of whether significant corporate goals were achieved.
Additionally, we adjust base salaries as warranted throughout the year for
promotions or other changes in the scope or breadth of an executive's role or
responsibilities.
-82-
vFINANCE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
Equity-Based Compensation
Under the terms of our Named Executive Officers' employment agreements,
they are entitled to receive equity-based compensation in the form of stock
options. We believe that equity compensation is an effective means of creating a
long-term link between the compensation provided to our Named Executive Officers
and other key management personnel with gains realized by the stockholders. All
stock options incorporate the following features:
o the term of the grant does not exceed 5 years;
o the grant price is not less than the market price on the date of
grant; and
o options vest 25% per year over four years beginning with the first
anniversary of the date of grant.
We use stock options as a long-term incentive vehicle because:
o stock options align the interests of executives with those of
the stockholders, support a pay-for-performance culture,
foster employee stock ownership, and focus the management team
on increasing value for the stockholders;
o stock options are performance based (all of the value received
by the recipient from a stock option is based on the growth of
the stock price above the option price); and
o the five year vesting for stock options creates incentive for
increases in stockholder value over a longer term and
encourages executive retention.
In determining the number of options to be granted to Named Executive
Officers, we take into account the individual's position, scope of
responsibility, ability to affect profits and stockholder value, the
individual's historic and recent performance, and the value of stock options in
relation to other elements of total compensation.
Incentive-Based Compensation
Discretionary Bonus. Our former Chairman and our former Chief Financial
Officer were, and our current Chairman and Chief Executive Officer and our
current Chief Financial Officer are, eligible to receive periodic bonuses in
amounts determined by our Board in its sole discretion based upon targets for
revenue, profitability, cash flow, acquisitions and mergers closed, recruiting,
capital expenditure budget objectives, balance sheet objectives and the
respective individual performance of the executive. The annual bonuses paid to
our current Chairman and Chief Executive Officer and current Chief Financial
Officer are, and those paid to our former Chairman and our former Chief
Financial Officer were, paid in cash. These bonus provisions are intended, in
accord with our compensation philosophies and objectives, to align executive
interests with stockholder interests.
Incentive Bonus. Our employment agreements with our former Chairman and our
current Chairman and Chief Executive Officer, provide for the payment of an
incentive bonus equal to 10% of the "Income," up to a maximum of 50% of such
officer's base salary. "Income" is computed in accordance with the following
formula:
Income = "Revenues" - "Expenses" - "Reserves"
-83-
vFINANCE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
Where,
o "Revenues" means 100% of cash revenues or other income received by us;
o "Expenses" means the direct and indirect expenses for our
operation including, but not limited to, salaries, profit
sharing expenses to divisional executives or other divisional
employees (excluding the subject officer), taxes, allocable
rent, utilities, phone, accounting, bookkeeping, etc.; and
o "Reserves" means, in the context of current facts and
circumstances, the appropriate reserve for future
contingencies and demands on cash resources attributable to
the operations of such division.
The incentive bonuses paid to our former Chairman, our current Chairman and
Chief Executive Officer and Chief Financial Officer are paid as frequently as
quarterly in cash, as directed by the Board of Directors.
Our employment agreements with our former Chief Financial Officer provided
and the employment agreement with the President and Chief Operating Officer of
vFinance Investments, Inc. provides for the payment of annual incentive bonuses.
Our employment agreement with our former Chief Financial Officer provided for an
incentive bonus based upon the percentage of the increase (if any) of operating
profits from the creation and/or sale of financial, home resource, information,
data and telecommunication services. The bonus was computed using the following
percentages:
Period Percentage
---------------------------------------- -------------------------
Year Just Ended 10%
Incremental profit of the prior year 8%
Incremental profit of two years ago 6%
Incremental profit of three years ago 4%
Incremental profit of four years ago 2%
Our employment agreement with the President and Chief Operating Officer of
vFinance Investments, Inc. provides for the payment of an incentive bonus of 10%
of the pre-tax net income of our retail brokerage division above $1,732,000.
The incentive bonuses paid to our former and present Chief Financial
Officer and the President and Chief Operating Officer of vFinance Investments,
Inc. are paid periodically in cash, as directed by the Board of Directors.
These bonus provisions are intended to align executive interests with
stockholder interests.
As the employment agreements of our Named Executive Officers come up for
renewal, our Board plans to review the employment agreements to determine if our
Named Executive Officers' compensation levels are competitive and have the right
mix of incentive-based compensation.
-84-
vFINANCE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
Benefits
Our former Chairman and our former Chief Financial Officer participated,
and our current Chairman and Chief Executive Officer and our current Chief
Financial Officer participate, in a variety of health and welfare benefit plans
for which we pay the premium. We believe that health and welfare benefits help
ensure that we have a productive and focused workforce.
Termination-Based Compensation
Termination
Our employment agreement with our current Chief Financial Officer is, and
our employment agreement with our former Chief Financial Officer was, terminable
at will. Accordingly, we will not incur any obligations upon the termination of
these Named Executive Officers.
Our employment agreement with our former Chairman could have been, and our
employment agreement with our current Chairman and Chief Executive Officer may
be, terminated upon the occurrence of the following:
i. the death of such Named Executive Officer;
ii. such Named Executive Officer giving 30 days' notice of
termination;
iii. the Named Executive Officer being unable to discharge his duties
due to physical or mental illness (for the purpose of this
discussion "Disability") for a period of more than nine
consecutive months or 12 months during any 18-month period; and
iv. (a) the final non-appealable adjudication of such Named Executive
Officer as guilty of a felony or (b) the unanimous determination
of our Board (other than such Named Executive Officer) that such
Named Executive Officer has engaged in material intentional
misconduct or the gross neglect of his duties that has a material
adverse effect on our business (for the purpose of this
discussion, "For Cause").
Upon the death or "Disability" of our former Chairman and our current
Chairman and Chief Executive Officer or our termination of our employment
agreements with such Named Executive Officers other than "For Cause," such
employment agreements provide that we would be required to pay these Named
Executive Officers a lump sum payment equal to the sum of (a) twice the sum of
their respective highest annual base salary during employment with us, and (b)
twice the greater of (i) the highest bonus, incentive or other compensation
payment actually received by such officer during the three years preceding the
termination and (ii) the highest bonus, incentive or other compensation payment
such officer was entitled to receive during the three years preceding the
termination. Additionally, we will be required to provide all applicable
benefits to such officer and his family for a period of two years. All stock
options warrants or other similar securities will become fully vested. Our
employment agreement with our former Chairman was mutually terminated in 2006.
For a description the terms of the resignation agreement, see "Additional
Information Regarding Executive Compensation - Employment Agreements."
-85-
vFINANCE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
Prior to December 31, 2006, our employment agreement with the President and
Chief Operating Officer of vFinance Investments could have been terminated for
"Good reason" by such officer or for "Cause" by us. If our employment agreement
with the President and Chief Operating Officer of vFinance Investments was
terminated for "Good reason" by such officer or other than for "Cause" by us
prior to December 31, 2006, we would have been obligated to continue paying the
President and Chief Operating Officer of vFinance Investments his base salary
until such date. After December 31, 2006, the President and Chief Operating
Officer of vFinance Investments is terminable at will.
In determining whether to approve and setting the terms of such termination
arrangements, our Board recognizes that executives, especially highly ranked
executives, often face challenges securing new employment following termination.
Based upon the data reviewed by our Board, we believe that the payments to be
made upon termination are generally in line with severance packages offered to
similarly situated executives.
Change in Control
Upon the acquisition by an individual or company of 50.1% or more of our
issued and outstanding shares, all options granted to our current Chief
Financial Officer and the President and Chief Operating Officer of vFinance
Investments, Inc. pursuant to their respective employment agreements will become
immediately vested.
Upon the acquisition by an individual or company of 51% or more of our
issued and outstanding shares, all options granted to our former Chief Financial
Officer pursuant to her employment agreement would have become immediately
vested. Additionally, if our former Chief Financial Officer's employment were
terminated following such acquisition, we would have been required to pay our
former Chief Financial Officer 12 months' salary.
Upon a "Change in Control," as defined below, anytime from January 3, 2007
up to and including January 3, 2010, we have agreed to pay to our former
Chairman an amount equal to: (a) twice the sum of his highest annual base salary
during his employment with us, and (b) twice the greater of (i) the highest
bonus, incentive or other compensation payment actually received by him during
the three years preceding the Change in Control and (ii) the highest bonus,
incentive or other compensation payment he was entitled to receive during the
three years preceding the Change in Control. In the event of a Change in
Control, all stock options, warrants, stock appreciation rights and other
similar securities held by our former Chairman will become immediately and fully
vested.
Upon a Change in Control, we have agreed to pay to our current Chairman and
Chief Executive Officer an amount equal to: (a) twice the sum of his highest
annual base salary during his employment with us, and (b) twice the greater of
(i) the highest bonus, incentive or other compensation payment actually received
by him during the three years preceding the Change in Control and (ii) the
highest bonus, incentive or other compensation payment he was entitled to
receive during the three years preceding the Change in Control. In the event of
a Change in Control, all stock options, warrants, stock appreciation rights and
other similar securities held by our current Chairman and Chief Executive
Officer will become immediately and fully vested.
-86-
vFINANCE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
In determining whether to approve and in setting the terms of such Change
in Control arrangements, our Board recognizes the importance to us and our
stockholders of avoiding the distraction and loss of key management personnel
that may occur in connection with rumored or actual fundamental corporate
changes. A properly arranged Change in Control provision protects stockholder
interests by enhancing employee focus during rumored or actual Change in Control
activity through:
o incentives to remain with us despite uncertainties while a transaction is
under consideration or pending; and
o assurance of compensation for terminated employees after a Change in
Control.
We believe that our change in control arrangements are generally in line
with such arrangements offered to similarly situated officers of the companies.
For the purposes of this discussion, a "Change of Control" means the
occurrence of the following events: (1) thirty percent (30%) or more of our
voting stock is acquired by any person (other than the subject executive
officer), entity or affiliated group; (ii) an unapproved change to the majority
control of our Board; (iii) any merger, consolidation or business combination
pursuant to which we are not the surviving corporation; (iv) our liquidation or
dissolution; or (v) the sale of all or substantially all of our assets.
Board Report
Our Board reviewed and discussed the above Compensation Discussion &
Analysis ("CD&A") with our management. Based on the review and discussions, our
Board determined that the CD&A be included in this Annual Report on Form 10-KSB.
Board of Directors
Leonard J. Sokolow
Charles R. Modica
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ADDITIONAL INFORMATION REGARDING EXECUTIVE COMPENSATION
Summary Compensation Table
The following table provides compensation information for the year ended
December 31, 2006 for Named Executive Officers. The "Executive Compensation -
Compensation Discussion and Analysis" section of this proxy statement includes
information regarding the material terms of plans and agreements pursuant to
which certain items set forth below are paid.
Name and Principal Position Year Salary Bonus Option Awards All Other Total
Comp.
($) ($)(1) ($) ($) ($)
(a) (b) (c) (d) (f) (i) (j)
---------------------------------------------------------- ------------- ------------ ----------- ------------ --------- ----------
2006 340,698 155,000 280,000 9,160 784,858
Leonard J. Sokolow
Chief Executive Officer
2006 118,192 27,000 135,000 - 280,192
Alan B. Levin
Chief Financial Officer
2006 147,512 7,024 - - 154,536
Richard Campanella
President and Chief Operating Officer
of vFinance Investments, Inc.
2006 283,373 106,000 - 9,160 398,533
Timothy Mahoney
Former Chairman and Chief Operating Officer
2006 118,035 26,581 - 5,343 149,959
Sheila Reinken
Former Chief Financial Officer
(1) Mr. Levin assumed the position of Chief Financial Officer effective on
December 29, 2006 and the position of interim Chief Financial Officer on July
24, 2006. Prior to July 2006, Mr. Levin served as our Controller. The
information presented herein represents actual amounts paid for the period from
January 1, 2006 to December 31, 2006.
(2) Ms. Reinken resigned from the position of Chief Financial Officer July
26, 2006. The information presented herein represents actual amounts paid for
the period from January 1, 2006 to July 26, 2006.
(3) Bonus amounts have been determined pursuant to the bonus terms outlined
in our Named Executive Officers' respective employment agreements or based on
the discretion of the Board of Directors.
(4) Options amounts have been determined pursuant to the option terms
outlined in our Named Executive Officers' respective employment agreements or
based on the discretion of the Board of Directors.
(5) Represents health insurance contributions.
-88-
Grants Of Plan-Based Awards
The following table shows all plan-based awards granted to Named
Executive Officers during fiscal year 2006. Certain terms of the Corporation's
Stock Plan pursuant to which the grants identified in the table were made are
described in the "Executive Compensation - Compensation Discussion and Analysis
- Long-Term Equity-Based Compensation" section of this proxy statement.
Estimated Future Payouts Under Estimated Future Payouts
Non-Equity Incentive Plan Under Equity Incentive Plan
Awards: Awards:
Name Grant Date Threshold ($) Target ($) Maximum ($) Threshold ($)Target Maximum ($)
(a) (b) (c) (d) (e) (f) (g) (h)
------------------------------------------------------------------------------------------------------
Leonard J. Sokolow 12/29/2006 - - - - - -
------------------------------------------------------------------------------------------------------
7/24/2006 - - - - - -
Alan B. Levin 12/29/2006 - - - - - -
------------------------------------------------------------------------------------------------------
Richard Campanella 2006 - - - - - -
------------------------------------------------------------------------------------------------------
Timothy Mahoney 2006 - - - - - -
------------------------------------------------------------------------------------------------------
Sheila Reinken 2006 - - - - - -
------------------------------------------------------------------------------------------------------
All Other All Other
Stock Option Exercise
Awards: Awards: or Base Grant Date
Number of Number of Price of Fair Value of
Shares of Securities Option Stock and
Name Stock or Underlying Awards Option
Units (#) Options (#) ($/Sh) Awards ($)
(a) (i) (j) (k) (l)
--------------------------------------------------------------
Leonard J. Sokolow - 2,000,000 0.21 140,000
--------------------------------------------------------------
- 500,000 0.20
Alan B. Levin - 500,000 0.21 65,000
--------------------------------------------------------------
Richard Campanella - 600,000 0.17 70,000
--------------------------------------------------------------
Timothy Mahoney - - - -
--------------------------------------------------------------
Sheila Reinken - - - -
--------------------------------------------------------------
Employment Agreements
Leonard J. Sokolow -Chairman and Chief Executive Officer
On November 16, 2004, we entered into a new employment agreement with
Leonard J. Sokolow, who is the beneficial owner of 11.4% of our total
outstanding common shares at December 31, 2006, pursuant to which Mr. Sokolow
served as our Chief Executive Officer and President. The employment agreement
provides that Mr. Sokolow receive an initial base salary of $257,000 per annum,
subject to a 5% increase per annum beginning January 1, 2005. Our Board will
review the base salary at least annually and may increase (but not decrease) the
base salary from time to time. Additionally, the employment agreement provides
that Mr. Sokolow receive (i) a discretionary bonus, interim cash bonus and/or
other bonus when and in such amounts as may be determined by our Board of
Directors based on his performance, our performance and/or other factors and
(ii) incentive compensation paid quarterly no later than the 45th day following
the end of quarter primarily based on our performance. The employment agreement
has a term of three years, subject to automatic extensions for one year on each
anniversary date thereafter unless we have provided a non-renewal notice thirty
(30) days prior to such anniversary date. The employment agreement also contains
provisions related to change of control, discussed in detail under the heading
"Additional Information Regarding Executive Compensation - Post-Termination /
Change in Control Benefits," below.
-89-
On May 12, 2006, Mr. Sokolow and we entered into an amendment to his
employment agreement to provide a base salary of $343,511. On December 29, 2006,
Mr. Sokolow and we entered into another amendment to his employment agreement,
pursuant to which Mr. Sokolow serves as the Chairman of our Board of Directors
and our Chief Executive Officer. Mr. Sokolow's base salary was increased from
$343,511 per annum to $396,750 per annum, subject to an annual increase based on
the reported cost of living adjustment beginning January 1, 2008. None of the
other terms of Mr. Sokolow's employment agreement were modified in any material
respect.
Timothy E. Mahoney - Former Chairman and Chief Operating Officer
Pursuant to his employment agreement, Mr. Mahoney received an annual base
salary of $283,394 and was entitled to bonus or incentive compensation as
determined by our Board of Directors based on his performance, our performance
and other factors. The employment agreement provided that if we terminated Mr.
Mahoney other than for cause or upon death or disability, or if Mr. Mahoney
voluntarily terminated his employment due to an adverse change in duties, a
reduction in compensation or benefits or the relocation of our principal offices
(collectively a "Triggering Event"), we would have been required to pay Mr.
Mahoney (a) two times his highest annual base salary in one lump sum, and (b)
twice the greater of (i) the highest bonus, incentive or other compensation
payment actually received by Mr. Mahoney during the three years preceding the
Triggering Event and (ii) the highest bonus, incentive or other compensation
payment Mr. Mahoney was entitled to receive during the three years preceding the
Triggering Event. We would have also been required to provide Mr. Mahoney up to
two years of other employee benefits.
On December 29, 2006, Mr. Mahoney and we entered into a Resignation
Agreement (the "Resignation Agreement"), pursuant to which Mr. Mahoney resigned
from his positions as the Chairman of our Board of Directors and our Chief
Operating Officer effective January 3, 2007. In accordance with the Resignation
Agreement, we have agreed to pay to Mr. Mahoney, upon a Change in Control
anytime from January 3, 2007 up to and including January 3, 2010 an amount equal
to: (a) twice the sum of Mr. Mahoney's highest annual base salary during his
employment with us, and (b) twice the greater of (i) the highest bonus,
incentive or other compensation payment actually received by Mr. Mahoney during
the three years preceding the Change in Control and (ii) the highest bonus,
incentive or other compensation payment Mr. Mahoney was entitled to receive
during the three years preceding the Change in Control. In the event of a Change
in Control, all stock options, warrants, stock appreciation rights and other
similar securities held by Mr. Mahoney will become immediately and fully vested.
In connection with Mr. Mahoney's resignation, on December 29, 2006, the
Company and Mr. Mahoney jointly terminated Mr. Mahoney's Amended and Restated
Employment Agreement dated November 16, 2004, which termination was effective
January 3, 2007.
The termination of the employment agreement prior to the expiration of its
term will not cause us to incur any early termination penalties of any kind, and
all post-employment matters between Mr. Mahoney and us are governed by the
Resignation Agreement.
-90-
Alan B. Levin - Chief Financial Officer
On July 24, 2006, we entered into an employment agreement with Alan B.
Levin, pursuant to which Mr. Levin served as our Interim Chief Financial
Officer. Under the terms of his employment agreement, Mr. Levin is entitled to
an annual base salary of $135,000, plus certain incentive bonuses. On December
29, 2006, Mr. Levin was appointed our Chief Financial Officer, upon which his
annual base salary increased to $165,000 under his employment agreement. In
addition, we granted to Mr. Levin five-year options to purchase 500,000 of our
shares at an exercise price of $0.20 per share, of which 125,000 options shall
vest on July 24, 2007, and 125,000 options shall vest each subsequent yearly
anniversary thereafter provided that Mr. Levin is employed on the applicable
vesting date. Mr. Levin's employment is terminable at will. Upon the acquisition
by any individual, group or entity of more than 50% of the issued and
outstanding shares of the Company's common stock, Mr. Levin's options will vest
immediately.
Richard Campanella - Secretary and President and Chief Operating Officer of
vFinance Investments, Inc.
On January 20, 2005, we entered into an employment agreement with Richard
Campanella, pursuant to which Mr. Campanella serves as the President and Chief
Operating Officer of vFinance Investments. Under the terms of his employment
agreement, Mr. Campanella is entitled to an annual base salary of $135,000, plus
certain incentive bonuses. In addition, we granted to Mr. Campanella five-year
options to purchase 600,000 of our shares at an exercise price of $0.18 per
share, of which 150,000 options vested on July 1, 2006, and 125,000 options
shall vest each subsequent yearly anniversary thereafter provided that Mr.
Campanella is employed on the applicable vesting date. If our employment
agreement with Mr. Campanella was terminated for "Good reason" by such officer
or other than for "Cause" by us prior to December 31, 2006, we would have been
obligated to continue paying Mr. Campanella his base salary until such date.
After December 31, 2006, Mr. Campanella's employment with us is terminable at
will.
Sheila C. Reinken - Former Chief Financial Officer and Chief Administrative
Officer
On November 15, 2004, we entered into an employment agreement with Sheila
C. Reinken, pursuant to which Mrs. Reinken served as our Chief Financial Officer
and Chief Administrative Officer. The employment agreement provided for the
payment of an annual base salary of $155,000, a discretionary bonus with a
target of 50% of her base salary, plus certain incentive bonuses. In addition,
we granted Ms. Reinken options to purchase 600,000 shares of our common stock,
of which 150,000 options vested on January 4, 2006, at an exercise price of
$0.245 per share.
Ms. Reinken resigned from her position as our Chief Financial Officer and
Chief Administrative Officer on July 21, 2006. Because Ms. Reinken's employment
was terminable at will, we did not incur any obligations as a result of her
termination.
-91-
Outstanding Equity Awards At Year-End
None of our Named Executive Officers exercised options or received stock
awards during the year ended December 31, 2006.
--------------------------------------------------------------------------------
Option Awards
---------------------------------------------------------
Name Number of Number of
Securities Securities
Underlying Underlying
Unexercised Unexercised Option Option
Option (#), Option (#), Exercise Expiration
Exercisable Unexercisable Price ($) Date
(a) (b) (c) (e) (f)
--------------------------------------------------------------------------------
375,000 1,125,000 0.155 12/29/10
Leonard J. Sokolow - 2,000,000 0.210 12/28/11
--------------------------------------------------------------------------------
40,000 120,000 0.180 06/13/10
Alan B. Levin 12,500 37,500 0.155 12/29/10
- 500,000 0.200 07/23/11
- 500,000 0.210 12/28/11
--------------------------------------------------------------------------------
Richard Campanella 150,000 450,000 0.170 06/30/10
--------------------------------------------------------------------------------
Timothy Mahoney 1,500,000 - 0.155 12/29/10
--------------------------------------------------------------------------------
Sheila Reinken - - - -
--------------------------------------------------------------------------------
-92-
Option Exercises and Stock Vested
None of our Named Executive Officers exercised options or received stock
awards during the year ended December 31, 2006
Pension Benefits
We do not have any defined benefit plans and only offer defined
contribution plans.
Non-Qualified Deferred Compensation
We do not have any non-qualified deferred contribution plans or other
deferred compensation plans.
Post-Termination / Change in Control Benefits
The section below describes the payments that may be made to Named
Executive Officers upon termination or Change in Control, as defined below,
pursuant to individual agreements. For payments made to a participant upon a
retirement other than in connection with termination or a Change in Control, see
Pension Benefits above.
-93-
Termination
Our employment agreement with our current Chief Financial Officer is, and
our employment agreement with our former Chief Financial Officer was, terminable
at will. Accordingly, we will not incur any obligations upon the termination of
these Named Executive Officers.
Our employment agreement with our former Chairman could have been, and our
employment agreement with our current Chairman and Chief Executive Officer may
be, terminated upon the occurrence of the following:
v. the death of such Named Executive Officer;
vi. such Named Executive Officer giving 30 days' notice of
termination;
vii. the Named Executive Officer being unable to discharge his duties
due to physical or mental illness (for the purpose of this
discussion "Disability") for a period of more than nine
consecutive months or 12 months during any 18-month period; and
viii. (a) the final non-appealable adjudication of such Named Executive
Officer as guilty of a felony or (b) the unanimous determination
of our Board (other than such Named Executive Officer) that such
Named Executive Officer has engaged in material intentional
misconduct or the gross neglect of his duties that has a material
adverse effect on our business (for the purpose of this
discussion, "For Cause").
Upon the death or "Disability" of our former Chairman and our current
Chairman and Chief Executive Officer or our termination of our employment
agreements with such Named Executive Officers other than "For Cause," such
employment agreements provide that we would be required to pay these Named
Executive Officers a lump sum payment equal to the sum of (a) twice the sum of
their respective highest annual base salary during employment with us, and (b)
twice the greater of (i) the highest bonus, incentive or other compensation
payment actually received by such officer during the three years preceding the
termination and (ii) the highest bonus, incentive or other compensation payment
such officer was entitled to receive during the three years preceding the
termination. Additionally, we will be required to provide all applicable
benefits to such officer and his family for a period of two years. All stock
options warrants or other similar securities will become fully vested.
Our employment agreement with our former Chairman was mutually terminated
in 2006. For a description the terms of the Resignation Agreement, see
"Additional information Regarding Executive Compensation - Employment
Agreements," above. The termination of the employment agreement prior to the
expiration of its term will not cause us to incur any early termination
penalties of any kind, and all post-employment matters between our former
Chairman and us are governed by the Resignation Agreement.
Prior to December 31, 2006, our employment agreement with the President and
Chief Operating Officer of vFinance Investments, Inc. could have been terminated
for "Good reason" by such officer or for "Cause" by us. If our employment
agreement with the President and Chief Operating Officer of vFinance
Investments, Inc. was terminated for "Good reason" by such officer or other than
for "Cause" by us prior to December 31, 2006, we would have been obligated to
continue paying the President and Chief Operating Officer of vFinance
Investments, Inc. his base salary for the remainder of the term of his
employment agreement.
-94-
Assuming our current Chairman and Chief Executive Officer's employment was
terminated on December 31, 2006 upon his death or "Disability" or our
termination other than "For Cause," we would be required to pay him a lump sum
of approximately $1.13 million.
Change in Control
Upon the acquisition by an individual or company of 50.1% or more of our
issued and outstanding shares, all options granted to our current Chief
Financial Officer and the President and Chief Operating Officer of vFinance
Investments, Inc. pursuant to their respective employment agreements will become
immediately vested. Upon the acquisition by an individual or company of 50.1% or
more of our issued and outstanding shares on December 31, 2006, 1,157,500 shares
of common stock underlying options held by our current Chief Financial Officer
and 450,000 shares of common stock underlying options held by the President and
Chief Operating Officer of vFinance Investments, Inc. would have vested. The
value received by our current Chief Financial Officer and the President and
Chief Operating Officer of vFinance Investments, Inc. would have been $12,550
and $24,000, respectively, calculated as the excess of the stock closing value
on December 31, 2006 over the total options outstanding for each executive at
the exercise price for their respective option grants.
Upon a Change in Control anytime from January 3, 2007 up to and including
January 3, 2010, we have agreed to pay to our former Chairman an amount equal
to: (a) twice the sum of his highest annual base salary during his employment
with us, and (b) twice the greater of (i) the highest bonus, incentive or other
compensation payment actually received by him during the three years preceding
the Change in Control and (ii) the highest bonus, incentive or other
compensation payment he was entitled to receive during the three years preceding
the Change in Control. In the event of a Change in Control, all stock options,
warrants, stock appreciation rights and other similar securities held by our
former Chairman will become immediately and fully vested. Upon a Change in
Control as of December 31, 2006, we would have been required to pay our former
Chairman a lump sum of $838,788.
Upon a Change in Control, we have agreed to pay to our current Chairman and
Chief Executive Officer an amount equal to: (a) twice the sum of his highest
annual base salary during his employment with us, and (b) twice the greater of
(i) the highest bonus, incentive or other compensation payment actually received
by him during the three years preceding the Change in Control and (ii) the
highest bonus, incentive or other compensation payment he was entitled to
receive during the three years preceding the Change in Control. In the event of
a Change in Control, all stock options, warrants, stock appreciation rights and
other similar securities held by our current Chairman and Chief Executive
Officer will become immediately and fully vested. Upon a Change in Control as of
December 31, 2006, we would have been required to pay our current Chairman and
Chief Executive Officer a lump sum of approximately $1.13 million.
Director Compensation
Directors do not receive any compensation for serving on our Board of
Directors.
-95-
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
AND RELATED STOCKHOLDER MATTERS.
The table below provides information regarding the beneficial ownership of
the Common Stock as of March 26, 2007. The table reflects ownership by: (1) each
person or entity who owns beneficially 5% or more of the shares of our
outstanding Common Stock, (2) each of our directors, (3) each of the Named
Executive Officers, and (4) our directors and officers as a group. Except as
otherwise indicated, and subject to applicable community property laws, we
believe the persons named in the table have sole voting and investment power
with respect to all shares of Common Stock held by them. Except as otherwise
indicated, each stockholder's percentage ownership of our Common Stock in the
following table is based on 54,429,876 shares of Common Stock outstanding.
Name of Beneficial Owner Number of Shares
Beneficially
Owned (in Percent of
thousands) Class
--------------------------------------------------------------- ------------------ --------------
Leonard J. Sokolow (2) 6,258.0 11.4%
Timothy E. Mahoney (3) 7,383.0 13.2%
Highlands Group Holdings, Inc. (4) 2,175.0 4.0 %
Alan B. Levin (5) 52.5 *
Richard Campanella (6) 225.0 *
Sterling Financial Group of Companies, Inc. (7) 13,000.0 23.9%
Global Partners Securities, Inc. (8) 4,591.6 8.2 %
Level2.com, Inc. (9) 4,591.6 8.2 %
Oxir Investment Ltd. (10) 3,000.0 5.5 %
All executive officers and directors as a group (4 persons) 6,535.5 11.9%
---------------------------
* Denotes less than 1% ownership.
(1) Beneficial ownership is determined in accordance with the rules of the
SEC. Shares of Common Stock subject to option or warrants currently exercisable
or exercisable withing 60 days of March 26, 2006, are deemed outstanding for
computing the percentage ownership of the stockholder holding the options or
warrants, but are not deemed outstanding for computing the percentage ownership
of any other stockholder. Unless otherwise indicated, the officer, directors and
stockholders can be reached at our principal offices. Percentage of ownership is
based on 54,429,876 shares of Common Stock oustanding as of March 26, 2007.
(2) Includes 5,883,010 shares of Common Stock issued in the names of Mr.
Sokolow and his wife, and 375,000 shares of Common Stock issuable upon exercise
of options at a price of $0.155 per share, which options are exercisable within
60 days of March 26, 2007.
-96-
(3) Includes 2,175,000 shares of Common Stock issued in the name of
Highlands Group Holdings, Inc., 3,205,009 shares of Common Stock issued in the
name of Mr. Mahoney and 1,500,000 shares of Common Stock issuable upon exercise
of options at a price of $0.155 per share, which options are exercisable within
60 days of March 26, 2007.
(4) Highlands Group Holdings, Inc., whose address is 68 Cayman Place, Palm
Beach Gardens, Florida 33418, is wholly owned by Mr. Timothy Mahoney, our former
Chairman and Chief Operating Officer. Mr. Mahoney, as the owner of Highlands
Group Holdings, Inc., is deemed to beneficially own the 2,175,000 shares held by
Highlands Group Holdings, Inc.
(5) Includes 52,500 shares of Common Stock issuable upon exercise of
options at a weighted-average price of $0.174 per share, which options are
exercisable within 60 days of March 26, 2007.
(6) Includes 75,000 shares of common stock issued in the name of Mr.
Campanella and 150,000 shares of Common Stock issuable upon exercise of options
at a price of $0.17 per share, which options are exercisable within 60 days of
March 26, 2007.
(7) Based solely on information contained in a Schedule 13D filed with the
SEC on May 22, 2006, Sterling Financial Group of Companies, Inc.'s former
business address was 1200 North Federal Highway, Suite 401, Boca Raton, Florida
33432. Charles Garcia, as the sole officer of Sterling Financial Group of
Companies, Inc., has the power to vote and to dispose of all of the shares held
by Sterling Financial Group of Companies, Inc., and is deemed to have shared
voting power and shared dispositive power with respect to such shares.
(8) Includes 3,288,253 shares of Common Stock and 1,303,393 shares of
Common Stock issuable upon exercise of warrants at a price of $0.11 per share,
which warrants are exercisable within 60 days of March 26, 2007. Global Partners
Securities, Inc.'s business address is 1909 Tyler Street, Wachovia Center,
Penthouse, Hollywood, Florida 33020. Marcos Konig, Harry Konig and Salomon
Konig, as president, vice president and director of Global Partners Securities,
Inc., share the power to vote and to dispose of all of the shares held by Global
Partners Securities, Inc. Global Partners Securities, Inc. has informed the
Company that it intends to assign these shares of Common Stock for the benefit
of its creditor, Dennis de Marchena.
(9) Includes 3,288,253 shares of Common Stock and 1,303,393 shares of
Common Stock issuable upon exercise of warrants at a price of $0.11 per share,
which warrants are exercisable within 60 days of March 26, 2007. Level2.com,
Inc.'s former business address was 2101 W Commercial Blvd., Suite 3500, Ft.
Lauderdale Florida 33309. Marcos Konig, Harry Konig and Salomon Konig, as
president, vice president and director of Level2.com, Inc., respectively, share
the power to vote and to dispose of all of the shares held by Level2.com, Inc.
Level2.com, Inc. has informed the Company that it intends to assign these shares
of Common Stock for the benefit of its creditor, Dennis de Marchena.
(10) Based solely on information contained in a Schedule 13D filed with the
SEC on July 13, 2006, Vassili Oxenuk, as sole officer and director and sole
shareholder of Oxir Investment Ltd., has the power to vote and to dispose of all
of the shares held by Oxir Investment Ltd., and is deemed to have shared voting
power and shared dispositive power with respect to such shares. Oxir Investment
Ltd.'s business address is The Studio, St. Nicholas Close, Elstree Herts, United
Kingdom WD6 3EW. Mr. Oxenuk has advised the Company that Oxir Investments Ltd.
beneficially owns 3,000,000 shares of Common Stock.
-97-
In connection with Sterling Financial Group of Companies, Inc.'s
acquisition of our securities, on May 11, 2006, we and vFinance Investments
entered into a voting and lockup agreement with Sterling Financial Investment
Group, Inc., Sterling Financial Group of Companies, Inc., Charles Garcia,
Leonard J. Sokolow and Timothy E. Mahoney. Pursuant to this agreement, Leonard
J. Sokolow and Timothy E. Mahoney agreed, in their capacity as stockholders and
directors, to vote for a disgneee of Charles Garcia to serve on our Board of
Directors for so long as Mr. Garcia is employed by vFinance Investments and to
vote for Mr. Garcia's designee to so serve for the one-year period beginning
upon Mr. Garcia's departure. Further, Sterling Financial Group of Companies,
Inc. agreed not to sell the acquired securities until May 11, 2007. On January
17, 2006, we also entered into a standstill agreement with Sterling Financial
Investment Group, Inc., Sterling Financial Group of Companies, Inc., Charles
Garcia and Alexis Korybut (the "Sterling Parties|"), which agreement has the
same standstill provisions as our agreement with the Konigs.
Equity Compensation Plan Information
The following table sets forth certain information as of December 31, 2005,
with respect to compensation plans (including individual compensation
arrangements) under which our equity securities are authorized for issuance
under:
o all compensation plans previously approved by our security holders; and
o all compensation plans not previously approved by our security holders.
Number of
Securities
Weighted- Remaining
Average Available For
Exercise Future Issuance
Number of Securites Price Under Equity
to be issued upon Outstanding Compensation
exercise of options, Plans (excluding
outstanding options, warrants securities reflected
warrants and rights and rights in column (a)
Plan Category (a) (b) (c)
--------------------------------------------------------- ----------------------- ---------------------- ----------------------
Equity compensation plans approved by security holders
Equity compensation plans not approved by security
holders (1) 19,538,480 .10 -
--------------------------------------------------------- ----------------------- ---------------------- ----------------------
Total 19,538,480 $ .10 -
====================== ===================== =======================
(1) Includes options and warrants granted pursuant to individual compensation
arrangements.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE.
Related Party Transactions
Except as otherwise set forth in this report, the Company did not engage in
any transactions with related parties since January 1, 2006 in which the amount
involved exceeded $120,000.
We have a written policy regarding the review, approval or ratification of
related person transactions. A related person transaction for the purposes of
the policy is a transaction between us and one of our directors or nominees for
director, executive officers or 5% shareholders, or a member of one of these
person's immediate family, in which such person has a direct or indirect
material interest and involves more than $120,000. Under this policy, related
person transactions are prohibited unless our Board of Directors, or a committee
designated thereby, has determined in advance that the transaction is in our
best interests. In the event we enter into such a transaction without board
approval, the Board of Directors must promptly review its terms and may ratify
the transaction if it determines it is appropriate.
Director Independence
The Board of Directors has determined that Charles R. Modica is
"independent" as such term is defined by the applicable listing standards of The
NASDAQ Stock Market, Inc. Our Board of Directors based this determination on our
directors' employment relationships.
-98-
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES.
During 2006 and 2005, the Company incurred the following fees for
professional services rendered by our principal accountant Sherb & Co., LLP:
2006 2005
------------- -------------
Audit Fees (1) $ 92,000 $ 107,985
Audit-related Fees - -
Tax Fees (2) $ 7,500 $ 27,500
All Other Fees $ 13,700 $ -
------------- -------------
Total $ 113,200 $ 135,485
============== ==============
Audit Fees
During the years ended December 31, 2006 and 2005, the aggregate fees
billed by Sherb & Co., LLP, our principal accountants in 2006 and 2005, for the
audit of our financial statements for each of those years, the review of our
financial statements included in our Quarterly Reports on Form 10-QSB and fees
related to filings with the SEC and accounting consultations during those fiscal
years were $92,000 and $107,985, respectively.
Audit Related Fees
During the years ended December 31, 2006 and 2005, our principal
accountants, Sherb & Co., LLP, did not provide any assurance or related
services.
Tax Fees
During the years ended December 31, 2006 and 2005, our principal
accountants, Sherb & Co., LLP, billed us $7,500 and $27,500, respectively, for
the preparation of federal income tax returns and other tax related matters.
Other Fees
During the years ended December 31, 2005 and 2004, our principal
accountants, Sherb & Co., LLP, did not provide any services or products other
than as reported above.
Pre-Approval Policies and Procedures
Our Board of Directors has adopted a policy that requires advance approval
of all audit services and permitted non-audit services to be provided by the
independent auditor as required by the Exchange Act. Our Board of Directors must
approve the permitted service before the independent auditor is engaged to
perform it.
Our Board of Directors approved all of the services described above in
accordance with its pre-approval policies and procedures.
-99-
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES.
Number of
Exhibit Exhibit Description
2.1 Share Exchange Agreement among the Company, vFinance
Holdings, Inc., certain shareholders of vFinance Holdings,
Inc. and Union Atlantic, dated November 8, 1999
(incorporated by reference to Exhibit 2.1 to the Company's
Current Report on Form 8-K filed with the SEC on November 8,
1999).
2.2 Amendment to Share Exchange Agreement dated November 29,
1999 (incorporated by reference to Exhibit 2.2 to the
Company's Annual Report on Form 10-KSB filed with the SEC on
March 30, 2000).
2.3 Agreement and Plan of Merger dated as of December 22, 2000,
by and among the Company, NW Holdings, Inc., and Alvin S.
Mirman, Ilene Mirman, Marc N. Siegel, Richard L. Galterio,
Vincent W. Labarbara, Eric M. Rand, and Mario Marsillo, Jr.
(incorporated by reference to Exhibit 2.1 to the Company's
Current Report on Form 8-K filed with the SEC on January 17,
2001).
2.4 Agreement and Plan of Merger, dated as of January 3, 2001,
by and among the Company, Colonial Acquisition Corp.,
Colonial Direct Financial Group, Inc., and Michael Golden
and Ben Lichtenberg (incorporated by reference to Exhibit
2.2 to the Company's Current Report on Form 8-K filed with
the SEC on January 17, 2001).
2.5 Securities Exchange Agreement, dated as of August 15, 2001,
among Kathleen Wallman, Steven Wallman, Joseph Daniel and
vFinance.com, Inc. (n/k/a vFinance, Inc.) (Incorporated by
reference to Exhibit 10.1 to the Company's Quarterly Report
on Form 10-QSB filed with the SEC on November 14, 2001).
3.1 Certificate of Incorporation as filed with the Delaware
Secretary of State on February 12, 1992 (incorporated by
reference to the Company's Registration Statement on Form
S-18 filed with the SEC on July 24, 1992).
3.2 Certificate of Renewal and Revival of Certificate of
Incorporation as filed with the Delaware Secretary of State
on March 15, 1996 (incorporated by reference to Exhibit 3.2
to the Company's Annual Report on Form 10-KSB filed with the
SEC on March 30, 2000).
3.3 Certificate of Amendment to the Certificate of Incorporation
as filed with the Delaware Secretary of State on April 28,
1999 (incorporated by reference to Exhibit 3.3 to the
Company's Annual Report on Form 10-KSB filed with the SEC on
March 30, 2000).
3.4 Certificate of Amendment to Certificate of Incorporation as
filed with the Delaware Secretary of State on March 13, 2000
(incorporated by reference to Exhibit 3.4 to the Company's
Annual Report on Form 10-KSB filed with the SEC on March 30,
2000).
3.5 Certificate of Amendment to Certificate of Incorporation as
filed with the Delaware Secretary of State on November 28,
2001 (incorporated by reference to Exhibit 3.5 to the
Company's Annual Report on Form 10-KSB filed with the SEC on
April 16, 2002).
-100-
Number of
Exhibit Exhibit Description
3.6 Certificate of Designation of Series A Convertible Preferred
Stock of the Company as filed with the Delaware Secretary of
State on January 3, 2001 (incorporated by reference to
Exhibit 3(i).1 to the Company's Current Report on Form 8-K
filed with the SEC on January 17, 2001).
3.7 Certificate of Designation of Series B Convertible Preferred
Stock of the Company as filed with the Delaware Secretary of
State on January 3, 2001 (incorporated by reference to
Exhibit 3(i).2 to the Company's Current Report on Form 8-K
filed with the SEC on January 17, 2001).
3.8 Bylaws of the Company (incorporated by reference to the
Company's Registration Statement on Form S-18 filed with the
SEC on July 24, 1992).
3.9 Unanimous Written Consent of the Company's Board of
Directors dated January 24, 1994, amending the Bylaws
(incorporated by reference to Exhibit 3.6 to the Company's
Annual Report on Form 10-KSB filed with the SEC on March 30,
2000).
3.10 Unanimous Written Consent of the Company's Board of
Directors, effective as of January 24, 1999, amending the
Bylaws (incorporated by reference to Exhibit 3.7 to the
Company's Annual Report on Form 10-KSB filed with the SEC on
March 30, 2000).
4.1 Form of Warrant issued to AMRO International, S.A. (to
purchase 100,000 shares), CALP II Limited Partnership, a
Bermuda limited partnership (to purchase 350,000 shares),
Celeste Trust Reg (to purchase 5,000 shares), Balmore SA (to
purchase 35,000 shares), Sallee Investments LLLP (to
purchase 25,000 shares), worldVentures Fund I, LLC (to
purchase 25,000 shares), RBB Bank Aktiengesellschaft (to
purchase 130,000 shares) and Thomas Kernaghan & Co., Ltd.
(to purchase 58,333 shares) (incorporated by reference to
Exhibit 4.2 to the Company's Current Report on Form 8-K
filed with the SEC on April 13, 2000).
4.2 Stock Purchase Warrant, dated August 15, 2001, issued to
Kathleen Wallman (incorporated by reference to Exhibit 10.3
to the Company's Quarterly Report on Form 10-QSB filed with
the SEC on November 14, 2001).
4.3 Stock Purchase Warrant, dated August 15, 2001, issued to
Joseph Daniel (incorporated by reference to Exhibit 10.4 to
the Company's Quarterly Report on Form 10-QSB filed with the
SEC on November 14, 2001).
4.4 Form of Common Stock Purchase Warrant (incorporated by
reference to Exhibit 4.2 to the Company's Current Report on
Form 8-K filed with the SEC November 8, 2004).
4.5 Warrant to Purchase Common Stock dated November 7, 2006
issued to Global Partners Securities, Inc. (incorporated by
reference to Exhibit 10.2 to the Company's Current Report on
Form 8-K filed with the SEC on November 13, 2006.).
4.6 Warrant to Purchase Common Stock dated November 7, 2006
issued to Level2.com, Inc. (incorporated by reference to
Exhibit 10.3 to the Company's Current Report on Form 8-K
filed with the SEC on November 13, 2006).
-101-
Number of
Exhibit Exhibit Description
10.1 Purchase Agreement between the Company and Steven Jacobs and
Mauricio Borgonovo, dated December 24, 1999, for the
purchase of Pinnacle Capital Group, LLC (incorporated by
reference to Exhibit 10.9 to the Company's Annual Report on
Form 10-KSB filed with the SEC on March 30, 2000).
10.2 Asset Purchase Agreement among the Company, Steven Jacobs
and Mauricio Borgonovo dated January 3, 2000 (incorporated
by reference to Exhibit 10.10 to the Company's Annual Report
on Form 10-KSB filed with the SEC on March 30, 2000).
10.3 Asset Purchase Agreement dated November 17, 1999 among the
Company, Andrew Reckles, Paul T. Mannion and Vincent Sbarra
(incorporated by reference to Exhibit 10.11 to the Company's
Annual Report on Form 10-KSB filed with the SEC on March 30,
2000).
10.4 Stock Purchase Agreement between the Company and River
Rapids Ltd., dated September 27, 1999 (incorporated by
reference to Exhibit 10.14 to the Company's Annual Report on
Form 10-KSB filed with the SEC on March 30, 2000).
10.5 Amendment to Stock Purchase Agreement between the Company
and River Rapids Ltd. dated December 22, 1999 (incorporated
by reference to Exhibit 10.15 to the Company's Annual Report
on Form 10-KSB filed with the SEC on March 30, 2000).
10.6 Common Stock and Warrants Purchase Agreement among the
Company, AMRO International, S.A., CALP II Limited
Partnership, a Bermuda Limited partnership, Celeste Trust
Reg, Balmore SA, Sallee Investments LLLP, worldVentures Fund
I, LLC and RBB Bank Aktiengesellschaft, dated March 31, 2000
(incorporated by reference to Exhibit 2.1 to the Company's
Current Report on Form 8-K filed with the SEC on April 13,
2000).
10.7 Registration Rights Agreement among the Company, AMRO
International, S.A., CALP II Limited Partnership, a Bermuda
limited partnership, Celeste Trust Reg, Balmore SA, Sallee
Investments LLLP, worldVentures Fund I, LLC, RBB Bank
Aktiengesellschaft and Thomas Kernaghan & Co., Ltd., dated
March 31, 2000 (incorporated by reference to Exhibit 4.1 to
the Company's Current Report on Form 8-K filed with the SEC
on April 13, 2000).
10.8 Escrow Agreement among the Company, AMRO International,
S.A., CALP II Limited Partnership, a Bermuda limited
partnership, Celeste Trust Reg, Balmore SA, Sallee
Investments LLLP, worldVentures Fund I, LLC, RBB Bank
Aktiengesellschaft and Epstein Becker & Green, P.C., dated
March 31, 2000 (incorporated by reference to Exhibit 10.21
to Amendment No. 1 to the Company's Registration (Statement
on Form SB-2 filed with the SEC on July 14, 2000).
10.9* Amended and Restated Employment Letter Agreement dated
December 18, 2000, between the Company and David Spector
(incorporated by reference to Exhibit 10.24 to the Company's
Annual Report on Form 10-KSB filed with the SEC on March 20,
2001).
10.10 Registration Rights Agreement, dated as of August 15, 2001,
among Kathleen Wallman, Joseph Daniel and vFinance.com, Inc.
(n/k/a vFinance, Inc.) (Incorporated by reference to Exhibit
10.2 to the Company's Quarterly Report on Form 10-QSB filed
with the SEC on November 14, 2001).
-102-
Number of
Exhibit Exhibit Description
10.11 Note Purchase Agreement by and between vFinance.com, Inc.
d/b/a vFinance, Inc. (n/k/a vFinance, Inc.) and Best Finance
Investments Limited (n/k/a SBI Investments (USA), Inc.)
dated November 28, 2001 (incorporated by reference to
Exhibit 10.18 to the Company's Annual Report on Form 10-KSB
filed with the SEC April 16, 2002).
10.12 Letter Agreement dated November 30, 2001 amending Note
Purchase Agreement (incorporated by reference to Exhibit
10.19 to the Company's Annual Report on Form 10-KSB filed
with the SEC April 16, 2002).
10.13 Letter Agreement dated December 14, 2001 amending Note
Purchase Agreement (incorporated by reference to Exhibit
10.20 to the Company's Annual Report on Form 10-KSB filed
with the SEC April 16, 2002).
10.14 Letter Agreement dated December 28, 2001 amending Note
Purchase Agreement (incorporated by reference to Exhibit
10.21 to the Company's Annual Report on Form 10-KSB filed
with the SEC April 16, 2002).
10.15 Letter Agreement dated February 13, 2002 amending Note
Purchase Agreement (incorporated by reference to Exhibit
10.22 to the Company's Annual Report on Form 10-KSB filed
with the SEC April 16, 2002).
10.16 Letter Agreement dated March 4, 2002 amending Note Purchase
Agreement (incorporated by reference to Exhibit 10.23 to the
Company's Annual Report on Form 10-KSB filed with the SEC
April 16, 2002).
10.17 Credit Facility by and between the Company and UBS Americas,
Inc. dated as of January 25, 2002 (incorporated by reference
to Exhibit 10.24 to the Company's Annual Report on Form
10-KSB filed with the SEC April 16, 2002).
10.18 Subordination Agreement by and among the Company, UBS
Americas, Inc., and SBI Investments (USA), Inc. dated as of
January 25, 2002 (incorporated by reference to Exhibit 10.25
to the Company's Annual Report on Form 10-KSB filed with the
SEC April 16, 2002).
10.19 Consulting Agreement effective as of August 20, 2001 by and
between vFinance.com, Inc. and Insight Capital Consultants
Corporation (incorporated by reference to Exhibit 10.34 to
the Company's Annual Report on Form 10- KSB filed with the
SEC April 16, 2002).
10.20 Amendment to Credit Agreement dated April 12, 2002 by and
between the Company and UBS Americas Inc. (incorporated by
reference to Exhibit 10.36 to the Company's Annual Report on
Form 10-KSB filed with the SEC April 16, 2002).
10.21 Selected Asset Purchase Agreement dated as of May 29, 2002
among vFinance Investments, Inc., Somerset Financial
Partners, Inc., Somerset Financial Group, Inc., Douglas Toth
and Nicholas Thompson (the "Select Asset Purchase
Agreement") (incorporated by reference to Exhibit 10.1 to
the Company's Quarterly Report on Form 10-QSB filed with the
SEC August 14, 2002).
-103-
Number of
Exhibit Exhibit Description
10.22 Amendment to Select Asset Purchase Agreement dated June 17,
2002 among vFinance Investments, Inc., Somerset Financial
Partners, Inc., Somerset Financial Group, Inc. Douglas Toth
and Nicholas Thompson (incorporated by reference to Exhibit
10.2 to the Company's Quarterly Report on Form 10-QSB filed
with the SEC August 14, 2002).
10.23 Escrow Agreement dated June 19, 2002 among vFinance
Investments, Inc., Somerset Financial Partners, Inc.,
Somerset Financial Group, Inc. Douglas Toth, Nicholas
Thompson and Krieger & Prager LLP (incorporated by reference
to Exhibit 10.3 to the Company's Quarterly Report on Form
10-QSB filed with the SEC August 14, 2002).
10.24 Termination Agreement (incorporated by reference to Exhibit
10.1 to the Company's Quarterly Report on Form 10-QSB/A
filed with the SEC November 14, 2002).
10.25 Branch Agreement between the Company and JSM Holding Corp
(incorporated by reference to Exhibit 10.41 to the Company's
Annual Report on Form 10-KSB filed with the SEC March 31,
2003).
10.26 Lease agreement on the Company's headquarters in Boca Raton,
FL, dated January 1, 2003 between the Company and Zenith
Professional Center, LTD. (incorporated by reference to
Exhibit 10.44 to the Company's Annual Report on Form 10-KSB
filed with the SEC March 30, 2004).
10.27 Stock purchase warrant agreement between the Company and
Zenith Professional Center, LTD. (incorporated by reference
to Exhibit 10.45 to the Company's Annual Report on Form
10-KSB filed with the SEC March 30, 2004).
10.28 Asset Purchase Agreement, dated November 2, 2004, by and
between vFinance Investments Holdings, Inc. and Global
Partners Securities, Inc. (incorporated by reference to
Exhibit 2.1 to the Company's Current Report on Form 8-K
filed with the SEC November 8, 2004).
10.29 Stock Purchase Agreement, dated November 2, 2004, by and
between vFinance Investments Holdings, Inc. and Level2.com,
Inc. (incorporated by reference to Exhibit 2.2 to the
Company's Current Report on Form 8-K filed with the SEC
November 8, 2004).
10.30 Registration Rights Agreement, dated November 2, 2004, by
and among vFinance, Inc., Global Partners Securities, Inc.
and Level2.com, Inc. (incorporated by reference to Exhibit
4.1 to the Company's Current Report on Form 8-K filed with
the SEC November 8, 2004).
10.31 Stock Escrow Agreement, dated November 2, 2004, by and among
vFinance Investments Holdings, Inc., the Company, Global
Partners Securities, Inc., Level2.com, Inc., and Edwards &
Angell, LLP (incorporated by reference to Exhibit 10.1 to
the Company's Current Report on Form 8-K filed with the SEC
November 8, 2004).
10.32 Standstill Agreement, dated November 2, 2004, by and among
vFinance, Inc. and each of Marcus Konig, Harry Konig and
Salomon Konig (incorporated by reference to Exhibit 10.2 to
the Company's Current Report on Form 8-K filed with the SEC
November 8, 2004).
-104-
Number of
Exhibit Exhibit Description
10.33* Amended and Restated Letter Agreement dated January 14, 2005
between the Company and Sheila C. Reinken (incorporated by
reference to Exhibit 10.1 to the Company's Current Report on
Form 8-K filed with the SEC January 21, 2005).
10.34 CIE Master Services Agreement dated May 13, 2005 by and
between the Company and Center for Innovative
Entrepreneurship, Inc. (incorporated by reference to Exhibit
10.1 to the Company's Quarterly Report of Form 10-QSB filed
with the SEC on May 16, 2005)
10.35 vFinance Management Services Agreement dated May 13, 2005 by
and between the Company and Center for Innovative
Entrepreneurship, Inc. (incorporated by reference to Exhibit
10.2 to the Company's Quarterly Report of Form 10-QSB filed
with the SEC on May 16, 2005)
10.36 License and Website Agreement dated June 8, 2005 by and
between the Company and vFinance Holdings, Inc. and Center
for Innovative Entrepreneurship, Inc. (incorporated by
reference to Exhibit 10.2 to the Company's Quarterly Report
of Form 10-QSB filed with the SEC on August 15, 2005).
10.37 Asset Purchase Agreement, dated January 10, 2006, by and
among the Company, vFinance Investments, Inc., Sterling
Financial Investment Group, Inc., and Sterling Financial
Group of Companies, Inc. (incorporated by reference to
Exhibit 2.1 to the Company's Current Report on Form 8-K
filed with the SEC on January 17, 2006).
10.38 Registration Rights Agreement, dated January 10, 2006, by
and among vFinance, Inc., and Sterling Financial Group of
Companies, Inc. (incorporated by reference to Exhibit 4.1 to
the Company's Current Report on Form 8-K filed with the SEC
on January 17, 2006).
10.39 Standstill Agreement, dated January 10, 2006, by and among
vFinance, Inc. and each of Sterling Financial Investment
Group, Inc., Sterling Financial Group of Companies, Inc.,
Charles Garcia and Alexis Korybut (incorporated by reference
to Exhibit 10.1 to the Company's Current Report on Form 8-K
filed with the SEC on January 17, 2006).
10.40 Voting and Lockup Agreement, dated January 10, 2006, by and
among vFinance, Inc., vFinance Investments, Inc., Sterling
Financial Investment Group, Inc., Sterling Financial Group
of Companies, Inc., Charles Garcia Leonard Sokolow and
Timothy Mahoney (incorporated by reference to Exhibit 10.2
to the Company's Current Report on Form 8-K filed with the
SEC on January 17, 2006).
10.41 Management Agreement, dated January 10, 2006, by and among
vFinance Investments, Inc., Sterling Financial Investment
Group, Inc. and Sterling Financial Group of Companies, Inc.
(incorporated by reference to Exhibit 10.3 to the Company's
Current Report on Form 8-K filed with the SEC on January 17,
2006).
10.42 Amendment to Asset Purchase Agreement, dated May 11, 2006,
by and between vFinance, Inc., vFinance Investments, Inc.,
Sterling Financial Investment Group, Inc., and Sterling
Financial Group of Companies, Inc. (incorporated by
reference to Exhibit 2.2 to the Company's Current Report on
Form 8-K filed with the SEC on May 16, 2006).
10.43 Second Amendment to Asset Purchase Agreement, dated May 11,
2006, by and between vFinance, Inc., vFinance Investments,
Inc., Sterling Financial Investment Group, Inc., and
Sterling Financial Group of Companies, Inc. (incorporated by
reference to Exhibit 2.3 to the Company's Current Report on
Form 8-K filed with the SEC on May 16, 2006).
-105-
Number of
Exhibit Exhibit Description
10.44 Amendment to Registration Rights Agreement, dated May 11,
2006, by and among vFinance, Inc., and Sterling Financial
Group of Companies, Inc. (incorporated by reference to
Exhibit 4.2 to the Company's Current Report on Form 8-K
filed with the SEC on May 16, 2006).
10.45 Amendment to Voting and Lockup Agreement, dated May 11,
2006, by and among vFinance, Inc., vFinance Investments,
Inc., Sterling Financial Investment Group, Inc., Sterling
Financial Group of Companies, Inc., Charles Garcia Leonard
Sokolow and Timothy Mahoney (incorporated by reference to
Exhibit 10.3 to the Company's Current Report on Form 8-K
filed with the SEC on May 16, 2006).
10.46 Amendment to Management Agreement, dated May 11, 2006, by
and among vFinance Investments, Inc., Sterling Financial
Investment Group, Inc. and Sterling Financial Group of
Companies, Inc. (incorporated by reference to Exhibit 10.5
to the Company's Current Report on Form 8-K filed with the
SEC on May 16, 2006).
10.47 Stock Escrow Agreement dated May 11, 2006, by and among
vFinance, Inc., vFinance Investments, Inc., Sterling
Financial Investment Group, Inc., Sterling Financial Group
of Companies, Inc., and Edwards Angell Palmer & Dodge, LLP
(incorporated by reference to Exhibit 10.6 to the Company's
Current Report on Form 8-K filed with the SEC on May 16,
2006).
10.48 Employment Agreement Amendment No. 1 dated May 12, 2006 by
and among vFinance, Inc. and Leonard Sokolow (incorporated
by reference to Exhibit 10.7 to the Company's Current Report
on Form 8-K filed with the SEC on May 16, 2006).
10.49 Employment Agreement dated July 24, 2006 between vFinance,
Inc. and Alan B. Levin (incorporated by reference to Exhibit
10.1 to the Company's Current Report on Form 8-K filed with
the SEC on July 26, 2006).
10.50 Settlement Agreement dated October 16, 2006 by and among
vFinance, Inc., Henry S. Snow, Sandra S. Snow, Michael
Golden and Ben Lichtenberg (incorporated by reference to
Exhibit 10.1 to the Company's Current Report on Form 8-K
filed with the SEC on November 13, 2006).
10.51 Settlement and Escrow Release Agreement dated as of November
7, 2006 by and among vFinance, Inc., vFinance Investments,
Inc., Global Partners Securities, Inc., Level2.com,Inc. and
Edwards Angell Palmer & Dodge LLP (incorporated by reference
to Exhibit 10.4 to the Company's Current Report on Form 8-K
filed with the SEC on November 13, 2006).
10.52* Resignation Agreement dated December 29, 2006 by and between
vFinance, Inc. and Timothy E. Mahoney (incorporated by
reference to Exhibit 10.1 to the Company's Current Report on
Form 8-K filed with the SEC on January 8, 2007).
10.53* Employment Agreement Amendment #2 dated December 29, 2006 by
and between vFinance, Inc. and Leonard J. Sokolow
(incorporated by reference to Exhibit 10.2 to the Company's
Current Report on Form 8-K filed with the SEC on January 8,
2007).
10.54 Voting Agreement dated December 29, 2006 by and between
Timothy E. Mahoney and Leonard J. Sokolow (incorporated by
reference to Exhibit 10.3 to the Company's Current Report on
Form 8-K filed with the SEC on January 8, 2007). -106-
Number of
Exhibit Exhibit Description
14 Code of Ethics (incorporated by reference to Exhibit 14 to
the Company's Annual Report on Form 10-KSB filed with the
SEC March 30, 2004).
21** List of Subsidiaries
23.1** Consent of Sherb & Co. LLP
31.1** Certification by Chief Executive Officer pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.
31.2** Certification by Chief Financial Officer pursuant to Section
1350 of the Sarbanes-Oxley Act of 2002.
32.1** Certification by Chief Executive Officer pursuant to Section
906 of the Sarbanes-Oxley Act of 2002.
32.2** Certification by Chief Financial Officer pursuant to Section
906 of the Sarbanes-Oxley act of 2002.
* Management contract or compensatory plan or arrangement.
** Filed herewith.
-107-
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Exchange Act, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
vFinance, Inc.
By: /s/ Leonard J. Sokolow
--------------------------------------------------
LEONARD J. SOKOLOW, CHAIRMAN OF THE BOARD AND CHIEF EXECUTIVE OFFICER
Date: April 2, 2006
Pursuant to the requirements of the Exchange Act, this report has been signed
below by the following persons on behalf of the registrant and in the capacities
and on the dates indicated.
Signature Capacity Date
------------------------ ------------------------------------ ---------------
Chairman of the Board and Chief
/s/ Leonard J. Sokolow Executive Officer
------------------------ (Principal Executive Officer) April 2, 2007
Leonard J. Sokolow
/s/ Alan B. Levin Chief Financial Officer and
------------------------ Principal Financial and Accounting April 2, 2007
Alan B. Levin Officer)
/s/ Charles R. Modica Director April 2, 2007
------------------------
Charles R. Modica
-108-