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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, 2007
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: 001-11454
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
Common Stock, Par Value $.01 Per Share
Name of Each Exchange on Which Registered
OTC Bulletin Board
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. [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
definitions of "large accelerated filer," "accelerated filer," and "smaller
reporting company" in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer [ ] Accelerated filer [ ]
(Do not check if a
smaller reporting company)
Non-accelerated filer [ ] Smaller reporting company [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 June 30, 2007, the aggregate market value of the common stock of the
registrant held by non-affiliates was approximately $9.7 million based on the
closing price of the common stock as quoted on the OTC Bulletin Board on such
date.
As of March 10, 2008, the registrant had 54,829,876 shares of common stock
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE: None
INDEX TO FORM 10-K
Page
PART I
ITEM 1. BUSINESS.............................................................2
ITEM 1A. RISK FACTORS........................................................16
ITEM 2. PROPERTIES..........................................................28
ITEM 3. LEGAL PROCEEDINGS...................................................29
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.................30
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER
MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES...................31
ITEM 6. SELECTED FINANCIAL DATA.............................................33
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS...........................................34
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK..........43
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.........................44
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE................................................77
ITEM 9A. CONTROLS AND PROCEDURES.............................................77
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
AND RELATED STOCKHOLDER MATTERS.....................................93
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE........................................................96
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES..............................96
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES.............................98
SIGNATURES..................................................................106
PART 1
FORWARD-LOOKING STATEMENTS
The information contained in this Annual Report on Form 10-K includes
forward-looking statements as defined in the Private Securities Reform Act of
1995. These forward looking statements are often identified by words such as
"may," "will," "expect," "intend," "anticipate," "believe," "estimate,"
"continue," "plan" and similar expressions. These statements involve estimates,
assumptions and uncertainties that could cause actual results to differ
materially from those expressed for the reasons described in this Annual Report
on Form 10-K. You should not place undue reliance on these forward-looking
statements.
You should be aware that our actual results could differ materially from those
contained in the forward-looking statements due to a number of factors,
including:
o general economic conditions;
o our ability to obtain future financing or funds when needed;
o the inability of our broker-dealer operations to operate
profitably in the face of intense competition from
larger full-service and discount brokers;
o a general decrease in merger and acquisition activities and our
potential inability to receive success fees as
a result of transactions not being completed;
o increased competition from business development portals;
o technological changes;
o our potential inability to implement our growth strategy through
acquisitions or joint ventures;
o acquisitions, business combinations, strategic partnerships,
divestures, and other significant transactions
may involve additional uncertainties; and
o our ability to maintain and execute a successful business strategy.
You should also consider carefully the statements under "Risk Factors" and other
sections of this Annual Report on Form 10-K, which address additional factors
that could cause our actual results to differ from those set forth in the
forward-looking statements and could materially and adversely affect our
business, operating results and financial condition. All subsequent written and
oral forward-looking statements attributable to us or persons acting on our
behalf are expressly qualified in their entirety by the applicable cautionary
statements.
The forward-looking statements speak only as of the date on which they are made,
and, except to the extent required by federal securities laws, we undertake no
obligation to update any forward-looking statement to reflect events or
circumstances after the date on which the statement is made or to reflect the
occurrence of unanticipated events. In addition, we cannot assess the impact of
each factor on our business or the extent to which any factor, or combination of
factors, or factors we are unaware of, may cause actual results to differ
materially from those contained in any forward-looking statements.
-1-
ITEM 1. BUSINESS.
vFinance, Inc. ("vFinance") is a financial services company that specializes in
high growth opportunities. Our three principal lines of business are: (1)
offering full service retail brokerage to approximately 12,000 high net worth
individuals and institutional clients, (2) providing investment banking, merger,
acquisition and advisory services to micro, small and mid-cap high growth
companies, and (3) trading securities, including making markets in over 3,500
micro and small-cap stocks and providing liquidity in the United States Treasury
marketplace. In addition to our core business, we offer information services on
our website. vFinance Investments, Inc. ("vFinance Investments") and
EquityStation, Inc. ("EquityStation"), both subsidiaries of the Company, are
broker-dealers registered with the Securities and Exchange Commission ("SEC"),
and members of Financial Industry Regulatory Authority ("FINRA") (formerly the
National Association of Securities Dealers) and Securities Investor Protection
Corporation ("SIPC"). vFinance Investments is also a member of the National
Futures Association ("NFA").
Our website, www.vfinance.com, is available to an audience of entrepreneurs,
corporate executives and private and institutional investors in over 150
countries with an estimated 35,000 unique visitors monthly. The website provides
sales leads to our investment banking, brokerage and institutional services
divisions, giving visitors 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, we charge nominal fees for the
use of proprietary search engines and premium services such as our business
planning services.
Restatement 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, on December 11, 2007 we restated certain
amounts in our 2006, 2005, 2004 and 2003 Consolidated Financial Statements as a
result of comments we received from the staff of the SEC.
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.
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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 Holdings,
Inc. completed 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.com, Inc. ("Level 2"), 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 Holdings, Inc. assumed no
liabilities in connection with the acquisition of Global's assets. Two of the
principals of Global and EquityStation 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, exercisable
at $0.19 per share. One of the principals was employed by us until October 31,
2007 and the other principal was employed by us until January 15, 2008.
EquityStation is a broker-dealer registered with the SEC and is a member of
FINRA. EquityStation 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 advanced 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 Sterling Financial's business as
a going concern, certain intellectual property, customer relationships
associated with Sterling Financial's Institutional Fixed Income and Latin
American businesses, computer equipment and certain real property leases. In
exchange for the assets, we issued 13 million shares of our common stock to
SFGC. The aggregate purchase price was determined to be $3.4 million. This
transaction was approved by FINRA on April 28, 2006. The Sterling Financial
acquisition resulted in the addition of institutional traders in U.S. treasuries
and corporate bonds and retail brokerage activities in Latin American through
the addition of independent contractor offices in Panama, Chile and Columbia.
We expect that the institutional investor customer relationships acquired from
Sterling Financial will result in approximately $7.0 million of incremental
annual revenues and a marginal impact on net income, as the increased revenues
and cost savings are expected to be offset by operating expenses and $680.0
thousand of annual non-cash amortization expense.
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 as well as investment banking
advisory services for private and public Hispanic businesses.
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Recent Developments
The following is a brief summary of the material provisions of the agreements
entered into or to be entered into in connection with our merger with National
Holdings Corporation. The summary is not complete and is qualified in its
entirety by reference to the agreements, which are included as exhibits to this
Annual Report on Form 10-K and which are incorporated herein by this reference.
We urge you to read the agreements in their entirety for a more complete
description of their terms and conditions.
Merger Agreement
On November 7, 2007, we entered into an Agreement and Plan of Merger (the
"Merger Agreement") with National Holdings Corporation ("National"), vFin
Acquisition Corporation ("Merger Sub"), a wholly-owned subsidiary of National.
Under the terms and subject to the conditions set forth in the Merger Agreement,
which has been unanimously approved by the special committees of our board of
directors and the Board of Directors of National and our board of directors and
those of National and Merger Sub, Merger Sub will be merged with and into us
(the "Merger"), the separate corporate existence of Merger Sub will cease and we
will continue as a surviving corporation of the Merger and as a wholly-owned
subsidiary of National.
Pursuant to the Merger Agreement, upon the closing of the Merger (the "Effective
Date"), all of our stockholders (except those who properly exercise dissenters'
rights under Delaware law) will become stockholders of National. Upon the
Effective Date, our stockholders will own approximately 40% of the outstanding
shares of common stock of National. National's common stock is quoted on the OTC
Bulletin Board under the symbol "NHLD."
To effect the Merger, each share of our common stock outstanding immediately
prior to the closing of the Merger (other than shares held by National or us or
any of our stockholders who properly exercise dissenters' rights under Delaware
law) will automatically be converted into the right to receive 0.14 shares of
National common stock, plus any cash in lieu of fractional shares of National
common stock.
Each option to purchase shares of our common stock outstanding upon the
Effective Date will be converted into options to acquire the number of shares of
National common stock determined by multiplying (i) the number of shares of our
common stock underlying each outstanding stock option immediately prior to the
effective time of the Merger by (ii) 0.14, at a price per share of National
common stock equal to (i) the exercise price per share of each stock option
otherwise purchasable pursuant to the stock option divided by (ii) 0.14. Each
warrant to purchase shares of our common stock outstanding on the Effective Date
will be exercisable to purchase the number of shares of National common stock
determined by multiplying (i) the number of shares of our common stock
underlying each outstanding warrant by (ii) 0.14, at a price per share of
National common stock equal to (i) the aggregate exercise price of such
outstanding warrant to purchase our common stock divided by (ii) the number of
shares of National common stock for which such warrant is exercisable, as
determined above.
Completion of the Merger is subject to various customary conditions, including,
among others, (i) requisite approvals of our stockholders, (ii) completion by
National of a private placement of equity securities resulting in gross proceeds
of at least $3 million, (iii) effectiveness of the registration statement for
the National securities to be issued in the Merger, (iv) absence of any suit,
proceeding or investigation challenging or seeking to restrain or prohibit the
Merger, and (v) FINRA and any other applicable regulatory approvals.
-4-
The Merger Agreement contains a non-solicitation or "no-shop" provision
restricting each of National and us from soliciting alternative acquisition
proposals from third parties and from providing information to and engaging in
discussions with third parties regarding alternative acquisition proposals. The
no-shop provision is subject to a customary "fiduciary-out" provision, which
allows each National and us under certain circumstances to provide information
to and participate in discussions with third parties with respect to bona fide
written unsolicited alternative acquisition proposals and under certain
circumstances, coupled with the payment of a termination fee of $1.5 million, to
terminate the Merger Agreement.
The Merger must be approved by the holders of at least a majority of our
outstanding common stock. Our Board of Directors has not yet set a date for the
stockholder's meeting. We anticipate that the merger, if approved, will be
completed in mid-2008.
On the Effective Date, National's board of directors will consist of Mark
Goldwasser (Chairman of the Board), Leonard J. Sokolow (Vice Chairman of the
Board), Christopher Dewey (Vice Chairman of the Board), Charles Modica, Jorge
Ortega, up to three designees of National and up to one designee of ours.
Messrs. Modica and Ortega and the designees will be independent directors. The
designees must be reasonably acceptable to our board of directors and that of
National.
Voting Agreements
In connection with the Merger Agreement, National and Merger Sub have entered
into a voting agreement (the "Stockholder Voting Agreement") with Leonard J.
Sokolow and Dennis De Marchena, who owned approximately 10.7% and 4.0%,
respectively, of our outstanding shares of common stock as of March 10, 2008.
Pursuant to the Stockholder Voting Agreement, Mr. Sokolow has agreed to vote all
of his shares and Mr. De Marchena has agreed to vote 2,000,000 of his shares, or
approximately 3.6% of our outstanding shares of common stock on March 10, 2008,
in favor of the Merger and against any transaction or other action that would
interfere with the Merger.
Pursuant to the Merger Agreement, Mark Goldwasser, Chairman of the board of
directors of National, Christopher Dewey, Vice Chairman of the board of
directors of National, and Leonard J. Sokolow, our Chairman and Chief Executive
Officer, will enter into an agreement (the "Director Voting Agreement") on the
Effective Date to vote their shares of National for the election of each other
and up to three designees of Mr. Goldwasser and up to three designees of Mr.
Sokolow until the earlier to occur of: (i) National's merger, consolidation or
reorganization whereby the holders of National's voting stock own less than 50%
of the voting power of National after such transaction, (ii) by mutual consent
of the parties thereto, (iii) the date that Messrs. Goldwasser, Sokolow and
Dewey own in the aggregate less than one percent of the outstanding voting
securities of National, (iv) upon the fifth anniversary of the Director Voting
Agreement or (v) upon listing of National's common stock on AMEX, the NASDAQ
Capital Market or the NASDAQ Global Market.
Sokolow Employment Termination Agreement to be Entered into on the Effective
Date
On the Effective Date, Mr. Sokolow's present employment as our Chairman and
Chief Executive Officer and his present employment agreement with us dated
November 16, 2004, as amended, will be terminated and our principal office will
be relocated to New York City, New York. Accordingly, pursuant to the terms of
Mr. Sokolow's present employment agreement with us dated November 16, 2004, as
amended, Mr. Sokolow will be entitled to a lump sum cash payment of $1,150,000
as of the Effective Date. On the Effective Date, we will enter into an
employment termination agreement ("Termination Agreement") with Mr. Sokolow.
-5-
Pursuant to the Termination Agreement, Mr. Sokolow's employment as our Chairman
and Chief Executive Officer and his employment agreement with us will terminate.
Notwithstanding the fact that his stock options to purchase shares of our common
stock that have not vested as of the Effective Date would have vested pursuant
to his employment agreement with us, Mr. Sokolow has agreed to waive such
accelerated vesting. He will receive a lump sum cash payment of $1,150,000 as
required under the terms of his employment agreement with us. However, if: (i)
Mr. Sokolow's employment is terminated by National with cause or (ii) Mr.
Sokolow voluntarily resigns his employment with National, all stock options Mr.
Sokolow received in exchange for his stock options pursuant to the terms of the
Merger Agreement will become 100% vested and will remain exercisable by Mr.
Sokolow or his beneficiaries for a period of nine months from the date of such
event; provided, however, such period of nine months will not exceed the earlier
of (i) the latest date upon which such options could have expired by the
original terms under the circumstances or (ii) the tenth anniversary of the
original date of the grant of the options.
Pursuant to the terms of the Termination Agreement, if any payments made to Mr.
Sokolow, including the acceleration of the vesting of his National stock
options, will be subject to the tax imposed by Section 4999 of the Internal
Revenue Code of 1986, as amended, we have agreed to pay Mr. Sokolow an
additional amount such that the net amount retained by him, after deduction of
any tax on such payment, will equal the payments received by Mr. Sokolow under
the Termination Agreement.
Employment Agreements to be Entered into on the Effective Date
On the Effective Date, Mark Goldwasser and Leonard J. Sokolow will each enter
into substantially identical five-year employment agreements with National,
pursuant to which Mr. Goldwasser will be employed by National as Chairman and
Chief Executive Officer and Mr. Sokolow will be employed by National as Vice
Chairman and President. Under the terms of the employment agreements, Messrs.
Goldwasser and Sokolow will each receive an annual base salary of $450,000,
which will increase 5% per year, and a non-accountable automobile expense
allowance of $1,000 per month. In addition, each of them will be entitled to
receive on a fiscal year basis a cash bonus determined in the discretion of the
Compensation Committee of the board of directors of National of not less than:
(i) $225,000, (ii) 5% of National's fiscal year consolidated net income in
excess of $4.5 million, up to 100% of the difference between their then current
base salaries and $225,000 and (iii) such additional bonuses as the board of
directors of National may determine based upon the Board's assessment of their
performance in the following areas: revenue growth of National, new business
development, investor relations, communications with the board of directors,
communication and collaboration with the other members of the Executive
Committee of the board of directors and special projects as assigned by the
board of directors.
-6-
Each employment agreement terminates upon the earliest to occur of: (i) the
death of the employee; (ii) a termination by National by reason of the
disability of the employee; (iii) a termination by National with or without
cause; (iv) a termination by the employee with or without good reason; (v) upon
a "Change in Control" (as defined in the employment agreements); or (vi) the
non-renewal of the agreement. Upon the termination due to the death or
disability of the employee, by National without cause, by the employee with good
reason, upon a "Change of Control" or upon the expiration of the employment
agreement if National or the employee refuses to extend the term of the
employment agreement, the employee will be entitled to: (i) any accrued but
unpaid salary or bonus or unreimbursed expenses; (ii) any bonus payable for the
portion of the fiscal year during which the termination occurs; (iii) 100% of
the employee's base salary (150% in the event of termination by National without
cause or by the employee with good reason); (iv) the continuation of health
benefits until the earlier of (a) 18 months after termination and (b) the date
the employee accepts other employment; and (v) all unvested options granted
pursuant to the employment agreements will become immediately vested and be
exercisable for a period of nine months.
Pursuant to each employment agreement, on the Effective Date, each of Messrs.
Goldwasser and Sokolow will be granted non-qualified stock options to purchase
the greater of (i) 1,000,000 shares of National's common stock or (ii) 5% of
National's issued and outstanding shares of common stock immediately after
consummation of the Merger at a purchase price equal to the average of the
10-day closing market price of National's common stock prior to the Effective
Date. The options vest and become exercisable as to 25% of the shares underlying
the options every 12 months. The options expire seven years from the effective
date of the Merger.
In accordance with the terms of the Merger Agreement, on the Effective Date,
Alan B. Levin, our Chief Financial Officer, will enter into a one-year
employment agreement with National, pursuant to which he will be employed as the
Chief Financial Officer. Under the terms of the agreement, Mr. Levin will
receive an annual base salary of $180,000. In addition, he will be entitled to
receive an annual cash bonus determined in the discretion of the Compensation
Committee of the board of directors of National based upon its assessment by the
President of National of Mr. Levin's performance in the following areas:
revenue, net income and revenue growth of National, new business development,
investor relations, communications with the board of directors, communication
and collaboration with the other members of the Executive Committee of the board
of directors, and other factors including, without limitation, special projects
as assigned by the Chief Executive Officer, Executive Committee or the board of
directors of National.
Additional Information Regarding National Holdings Corporation
National files annual, quarterly, and special reports, proxy statements, and
other information with the SEC. Copies of these documents are available at the
SEC's public reference room at 100 F Street, N.E., Washington, DC 20549. Copies
of these materials may also be obtained from the SEC at prescribed rates by
writing to the Public Reference Section of the SEC, 100 F Street, N.E.,
Washington, DC 20549. Information about the operation of the SEC public
reference room in Washington, D.C. may be obtained by calling the SEC at
1-800-SEC-0330. National's filings are also available to the public from
commercial document retrieval services and at the web site maintained by the SEC
at http://www.sec.gov.
-7-
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 also
has made it more expensive for smaller firms to remain in business thus
accelerating the consolidation of these firms.
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.
Financial Arrangements with Clearing Brokers
In 2004, vFinance Investments entered into a clearing agreement (the "Clearing
Agreement") with National Financial Services LLC, Member New York Stock Exchange
("NYSE")/SIPC, a Fidelity Investments company ("NFS"), 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 $25,000 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, 2007, our
contingent obligation in connection with the Clearing Agreement was $680.0
thousand.
EquityStation and vFinance Investments have ancillary clearing agreements with
Fortis Clearing, Legent Clearing and Penson Clearing, providing services in the
areas NFS is not suited to handle. These clearing agreements contain customary
terms and conditions.
-8-
Our Business
Retail Brokerage
The largest portion of our revenues, 63%, 62% and 72% in 2007, 2006 and 2005,
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 50 states, plus the District of Columbia and Puerto Rico, and our registered
representatives are registered in those states where their customers reside. In
addition, vFinance Investments has registered representatives operating in
Panama, Chile and Colombia. vFinance Investments' 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 or her business.
As an employee, all of the expenses of the broker's operation are paid for by
the company, and the broker 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 and costs associated with its 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%, 25% and 16% of our revenues from trading profits in our market
making activities in 2007, 2006 and 2005, respectively.
vFinance Investments provides liquidity by making markets in over 3,500
Over-the-Counter Bulletin Board ("OTC Bulletin Board"), National Market System,
Pink Sheet, and NASDAQ Capital Market 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.
-9-
Investment Banking
We derived 11%, 12% and 8% of our revenues from our investment banking
activities in 2007, 2006 and 2005, respectively. We assist emerging growth,
private and public companies by (i) developing sound strategic plans, (ii)
obtaining equity, mezzanine, bridge, or acquisition capital, (iii) executing
strategically sound acquisitions or divestiture strategies, (iv) raising capital
in the public markets, and (v) maximizing shareholder value by conducting
recapitalizations or other liquidity transactions. As consideration for such
services, we are paid advisory fees and success fees, which are based on a
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 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 advanced direct market
access trading 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.
As of March 10, 2008, we employed or had contractual relationships with
approximately 22 people providing institutional services, approximately 10 of
which provide hedge fund related services. We currently service approximately
195 institutional customers, of which approximately 85 are hedge funds. For the
year ended December 31, 2007, hedge fund related services accounted for
approximately $5 million in revenue.
-10-
Internet Strategy
Our website, www.vfinance.com, is available to an audience of entrepreneurs,
corporate executives and private and institutional investors in over 150
countries with an estimated 35,000 unique visitors monthly. The website provides
sales leads to our investment banking, brokerage and institutional services
divisions, giving visitors 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, we 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 and EquityStation carried at NFS 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 EquityStation have agreed to indemnify the clearing brokers for
losses they incur on these credit arrangements.
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.
-11-
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 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 FINRA. FINRA
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 FINRA.
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. FINRA approved the change of ownership
to, or asset acquisition by, us, as the case may be, 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 and
EquityStation, and (v) Sterling Financial. The federal securities laws prohibit
the states from imposing substantive requirements on broker-dealers that exceed
those imposed under federal law. The laws, however, do 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.
-12-
The SEC, self-regulatory organizations, such as FINRA, and state securities
commissions may conduct administrative proceedings that 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 FINRA rules require prior notice to the SEC and
FINRA for certain withdrawals of capital and also provide that the SEC may
restrict for up to 20 business days any withdrawal of equity capital, or
unsecured loans or advances to shareholders, employees or affiliates if the
capital withdrawal, together with all other net capital withdrawals during a
30-day period, exceeds 30% of excess net capital and the SEC concludes that the
capital withdrawal may be detrimental to the financial integrity of the
broker-dealer.
In addition, the Uniform Net Capital Rule provides that the total outstanding
principal amount of a broker-dealer's indebtedness under certain subordination
agreements, the proceeds of which are included in its net capital, may not
exceed 70% of the sum of the outstanding principal amount of all subordinated
indebtedness included in net capital, par or stated value of capital stock, paid
in capital in excess of par, retained earnings and other capital accounts for a
period in excess of 90 days. A change in the Uniform Net Capital Rule, the
imposition of new rules or any unusually large charge against net capital could
limit those parts of our operations that require the intensive use of capital
and also could restrict our ability to pay dividends, repay debt and repurchase
shares of our outstanding stock.
As of March 10, 2008, 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. The
client accounts for EquityStation are carried on the books and records of NFS
and Penson Clearing. NFS has 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.
-13-
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, 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, FINRA 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
Annual Report on Form 10-K, 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).
-14-
Employees
At December 31, 2007, we employed the following personnel:
Position Salaried Contract Total
---------------------------- -------------- --------------- -----------
Officers 9 - 9
Administration 36 27 63
Brokers 21 126 147
Traders 19 1 20
Investment Bankers 6 12 18
Lenders - 6 6
-------------- --------------- -----------
Totals 91 172 263
============== =============== ===========
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
FINRA 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, other employees or brokers 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.
-15-
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 known 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 $2.2 million, including a $1.5 million
non-cash gain on debt forgiveness. For the years ended December 31, 2007, 2006
and 2005, however, our results amounted to net losses of approximately $1.7
million, $2.2 million and $1.1 million, respectively.
The net losses generated in 2007, 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, customer settlements and their respective legal costs, non-cash
impairment charges in 2005 and stock option expense in 2007 and 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.
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.
-16-
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 FINRA, 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 FINRA. 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.
-17-
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
FINRA Regulation, Inc., the regulatory arm of FINRA. We are primarily regulated
by FINRA and the SEC. FINRA Regulation Inc. adopts rules, subject to approval by
the SEC, that govern its members and conducts 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.
-18-
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 27% and 35% of our total assets as of
December 31, 2007 and 2006, respectively. 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.
-19-
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 we 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.
-20-
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 86% of our retail registered representatives
were independent contractors as of December 31, 2007. 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.
-21-
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.
-22-
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.
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.
-23-
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. We do not believe
that we have experienced any security breaches in the transmission of
confidential information. In 2007, however, we were the target of hacking that
affected some of our internal databases and our website. Since that incident, we
have invested in several defensive systems, including, but not limited to,
updating data encryption to current standards, upgrading password requirements
to "strong passwords" and adding state of the art firewall protection across all
of our networks. Moreover, we continually evaluate advanced encryption
technology to try and 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.
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, Fortis Clearing, Legent Clearing and Penson 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.
-24-
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.
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.
-25-
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.
-26-
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 of 1934, as amended (the "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.
-27-
Stockholders holdings may be diluted as a result of additional stock issuances.
As of March 10, 2008, we had outstanding approximately 54.8 million shares of
common stock, options to purchase an approximate total of 16.7 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 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.
The Company leases office space in four locations. The following chart
provides information related to these lease obligations:
Office Location Approximate Square Footage Lease Rental Expiration Date
--------------------------------------- --------------------------- ------------- ------------------
3010 N. Military, Boca Raton, FL 18,390 $ 666,930 2/28/2009
880 Third Ave., New York, NY 7,850 $ 188,520 6/30/2008
131 Gaither Drive, Mount Laurel, NJ 1,400 $ 19,600 9/31/2008
1200 N. Federal Highway, Boca Raton FL 16,250 $ 542,100 8/21/2014
Our corporate headquarters are located at 3010 North Military Trail, Boca Raton,
Florida 33431, where we lease 18,390 square feet for an approximate annual rent
of $666,930. The lease expires on February 28, 2009.
On December 15, 2004, we entered into a lease at 880 Third Avenue, New York, New
York for office space on the twelfth floor with an annual rent of $188,520 for
approximately 7,850 square feet. The lease expires on June 30, 2008.
On August 1, 2004, we entered into a lease in Mt. Laurel, New Jersey. The
opening of this office was part of our disaster recovery plan implemented in
order to be able to provide our clients with uninterrupted service. The lease is
for approximately 1,400 square feet with an annual rent of $19,600 and expires
on September 31, 2008.
Effective September 27, 2006, vFinance Investments assumed a lease for property
located in Boca Raton in connection with the acquisition of assets from Sterling
Financial. The lease is for approximately 16,250 square feet with an estimated
annual rent of $542,100 and expires on August 21, 2014. On September 27, 2006,
we entered into a sublease with regard to approximately 14,000 square feet of
this property with estimated annual rent of $486,400. Since September 2004, the
balance of this space has been subleased on a month-to-month basis for an
estimated annual rent of $71,200. In February 2008, we received notification
from the sublessee that occupies 14,000 square feet of this property that it was
insolvent and would be unable to perform its obligations under the sublease. See
Note 17 to our Consolidated Financial Statements for additional information.
We consider the facilities of our company and those of our subsidiaries to be
reasonably insured and adequate for the foreseeable needs of our company and its
subsidiaries.
-28-
ITEM 3. LEGAL PROCEEDINGS.
From time to time, vFinance, Inc. and/or one of our subsidiaries is named as a
party to a lawsuit that has arisen in the ordinary course of business. Although
it is possible that losses exceeding amounts already recorded may be incurred
upon ultimate resolution of these existing legal proceedings, we believe that
such losses, if any, will not have a material adverse effect on our business,
results of operations or financial position; however, unfavorable resolution of
each matter individually or in the aggregate could affect the consolidated
results of operations for the quarterly and annual periods in which they are
resolved.
The business of vFinance Investments 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.
Additionally, 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.
In November 2007, Nupetco Associates, LLC filed a customer arbitration action
(FINRA Case No. 07-03152) with FINRA naming vFinance Investments as a
co-respondent. Nupetco Associates, LLC alleges violations of various state and
federal securities laws. Nupetco Associates, LLC seeks compensatory damages of
$508,787 against vFinance Investments in addition to costs, attorneys fees and
punitive damages. vFinance Investments has filed an answer and affirmative
defenses and has requested discovery from the arbitration claimant. vFinance
Investments intends to vigorously defend the arbitration.
On January 3, 2008, the SEC issued and Order Instituting Administrative
Proceedings against vFinance Investments, Richard Campanella and a registered
representative of vFinance Investments, alleging that they violated federal
securities laws by failing to preserve and produce customer correspondence of
the registered representative. The registered representative terminated his
employment with the Company on August 4, 2006, and has not been associated with
the Company since that date. The Company and Mr. Campanella will likely assert
as a defense that Mr. Campanella complied to the best of his ability in a timely
manner with the SEC's requests for documents; however, the Company and Mr.
Campanella have not filed an answer responding to the specific allegations in
the Order. The Company and Mr. Campanella intend to vigorously defend against
the allegations.
-29-
On January 24, 2008, the Company received a complaint in a civil case (Case No.
50-2008-CA-001703-XXXX-MB, 15th Judicial Circuit Court, Palm Beach County,
Florida) from Harry Konig, a former employee. Mr. Konig claims that the Company
breached the employment agreement entered into with Mr. Konig on November 2,
2004, specifically with regard to the payment of his incentive compensation and
the issuance of options. Mr. Konig contends that he is owed $280,000 as
incentive compensation and options to purchase 350,000 shares of the Company's
common stock. In addition, Mr. Konig is seeking costs and attorney's fees
incurred for this action. The Company is evaluating the merits of the claims and
intends to defend vigorously against Mr. Konig's claims.
On March 4, 2008 the Company received a customer arbitration action (FINRA Case
No.08-00472) from Claimants, Donald and Patricia Halfmann. Under FINRA's Code of
Arbitration Procedure, vFinance is not required to file a responsive pleading
until April 18, 2008. The Halfmanns' Statement of Claim alleges that Jeff
Lafferty, a former broker working for vFinance Investments, opened accounts for
the Halfmanns and misappropriated approximately $110,000 of the Halfmanns' funds
via check alteration and forgery while he was employed by vFinance as the
Halfmanns' financial advisor. The Halfmanns also contend vFinance is liable for
an additional $150,000 for investments made by the Halfmanns directly with Jeff
Lafferty after their account transferred out of vFinance and after Lafferty's
resignation from vFinance, with a form U-5 filed with NASD by vFinance on August
27, 2004. Finally, the Halfmanns' Statement of Claim requests punitive damages,
costs and attorney's fees incurred for this action. While vFinance intends to
vigorously defend against the allegations made in the Halfmanns' Statement of
Claim, a prediction of the likely outcome cannot be made at this time.
The Company is engaged in a number of other legal proceedings incidental to the
conduct of its business. These claims aggregate within the range of $80,000 to
$150,000.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
-30-
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 has been listed for trading on the Over-the-Counter Bulletin
Board, or the OTC Bulletin Board, under the symbol "VFIN." The following is a
summary of the high and low closing prices of our common stock on the OTC
Bulletin Board during the periods presented. Such prices represent inter-dealer
prices, without retail mark-up, mark down or commissions, and may not
necessarily represent actual transactions. Trading in our common stock has not
been extensive and such trades should not be characterized as constituting an
active trading market.
High Low
------------ ------------
2007:
Fourth Quarter $ 0.24 $ 0.17
Third Quarter $ 0.24 $ 0.18
Second Quarter $ 0.24 $ 0.17
First Quarter $ 0.23 $ 0.17
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
On March 10, 2008, the closing price of our common stock was $0.18, as reported
on the web site of the OTC Bulletin Board. As of March 10, 2008, there were
approximately 302 stockholders of record of the common stock (not including the
number of persons or entities holding stock in nominee or street name through
various brokerage firms).
We are authorized to issue 100 million shares of common stock, of which
approximately 54.8 million shares were issued and outstanding as of March 10,
2008. 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.
-31-
Recent Sales of Unregistered Securities
None.
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, 2002 through December 31, 2007 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, 2002.
[GRAPHIC OMITTED]
Cumulative Total Return
2002 2003 2004 2005 2006 2007
-------- -------- -------- -------- -------- --------
vFinance, Inc. 100.00 211.11 277.78 188.89 233.33 211.11
Russell 2000 100.00 145.37 170.08 175.73 205.61 199.96
DJ Select Microcap 100.00 158.21 183.56 197.80 228.19 213.59
-32-
ITEM 6. SELECTED FINANCIAL DATA.
Set forth below is our historical financial data with respect to the fiscal
years ended December 31, 2007, 2006, 2005, 2004, and 2003. The information is
only a summary. This information has been derived from, and should be read in
conjunction with, our historical Consolidated Financial Statements and related
notes included in "Item 8. Financial Statements and Supplementary Data" and
"Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations." The financial data for the fiscal years ended 2006, 2005, 2004,
and 2003 have been restated to reflect a revision to our accounting policy for
investments in restricted securities, as discussed in Note 1 to our Consolidated
Financial Statements.
As of and for the Years Ended December 31,
--------------------------------------------------------------------------------
2007 2006 2005 2004 2003
(Restated) (Restated) (Restated) (Restated)
--------------- ---------------- ---------------- ------------ --------------
(In thousands, except per share data)
Net revenues $ 50,598.7 $ 38,552.7 $ 25,928.8 $ 26,280.3 $ 24,559.2
Income (loss) from operations (1,869.7) (2,300.6) (1,304.1) 1,298.1 450.9
Gain on forgiveness of debt - - - 1,500.0 -
Net income (loss) $ (1,746.0) $ (2,175.7) $ (1,141.5) $ 2,195.1 $ 277.8
Net income (loss) per share: basic $ (0.03) $ (0.04) $ (0.03) $ 0.06 $ 0.01
Wt. avg. shares outstanding: basic 54,805.2 48,714.8 40,049.7 33,773.3 29,609.1
Net income (loss) per share: diluted $ (0.03) $ (0.04) $ (0.03) $ 0.06 $ 0.01
Wt. avg. shares outstanding: diluted 54,805.2 48,714.8 40,049.7 35,840.2 29,963.4
Total assets $ 12,369.6 $ 11,792.4 $ 9,031.6 $ 9,846.0 $ 6,459.5
Long-term debt including capital lease obligations,
net of current portion 297.5 $ 125.6 $ 225.1 $ - $ 1,889.6
Shareholders' equity $ 5,827.8 $ 7,048.9 $ 5,109.1 $ 6,117.7 $ 1,354.9
See Notes 1, 4, 8 and 9 to our Consolidated Financial Statements included in
Item 8 of this Annual Report on Form 10-K for discussions of the effect of
restating 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 Registrant's Common
Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities"
for a discussion of our dividend policy.
-33-
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.
This discussion presents our management's analysis of our results of operations
and financial condition as of and for each of the years ended December 31, 2007,
2006 and 2005, respectively. The discussion should be read in conjunction with
our Consolidated Financial Statements and the notes related thereto which appear
elsewhere in this Annual Report on Form 10-K.
We have restated certain amounts in our consolidated statements of income for
each of the years ended December 31, 2006 and 2005, as a result of comments from
the SEC, as discussed in Note 1 to our Consolidated Financial Statements
contained elsewhere in this Annual Report on Form 10-K.
In addition to the aforementioned restatement 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.
Recent Developments
On November 7, 2007, we entered into an agreement and plan of merger with
National and vFin Acquisition Corporation, a wholly owned subsidiary of
National. Under the terms and subject to the conditions set forth in the merger
agreement, vFin Acquisition Corporation will be merged with and into us, the
separate corporate existence of vFin Acquisition Corporation will cease, and we
will continue as a surviving corporation of the merger and as a wholly-owned
subsidiary of National. For additional information regarding this transaction,
see "Item 1. Business - Recent Developments."
Overview
We are a financial services company that specializes in high growth
opportunities. Our three principal lines of business are: (1) offering full
service retail brokerage to approximately 12,000 high net worth and
institutional clients, (2) providing investment banking, merger, acquisition and
advisory services to micro, small and mid-cap high growth companies, and (3)
trading securities, including making markets in over 3,500 micro and small cap
stocks and providing liquidity in the United States Treasury marketplace. In
addition to our core business, we offer information services on our website.
vFinance Investments, Inc. ("vFinance Investments") and EquityStation, Inc.
("EquityStation"), two of our subsidiaries, are broker-dealers registered with
the Securities and Exchange Commission ("SEC"), and members of the Financial
Industry Regulatory Authority ("FINRA") (formerly the National Association of
Securities Dealers) 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 vFinance's financial
statements from their respective transaction dates, affecting the comparability
of its results of operations in the years ended December 31, 2007, 2006 and
2005, as discussed in the sections that follow. See Note 4, "Acquisitions," to
our Consolidated Financial Statements included in this Annual Report on Form
10-K for further information about the Sterling Financial Acquisition and the
Global Acquisition.
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The largest portion of our revenues, 63%, 62% and 72% in 2007, 2006 and 2005,
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%,
25% and 16% of our revenues through trading profits generated in our market
making activities in 2007, 2006 and 2005, respectively. The majority of our
remaining revenues are derived primarily from investment banking-related success
and consulting fees.
We reported a net loss of $1.7 million ($0.03 per basic and diluted share) in
2007, compared to $2.2 million ($0.04 per basic and diluted share) in 2006. Our
revenues increased $12.0 million in 2007, or 31%, principally as a result of the
addition of new brokers from the Sterling Financial Acquisition and the addition
of independent brokers in 2007 and 2006. 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
also increased. Our depreciation and amortization expense also increased by
$325.5 thousand in 2007, primarily as a result of amortization expense recorded
in connection with the Sterling Financial Acquisition.
We reported a net loss of $2.2 million ($0.04 per basic and diluted share) in
2006, compared to $1.1 million ($0.03 per basic and diluted share) in 2005. Our
revenues increased $12.6 million in 2006, or 49%, principally as a result of the
Sterling Financial Acquisition and improved market conditions for its 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
partially 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.
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Results of Operations
The following table and discussion summarizes the changes in the major revenue
and expense categories for the past three years, with 2006 and 2005 having been
restated:
As of and for the Years Ended December 31,
---------------------------------------------------------------------------------
2007 2006 Change % 2005 Change %
(Restated) Change (Restated) Change
----------- ----------- ----------- -------- ----------- ----------- ---------
Revenues:
Commissions - agency $25,622.6 $20,323.7 $ 5,298.9 26.1 % $15,941.2 $4,382.5 27.5 %
Trading profits 12,707.4 9,606.0 3,101.4 32.3 % 4,177.4 5,428.6 130.0 %
Success fees 5,691.9 4,481.3 1,210.6 27.0 % 2,108.6 2,372.7 112.5 %
Other brokerage related income 6,204.1 3,546.0 2,658.1 75.0 % 2,837.6 708.4 25.0 %
Consulting fees 204.9 375.4 (170.5) (45.4)% 523.6 (148.2) (28.3)%
Other 167.8 220.3 (52.5) (23.8)% 340.4 (120.1) (35.3)%
----------- ----------- ----------- -------- ----------- ----------- ---------
Total revenues 50,598.7 38,552.7 12,046.0 31.2 % 25,928.8 12,623.9 48.7 %
----------- ----------- ----------- -------- ----------- ----------- ---------
Compensation, commissions and benefits 41,713.0 31,232.0 10,481.0 33.6 % 20,313.3 10,918.7 53.8 %
Clearing and transaction costs 4,425.1 4,337.2 87.9 2.0 % 2,977.2 1,360.0 45.7 %
General and administrative costs 3,992.8 3,158.8 834.0 26.4 % 2,332.8 826.0 35.4 %
Occupancy and equipment costs 1,053.3 1,166.6 (113.3) (9.7)% 743.3 423.3 56.9 %
Depreciation and amortization 1,284.2 958.7 325.5 34.0 % 446.3 512.4 114.8 %
Goodwill impairment - - - - 420.0 (420.0) (100.0)%
----------- ----------- ----------- -------- ----------- ----------- ---------
Total operating costs 52,468.4 40,853.3 11,615.1 28.4 % 27,232.9 13,620.4 50.0 %
----------- ----------- ----------- -------- ----------- ----------- ---------
Loss from operations (1,869.7) (2,300.6) 430.9 (18.7)% (1,304.1) (996.5) 76.4 %
----------- ----------- ----------- -------- ----------- ----------- ---------
Other income (expenses):
Interest income 43.7 85.3 (41.6) (48.8)% 82.6 2.7 3.3 %
Interest expense (80.5) (59.7) (20.8) 34.8 % (30.7) (29.0) 94.5 %
Dividend income 11.3 22.5 (11.2) (49.8)% 5.9 16.6 281.4 %
Other income (expense), net 149.2 76.8 72.4 94.3 % 104.8 (28.0) (26.7)%
----------- ----------- ----------- -------- ----------- ----------- ---------
Total other income (expense) 123.7 124.9 (1.2) (1.0)% 162.6 (37.7) (23.2)%
----------- ----------- ----------- -------- ----------- ----------- ---------
Loss before income taxes (1,746.0) (2,175.7) 429.7 (19.7)% (1,141.5) (1,034.2) 90.6 %
Income tax benefit (provision) - - - - - - -
----------- ----------- ----------- -------- ----------- ----------- ---------
Net loss $ (1,746.0) $ (2,175.7) $ 429.7 (19.7)% $(1,141.5) $(1,034.2) 90.6 %
=========== =========== =========== ======== =========== =========== =========
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Revenues
As of and for the Years Ended December 31,
-------------------------------------------------------------------------------------------
2007 2006 Change % Change 2005 Change % Change
(Restated) (Restated)
------------- ------------ ------------- ---------- ------------ ----------- -----------
Revenues:
Commissions - agency $ 25,622.6 $ 20,323.7 $ 5,298.9 26 % $ 15,941.2 $4,382.5 27 %
Trading profits 12,707.4 9,606.0 3,101.4 32 % 4,177.4 5,428.6 130 %
Success fees 5,691.9 4,481.3 1,210.6 27 % 2,108.6 2,372.7 113 %
Other brokerage related income 6,204.1 3,546.0 2,658.1 75 % 2,837.6 708.4 25 %
Consulting fees 204.9 375.4 (170.5) (45)% 523.6 (148.2) (28)%
Other 167.8 220.3 (52.5) (24)% 340.4 (120.1) (35)%
------------- ------------ ------------- ---------- ------------ ----------- -----------
Total revenues $ 50,598.7 $ 38,552.7 $ 12,046.0 31 % $ 25,928.8 12,623.9 49 %
============= ============ ============= ========== ============ =========== ===========
In 2007, total revenues increased $12.0 million, or 31%, as a result of higher
agency commissions, increased trading profits and other brokerage related
income, all driven primarily by the addition of new brokers in 2007 and 2006.
Additionally, success fees from investment banking increased 27%, or $1.2
million, primarily as a result of an increase in investment banking revenue
during the fourth quarter, when we completed a substantial capital raising
transaction.
In 2006, total revenues increased $12.6 million, or 49%, primarily as a result
of the Sterling Financial Acquisition and more favorable market conditions.
Approximately 43% of the $12.6 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.
Operating Expenses
As of and for the Years Ended December 31,
--------------------------------------------------------------------------------------------
2007 2006 Change % Change 2005 Change % Change
(Restated) (Restated)
------------- ------------ ------------ ----------- ------------ ------------ -----------
Compensation, commissions and benefits $41,713.0 $31,232.0 $10,481.0 34 % $20,313.3 $10,918.7 54 %
Clearing and transaction costs 4,425.1 4,337.2 87.9 2 % 2,977.2 1,360.0 46 %
General and administrative costs 3,992.8 3,158.8 834.0 26 % 2,332.8 826.0 35 %
Occupancy and equipment costs 1,053.3 1,166.6 (113.3) (10)% 743.3 423.3 57 %
Depreciation and amortization 1,284.2 958.7 325.5 34 % 446.3 512.4 115 %
Goodwill impairment - - - - 420.0 (420.0) (100)%
------------- ------------ ------------ ----------- ------------ ------------ -----------
Total operating costs $52,468.4 $40,853.3 $11,615.1 28 % $27,232.9 $13,620.4 50 %
============= ============ ============ =========== ============ ============ ===========
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Compensation, commissions and benefits.
Compensation, commissions and benefits increased $10.5 million, or 34%, in 2007.
Compensation, commissions and benefits are correlated with our revenues,
primarily agency commissions, trading profits and success fees from investment
banking, which increased by 28% in the aggregate in 2007. Additional increases
in compensation, commissions and benefits are primarily attributable to
incentive compensation provided to new brokers.
Compensation, commissions and benefits increased $10.9 million, or 54%, in 2006,
primarily as a result of increased agency commissions, trading profits and
success fees from investment banking, which increased by 55% in the aggregate in
2006. We also recorded $448.2 thousand of compensation expense in connection
with the adoption of SFAS No. 123R, effective January 1, 2006, compared to $19.4
thousand recorded in 2005. 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.
Clearing and transaction costs.
Clearing and transaction costs increased $87.9 thousand in 2007, or 2%,
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, largely offset by a shift in our revenue
mix to lower-cost institutional trading transactions.
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.
General and administrative costs.
General and administrative expenses increased $834.0 thousand in 2007, or 26%,
primarily as a result of legal fees and settlement costs associated with
arbitration and litigation matters in 2007 and the expansion of our
Sarbanes-Oxley and Gramm-Leach-Bliley compliance programs. Remaining increases
resulted from temporary labor and other increased professional fees to support
our growth.
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.
Occupancy and equipment costs.
Occupancy and equipment expenses decreased $113.3 thousand in 2007, or 10%,
primarily because in December 2006 we subleased office space acquired under a
lease assumed in connection with the Sterling Financial Acquisition.
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.
Depreciation and amortization.
Depreciation and amortization increased $325.5 thousand in 2007, or 34%,
primarily as a result of the amortization expense associated with the customer
relationships from the Sterling Acquisition depreciation expense related to
property and equipment additions, including computer equipment under capital
leases.
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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.
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,
2007 or 2006.
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, 2007 and 2006 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 2007, 2006 or 2005 as a result
of the net loss we recorded in those periods.
In July 2006, the Financial Accounting Standards Board ("FASB") issued
Interpretation No. 48, "Accounting for Uncertainty in Income Taxes - an
Interpretation of FASB Statement 109" ("FIN 48"). This Interpretation prescribes
a consistent recognition threshold and measurement standard, as well as a clear
criteria for subsequently recognizing, derecognizing and measuring tax positions
for financial statement purposes. The Interpretation also requires expanded
disclosure with respect to uncertainties as they relate to income tax
accounting. FIN 48 was effective for fiscal years beginning after December 15,
2006. Management has evaluated all of its tax positions and determined that FIN
48 did not have a material impact on our financial position or results of
operations.
Transactions with Affiliates
During 2006, we recorded a $215.0 thousand charge to write-off amounts due from
an unconsolidated subsidiary, Center for Innovative Entrepreneurship ("CIE"),
for expenses we incurred on its behalf. We provide office space and management
and administrative services to CIE through an agreement under which we should be
reimbursed the costs of providing these services. We accrued a receivable for
reimbursements totaling $215.0 thousand through December 31, 2006 under the
expectation that CIE would generate cash flows sufficient to provide cash
reimbursement. While preparing our Consolidated Financial Statements as of and
for the year ended December 31, 2006, we determined that recovery of this $215.0
thousand was unlikely, and that reimbursements for these costs in the future
would be uncertain until CIE demonstrates an ability to reimburse us.
Accordingly, we wrote-off the entire receivable balance and currently recognize
amounts reimbursed by CIE under the cost recovery method. We expect to terminate
this arrangement in 2008.
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Also during 2006, we paid $161.9 thousand for a 4.9% equity interest in The
Cluster Competitiveness Group, S.A, a company that provides economic feasibility
services. We made this investment because we believed that through its
relationship, we could benefit from the introduction to investment banking needs
of the clients of this affiliate, and may make further investments in future
periods, although we have no commitment to do so.
On January 1, 2003, we entered into an agreement with JSM Capital Holding Corp.
("JSM"), a retail brokerage operation headquartered in New York and founded by
John S. Matthews (who also was, at the same time, named the President of our
Retail Brokerage Division). We issued JSM warrants to purchase 1.0 million
shares of our common stock at an exercise price of $0.20 in exchange for a 19%
equity interest 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
in the aggregate. In August 2005, our relationship with JSM was terminated, and
we fully impaired the investment in JSM in the fourth quarter of 2005, when it
was determined that JSM had no remaining material assets or operations. Mr.
Matthews filed an arbitration action against us in connection with the
termination of the relationship, which was settled in July 2007. Pursuant to the
terms of the settlement agreement, we paid $75.0 thousand to Mr. Matthews in
2007 and are obligated to make further payments totaling $225.0 thousand to Mr.
Matthews. See Note 13 to our Consolidated Financial Statements for further
discussion of the arbitration action and subsequent settlement.
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, 2007,
liquid assets consisted primarily of cash and cash equivalents of $5.5 million
and marketable securities of $817.4 thousand, for a total of $6.3 million, which
represents a $1.1 million increase over the $5.2 million in liquid assets as of
December 31, 2006. As of December 31, 2007, vFinance had long-term capital lease
obligations of $297.5 thousand, net of current obligations of $247.0 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
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, 2007,
vFinance Investments had net capital of $1.48 million, which was $481.7 thousand
in excess of its required net capital of $1.0 million. EquityStation had net
capital of $543.4 thousand that was $443.4 thousand in excess of its required
net capital of $100.0 thousand.
vFinance Investments' percentage of aggregate indebtedness to net capital was
289.6% in 2007. EquityStation's percentage of aggregate indebtedness to net
capital was 35.8% in 2007. 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.
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For the periods ended December 31, 2007 and 2006, we had gross deferred tax
assets of $5.7 million and $5.3 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 $1.2 million, $(222.2)
thousand and $(828.9) thousand during 2007, 2006 and 2005, respectively. The
major components of these changes are discussed below.
Cash provided by (used in) operating activities was $1.6 million in 2007
compared to $370.9 thousand in 2006 and $(673.3) thousand in 2005. 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
marketable securities. Cash provided by operating activities increased by $1.3
million in 2007, primarily as a result of the decrease in our net loss in 2007
and an increase in our accrued liabilities, consisting primarily of accrued
compensation paid during the first quarter of 2008.
Cash provided by operating activities was $370.9 thousand in 2006 compared to
cash used in operating activities of $673.3 thousand in 2005, primarily as a
result of a $405.2 thousand decrease in amounts due from clearing brokers, a
$285.0 thousand decrease in accounts receivable and a $716.0 thousand increase
in accrued compensation paid during the first quarter of 2007, partially offset
by a $428.0 increase in marketable securities.
Cash used in investing activities in 2007 was $106.9 thousand compared to $384.6
thousand in 2006 and $125.7 thousand in 2005. Cash used in investing activities
consisted of capital expenditures of $106.9, $222.7 thousand, and $125.7
thousand in 2007, 2006 and 2005, respectively, excluding non-cash additions to
property and equipment through capital leases. Cash used in investing activities
in 2006 also included a $161.9 thousand investment in an unconsolidated
affiliate.
Cash used in financing activities in 2007 was $281.1 thousand compared to $208.5
thousand in 2006 and $29.9 thousand in 2005. Cash used in financing activities
was comprised of repayments of capital lease obligations related to new capital
lease agreements for computer equipment, which we entered into during 2007, 2006
and 2005.
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.
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Contractual Obligations
The following table summarizes our future contractual commitments as of December
31, 2007, 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 2008 2009 - 2010 2011 - 2012 Therafter
------------- ------------- ------------ ------------- --------------
Capital lease obligations $ 544.5 $ 247.0 $ 297.5 $ - $ -
Operating lease obligations 4,628.5 1,358.5 1,348.3 1,295.0 626.7
------------- ------------- ------------ ------------- --------------
Total $ 5,173.0 $ 1,605.5 $1,645.8 $ 1,295.0 $ 626.7
============= ============= ============ ============= ==============
Off Balance-Sheet Arrangements
We were not a party to any off-balance sheet arrangements during the three years
ended December 31, 2007. 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:
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. 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 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.
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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. "Securities owned" and "Securities sold, not yet purchased" on our
Consolidated Balance Sheets are carried at market value, with related unrealized
gains and losses recognized in our results of operations. vFinance Investments
relies upon its clearing firms to provide it with these market values, because
the clearing firms use market data services that provide market values of
securities based on current market prices.
New Accounting Pronouncements
See Notes 1 and 12 to 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.
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
Report of Independent Registered Public Accounting Firm ..................... 45
Audited Financial Statements:
Consolidated Statements of Financial Condition as of
December 31, 2007 and 2006 (Restated)........................................ 46
Consolidated Statements of Operations for the years ended
December 31, 2007, 2006 (Restated) and 2005 (Restated) ................. 47
Consolidated Statements of Shareholders' Equity for the years ended
December 31, 2007, 2006 (Restated) and 2005(Restated)................... 48
Consolidated Statements of Cash Flows for the years ended
December 31, 2007, 2006(Restated) and 2005(Restated).................... 49
Notes to Consolidated Financial Statements .................................. 50
-44-
Report of Independent Registered Public Accounting Firm
To the Board of Directors
vFinance Inc., & Subsidiaries
We have audited the accompanying consolidated statement of financial condition
of vFinance Inc. and Subsidiaries as of December 31, 2007 and 2006 (as
restated), and the related consolidated statements of operations, shareholders'
equity and cash flows for the years ended December 31, 2007, 2006 (as restated)
and 2005 (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. The Company is not required to
have, nor were we engaged to perform, an audit of its internal control over
financial reporting. Our audit included consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purposes of expressing an
opinion on the effectiveness of the Company's internal control over financial
reporting. Accordingly, we express no such opinion. An audit includes examining
on a test basis, evidence supporting the amount and disclosures in the
consolidated 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. and
Subsidiaries as of December 31, 2007, and 2006 (as restated) and the results of
their operations and their cash flows for the years ended December 31, 2007,
2006 (as restated) and 2005 (as restated), in conformity with accounting
principles generally accepted in the United States of America.
/s/ Sherb & Co., LLP
Certified Public Accountants
Boca Raton, Florida
March 5, 2008
-45-
VFINANCE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
AS OF DECEMBER 31,
(In thousands, except share and per share data)
2007 2006
(Restated)
------------------- ----------------
Assets:
Current assets:
Cash and cash equivalents $ 5,454.1 $ 4,205.2
Due from clearing broker 631.0 299.9
Securities owned:
Marketable securities, at market value 817.4 1,009.4
Not readily marketable securities, at estimated fair value 451.6 563.9
Accounts receivable, net of allowance of $60.0 thousand and $0 155.6 123.8
Forgivable loans - employees, current portion 26.7 58.8
Notes receivable - employees 8.4 128.0
Prepaid expenses and other current assets 156.4 184.0
------------------- ----------------
Total current assets 7,701.2 6,573.0
------------------- ----------------
Property and equipment, net 800.8 661.0
Customer relationships, net 3,287.6 4,115.4
Other assets 580.0 443.0
------------------- ----------------
Total assets $ 12,369.6 $ 11,792.4
=================== ================
Liabilities and shareholders' equity:
Current liabilities:
Accounts payable $ 693.9 $ 821.7
Accrued compensation 3,305.6 2,394.6
Other accrued liabilities 1,548.1 800.7
Securities sold, not yet purchased 177.4 41.6
Capital lease obligations, current portion 247.0 210.8
Other 272.3 348.5
------------------- ----------------
Total current liabilities 6,244.3 4,617.9
------------------- ----------------
Capital lease obligations, long term 297.5 125.6
Shareholders' Equity:
Preferred stock $0.01 par value, 2.5 million shares
authorized, 0 shares issued and outstanding - -
Common stock $0.01 par value, 100,000,000 shares authorized
54,829,876 and 54,579,876 shares issued and outstanding 548.3 545.8
Additional paid-in capital 31,668.3 31,145.9
Accumulated deficit (26,388.8) (24,642.8)
------------------- ----------------
Total shareholders' equity 5,827.8 7,048.9
------------------- ----------------
Total liabilities and shareholders' equity $ 12,369.6 $ 11,792.4
=================== ================
The accompanying notes are an integral component of these financial statements.
-46-
VFINANCE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31,
(In thousands, except per share data)
2007 2006 (Restated) 2005 (Restated)
---------------- ------------------- ----------------
Revenues:
Commissions - agency $25,622.6 $20,323.7 $15,941.2
Trading profits 12,707.4 9,606.0 4,177.4
Success fees 5,691.9 4,481.3 2,108.6
Other brokerage related income 6,204.1 3,546.0 2,837.6
Consulting fees 204.9 375.4 523.6
Other 167.8 220.3 340.4
---------------- ----------------- -----------------
Total revenues 50,598.7 38,552.7 25,928.8
---------------- ----------------- -----------------
Operating expenses:
Compensation, commissions and benefits 41,713.0 31,232.0 20,313.3
Clearing and transaction costs 4,425.1 4,337.2 2,977.2
General and administrative costs 3,992.8 3,158.8 2,332.8
Occupancy and equipment costs 1,053.3 1,166.6 743.3
Depreciation and amortization 1,284.2 958.7 446.3
Goodwill impairment - - 420.0
---------------- ----------------- -----------------
Total operating costs 52,468.4 40,853.3 27,232.9
---------------- ----------------- -----------------
Loss from operations (1,869.7) (2,300.6) (1,304.1)
---------------- ----------------- -----------------
Other income (expenses):
Interest income 43.7 85.3 82.6
Interest expense (80.5) (59.7) (30.7)
Dividend income 11.3 22.5 5.9
Other income (expense), net 149.2 76.8 104.8
---------------- ----------------- -----------------
Total other income (expenses) 123.7 124.9 162.6
---------------- ----------------- -----------------
Loss before income taxes (1,746.0) (2,175.7) (1,141.5)
Income tax benefit (provision) - - -
---------------- ----------------- -----------------
Net loss $ (1,746.0) $ (2,175.7) $ (1,141.5)
================ ================= =================
Net loss per share: basic and diluted $ (0.03) $ (0.04) $ (0.03)
================ ================= =================
Weighted average number of shares outstanding: 54,805.2 48,714.8 40,049.7
basic and diluted
================ ================= =================
The accompanying notes are an integral component of these financial statements.
-47-
VFINANCE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2007, 2006 and 2005
(In thousands)
Common Stock Common Additional Deferred Accumulated Total
Shares Stock Paid-In Compensation Deficit Shareholders'
Amount Capital Equity
-----------------------------------------------------------------------
Balance at December 31, 2004 (Restated) 39,721.1 $ 397.2 $ 27,065.5 $ (19.4) $ (21,325.6) $ 6,117.7
Net loss (Restated) - - - - (1,141.5) (1,141.5)
Exercise of stock options 555.0 5.5 108.0 - - 113.5
Amortization of deferred compensation - - - 19.4 - 19.4
------------- -------- ----------- --------- -------------- -----------
Balance at December 31, 2005 (Restated) 40,276.1 402.7 27,173.5 - (22,467.1) 5,109.1
Net loss (Restated) - - - - (2,175.7) (2,175.7)
Stock-based compensation expense - - 448.2 - - 448.2
Issuance of shares in conjunction with acquisition
of Sterling Financial Group (Note 4) 13,000.0 130.0 3,276.0 - - 3,406.0
Issuance of shares in arbitration settlements 1,303.8 13.1 248.2 - - 261.3
------------- -------- ----------- --------- -------------- -----------
Balance at December 31, 2006 (Restated) 54,579.9 545.8 31,145.9 - (24,642.8) 7,048.9
Net loss - - - - (1,746.0) (1,746.0)
Stock-based compensation expense - - 474.9 - - 474.9
Issuance of shares for services rendered 250.0 2.5 47.5 - - 50.0
------------- -------- ----------- --------- -------------- -----------
Balance at December 31, 2007 54,829.9 $ 548.3 $ 31,668.3 $ - $ (26,388.8) $ 5,827.8
============= ======== =========== ========= ============== ===========
The accompanying notes are an integral component of these financial statements.
-48-
VFINANCE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31,
(In thousands)
2007 2006 2005
(Restated) (Restated)
------------------ --------------- --------------
CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES:
Net loss $ (1,746.0) $ (2,175.7) $ (1,141.5)
Adjustments to reconcile net loss to
net cash provided by (used in) operating activities:
Non-cash fees received (1,822.5) (1,974.1) (487.5)
Non-cash compensation paid 1,480.3 1,350.5 158.1
Depreciation and amortization 1,284.1 958.7 446.3
Issuance of equity for services rendered 50.0 - -
Issuance of equity in arbitration settlements - 261.3 -
Provision for doubtful accounts 60.0 - 69.7
Stock-based compensation 474.9 448.2 19.4
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 72.9 36.3 6.6
Changes in operating assets and liabilities:
(Increase) decrease in:
Accounts receivable (91.8) 285.0 (393.4)
Forgivable loans (40.8) (95.1) -
Due from clearing broker (331.1) 405.2 (38.0)
Notes receivable - employees 119.6 (60.5) 101.1
Investments in marketable securities 192.0 (428.0) 95.7
Investments in not readily marketable securities 454.5 483.3 177.0
Other current assets 27.6 (54.0) (32.1)
Other assets and liabilities, net (213.2) (83.0) (79.5)
Increase (decrease) in:
Accounts payable and accrued liabilities 1,530.6 798.6 (50.1)
Securities sold, not yet purchased 135.8 (0.8) (25.1)
------------------ -------------- --------------
Cash provided by (used in) operating activities 1,636.9 370.9 (673.3)
------------------ -------------- --------------
CASH USED IN INVESTING ACTIVITIES:
Purchase of property and equipment (106.9) (222.7) (125.7)
Investment in unconsolidated affiliate - (161.9) -
------------------ -------------- --------------
Cash used in investing activities (106.9) (384.6) (125.7)
------------------ -------------- --------------
CASH PROVIDED BY (USED IN) FINANCING ACTIVTIES:
Repayments of capital lease obligations (281.1) (208.5) (143.4)
Proceeds from exercise of common stock options - - 113.5
------------------ -------------- --------------
Cash used in financing activities (281.1) (208.5) (29.9)
------------------ -------------- --------------
Increase (decrease) in cash and cash equivalents 1,248.9 (222.2) (828.9)
Cash and cash equivalents at beginning of year 4,205.2 4,427.4 5,256.3
------------------ -------------- --------------
Cash and cash equivalents at end of year $ 5,454.1 $ 4,205.2 $ 4,427.4
================== ============== ==============
The accompanying notes are an integral component of these financial statements.
-49-
VFINANCE, INC. AND SUBSIDIARIES
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 financial services company that
specializes in high growth opportunities. Its three principal lines of business
are: (1) offering full service retail brokerage to approximately 12,000 high net
worth and institutional clients, (2) providing investment banking, merger,
acquisition and advisory services to micro, small and mid-cap high growth
companies, and (3) trading securities, including making markets in over 3,500
micro and small cap stocks and providing liquidity in the United States Treasury
marketplace. In addition to the Company's core business, it offers information
services on its website. vFinance Investments, Inc. ("vFinance Investments") and
EquityStation, Inc. ("EquityStation"), both subsidiaries of the Company, are
broker-dealers registered with the Securities and Exchange Commission ("SEC"),
and members of Financial Industry Regulatory Authority ("FINRA") (formerly the
National Association of Securities Dealers) 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 2006 and 2005 Consolidated Financial Statements have
been reclassified to conform to the presentation in the 2007 Consolidated
Financial Statements. Such reclassifications did not have a material impact on
the presentation of the overall financial statements.
Restatement
As previously described in the Company's Annual Report on Form 10-K for the
year ended December 31, 2006, the Company recorded adjustments as a result of
comments from the staff of the SEC to reclassify marketable securities received
as compensation for investment banking services from "trading securities" to
"available-for-sale" securities, effective January 1, 2002 as part of a
restatement. As a result of this reclassification, non-cash unrealized gains and
losses related to the securities classified as available-for-sale were
reclassified from the determination of net income (loss) to other comprehensive
income (loss), a component of shareholders' equity.
On November 12, 2007, after reconsidering the adjustments to the financial
statements described in the previous paragraph, management determined that the
reclassification suggested by the staff of the SEC should not have been made
and, as a result, the Company revised the previously restated Consolidated
Financial Statements as of and for the years ended December 31, 2006, 2005, 2004
and 2003.
-50-
VFINANCE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
Additionally, as previously described in the Company's Annual Report on
Form 10-K for the year ended December 31, 2006, it was the Company's policy to
reduce the market value of investments in restricted stock by 25% to reflect
such restrictions. On December 11, 2007, after discussions with the staff of the
SEC and after considering applicable accounting guidance related to the
valuation of restricted securities, the Company concluded that the 25% valuation
reduction was not consistent with generally accepted accounting principles in
the United States. As a result of this determination, the Company has revised
its previously restated Consolidated Financial Statements as of and for the
years ended December 31, 2006, 2005, 2004 and 2003 to remove the effects of this
policy.
The net effect of the restatements on the beginning accumulated deficit,
accumulated other comprehensive income and total shareholders' equity are as
follows:
Beginning Equity - December 31, 2004
-----------------------------------------------------------------------------------------------
Effect of Restatement
----------------------------------------------------------
As Reported -
December 31, 2006 2004 2003 2002 Cumulative Restated
Form 10-K Total
-------------------- ----------- ------------ ----------- -------------- --------------
Accumlated deficit $ (21,016.4) (219.7) (42.6) (46.9) (309.2) $(21,325.6)
Accumulated other comprehensive loss $ (341.2) 170.7 123.6 46.9 341.2 $ -
Total shareholders' equity $ 6,085.7 (49.0) 81.0 - 32.0 $ 6,117.7
-51-
VFINANCE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
The following tables present a summary of the effects from each of these
adjustments on the restated Consolidated Financial Statements in 2006 and 2005:
For the Year Ended December 31, 2006
----------------------------------------------
As Reported
December 31, 2006 Effect of
Form 10-K Restatement Restated
------------------- ---------- -------------
Statements of Operations:
Success fees $ 4,523.5 $ (42.2) $ 4,481.3
Total revenues 38,594.9 (42.2) 38,552.7
Loss from operations (2,258.4) (42.2) (2,300.6)
Loss before income taxes (2,133.5) (42.2) (2,175.7)
Net loss $ (2,133.5) (42.2) $ (2,175.7)
=================== =============
Net loss per share - basic and diluted $ (0.04) $ - $ (0.04)
=================== =============
Wt. avg.shares outstanding - basic and diluted 48,714.8 48,714.8
=================== =============
For the Year Ended December 31, 2005
----------------------------------------------
As Reported
December 31, 2006 Effect of
Form 10-K Restatement Restated
------------------- ---------- -------------
Statements of Operations:
Success fees $ 2,250.5 $ (141.9) $ 2,108.6
Total revenues 26,070.7 (141.9) 25,928.8
Loss from operations (1,162.2) (141.9) (1,304.1)
Loss before income taxes (999.6) (141.9) (1,141.5)
Net loss $ (999.6) (141.9) $ (1,141.5)
============== =============
Net loss per share - basic and diluted $ (0.02) $ (0.01) $ (0.03)
============== =============
Wt. avg.shares outstanding - basic and diluted 40,049.7 40,049.7
============== =============
In addition to the effects of the restatement noted above, as a consequence
of reverting to the financial statement presentation used by the Company prior
to the restatement, securities received as compensation for investment banking
services have been classified as "marketable securities" or "not readily
marketable securities", as appropriate, with realized and unrealized gains and
losses related to these securities included in the determination of net income
(loss) in the Consolidated Statements of Operations.
-52-
VFINANCE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
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
$60.0 thousand and $0 at December 31, 2007 and 2006, respectively.
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 $24.8 thousand and $30.7 thousand at December 31, 2007 and 2006,
respectively, and is included in Other Current Liabilities in the Consolidated
Balance Sheets.
Securities Owned
As of December 31, 2007 and 2006, marketable securities consisted primarily
of publicly traded unrestricted common stock, municipal securities and corporate
bonds the Company buys and sells in market-making and trading activities.
Marketable securities are stated at fair market value, based on information
obtained from the Company's clearing firms and nationally recognized exchange
values.
-53-
VFINANCE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
Not readily marketable securities consist of publicly traded common stock
restricted as to resale and common stock purchase warrants, both of which are
typically received as compensation for investment banking services. Restricted
stock and stock purchase warrants may be sold to certain qualified investors
prior to the removal of the resale restrictions, as dictated by Rule 144.
Restricted stock, including restricted stock obtained as a result of exercising
common stock purchase warrants, remains classified as not readily marketable
until the removal of all resale restrictions, typically within a year of the
Company's receipt of the security unless subject to a registration statement
with a later effective date. Market valuations of restricted stock are based on
market prices, as reported by a major exchange such as the NASDAQ Bulletin
Board, NASDAQ OTC or other similar nationally recognized exchange.
Unrealized gains or losses on securities owned 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 instruments are
sold. Net realized and unrealized gains (losses) related to securities owned and
traded were $12.7 million, $9.6 million and $4.2 million in 2007, 2006 and 2005,
respectively.
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 Consolidated 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.
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, net is $548.6 thousand and $321.6 thousand (net of accumulated
depreciation) of computer equipment acquired under capital leases at December
31, 2007 and 2006, respectively.
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.
-54-
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 assumed an operating lease for property located in
Boca Raton, Florida, as a term of the Sterling Financial Acquisition (see Note
4). 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. For additional information, see Note
17 to the Consolidated Financial Statements.
Intangible Assets
The Company accounts for business combinations using the purchase method of
accounting, in accordance with Statement of Financial Accounting Standards
("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.
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, 2007 or 2006.
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.
-55-
VFINANCE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
Other Accrued Liabilities
As of December 31, 2007 and 2006, other accrued liabilities were comprised
primarily of (i) $518.3 thousand and $70.0 thousand, respectively, in accrued
settlements and settlement reserves for open litigation, (ii) $429.5 thousand
and $306.0 thousand, respectively, in accrued bonus payable and (iii) $96.3
thousand and $76.0 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 collectability 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 retail
brokerage 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.
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. 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 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.
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 were made in accordance
with individual compensation agreements, which vary on a banker by banker basis.
At December 31, 2007 and 2006, the Company did not hold any securities to be
distributed in a future period as compensation.
-56-
VFINANCE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
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.
In December 2004, the Financial Accounting Standards Board ("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 the SFAS No. 123, "Accounting for Stock-Based
Compensation".
2005
------------
Net income (loss), as reported $ (1,141.5)
Pro forma stock-based compensation expense, net of taxes (544.0)
------------
Pro forma net income (loss) $ (1,685.5)
============
Basic and diluted net income (loss) per share, as reported $ (0.02)
Pro forma stock-based compensation expense $ (0.01)
Pro forma net income earnings (loss) per share - basic and diluted $ (0.03)
Risk-free interest rate 4.25%
Expected dividend yield -
Expected term 4-5 years
Expected volatility 72%
-57-
VFINANCE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
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.
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, 2007 and 2006, the balance of the
forgivable loans was $26.7 thousand and $58.8 thousand, 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, as it relates to financial assets
and liabilities, is effective for financial statements issued for fiscal years
beginning after November 15, 2007, and interim periods within those fiscal
years. On February 12, 2008, the FASB issued FSP No. FAS 157-2, "Effective Date
of FASB Statement No. 157," which delayed the effective date of SFAS No. 157 for
all nonfinancial assets and nonfinancial liabilities, except those that are
recognized or disclosed at fair value in the financial statements on at least an
annual basis, until January 1, 2009 for calendar year-end entities. Upon
adoption, the provisions of SFAS No. 157 are to be applied prospectively with
limited exceptions. The adoption of SFAS No. 157 is not expected to have a
material impact on our Consolidated Financial Statements.
-58-
VFINANCE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
As of January 1, 2007, the Company also adopted 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." The adoption of SFAS No. 155 did not have a material impact on our
Consolidated Financial Statements.
In February 2007, the FASB issued SFAS No. 159, "Fair Value Option for
Financial Assets and Financial Liabilities", which permits entities to choose to
measure many financial instruments and certain other items at fair value that
are not currently required to be measured at fair value and establishes
presentation and disclosure requirements designed to facilitate comparisons
between entities that choose different measurement attributes for similar types
of assets and liabilities. SFAS No. 159 is effective for fiscal years beginning
after November 15, 2007. The Company is currently evaluating the effect of
adopting SFAS No. 159 on its Consolidated Financial Statements.
In May 2007, the FASB issued FSP FIN No. 46R-7, "Application of FASB
Interpretation No. 46(R) to Investment Companies." FSP FIN No. 46R-7 amends the
scope of the exception to FIN No. 46R to state that investments accounted for at
fair value in accordance with the specialized accounting guidance in the
American Institute of Certified Public Accountants Audit and Accounting Guide,
Investment Companies, are not subject to consolidation under FIN No. 46R. This
interpretation is effective for fiscal years beginning on or after December 15,
2007. The Company does not expect the adoption of FSP FIN No. 46R-7 to have a
material impact on its consolidated financial statements.
In December 2007, the FASB issued SFAS No. 141 (revised 2007), "Business
Combinations" ("SFAS No. 141R"). SFAS No. 141R is a revision to SFAS No. 141 and
includes substantial changes to the acquisition method used to account for
business combinations (formerly the "purchase accounting" method), including
broadening the definition of a business, as well as revisions to accounting
methods for contingent consideration and other contingencies related to the
acquired business, accounting for transaction costs, and accounting for
adjustments to provisional amounts recorded in connection with acquisitions.
SFAS No.141R retains the fundamental requirement of SFAS No. 141 that the
acquisition method of accounting be used for all business combinations and for
an acquirer to be identified for each business combination. SFAS No. 141R is
effective for periods beginning on or after December 15, 2008, and will apply to
all business combinations occurring after the effective date. The Company is
currently evaluating the requirements of SFAS No. 141R.
The FASB also issued SFAS No. 160, "Non-controlling Interests in
Consolidated Financial Statements - an amendment of Accounting Research Bulletin
No. 51, Consolidated Financial Statements" in December 2007. This Statement
amends ARB No. 51 to establish new standards that will govern the (1) accounting
for and reporting of non-controlling interests in partially owned consolidated
subsidiaries and (2) the loss of control of subsidiaries. Non-controlling
interest will be reported as part of equity in the consolidated financial
statements. Losses will be allocated to the non-controlling interest, and, if
control is maintained, changes in ownership interests will be treated as equity
transactions. Upon a loss of control, any gain or loss on the interest sold will
be recognized in earnings. SFAS No. 160 is effective for periods beginning after
December 15, 2008. The Company is currently evaluating the requirements of SFAS
No. 160.
-59-
VFINANCE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
2. MERGER AGREEMENT
On November 7, 2007, the Company entered into an Agreement and Plan of
Merger (the "Merger Agreement") with National Holdings Corporation ("National").
Pursuant to the Merger Agreement, upon the closing of the Merger (the "Effective
Date"), each share of the Company's common stock outstanding immediately prior
to the closing of the Merger (other than shares held by National or the Company
or any of the Company's stockholders who properly exercise dissenters' rights
under Delaware law) will automatically be converted into the right to receive
0.14 shares of National common stock, plus any cash in lieu of fractional shares
of National common stock.
Each option to purchase shares of the Company's common stock outstanding
upon the Effective Date will be converted into options to acquire the number of
shares of National common stock determined by multiplying (i) the number of
shares of the Company's common stock underlying each outstanding stock option
immediately prior to the effective time of the Merger by (ii) 0.14, at a price
per share of National common stock equal to (i) the exercise price per share of
each stock option otherwise purchasable pursuant to the stock option divided by
(ii) 0.14. Each warrant to purchase shares of the Company's common stock
outstanding on the Effective Date will be exercisable to purchase the number of
shares of National common stock determined by multiplying (i) the number of
shares of the Company's common stock underlying each outstanding warrant by (ii)
0.14, at a price per share of National common stock equal to (i) the aggregate
exercise price of such outstanding warrant to purchase the Company's common
stock divided by (ii) the number of shares of National common stock for which
such warrant is exercisable, as determined above.
Completion of the Merger is subject to various customary conditions,
including, among others, (i) requisite approvals of the Company's stockholders,
(ii) completion by National of a private placement of equity securities
resulting in gross proceeds of at least $3 million, (iii) effectiveness of the
registration statement for the National securities to be issued in the Merger,
(iv) absence of any suit, proceeding or investigation challenging or seeking to
restrain or prohibit the Merger, and (v) FINRA and any other applicable
regulatory approvals. No assurance can be given that the Company will consummate
a merger with National.
-60-
VFINANCE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
3. PROPERTY AND EQUIPMENT
At December 31, 2007 and 2006, property and equipment, net, consisted of
the following:
2007 2006
------------- -------------
Furniture and fixtures $ 90.8 $ 90.8
Equipment 791.4 727.5
Capital leases - computer equipment 1,193.7 704.5
Leasehold improvements 174.8 174.8
Software 257.8 214.8
------------- -------------
2,508.5 1,912.4
Less: accumulated depreciation (1,707.7) (1,251.4)
------------- -------------
Property and equipment, net $ 800.8 $ 661.0
============= =============
The Company recorded depreciation expense of $456.3 thousand, $386.3
thousand and $299.6 thousand in the years ended December 31, 2007, 2006 and
2005, 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. 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 of the acquired customer
relationships are included in the Company's results of operations since the
acquisition in May 2006.
-61-
VFINANCE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
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 (Restated) Sterling Adjustments Pro Forma
------------------- ----------------- ----------------- ---------------
Total revenue $ 38,552.7 $ 3,759.4 $ - $ 42,312.1
Income (loss) from operations (2,300.6) 48.0 (340.6) (2,593.2)
Net income (loss) (2,175.7) 48.0 (340.6) (2,468.3)
----------------- ----------------- -----------------
Loss per share - basic and diluted $ (0.04) $ (0.07) $ (0.05)
================= ================= =================
Wt. avg. shares outstanding - basic and diluted 48,714.8 4,642.9 53,357.7
================= ================= =================
2005
-------------------------------------------------------------------------
vFinance (Restated) Sterling Adjustments Pro Forma
------------------- ----------------- ----------------- ---------------
Total revenue $ 25,928.8 $ 9,954.5 $ - $ 35,883.3
Income (loss) from operations (1,304.1) 447.6 (681.2) (1,537.7)
Net income (loss) (1,141.5) 447.6 (681.2) (1,375.1)
----------------- ----------------- -----------------
Loss per share - basic and diluted $ (0.03) $ (0.05) $ (0.03)
================= ================= =================
Wt. avg. shares outstanding - basic and diluted 40,049.7 13,000.0 53,049.7
================= ================= =================
5. CUSTOMER RELATIONSHIPS
At December 31, 2007 and 2006, customer relationships totaled $3.3 million
and $4.1 million, net of accumulated amortization of $1.6 million and $737.4
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 $827.9 thousand, $572.4 thousand and $146.7
thousand in the years ended December 31, 2007, 2006 and 2005, respectively.
The approximate future amortization expense related to these customer
relationships is as follows (in thousands):
2008 $828.0
2009 $828.0
2010 $828.0
2011 $402.0
2012 $147.0
Thereafter $254.6
-62-
VFINANCE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
6. NET CAPITAL REQUIREMENT
Both vFinance Investments and EquityStation are subject to the SEC's
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, 2007, vFinance Investments had net capital of $1.48 million, which
was $481.7 thousand in excess of its required net capital of $1.0 million.
EquityStation had net capital of $543.4 thousand that was $443.4 thousand in
excess of its required net capital of $100.0 thousand.
vFinance Investments' percentage of aggregate indebtedness to net capital
was 289.6% in 2007. EquityStation's percentage of aggregate indebtedness to net
capital was 35.8% in 2007. 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 May 12, 2006, the Company and 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
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 the Effective Date of the Merger, Mr. Sokolow's present employment as
the Company's Chairman and Chief Executive Officer and his present employment
agreement with the Company dated November 16, 2004, as amended, will be
terminated. Accordingly, pursuant to the terms of Mr. Sokolow's present
employment agreement with the Company dated November 16, 2004, as amended, Mr.
Sokolow will be entitled to a lump sum cash payment of $1,150,000 as of the
Effective Date. On the Effective Date, the Company will enter into an employment
termination agreement with Mr. Sokolow. See Note 2 for additional information
about the Merger.
-63-
VFINANCE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
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, as defined in the Resignation Agreement,
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.
The closing of the Merger with National will not result in a Change in Control
for purposes of the Resignation Agreement.
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.
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, 2007 and 2006, there was no Preferred Stock outstanding.
-64-
VFINANCE, INC. AND SUBSIDIARIES
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 settlements. A summary of the warrant activity for the years ended
December 31, 2007, 2006 and 2005 is as follows:
Weighted
Average Range of
Number of Exercise Exercise
Shares Price Price Exercisable
----------------------------------------------------------
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
============
Issued 3,206.8 $ 0.12 0.11 - 0.35
Exercised -
Expired (3,299.7) $ 0.11 0.11
---------------
Outstanding at December 31, 2007 3,866.8 $ 0.18 0.11 - 2.15 3,856.8
=============== ============
The following table summarizes information concerning warrants outstanding
at December 31, 2007:
Weighted
Average Weighted
Exercise Number Remaining Average
Prices Outstanding Contractual Exercise
Life Price
--------------------------------------------------------------------
$ 0.11 2,606.8 1.84
$ 0.15 750.0 0.12
$ 0.30 100.0 2.14
$ 0.625 400.0 3.63
$ 2.250 10.0 0.84
---------------
3,866.8 1.71 $0.18
=============== ===============
-65-
VFINANCE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
There were 3.2 million and 3.3 million warrants issued in 2007 and 2006,
respectively. There were no warrants issued in 2005. The weighted average
issue-date fair value of warrants issued equaled $0.12 and $0.13 in 2007 and
2006, respectively. As of December 31, 2007, the aggregate intrinsic value of
the Company's outstanding and exercisable warrants was $238.5 thousand.
9. STOCK OPTIONS
During 2007 and 2006, the Company recorded $474.9 thousand and $448.2
thousand, respectively, of compensation expense (included as Compensation,
commission and benefits costs in the Consolidated Statements 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:
2007 2006
---- ----
Risk-free interest rate 3.75% - 4.75% 4.25% - 5.25%
Expected dividend yield - -
Expected term Five years Five years
Expected volatility 63.3% - 85.3% 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 granted 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 2007:
Weighted
Average
Weighted Remaining
Average Contractual Aggregate
Exercise Terms Intrinsic
Shares Price (Years) Value
--------------- ---------------- --------------- ---------------
Options outstanding at beginning of year 15,578.7 $ 0.20
Granted 5,335.0 $ 0.20
Exercised - $ -
Forfeited and expired (4,133.8) $ 0.21
---------------
Options outstanding at end of year 16,779.9 $ 0.19 3.32 $ 181.70
===============
Options exercisable at end of year 7,635.3 $ 0.19 2.84 $ 113.70
Options available for future grants -
-66-
VFINANCE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
The weighted-average grant-date fair value of stock options granted during
2007, 2006 and 2005 was $0.20, $0.14 and $0.13, respectively. The total
intrinsic value of stock options exercised during 2005 was $113.5 thousand.
There were no stock options exercised in 2007 or 2006.
A summary of non-vested stock option transactions is as follows for 2007:
Shares Weighted Average
Grant Date Fair
Value (per share)
-------------- -----------------------
Nonvested at beginning of period 11,026.2 $ 0.20
Granted 5,335.0 $ 0.20
Vested (3,062.8) $ 0.20
Forfeited and expired (4,133.8) $ 0.21
--------------
Nonvested at end of period 9,164.6 $ 0.20
==============
As of December 31, 2007, there was $1.14 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 2007 was $715.0 thousand.
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:
Year Ended December 31,
--------------------------------------
2007 2006 2005
------------ ------------ ------------
Weighted average shares outstanding - basic 54,805.2 48,714.8 40,049.7
Effect of dilutive stock options and warrants - - -
------------ ------------ ------------
Weighted average shares outstanding - diluted 54,805.2 48,714.8 40,049.7
============ ============ ============
As of December 31, 2007, 2006 and 2005 the Company had 20.6 million and
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 2007,
2006 and 2005.
-67-
VFINANCE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
11. DEBT AND CAPITAL LEASE OBLIGATIONS
Capital lease obligations at December 31, 2007 consisted of the following:
Obligations under capital lease 544.5
Less: current maturities (247.0)
----------
$ 297.5
==========
Future minimum lease payments for equipment under capital leases at
December 31, 2007 are as follows:
Year Ending December 31: Amount
-------------------------------------------------- ------------
2008 $ 277.8
2009 210.2
2010 110.6
2011 -
2012 -
Thereafter -
------------
Total minimum lease payments 598.6
Less: amounts representing interest (54.1)
------------
Present value of net minimum lease payments 544.5
Less: current portion (247.0)
------------
$ 297.5
============
12. INCOME TAXES
The components of the Company's tax provision for the years ended December
31, 2007, 2006 and 2005 were as follows:
2007 2006 2005
------------ ------------ ------------
Current income tax expense $ - $ - $ -
Deferred income tax (benefit) - - -
------------ ------------ ------------
$ - $ - $ -
============ ============ ============
-68-
VFINANCE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
The reconciliation of the income tax computed at the U.S. Federal statutory
rate to income tax expense for the period ended December 31, 2007, 2006 and
2005:
2007 2006 2005
----------- ----------- -----------
Tax benefit at statutory rate of 35% $ (611.1) $ (761.5) $ (399.5)
State income taxes, net of Federal benefit (56.7) (70.7) (37.1)
Nondeductible expenses 258.1 75.4 609.9
Change in valuation allowance 409.7 756.8 (173.3)
----------- ----------- -----------
Net income tax expense (benefit) $ - $ - $ -
=========== =========== ===========
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:
2007 2006
------------- -------------
Deferred tax assets:
Net operating loss carry-forwards $ 4,881.9 $ 4,823.2
Deferred rent 58.6 66.0
Allowance for doubtful accounts 22.9 -
Stock options 171.4 171.0
Impairment of investment in JSM 30.6 30.0
Accrued bonuses 164.7 117.0
Depreciation and amortization 319.9 49.0
Deferred revenue 19.1 34.0
Reserve for settlements 72.7 37.0
------------- -------------
5,741.8 5,327.2
Valuation allowance (5,741.8) (5,327.2)
------------- -------------
Net deferred tax asset $ - $ -
============= =============
Net operating loss carry-forwards totaled approximately $12.8 million at
December 31, 2007. The net operating loss carry-forwards can be utilized or
expire if not utilized through the tax year ending in 2027. After consideration
of all the evidence, both positive and negative, management has recorded a full
valuation allowance at December 31, 2007 and 2006, due to the uncertainty of
realizing the deferred tax assets. The valuation allowance incresead by $414.6
during the year ended December 31, 2007.
Utilization of the Company's net operating loss carry-forwards may be
limited based on changes in ownership as defined in Internal Revenue Code
Section 382.
-69-
VFINANCE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
In July 2006, the FASB issued Interpretation No. 48, "Accounting for
Uncertainty in Income Taxes - an interpretation of FASB Statement No. 109 ("FIN
48"). This Interpretation prescribes a consistent recognition threshold and
measurement standard, as well as a clear criteria for subsequently recognizing,
derecognizing and measuring tax positions for financial statement purposes. The
Interpretation also requires expanded disclosure with respect to uncertainties
as they relate to income tax accounting. FIN 48 is effective for fiscal years
beginning after December 15, 2006. Management has evaluated all of its tax
positions and determined that FIN 48 did not have a material impact on the
Company's financial position or results of operations during its year ended
December 31, 2007.
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.
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, 2007, the contingent obligation of the Company associated
with this Clearing Agreement was $680.0 thousand.
In May 2007, EquityStation received notification from Merrill Lynch Pierce
Fenner & Smith, Broadcort Division ("Merrill") that effective September 22, 2007
it intended to terminate its clearing agreement with EquityStation, in
accordance with the clearing agreement. On September 4, 2007, Merrill extended
the termination date to October 23, 2007 and granted an additional extension on
October 8, 2007 until November 30, 2007. This termination did not result in a
material impact to its Consolidated Financial Statements, as it signed a
clearing agreement with Penson Financial Services, Inc. ("Penson Clearing") on
September 7, 2007, and also executed a Tri-party Clearing Agreement through
vFinance Investments to clear some of its business through National Financial
Services. Clearing has commenced with Penson Clearing and through the Tri-party
agreement.
-70-
VFINANCE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
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
---------------------------------- --------------
2008 $ 1,358.5
2009 728.2
2010 620.1
2011 635.1
2012 660.0
Thereafter 626.6
--------------
Total 4,628.5
Less: sublease rentals (486.4)
--------------
$ 4,142.1
==============
Total rent expense under operating leases, including space rental, totaled
$1.4 million, $1.0 million and $726.3 thousand for the years ended December 31,
2007, 2006 and 2005, respectively.
In February 2008, we received notification from the sublessee that occupies
14,000 square feet of office space the Company assumed in the Sterling Financial
Acquisition that it was insolvent and would be unable to perform its obligations
under the sublease. See Note 17.
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 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, 2007, the Company has accrued approximately
$110.0 thousand for these matters. The Company has recently 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.
-71-
VFINANCE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
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 legal proceedings and regulatory inquiries, the outcome of which,
either singularly or in the aggregate, is not expected to be material. There can
be no assurance however that any sanctions will not have a material adverse
effect on the financial condition or results of operations of the Company and/or
its subsidiaries.
The following is a brief summary of certain matters pending against or
involving the Company and its subsidiaries.
On or about February 28, 2005, Knight Equity Markets, LP ("Knight") filed
an arbitration action (FINRA Case No. 05-01069) against vFinance Investments,
claiming that vFinance Investments received roughly $6.5 million in dividends
that allegedly belong to Knight. vFinance Investments asserts 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. In
January 2008, the Company settled this claim for $325.0 thousand in cash.
On or about September 27, 2005, John S. Matthews filed an arbitration
action (FINRA Case No. 05-014991) against the Company, claiming that the Company
wrongfully terminated his independent contract with the Company and that the
Company "stole" his clients and brokers. Mr. Matthews obtained a temporary
restraining order and an agreed upon injunction was issued by the FINRA panel.
Mr. Matthews and JMS Capital Holding Corp., a plaintiff in the arbitration
action also requested unspecified damages resulting from the Company's alleged
improper activity. The Company and Mr. Matthews entered into a settlement
agreement in July 2007 with respect to this arbitration action. Pursuant to the
terms of the settlement agreement, the Company paid $75.0 thousand to Mr.
Matthews in 2007 and is further obligated to make payments to Mr. Matthews
totaling $225.0 thousand. In connection with this settlement, the Company
recorded $250.0 thousand of arbitration settlement expense (a component of
general and administrative costs) during the year ended December 31, 2007.
-72-
VFINANCE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
In November 2007, Nupetco Associates, LLC filed a customer arbitration
action (FINRA Case No. 07-03152) with FINRA naming vFinance Investments as a
co-respondent. The statement of claim alleges violations of various state and
federal securities laws. The statement of claim seeks compensatory damages of
approximately $510.0 thousand against vFinance Investments in addition to costs,
attorneys' fees and punitive damages. vFinance Investments has filed an answer
and affirmative defenses and has requested discovery from the arbitration
claimant. vFinance Investments intends to vigorously defend the arbitration.
On March 4, 2008 the Company received a customer arbitration action (FINRA
Case No.08-00472) from Claimants, Donald and Patricia Halfmann. Under FINRA's
Code of Arbitration Procedure, vFinance is not required to file a responsive
pleading until April 18, 2008. The Halfmanns' Statement of Claim alleges that
Jeff Lafferty, a former broker working for vFinance Investments, opened accounts
for the Halfmanns and misappropriated approximately $110,000 of the Halfmanns'
funds via check alteration and forgery while he was employed by vFinance as the
Halfmanns' financial advisor. The Halfmanns also contend vFinance is liable for
an additional $150,000 for investments made by the Halfmanns directly with Jeff
Lafferty after their account transferred out of vFinance and after Lafferty's
resignation from vFinance, with a form U-5 filed with NASD by vFinance on August
27, 2004. Finally, the Halfmanns' Statement of Claim requests punitive damages,
costs and attorney's fees incurred for this action. While vFinance intends to
vigorously defend against the allegations made in the Halfmanns' Statement of
Claim, a prediction of the likely outcome cannot be made at this time.
The Company engaged in a number of other legal proceedings incidental to
the conduct of its business. These claims aggregate a range of $80.0 thousand to
$150.0 thousand.
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, 2007, 2006 and 2005, respectively.
15. CASH FLOW INFORMATION
Supplemental disclosure of cash flow information and non-cash items
affecting the statement of cash flows are as follows:
2007 2006 2005
------------ ------------ -------------
Supplemental cash flow disclosures:
Cash paid for interest during the year $ 80.6 $ 59.7 $ 30.7
============ ============ =============
Cash paid for income taxes during the year $ - $ - $ -
============ ============ =============
Non-cash items affecting investing and financing activities:
Acquisition of computer equipment under capital leases $ 489.2 $ 132.0 $ 368.0
============ ============ =============
Common stock issued for acquisition $ - $ 3,406.0 $ -
============ ============ =============
-73-
VFINANCE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
15. 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, 2007, the Company had $4.4 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, 2007.
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.
16. 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 2007 and 2006.
Three Months
Three Months Three Months Three Months Ended Ended December
Ended March 31, Ended June 30, September 30, 2007 31, 2007
2007 (Unaudited) 2007 (Unaudited) (Unaudited) (Unaudited)
----------------------------------------------------------------------------
Revenues, as reported $ 12,019.2 $ 13,196.4 $ 11,010.3
Effect of restatement 21.0 (114.9) (24.3)
---------------- ------------------ ------------------
Revenues - restated $ 12,040.2 $ 13,081.5 $ 10,986.0 $ 14,491.0
================ ================== ================== ================
Income (loss) from operations, as reported $ 36.7 $ (128.7) $ (700.5)
Effect of restatement 21.0 (114.9) (24.3)
---------------- ------------------ ------------------
Income (loss) from operations - restated $ 57.7 $ (243.6) $ (724.8) $ (959.0)
================ ================== ================== ================
Net income (loss), as reported $ 37.8 $ (129.9) $ (641.3)
Effect of restatement 21.0 (114.9) (24.3)
---------------- ------------------ ------------------
Net income (loss) - restated $ 58.8 $ (244.8) $ (665.6) $ (894.4)
================ ================== ================== ================
Net income (loss) per share - basic, as reported $ 0.00 $ (0.00) $ (0.01) $ (0.02)
Effect of restatement - - - -
---------------- ------------------ ------------------ ----------------
Net income (loss) per share - basic - restated $ 0.00 $ (0.00) $ (0.01) $ (0.02)
================ ================== ================== ================
Weighted avg. shares outstanding - basic 54,729.9 54,829.9 54,829.9 54,829.9
================ ================== ================== ================
Net income (loss) per share - diluted, as reported $ 0.00 $ (0.00) $ (0.01) $ (0.02)
Effect of restatement - - - -
---------------- ------------------ ------------------ ----------------
Net income (loss) per share - diluted - restated $ - $ - $ (0.01) $ (0.02)
================ ================== ================== ================
Weighted avg. shares outstanding - diluted 56,125.1 54,829.9 54,829.9 54,829.9
================ ================== ================== ================
-74-
VFINANCE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
Three Months
Three Months Three Months Three Months Ended Ended December
Ended March 31, Ended June 30, September 30, 2006 31, 2006
2006 (Unaudited) 2006 (Unaudited) (Unaudited) (Unaudited)(3)
---------------------------------------------------------------------
Revenues, as reported (1) $ 9,007.6 $ 9,654.5 $ 9,529.4 $ 10,403.4
Effect of restatement (83.1) (98.1) (40.5) 179.5
---------------- --------------- --------------- ----------------
Revenues - restated $ 8,924.5 $ 9,556.4 $ 9,488.9 $ 10,582.9
================ =============== =============== ================
Income (loss) from operations, as reported (1) $ 388.4 $ (361.5) $ (433.8) $ (1,851.5)
Effect of restatement (83.1) (98.1) (40.5) 179.5
---------------- --------------- --------------- ----------------
Income (loss) from operations - restated $ 305.3 $ (459.6) $ (474.3) $ (1,672.0)
================ =============== =============== ================
Net income (loss), as reported (1) $ 411.6 $ (342.8) $ (385.7) $ (1,816.6)
Effect of restatement (83.1) (98.1) (40.6) 179.6
---------------- --------------- --------------- ----------------
Income (loss) from operations - restated $ 328.5 $ (440.9) $ (426.3) $ (1,637.0)
================ =============== =============== ================
Net income (loss) per share - basic, as reported (1) $ 0.01 $ (0.01) $ (0.01) $ (0.03)
Effect of restatement - - - -
---------------- --------------- --------------- ----------------
Net income (loss) per share - basic - restated $ 0.01 $ (0.01) $ (0.01) $ (0.03)
================ =============== =============== ================
Weighted avg. shares outstanding - basic 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) $ (0.03)
Effect of restatement - - - -
---------------- --------------- --------------- ----------------
Net income (loss) per share - diluted - restated $ 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 Note 18 to
the Company's Consolidated Financial Statements in the Company's Annual Report
on Form 10-K for the year ended December 31, 2006.
(2) 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.
(3) 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 paid in 2007 and a decrease in success fee revenues derived from
investment banking services compared to prior quarters.
-75-
VFINANCE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
17. SUBSEQUENT EVENTS
In February 2008, we received notification from the sublessee that occupies
14,000 square feet of office space the Company assumed in the Sterling Financial
Acquisition that it was insolvent and would be unable to perform its obligations
under the sublease. As of March 5, 2008, this sublessee vacated the premises and
the Company began to market the property to identify a replacement sublessee.
The Company does not expect the identification of a replacement sublessee or the
terms upon which the property may be subleased to result in a material adverse
effect to the Company's financial position or results of operations.
On March 4, 2008 the Company received a customer arbitration action (FINRA
Case No.08-00472) from Claimants, Donald and Patricia Halfmann. Under FINRA's
Code of Arbitration Procedure, vFinance is not required to file a responsive
pleading until April 18, 2008. The Halfmanns' Statement of Claim alleges that
Jeff Lafferty, a former broker working for vFinance Investments, opened accounts
for the Halfmanns and misappropriated approximately $110,000 of the Halfmanns'
funds via check alteration and forgery while he was employed by vFinance as the
Halfmanns' financial advisor. The Halfmanns also contend vFinance is liable for
an additional $150,000 for investments made by the Halfmanns directly with Jeff
Lafferty after their account transferred out of vFinance and after Lafferty's
resignation from vFinance, with a form U-5 filed with NASD by vFinance on August
27, 2004. Finally, the Halfmanns' Statement of Claim requests punitive damages,
costs and attorney's fees incurred for this action. While vFinance intends to
vigorously defend against the allegations made in the Halfmanns' Statement of
Claim, a prediction of the likely outcome cannot be made at this time.
-76-
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
ITEM 9A. CONTROLS AND PROCEDURES.
Under the supervision and with the participation of our management, including
our Chief Executive Officer and Chief Financial Officer, we conducted an
evaluation of the effectiveness of the design and operation of our disclosure
controls and procedures, as defined in Rules 13a-15(e) under the Exchange Act,
as of the end of the period covered by this Annual Report. Based on this
evaluation, our Chief Executive Officer and Chief Financial Officer concluded as
of December 31, 2007 that our disclosure controls and procedures were effective
such that the information relating to the Company, including our consolidated
subsidiaries, required to be disclosed in our SEC reports (i) is recorded,
processed, summarized and reported within the time periods specified in SEC
rules and forms and (ii) is accumulated and communicated to our management,
including our Chief Executive Officer and Chief Financial Officer, as
appropriate, to allow timely decisions regarding required disclosure.
Our management, including our Chief Executive Officer and Chief Financial
Officer, does not expect that our disclosure controls and procedures or our
internal controls will prevent all error and all fraud. A control system, no
matter how well conceived and operated, can provide only reasonable, not
absolute, assurance that the objectives of the control system are met. 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. Due to the inherent limitations in all control systems, no evaluation of
controls can provide absolute assurance that all control issues and instances of
fraud, if any, within vFinance, Inc. have been detected.
Management's Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal
control over financial reporting (as defined in Rule 13a-15(f) under the
Exchange Act). Our management assessed the effectiveness of our internal control
over financial reporting as of December 31, 2007. In making this assessment, our
management used the criteria set forth by the Committee of Sponsoring
Organizations of the Treadway Commission ("COSO") in Internal Control-Integrated
Framework. Our management has concluded that, as of December 31, 2007, our
internal control over financial reporting is effective based on these criteria.
This report does not include an attestation report of our registered public
accounting firm regarding internal control over financial reporting.
Management's report was not subject to attestation by our registered public
accounting firm pursuant to temporary rules of the SEC that permit us to provide
only management's report in this report.
-77-
Our management, including the certifying officers, assessed, as of December 31,
2007, the effectiveness of our internal control over financial reporting. In
making this assessment, management used the criteria set forth in the framework
in Internal Control - Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission.
As of December 31, 2007, our management, including the certifying officers, has
concluded that we maintained effective internal control over financial
reporting.
This report does not include an attestation report of our registered public
accounting firm regarding internal control over financial reporting.
Management's report was not subject to attestation by our registered public
accounting firm pursuant to temporary rules of the SEC that permit us to provide
only management's report in this report.
ITEM 9B. OTHER INFORMATION.
Not Applicable.
-78-
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE.
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth the names, ages and positions of our executive
officers and directors as of March 10, 2008. 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 51 Chairman and Chief Executive Officer
Charles R. Modica 60 Director
Jorge A. Ortega 44 Director
Alan B. Levin 44 Chief Financial Officer
Richard Campanella 56 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.
Jorge A. Ortega has been one of our directors since June 6, 2007. Mr.
Ortega has served as President of The Jeffrey Group, Inc., a marketing,
communications and public relations consulting firm since February 2005. From
October 1991 to January 2005, Mr. Ortega was Managing Director of
Burson-Marsteller, LLC, a global public relations and public affairs firm. Mr.
Ortega received his B.A. degree in Business Administration from The American
University in 1985.
-79-
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 and Chief Financial Officer 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.
Richard Campanella has been our Secretary since December 18, 2001. Mr.
Campanella currently serves as the President and Chief Operating 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. As of March 10, 2008, Mr. Mahoney
owned approximately 5.4 million shares of our common stock, and held options to
purchase 1.5 million shares of our common stock. Mr. Charles Modica was
designated as Mr. Mahoney's board appointee in connection with Mr. Mahoney's
departure.
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.
-80-
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, 2007, our officers, directors and significant
stockholders have timely filed the appropriate form under Section 16(a) of the
Exchange Act., except a Form 4 for Richard Campanella (one filing) that was
subsequently filed and a Form 3 (one filing) and a Form 4 (one filing) for
Dennis De Marchena that have not been filed.
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 "Executive Compensation." Specific information regarding the
compensation earned by or paid to our Named Executive Officers in 2007 is set
forth in a series of tables under the heading "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.
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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.
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.
2007 Executive Compensation Components
For the fiscal year ended December 31, 2007, 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.
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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.
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 Chairman and Chief Executive Officer and our 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 Chairman
and Chief Executive Officer and Chief Financial Officer are paid in cash. These
bonus provisions are intended, in accord with our compensation philosophies and
objectives, to align executive interests with stockholder interests.
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Incentive Bonus. Our employment agreement with our Chairman and Chief
Executive Officer provides 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"
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 Chairman and Chief Executive Officer are
paid as frequently as quarterly in cash, as directed by the Board of Directors.
Our employment agreement with the President and Chief Operating Officer of
vFinance Investments provides for the payment of annual incentive bonuses.
Our employment agreement with the President and Chief Operating Officer of
vFinance Investments 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 Chief Financial Officer and the President
and Chief Operating Officer of vFinance Investments 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.
Benefits
Our Chairman and Chief Executive Officer and our 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.
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Termination-Based Compensation
Termination
Our employment agreements with our Chief Financial Officer and the
President and Chief Operating Officer of vFinance Investments are terminable at
will. Accordingly, we will not incur any obligations upon the termination of
those Named Executive Officers.
Our employment agreement with our 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 Chairman and Chief Executive Officer
or our termination of our employment agreement with such Named Executive Officer
other than "For Cause," such employment agreement provides that we would be
required to pay this Named Executive Officer a lump sum payment equal to the sum
of (a) twice the sum of his 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.
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 Chairman and Chief
Executive Officer, Chief Financial Officer and the President and Chief Operating
Officer of vFinance Investments pursuant to their respective employment
agreements will become immediately vested.
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Upon a Change in Control, we have agreed to pay to our 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 Chairman and Chief Executive Officer will become
immediately and fully vested.
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-K.
Board of Directors
Leonard J. Sokolow
Charles R. Modica
Jorge A. Ortega
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ADDITIONAL INFORMATION REGARDING EXECUTIVE COMPENSATION
Summary Compensation Table
The following table provides compensation information for the years ended
December 31, 2006 and 2007 for Named Executive Officers. The "Executive
Compensation - Compensation Discussion and Analysis" section of this report
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 Comp. Total
($) ($)(1) ($) ($) ($)
(1) (2) (3) (4)
--------------------------------------------------------------------------------------------------------------------------------
Leonard J. Sokolow 2007 394,700 187,000 - - 581,700
Chief Executive Officer 2006 340,698 155,000 280,000 9,160 784,858
--------------------------------------------------------------------------------------------------------------------------------
Alan B. Levin (1) 2007 165,000 65,000 - - 230,000
Chief Financial Officer 2006 118,200 27,000 135,000 - 280,200
--------------------------------------------------------------------------------------------------------------------------------
Richard Campanella 2007 150,900 114,600 - - 265,500
President and Chief Operating Officer 2006 147,500 7,000 - - 154,500
of vFinance Investments, Inc.
--------------------------------------------------------------------------------------------------------------------------------
(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 for 2006 herein represents actual amounts paid for the
period from January 1, 2006 to December 31, 2006.
(2) Bonus amounts have been determined pursuant to the bonus terms outlined
in our Named Executive Officers' respective employment agreements. Leonard
Sokolow and Alan Levin receive a bonus based on the Boards review of the
consolidated quarterly and annual EBITDA performance, as well as taking into
consideration performance in other areas such as but not limited to, revenue
growth and savings in operating expenses. These bonus amounts typically
approximate 50% of the officer's base salary and are paid no more frequently
than quarterly. Richard Campanella's agreement calls for a payment equal to 10%
of Retail net profit after all overhead and expense allocations above $1.7
million. This amount is calculated on a quarterly basis and 50% of the bonus
payment is withheld from each quarter pending the annual audit and verification
of the retail profits, after which time the balance is paid.
(3) Options amounts have been determined pursuant to the option terms
outlined in our Named Executive Officers' respective employment agreements.
(4) Represents health insurance contributions.
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Grants of Plan-Based Awards
The Named Executive Officers were not granted any plan-based awards during
fiscal year 2007.
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 10.7% of our total
outstanding common shares at December 31, 2007, 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
"Executive Compensation -Post-Termination / Change in Control Benefits," below.
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.
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. Effective July 24, 2007, Mr. Levin's base salary was increased to
$180,000. 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.
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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 $0.18 per
share, of which 275,000 options were vested as of July 1, 2007, and 125,000
options shall vest each subsequent yearly anniversary thereafter provided that
Mr. Campanella is employed on the applicable vesting date. Mr. Campanella's
employment with us is terminable at will.
Outstanding Equity Awards at Year-End
The following table shows all outstanding equity awards held by Named
Executive Officers as of December 31, 2007.
Option Awards
---------------------------------------------------------
Name Number of Number of
Securities Securities
Underlying Underlying
Unerxercied Unexercised Option Option
Options (#), Options (#), Exercise Expiration
Exercisable Unxercisable Price ($) Date
-------------------------------------------------------------------------------
Leonard J. Sokolow 750,000 750,000 0.155 12/29/10
500,000 1,500,000 0.210 12/28/11
-------------------------------------------------------------------------------
80,000 120,000 0.180 06/13/10
Alan B. Levin 25,000 25,000 0.155 12/29/10
125,000 375,000 0.200 07/23/11
125,000 375,000 0.210 12/28/11
-------------------------------------------------------------------------------
Richard Campanella 300,000 300,000 0.170 06/30/10
-------------------------------------------------------------------------------
Option Exercises and Stock Vested
None of our Named Executive Officers exercised options or received stock
awards during the year ended December 31, 2007.
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.
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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.
Termination
Our employment agreements with our Chief Financial Officer and the
President and Chief Operating Officer of vFinance Investments are terminable at
will. Accordingly, we will not incur any obligations upon the termination of
these Named Executive Officers.
Our employment agreement with our 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 Chairman and Chief Executive Officer
or our termination of our employment agreement with such Named Executive Officer
other than "For Cause," such employment agreement provides that we would be
required to pay this Named Executive Officer a lump sum payment equal to the sum
of (a) twice the sum of his 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.
Assuming our Chairman and Chief Executive Officer's employment was
terminated on December 31, 2007 upon his death or "Disability" or our
termination other than "For Cause," we would be required to pay him a lump sum
of approximately $1.15 million.
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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 Chairman and Chief
Executive Officer, our Chief Financial Officer and the President and Chief
Operating Officer of vFinance Investments 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, 2007, 2,250,000 shares of common stock underlying options held by
our Chairman and Chief Executive Officer, 855,000 shares of common stock
underlying options held by our Chief Financial Officer and 300,000 shares of
common stock underlying options held by the President and Chief Operating
Officer of vFinance Investments would have vested. The value received by our
Chairman and Chief Executive Officer, our Chief Financial Officer and the
President and Chief Operating Officer of vFinance Investments would have been
$1,675 and $6,000, respectively, calculated as the excess of the stock closing
value on December 31, 2007 over the total options outstanding for each executive
at the exercise price for their respective option grants.
If consummated, the Merger with National would cause all options granted to
our Chairman and Chief Executive Officer, our Chief Financial Officer and the
President and Chief Operating Officer of vFinance Investments to become
immediately vested. Notwithstanding, our Chairman and Chief Executive Officer
has agreed to waive such accelerated vesting.
Upon a Change in Control, we have agreed to pay to our 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 Chairman and Chief Executive Officer will become
immediately and fully vested. Upon a Change in Control as of December 31, 2007,
we would have been required to pay our current Chairman and Chief Executive
Officer a lump sum of approximately $1.15 million.
The Merger with National will not be considered a Change in Control under
our Chairman and Chief Executive Officer's employment agreement. However
pursuant to the Termination Agreement that will be executed upon the Effective
Date of the Merger, our Chairman and Chief Executive Officer's employment and
his employment agreement with us will terminate and he will receive a lump sum
cash payment of $1,150,000.
Director Compensation
The following table sets forth a summary of the compensation earned by our
non-employee directors and/or paid to certain of our non-employee directors in
2007.
Fees Earned or Paid Option Awards Total
Name Cash ($) ($) ($)
------------------- -------------------- ---------------- ---------------
Charles R. Modica 7,000 24,000 31,000
Jorge A. Ortega 7,000 24,000 31,000
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Director Compensation Policy
Each director who is not an executive officer is entitled to an annual fee
of $12,000, payable quarterly. Directors who are executive officers are not
entitled to an annual fee.
On June 6, 2007, we granted each Mr. Ortega and Mr. Modica a five-year
stock option to purchase 200,000 shares of our common stock at an exercise price
of $0.20 per share, the closing price of our common stock on June 6, 2007, in
connection with their agreement to join the Board.
The stock options granted to Messrs. Ortega and Modica vest 25% per year
over four years beginning on June 6, 2008. Upon the acquisition by an individual
or company of 50.1% or more our issued and outstanding shares of common stock,
all options granted to Messrs. Ortega and Modica will become immediately vested.
Employee directors do not receive any compensation for serving on our Board
of Directors.
Compensation Committee Interlocks and Insider Participation
Our Board of Directors performs the equivalent functions of a compensation
committee. The members of our Board of Directors during 2007 were Leonard J.
Sokolow, Charles R. Modica and Jorge A. Ortega. Mr. 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.
Messrs. Modica and Ortega have been members of our Board of Directors since
January and July 2007, respectively. Except as otherwise set forth in this
Annual Report on Form 10-K, we did not engage in any transactions with Messrs.
Sokolow, Modica or Ortega since January 1, 2007 in which the amount involved
exceeded $120,000. None of our executive officers serve as director of, or in
any compensation-related capacity for, companies with which members of our Board
of Directors are affiliated.
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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 10, 2008. 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 54,829,876 shares of Common Stock outstanding.
Name of Beneficial Owner Number of Shares Percent
Beneficially of class
Owned
(in thousands) (1)
------------------------------------------------------------ -------------------- -----------
Leonard J. Sokolow (2) 7,133.0 12.7%
Charles R. Modica - *
Jorge A. Ortega - *
Alan B. Levin (3) 430.0 *
Richard Campanella (4) 425.0 *
Timothy E. Mahoney (5) 4,705.0 8.4%
Highlands Group Holdings, Inc. (6) 2,175.0 4.0%
Sterling Financial Group of Companies, Inc. (7) 4,934.4 9.0%
Oxir Investment Ltd. (8) 3,000.0 5.5%
Dennis De Marchena (9) 4,738.0 8.3%
All executive officers and directors as a group (5 persons) 7,988.0 14.1%
*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 within 60 days of March 10, 2008, 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 54,829,876 shares of common stock outstanding as of March 10, 2008.
(2) Includes 5,883,010 shares of common stock issued in the names of Mr. Sokolow
and his wife, and 1,250,000 shares of common stock issuable upon exercise of
options at a weighted-average price of $0.177 per share, which options are
exercisable within 60 days of March 10, 2008.
(3) Includes 75,000 shares of common stock issued in the name of Mr. Levin and
355,000 shares of common stock issuable upon exercise of options at a
weighted-average price of $0.196 per share, which options are exercisable within
60 days of March 10, 2008.
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(4) Includes 125,000 shares of common stock issued in the name of Mr. Campanella
and 300,000 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 10,
2008.
(5) 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 10, 2008. Mr. Mahoney's address is 68 Cayman Place, Palm Beach Gardens,
Florida 33418.
(6) 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.
(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. Mr. Garcia has advised
us that Sterling Financial Group of Companies, Inc. beneficially owns 4,934,436
shares of common stock.
(8) 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 us that Oxir Investments Ltd.
beneficially owns 3,000,000 shares of common stock.
(9) Includes 2,198,091 shares of common stock issued in the name of Mr. De
Marchena and 2,539,897 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 10, 2008. Mr. De Marchena's address is Avenida Boulevard El Cafetal,
Edificio Mara, Apartmento 01, Planta Baja, Frente a Quinta Leonor, El Cafetel,
Caracas, Venezuela 1060.
In connection with Sterling Financial's acquisition of our securities, on May
11, 2006, we and vFinance Investments entered into a voting and lockup agreement
with Sterling Financial, 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 designee
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. Mr.
Garcia's designee is Jorge Ortega. On January 17, 2006, we also entered into a
standstill agreement with Sterling Financial, Charles Garcia and Alexis Korybut,
to provide restrictions on certain actions for a defined period of time.
-94-
In connection with the execution of the Merger Agreement, National and vFin
Acquisition Corporation have entered into a voting agreement with Leonard J.
Sokolow and Dennis De Marchena, who own approximately 10.7% and 9.9%,
respectively, of our outstanding shares of common stock as of March 10, 2008.
Pursuant to the agreement, Mr. Sokolow has agreed to vote all of his shares and
Mr. De Marchena has agreed to vote 2,000,000 of his shares in favor of the
merger and against any transaction or other action that would interfere with the
merger.
Pursuant to the Merger Agreement, Mark Goldwasser, Chairman of the board of
directors of National, Christopher Dewey, Vice Chairman of the board of
directors of National, and Leonard J. Sokolow, our Chairman and Chief Executive
Officer, will enter into an agreement on the effective date of the Merger
Agreement to vote their shares of National for the election of each other and up
to three designees of Mr. Goldwasser and up to three designees of Mr. Sokolow
until the earlier to occur of: (i) National's merger, consolidation or
reorganization whereby the holders of National's voting stock own less than 50%
of the voting power of National after such transaction; (ii) by mutual consent
of the parties thereto; (iii) the date that Messrs. Goldwasser, Sokolow and
Dewey own in the aggregate less than one percent of the outstanding voting
securities of National; (iv) upon the fifth anniversary of the agreement; or (v)
upon listing of National's common stock on AMEX, the NASDAQ Capital Market or
the NASDAQ Global Market.
Equity Compensation Plan Information
The following table sets forth certain information as of December 31, 2007, with
respect to compensation plans (including individual compensation arrangements)
under which our equity securities are authorized for issuance under: all
compensation plans previously approved by our security holders; and all
compensation plans not previously approved by our security holders.
Number of
Seecurities
Remaining
Weighted- Available For
Average Future Inssuance
Number of Securities Exercise Under Equity
to be issued upon Price Compensation
exercise of Outstanding Plans (excluding)
outstanding options options, securities reflected
warrants and rights warrants and in column (a)
Plan Category (a) rights (b) (c)
---------------------------------------------------------- ------------------------- ---------------- ---------------------
Equity compensation plans approved by security holders - $ - -
Equity compensation plans not approved by security holders (1) 20,648,800.00 $ 0.18 -
------------------------- ---------------- --------------------
Total 20,648,800.00 $ 0.18 -
========================= ================ ====================
(1) Includes options and warrants granted pursuant to individual compensation
arrangements.
-95-
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE.
We did not engage in any transactions with related parties since January 1,
2007 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
persons' 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 and Jorge A.
Ortega are "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.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES.
During 2007 and 2006, the Company incurred the following fees for
professional services rendered by our principal accountant Sherb & Co., LLP:
2007 2006
--------------- ---------------
Audit Fees $ 93,000 $ 92,000
Audit-related Fees $ - $ -
Tax Fees $ 12,500 $ 7,500
All Other Fees $ 14,100 $ 13,700
--------------- ---------------
Total $119,600 $113,200
=============== ===============
Audit Fees
During the years ended December 31, 2007 and 2006, the aggregate fees
billed by Sherb & Co., LLP, our principal accountants in 2007 and 2006, 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-Q and fees
related to filings with the SEC and accounting consultations during those fiscal
years were $93,000 and $92,000, respectively.
Audit Related Fees
During the years ended December 31, 2007 and 2006, our principal
accountants, Sherb & Co., LLP, did not provide any assurance or other audit
related services.
-96-
Tax Fees
During the years ended December 31, 2007 and 2006, our principal
accountants, Sherb & Co., LLP, billed us $12,500 and $7,500, respectively, for
the preparation of federal income tax returns and other tax related matters.
Other Fees
During the years ended December 31, 2006 and 2005, 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.
-97-
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).
2.6*** Agreement and Plan of Merger dated November 7, 2007 by and
among The Company, National Holdings Corporation and vFin
Acquisition Corporation (incorporated by reference to Exhibit
2.1 to the Company's Current Report on Form 8-K filed with the
SEC on November 8, 2007).
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).
-98-
Number of
Exhibit Exhibit Description
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).
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 Certificate of Renewal and Revival of Charter as filed with
the Delaware Secretary of State on November 30, 2006.
3.9 Amended and Restated Certificate of Incorporation of the
Company as filed with the Delaware Secretary of State on
November 30, 2006.
3.10 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).
3.11 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).
3.12 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).
-99-
Number of
Exhibit Exhibit Description
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).
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).
-100-
Number of
Exhibit Exhibit Description
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).
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).
-101-
Number of
Exhibit Exhibit Description
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).
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).
-102-
Number of
Exhibit Exhibit Description
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).
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).
-103-
Number of
Exhibit Exhibit Description
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).
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).
-104-
Number of
Exhibit Exhibit Description
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).
10.55 Voting Agreement dated November 7, 2007 by and among National
Holdings Corporation, vFin Acquisition Corporation, Leonard J.
Sokolow and Dennis De Marchena (incorporated by reference to
Exhibit 99.1 to the Company's Current Report on Form 8-K filed
with the SEC on November 8, 2007).
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.
*** Schedules have been omitted pursuant to Item 601(b)(2) of Regulation S-K.
Exhibit F to the Agreement and Plan of Merger is incorporated by reference
to Exhibit 99.1 to the Company's Current Report on Form 8-K filed with the
SEC on November 8, 2007. The Company hereby undertakes to furnish copies of
any of the omitted schedules upon request by the Securities and Exchange
Commission.
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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: March 12, 2008
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) March 12, 2008
Leonard J. Sokolow
/s/ Alan B. Levin Chief Financial Officer and (Principal
-------------------------------- Financial Officer and Principal March 12, 2008
Alan B. Levin Accounting Officer)
/s/ Charles R. Modica Director March 12, 2008
--------------------------------
Charles R. Modica
/s/ Jorge A. Ortega Director March 12, 2008
--------------------------------
Jorge A. Ortega
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