As
filed with the Securities and Exchange Commission on October 3,
2008
Registration
No. 333-______
UNITED
STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
FORM
S-1
REGISTRATION
STATEMENT UNDER
THE
SECURITIES ACT OF 1933
NATIONAL
HOLDINGS CORPORATION
(Exact
name of registrant as specified in its charter)
Delaware
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6200
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36-4128138
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(State
or other jurisdiction of
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(Primary
Standard Industrial
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(I.R.S.
Employer
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incorporation
or organization)
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Classification
Code Number)
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Identification
Number)
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120
Broadway, 27th
Floor
New
York, NY 10271
(212)
417-8000
(Address,
including zip code, and telephone number, including area code, of registrant’s
principal executive offices)
Mark
Goldwasser
Chairman
and Chief Executive Officer
120
Broadway, 27th
Floor
New
York, New York 10271
(212)
417-8000
(Name,
address, including zip code, and telephone number, including area code, of
agent
for service)
With
copies to:
Mitchell
C. Littman, Esq.
Littman
Krooks LLP
655
Third Avenue
New
York, New York 10017
(212)
490-2020
Approximate
date of commencement of proposed sale to the public: As
soon
as practicable after this Registration Statement becomes effective.
If
any of
the securities being registered on this Form are to be offered on a delayed
or
continuous basis pursuant to Rule 415 under the Securities Act of 1933,
other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box. x
If
this
Form is filed to register additional securities for an offering pursuant to
Rule
462(b) under the Securities Act, please check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. o
If
this
Form is a post-effective amendment filed pursuant to Rule 462(c) under the
Securities Act, check the following box and list the Securities Act registration
statement number of the earlier effective registration statement for the same
offering. o
If
this
Form is a post-effective amendment filed pursuant to Rule 462(d) under the
Securities Act, check the following box and list the Securities Act registration
statement number of the earlier effective registration statement for the same
offering. o
Title
of each Class to be Registered
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Amount To
Be
Registered (1)
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Proposed
Maximum
Offering Price
Per Share (2)
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Proposed Maximum
Aggregate
Offering Price (2)
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Amount of
Registration Fee
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Common
stock, par value $0.02 per share
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12,716,185
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$
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0.675
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$
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8,583,425
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$
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479
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(1)
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Includes:
(i) 3,257,811 shares of common stock held by the selling stockholders
named within; (ii) 4,004,000 shares of common stock issuable upon
conversion of our Series A Preferred Stock by certain selling stockholders
named within, including shares of common stock issuable upon conversion
of
additional shares of our Series A Preferred Stock which may be issued
to
the holders thereof in the future in the form of PIK dividends; (iii)
3,475,000 shares of common stock issuable upon conversion of $6,000,000
principal amount and accrued interest of our 10% Convertible Promissory
Notes by certain selling stockholders named within; (iv) 1,979,374
shares
of common stock issuable upon exercise of warrants held by certain
selling
stockholders named within. Pursuant to Rule 416 under the Securities
Act of 1933, as amended, such number of common stock registered hereby
shall also include an indeterminate number of additional shares of
common
stock issuable upon conversion of the Series A Preferred Stock and
10%
convertible promissory notes and upon exercise of the warrants, as
such
number may be adjusted as a result of stock splits, stock dividends
and
anti-dilution provisions in accordance with Rule 416.
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(2)
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Estimated
solely for purposes of calculating the registration fee pursuant
to Rule
457(c) and Rule 457(g) under the Securities Act of 1933, as amended,
and
based upon the average of the high and low sales prices reported
for the
common stock on the Over-The-Counter Bulletin Board on September
29, 2008.
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The
Registrant hereby amends this Registration Statement on such date or dates
as
may be necessary to delay its effective date until the Registrant shall file
a
further amendment which specifically states that this Registration Statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933, as amended, or until the Registration Statement shall
become effective on such date as the Commission, acting pursuant to said
Section 8(a), may determine.
The
information in this preliminary prospectus is not complete and may be changed.
These securities may not be sold until the registration statement filed with
the
Securities and Exchange Commission is effective. This preliminary prospectus
is
not an offer to sell nor does it seek an offer to buy these securities in any
jurisdiction where the offer or sale is not permitted.
Subject
to Completion, dated October 3, 2008
PROSPECTUS
12,716,185
Shares
NATIONAL
HOLDINGS
CORPORATION
National
Holdings Corporation
Common
Stock
This
prospectus relates to the resale, from time to time, of up to 12,716,185 shares
of our common stock which are held by certain of our stockholders named within.
These shares include 3,257,811 shares of common stock held by certain selling
stockholders,
4,004,000
shares of common stock issuable upon conversion of our Series A Preferred Stock
by certain selling stockholders, 1,979,374 shares
of
common stock issuable upon exercise of warrants held by certain selling
stockholders, and 3,475,000 shares of common stock issuable upon conversion
of
10% convertible promissory notes held by certain selling stockholders.
All
of
these shares of common stock are being sold by the selling stockholders named
in
this prospectus, or their transferees, pledgees, donees or
successors-in-interest. The selling stockholders will receive all proceeds
from
the sale of the shares of our common stock being offered in this prospectus.
We
will receive, however, the exercise price of the warrants upon exercise by
certain selling stockholders of their warrants.
The
selling stockholders may sell the shares of common stock being offered by them
from time to time on the Over-the-Counter Bulletin Board, in market
transactions, in negotiated transactions or otherwise, and at prices and at
terms that will be determined by the then prevailing market price for the shares
of common stock or at negotiated prices directly or through brokers or dealers,
who may act as agent or as principal or by a combination of such methods of
sale. For additional information on the methods of sale, you should refer to
the
section entitled “Plan of Distribution” on page 25.
Our
common stock trades on the Over-The-Counter Bulletin Board under the symbol
“NHLD.OB.” On October 1, 2008, the closing price of our common stock on the
Over-The-Counter Bulletin Board was $0.90.
Investing
in our common stock involves risks. See “Risk Factors” beginning on page 4.
NEITHER
THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES COMMISSION
HAS
APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF THIS PROSPECTUS
IS
TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
The
date
of this prospectus is October 3, 2008
TABLE
OF CONTENTS
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Page No.
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TABLE
OF CONTENTS
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i
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PROSPECTUS
SUMMARY
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1
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RISK
FACTORS
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4
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RECENT
DEVELOPMENTS
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16
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SPECIAL
NOTE REGARDING FORWARD LOOKING STATEMENTS
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18
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USE
OF PROCEEDS
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18
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MARKET
PRICE OF OUR COMMON STOCK
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19
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SELLING
STOCKHOLDERS
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20
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PLAN
OF DISTRIBUTION
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25
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UNUADITED
PRO FORMA CONDENSED COMBINED FINANCIAL
INFORMATION
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28
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DESCRIPTION
OF OUR BUSINESS
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33
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MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
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42
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DIRECTORS
AND EXECUTIVE OFFICERS
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43
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COMPENSATION
DISCUSSION AND ANALYSIS
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48
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SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
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50
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DESCRIPTION
OF OUR COMMON STOCK
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53
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LEGAL
MATTERS
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55
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EXPERTS
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55
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WHERE
YOU CAN FIND MORE INFORMATION
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56
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INCORPORATION
BY REFERENCE
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56
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INDEX
TO FINANCIAL STATEMENTS
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F-1
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You
should rely only on the information contained in this document or to which
we
have referred you. We have not authorized anyone to provide you with information
that is different. This document may only be used where it is legal to sell
these securities. The information in this document may only be accurate on
the
date of this document.
PROSPECTUS
SUMMARY
This
summary highlights information contained elsewhere in this prospectus. It does
not contain all of the information that you should consider before investing
in
our common stock. You should read the entire prospectus carefully, including
our
financial statements incorporated by reference from our Annual Report on Form
10-K and quarterly reports on Form 10-Q. You should read “Risk Factors”
beginning on page 4 for more information about important risks that you should
consider before investing in our common stock.
As
used in this prospectus, unless the context otherwise requires, the terms the
“Company”, “National,” “we,” “our” and “us” refer to National Holdings
Corporation and its consolidated subsidiaries.
General
National
is a Delaware financial services corporation organized in 1996 operating through
its wholly owned subsidiaries, National Securities Corporation, vFinance
Investments, Inc. and EquityStation, Inc. (collectively, the “Broker Dealer
Subsidiaries”).
Though
our Broker Dealer Subsidiaries, we conduct a national securities brokerage
business through our main offices in New York, New York, Boca Raton, Florida,
and Seattle, Washington, as well as 94 other locations throughout the country
and four offices outside the country. Our business includes securities brokerage
for individual and institutional clients, market-making trading activities,
asset management and corporate finance services.
We
provide a broad range of securities brokerage and investment services to a
diverse retail and institutional clientele, as well as corporate finance and
investment banking services to corporations and businesses. Our brokers
primarily operate as independent contractors. An independent contractor
registered representative who becomes an affiliate of one of our Broker Dealer
Subsidiaries establishes his own office and is responsible for the payment
of
expenses associated with the operation of such office, including rent,
utilities, furniture, equipment, stock quotation machines and general office
supplies. The independent contractor registered representative is entitled
to
retain a higher percentage of the commissions generated by his sales than an
employee registered representative at a traditional employee-based brokerage
firm. This arrangement allows us to operate with a reduced amount of fixed
costs
and lowers the risk of operational losses for non-production.
In
July
1994, National Securities formed a wholly owned subsidiary, National Asset
Management, Inc.,
a
Washington corporation ("NAM").
NAM is
a federally-registered investment adviser providing asset management advisory
services to high net worth clients for a fee based upon a percentage of assets
managed. In March 2008, all of the issued and outstanding stock of NAM was
transferred from National Securities to National.
In
the
third quarter of fiscal year 2006, we formed a wholly owned subsidiary, National
Insurance Corporation,
a
Washington corporation ("National Insurance").
National Insurance provides fixed insurance products to its clients, including
life insurance, disability insurance, long term care insurance and fixed
annuities. National Insurance finalized certain requisite state registrations
during the second quarter of fiscal year 2007 and commenced business operations
that have been de minimus.
vFinance
Lending Services, Inc, originally formed as a wholly owned subsidiary of
vFinance, Inc., was established in May 2002. It is a mortgage lender focused
primarily on the commercial sector, providing bridge loans and commercial
mortgages through its nationwide network of lenders. Its operations to date
have
been de minimus.
The
Offering
This
prospectus relates to the offer and sale from time to time of up to 12,716,185
shares of our common stock by the Selling Stockholders. We are also registering
for sale any additional shares of common stock which may become issuable by
reason of any stock dividend, stock split, recapitalization or other similar
transaction effected without the receipt of consideration, which results in
an
increase in the number of outstanding shares of our common stock.
The
Selling Stockholders may sell these shares in the over-the-counter market or
otherwise, at market prices prevailing at the time of sale, at prices related
to
the prevailing market price, or at negotiated prices. We will not receive any
proceeds from the sale of shares by the Selling Stockholders.
As
of
September 30, 2008, there were 16,421,538 shares outstanding. The 12,716,185
shares of our common stock being registered on behalf of the Selling
Stockholders pursuant to this prospectus, including shares underlying
outstanding warrants, convertible notes or shares of our Series A Preferred
Stock which may be issued upon the exercise or conversion of such securities,
represents approximately 49% of the total common stock outstanding on a diluted
basis.
Recent
Developments
In
March
2008, we completed
a
financing transaction under which St. Cloud Capital Partners II, L.P., an
institutional investor (“St. Cloud”), made a $3.0 million investment in the
Company. We issued a four-year, 10% convertible senior subordinated
promissory note
in the
principal amount of $3,000,000, initially convertible at $2.00 per share of
common stock, and a five-year warrant to purchase an aggregate of 375,000 shares
of common stock at an exercise price of $2.50 per share.
In
June
2008, we completed
a
financing transaction under which St. Cloud made an additional $3.0 million
investment in the Company. We issued a four-year, 10% convertible senior
subordinated
promissory note
in the
principal amount of $3,000,000 initially convertible at $1.60 per share of
common stock, and a five-year warrant to purchase an aggregate of 468,750 shares
of common stock at an exercise price of $2.00 per share.
Marshall
S. Geller, the Senior Managing Member of SCGP II, LLC, the General Partner
of
St. Cloud Capital Partners II, L.P., is a member of the Board of Directors
and
Robert W. Lautz, Jr., a Managing Member of SCGP II, LLC, became a member of
the
Board of Directors of the Company simultaneous with the closing of the June
2008
financing transaction.
Effective
as of 12:01 a.m. (EDT) July 1, 2008 (the “Effective Date”), we completed the
merger of vFin Acquisition Corporation, a wholly owned subsidiary of the Company
(“Merger Sub), with and into vFinance, Inc. (“vFinance”). Pursuant to the terms
of the Agreement and Plan of Merger Agreement, dated November 7, 2007, as
amended (the “Merger Agreement”), Merger Sub was merged with and into vFinance
(the “Merger”), with vFinance the surviving corporation and a wholly owned
subsidiary of the Company. Under the terms of the Merger Agreement, on the
Effective Date each of the 55,635,066 shares
of
vFinance common stock issued and outstanding immediately prior to the Effective
Date was exchanged for 0.14 shares of Company common stock, or approximately
7,788,910 shares of Company common stock. The closing price of the Company’s
common stock, as quoted on the Over-the-Counter Bulletin Board, on June 30,
2008
was $1.75 per share.
Each
option and warrant to purchase shares of vFinance common stock outstanding
prior
to the Effective Date was converted into options or warrants, as applicable,
to
acquire the number of shares of the Company’s Common Stock determined by
multiplying (i) the number of vFinance shares of common stock underlying each
outstanding vFinance stock option or warrant immediately prior to the Effective
Date of the Merger by (ii) 0.14, at an exercise price per share of the Company’s
Common Stock equal to (i) the exercise price per share of each stock option
or
warrant otherwise purchasable pursuant to the vFinance stock option divided
by
(ii) 0.14.
Other
information
Our
principal executive offices are located at 120 Broadway, 27th
Floor,
New York, NY 10271. Our telephone number is (212) 417-8000. Our website address
is www.nationalsecurities.com. Except
for any documents that are incorporated by reference into this prospectus that
may be accessed from our website, the information available on or through our
website is not part of this prospectus.
RISK
FACTORS
Our
business, operations and financial condition are subject to various risks.
You
should consider carefully the following risk factors, in addition to the other
information set forth in this prospectus, before deciding to participate in
the
offering. If any of these risks and uncertainties actually occur, our business,
financial condition or results of operations could be materially and adversely
affected, the value of our common stock could decline, and you may lose all
or
part of your investment.
Risks
Related to Our Business
Our
operating results have resulted in reporting losses.
Although
National was profitable in fiscal years 2007, 2006 and 2004, it reported losses
of approximately $1.2 million, $843 thousand, $3.4 million and $7.9 million
in
fiscal years 2005, 2003, 2002 and 2001, respectively, and $3.4 million for
the
nine months ended June 30, 2008. National’s losses were primarily attributable
to the market slowdowns and reduced trading activity and volatility, and the
cessation of National’s market making activities prior to the Merger. In
addition, vFinance had sustained substantial losses in each year since its
inception due to ongoing operating expenses and a lack of revenues sufficient
to
offset those operating expenses. For the year ended December 31, 2004, when
vFinance earned a substantial profit for the first time in its history,
vFinance's results amounted to net income of $2.2 million (as revised),
including a $1.5 million non-cash gain on debt forgiveness. For the years ended
December 31, 2007, 2006 and 2005, however, vFinance's results amounted to net
losses of approximately $1.7 million, $2.2 million and $1.1 million,
respectively.
There
is
no assurance that we will be profitable in the future. If
we are
unable to achieve or sustain profitability, we may need to curtail, suspend
or
terminate certain operations.
We
may fail to realize the anticipated benefits of the
merger.
The
success of the merger will depend, in part, on our ability to realize the
anticipated growth opportunities and synergies from combining National and
vFinance. The integration of National and vFinance will be a time consuming
and
expensive process and may disrupt their operations if it is not completed in
a
timely and efficient manner. In addition, we may not achieve anticipated
synergies or other benefits of the merger. National and vFinance must operate
as
a combined organization utilizing common information and communication systems,
operating procedures, financial controls and human resources practices. We
may
encounter the following difficulties, costs and delays involved in integrating
these operations:
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failure
to integrate National's and vFinance's businesses and
operations;
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failure
to successfully manage relationships with customers and other important
relationships;
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failure
of customers to continue using the services of the combined company;
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difficulties
in successfully integrating the management teams and employees of
National
and vFinance;
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challenges
encountered in managing larger operations;
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the
loss of key employees and registered
representatives;
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failure
to manage the growth and growth strategies of National and
vFinance;
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diversion
of the attention of management from other ongoing business concerns;
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potential
incompatibility of technologies and
systems;
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potential
impairment charges incurred to write down the carrying amount of
intangible assets generated as a result of the merger;
and
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potential
incompatibility of business cultures.
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If
the
combined company's operations after the merger do not meet the expectations
of
existing customers of National and vFinance, then these customers may cease
doing business with the combined company altogether, which would harm our
results of operations and financial condition.
If
the
management team is not able to develop strategies and implement a business
plan
that successfully addresses these difficulties, we may not realize the
anticipated benefits of the merger. In particular, National is likely to realize
lower earnings per share, which may have an adverse impact on National and
the
market price of its common stock.
The
merger may result in disruption of National's and vFinance's existing
businesses, distraction of their management and diversion of other
resources.
The
integration of National's and vFinance's businesses may divert management time
and resources from the main businesses of both companies. This diversion of
time
and resources could cause the market price of our common stock to decrease.
The
new management will need to spend some of their time integrating vFinance's
and
National's operations. This could cause our business to suffer.
We
may require additional financing.
In
order
for us to have the opportunity for future success and profitability, we
periodically may need to obtain additional financing, either through borrowings,
public offerings, private offerings, or some type of business combination (e.g.,
merger, buyout, etc.). We have actively pursued a variety of funding sources,
and have consummated certain transactions in order to address its capital
requirements. We may need to seek to raise additional capital through other
available sources, including borrowing additional funds from third parties
and
there can be no assurance that it will be successful in such pursuits.
Additionally, the issuance of new securities to raise capital will cause the
dilution of shares held by current stockholders. Accordingly, if we are unable
to generate adequate cash from its operations, and if it is unable to find
sources of funding, such an event would have an adverse impact on our liquidity
and operations.
If
we are unable to pay our outstanding debt obligations when due, our operations
may be materially adversely affected.
At
September 30, 2008, we had total indebtedness of $7,500,000, $1,500,000 of
which
matures during fiscal year 2009. We cannot assure you that our operations will
generate funds sufficient to repay our existing debt obligations as they come
due. Our failure to repay our indebtedness and make interest payments as
required by our debt obligations, could have a material adverse affect on our
operations.
We
are exposed to risks due to its investment banking
activities.
Participation
in an underwriting syndicate or a selling group involves both economic and
regulatory risks. An underwriter may incur losses if it is unable to resell
the
securities it is committed to purchase, or if it is forced to liquidate its
commitment at less than the purchase price. 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 such offerings. Acting as a managing underwriter increases these
risks. Underwriting commitments constitute a charge against net capital and
our
ability 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
risk management policies and procedures may leave us exposed to unidentified
risks or an unanticipated level of risk.
The
policies and procedures we employ to identify, monitor and manage risks may
not
be fully effective. Some methods of risk management are based on the use of
observed historical market behavior. As a result, these methods may not
accurately predict future risk exposures, which could be significantly greater
than the historical measures indicate. Other risk management methods depend
on
evaluation of information regarding markets, clients or other matters that
are
publicly available or otherwise accessible by us. This information may not
be
accurate, complete, up-to-date or properly evaluated. Management of operational,
legal and regulatory risks requires, among other things, policies and procedures
to properly record and verify a large number of transactions and events. We
cannot assure that our policies and procedures will effectively and accurately
record and verify this information.
We
seek
to monitor and control our risk exposure through a variety of separate but
complementary financial, credit, operational and legal reporting systems. We
believe that we are able to evaluate and manage the market, credit and other
risks to which it is 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 could 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.
We
depend on senior
employees and the loss of their services could harm our
business.
We
depend
on the continued services of its management team, particularly Mark Goldwasser,
our Chairman and Chief Executive Officer, Leonard J. Sokolow, our Vice Chairman
and President, and Christopher C. Dewey, our Vice Chairman, as well as our
ability to hire additional members of management, and to retain and motivate
other officers and key employees. We may not be able to find an appropriate
replacement for Messrs. Goldwasser, Sokolow or Dewey or any other executive
officer if the need should arise. We currently maintain a $2,000,000 of life
insurance policy on Mr. Goldwasser. Due to the regulated nature of some of
our
businesses, some of our executive officers, or other key personnel could become
subject to suspensions or other limitations on the scope of their services
to
the Company from time to time. If we lose the services of any executive officers
or other key personnel, we may not be able to manage and grow our operations
effectively, enter new brokerage markets or develop new products.
Our
Broker Dealer Subsidiaries are subject to various risks associated with the
securities industry.
As
securities broker-dealers, our Broker Dealer Subsidiaries are subject to
uncertainties that are common in the securities industry. These uncertainties
include:
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the
volatility of domestic and international financial, bond and stock
markets;
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extensive
governmental regulation;
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substantial
fluctuations in the volume and price level of securities; and
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dependence
on the solvency of various third parties.
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As
a
result, revenues and earnings may vary significantly from quarter to quarter
and
from year to year. In periods of low volume, profitability is impaired because
certain expenses remain relatively fixed. In the event of a market downturn,
our
business could be adversely affected in many ways. Our revenues are likely
to
decline in such circumstances and, if it were unable to reduce expenses at
the
same pace, its profit margins would erode.
Failure
to comply with the net capital requirements could subject us to sanctions
imposed by the SEC or FINRA.
Our
Broker Dealer Subsidiaries are subject to the SEC's net capital rule which
requires the maintenance of minimum net capital. National
Securities, vFinance Investments, and EquityStation are each required to
maintain $250,000, $250,000 and $100,000 in minimum net capital, respectively.
Due to their market maker status, National Securities and vFinance Investments
are required to maintain a specified amount per security that they make a market
in, based on the bid price of each stock. This required amount can exceed the
minimum net capital requirement, and in the case of vFinance Investments, the
minimum Net Capital Requirement
has been
$1,000,000 (the limit) in recent years. The net capital rule is designed to
measure the general financial integrity and liquidity of a broker-dealer.
Compliance with the net capital rule limits those operations of broker-dealers
that require the intensive use of their capital, such as underwriting
commitments and principal trading activities. The rule also limits the ability
of securities firms to pay dividends or make payments on certain indebtedness,
such as subordinated debt, as it matures. FINRA may enter the offices of a
broker-dealer at any time, without notice, and calculate the firm's net capital.
If the calculation reveals a deficiency in net capital, FINRA may immediately
restrict or suspend certain or all of the activities of a broker-dealer. Our
Broker Dealer Subsidiaries may not be able to maintain adequate net capital,
or
its net capital may fall below requirements established by the SEC, and subject
us to disciplinary action in the form of fines, censure, suspension, expulsion
or the termination of business altogether. In
addition, if these net capital rules are changed or expanded, or if there is
an
unusually large charge against net capital, operations that require the
intensive use of capital would be limited. A large operating loss or charge
against net capital could adversely affect our ability to expand or even
maintain its present levels of business,
which
could have a material adverse effect on our business. In addition, we may become
subject to net capital requirements in other foreign jurisdictions in which
we
currently operate or which it may enter. We
cannot
predict its future capital needs or its
ability
to obtain additional financing.
Our
business could be adversely affected by a breakdown in the financial markets.
As
a
securities broker-dealer, each of our Broker Dealer Subsidiaries’ business is
materially affected by conditions in the financial markets and economic
conditions generally, 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 are likely to
decline and our operations are likely to be adversely affected.
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, placement agent and underwriting fees, are directly related
to the number and size of the transactions in which it participates 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 it receives from commissions and spreads. 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 stockholders'
equity.
Market
fluctuations and volatility may reduce our revenues and profitability.
Our
revenue and profitability may be adversely affected by declines in the volume
of
securities transactions and in market liquidity. Additionally, our profitability
may be adversely affected by losses from the trading or underwriting of
securities or failure of third parties to meet commitments. We act as a market
maker in publicly traded common stocks. In market making transactions, we
undertake the risk of price changes or being unable to resell the common stock
it holds or being unable to purchase the common stock it has sold. These risks
are heightened by the illiquidity of many of the common stocks we trade and/or
make a market. Any losses from our trading activities, including as a result
of
unauthorized trading by our employees, could have a material adverse effect
on
our business, financial condition, results of operations or cash flows.
Lower
securities price levels may also result in a reduced volume of transactions,
as
well as losses from declines in the market value of common stocks held for
trading purposes. During periods of declining volume and revenue, our
profitability would be adversely affected. Declines in market values of common
stocks and the failure of issuers and third parties to perform their obligations
can result in illiquid markets.
We
generally maintains trading and investment positions in the equity markets.
To
the extent that we owns 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
it to potentially unlimited losses as it attempts to cover its 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 it expects 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 have 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.
Competition
with other financial firms may have a negative effect on our business.
We
compete directly with national and regional full-service broker-dealers and
a
broad range of other financial service firms, including banks and insurance
companies. Competition has increased as smaller securities firms have either
ceased doing business or have been acquired by or merged into other firms.
Mergers and acquisitions have increased competition from these firms, many
of
which have significantly greater financial, technical, marketing and other
resources than the Company. Many of these firms offer their customers more
products and research than currently offered by us. These competitors may be
able to respond more quickly to new or changing opportunities, technologies
and
client requirements. We also face competition from companies offering discount
and/or electronic brokerage services, including brokerage services provided
over
the Internet, which we are currently not offering and do not intend to offer
in
the foreseeable future. These competitors may have lower costs or provide more
services, and may offer their customers more favorable commissions, fees or
other terms than those offered by the Company. To the extent that issuers and
purchasers of securities transact business without our assistance, our operating
results could be adversely affected.
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:
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effectively
use new technologies;
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adapt
its services to emerging industry or regulatory standards;
or
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market
new or enhanced services.
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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.
We
are currently subject to extensive securities regulation and the failure to
comply with these regulations could subject us to penalties or sanctions.
The
securities industry and our business are subject to extensive regulation by
the
SEC, state securities regulators and other governmental regulatory authorities.
We are also regulated by industry self-regulatory organizations, including
the
Financial Industry Regulatory Authority, Inc. (“FINRA”), the Municipal
Securities Rulemaking Board ("MSRB") and the National Futures Association
(“NFA”). Our Broker Dealer Subsidiaries are registered broker-dealers with the
SEC and member firms of FINRA. Broker-dealers are subject to regulations which
cover all aspects of the securities business, including sales methods and
supervision, trading practices among broker-dealers, use and safekeeping of
customers' funds and securities, capital structure of securities firms, record
keeping, and the conduct of directors, officers and employees. Changes in laws
or regulations or in governmental policies could cause use
to
change the way we conducts our business, which could adversely affect
the
Company.
Compliance
with many of the regulations applicable to the Company involves a number of
risks, particularly in areas where applicable regulations may be subject to
varying interpretation. These regulations often serve to limit our activities,
including through net capital, customer protection and market conduct
requirements. If we are found to have violated an applicable regulation,
administrative or judicial proceedings may be initiated against us that may
result in a censure, fine, civil penalties, issuance of cease-and-desist orders,
the deregistration or suspension of our broker-dealer activities, the suspension
or disqualification of our officers or employees, or 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
rely on clearing brokers and unilateral termination of the agreements with
these
clearing brokers could disrupt our business.
Our
Broker-Dealer Subsidiaries are introducing brokerage firms, using third party
clearing brokers to process its securities transactions and maintain customer
accounts. The clearing brokers also provide billing services, extend credit
and
provide for control and receipt, custody and delivery of securities. We depend
on the operational capacity and ability of the clearing brokers for the orderly
processing of transactions. In addition, by engaging the processing services
of
a clearing firm, we are exempt from some capital reserve requirements and other
regulatory requirements imposed by federal and state securities laws. If the
clearing agreements are unilaterally terminated for any reason, we would be
forced to find alternative clearing firms without adequate time to negotiate
the
terms of a new clearing agreement and without adequate time to plan for such
change. There can be no assurance that if there were a unilateral termination
of
its clearing agreement that we would be able to find an alternative clearing
firm on acceptable terms to it or at all.
We
permit
our clients to purchase securities on a margin basis or sell securities short,
which means that the clearing firm extends credit to the client secured by
cash
and securities in the client's account. During periods of volatile markets,
the
value of the collateral held by the clearing brokers could fall below the amount
borrowed by the client. If margin requirements are not sufficient to cover
losses, the clearing brokers sell or buy securities at prevailing market prices,
and may incur losses to satisfy client obligations. We have agreed to indemnify
the clearing brokers for losses they incur while extending credit to its
clients.
Credit
risk exposes us to losses caused by financial or other problems experienced
by
third parties.
We
are
exposed to the risk that third parties that owe us money, securities or other
assets will not perform their obligations. These parties include trading
counterparts, customers, clearing agents, exchanges, clearing houses, and 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 holding securities of third parties, executing securities trades
that fail to settle at the required time due to non-delivery by the counterparty
or systems failure by clearing agents, exchanges, clearing houses or other
financial intermediaries, and extending credit to clients through bridge or
margin loans or other arrangements. Significant failures by third parties to
perform their obligations owed to us could adversely affect our revenues and
perhaps our ability to borrow in the credit markets.
Adverse
results of current litigation and potential securities law liability would
result in financial losses and divert management's attention to business.
Many
aspects of our business involve substantial risks of liability. There is a
risk
of litigation and arbitration within the securities industry, including class
action suits seeking substantial damages. We are subject to potential claims
by
dissatisfied customers, including claims alleging they were damaged by improper
sales practices such as unauthorized trading, sale of unsuitable securities,
use
of false or misleading statements in the sale of securities, mismanagement
and
breach of fiduciary duty. We may be liable for the unauthorized acts of its
retail brokers if it fails to adequately supervise their conduct. As an
underwriter, we may be subject to substantial potential liability under federal
and state law and court decisions, including liability for material
misstatements and omissions in securities offerings. We may be required to
contribute to a settlement, defense costs or a final judgment in legal
proceedings or arbitrations involving a past underwriting and in actions that
may arise in the future. We carry "Errors and Omissions" insurance to protect
against arbitrations; however, the policy is limited in items and amounts
covered and there can be no assurance that it will cover a particular complaint.
The adverse resolution of any legal proceedings involving us and/or our
subsidiaries could have a material adverse effect on our business, financial
condition, results of operations or cash flows.
We
face significant competition for registered representatives.
We
are
dependent upon the independent contractor model for its retail brokerage
business. A significant percentage of our retail registered representatives
are
independent contractors. We are exposed to the risk that a large group of
independent contractors could leave the firm or decide to affiliate with another
firm and that it will be 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.
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:
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employees
binding us to transactions that exceed authorized limits or present
unacceptable risks to us;
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employees
hiding unauthorized or unsuccessful activities from us; or
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the
improper use of confidential
information.
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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.
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 its
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:
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subsystem,
component, or software failure;
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a
power or telecommunications
failure;
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an
earthquake, fire, or other natural disaster or act of
God;
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hacker
attacks or other intentional acts of vandalism;
or
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terrorist's
acts or war.
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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. 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.
Our
success and ability to compete may depend in part on vFinance's intellectual
property.
vFinance
relies on copyright and trademark law, as well as confidentiality arrangements,
to protect its intellectual property. vFinance owns the following federally
registered marks: vFinance, Inc.®, vFinance.com, Inc.®, AngelSearch®,
Direct2Desk® and Hedge Fund Accelerator®. vFinance currently does not have any
patents. The concepts and technologies vFinance uses may not be patentable.
vFinance's competitors or others may adopt product or service names similar
to
"vFinance.com," thereby impeding vFinance's ability to build brand identity
and
possibly leading to client confusion. vFinance's inability to adequately protect
the name "vFinance.com" would seriously harm its business. Policing unauthorized
use of vFinance's 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 vFinance little or no effective protection for
its
intellectual property. vFinance cannot assure you that the steps it takes will
prevent misappropriation of its intellectual property or that agreements entered
into for that purpose will be enforceable. In addition, litigation may be
necessary in the future to:
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enforce
vFinance's intellectual property
rights;
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determine
the validity and scope of the proprietary rights of others;
or
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defend
against claims of infringement or
invalidity.
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Such
litigation, whether successful or unsuccessful, could result in substantial
costs and diversions of resources, either of which could seriously harm
vFinance's business. ]
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enforce
vFinance's intellectual property
rights;
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determine
the validity and scope of the proprietary rights of others;
or
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defend
against claims of infringement or
invalidity.
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Such
litigation, whether successful or unsuccessful, could result in substantial
costs and diversions of resources, either of which could seriously harm
vFinance's business.
The
"National" brand may not achieve the broad recognition necessary to
succeed.
We
believe that broader recognition and positive perception of the "National"
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:
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the
success of our advertising and promotional
efforts;
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an
increase in the number of users and page views of our subsidiaries’
website; and
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the
ability to continue to provide a website and services useful to our
clients.
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Risks
Related to our Common Stock
Our
common stock has low trading volume and any sale of a significant number of
shares is likely to depress the trading price.
Our
common stock is quoted on the OTC Bulletin Board. Traditionally, the trading
volume of the common stock has been limited. For example, for the 30 trading
days ending on September 30, 2008, the average daily trading volume was
approximately 8,400 shares per day and on certain days there was no trading
activity.
During
such 30-day period the closing price of the National common stock ranged from
a
high of $1.14 to a low of $0.70. Because of this limited trading volume,
purchasers of the securities being offered hereby may not be able to sell
quickly any significant number of such shares, and any attempted sale of a
large
number of our shares will likely have a material adverse impact on the price
of
our common stock. Because of the limited number of shares being traded, the
per
share price is subject to volatility and may continue to be subject to rapid
price swings in the future.
The
conversion or exercise of our outstanding convertible securities stock may
result in dilution to our common stockholders.
Dilution
of the per share value of the our common shares could result from the conversion
of most or all of the currently outstanding shares of our preferred stock and
from the exercise of the currently outstanding convertible securities.
Preferred
Stock - We currently
have 37,550 shares of Series A preferred stock outstanding, which are
convertible, in total, into 3,004,000 shares of common stock.
Warrants
and Options - We
currently have outstanding: warrants to purchase 1,979,373 shares of common
stock at exercise prices ranging from $0.79 to $16.07 per share and options
to
purchase 7,037,640 shares of common stock at exercise prices ranging from $1.00
to $2.57 per
share.
Convertible
Notes
- We
currently have outstanding $6,000,000 principal amount of convertible promissory
notes which are convertible into an aggregate of 3,375,000 shares of common
stock at conversion prices of $1.60 or $2.00 per share.
The
exercise of these warrants and options, and conversion of the Series A preferred
shares and convertible notes, and the sale of the underlying common stock,
or
even the potential of such conversion or exercise and sale, may have a
depressive effect on the market price of our securities and will cause dilution
to our stockholders. Moreover, the terms upon which we will be able to obtain
additional equity capital may be adversely affected, since the holders of the
outstanding convertible securities can be expected to convert or exercise them
at a time when we would, in all likelihood, be able to obtain any needed capital
on terms more favorable to us than the exercise terms provided by the
outstanding options and warrants. Dilution could create significant downward
pressure on the trading price of our common stock if the conversion or exercise
of these securities encouraged short sales. Even the mere perception of eventual
sales of common shares issued on the conversion of these securities could lead
to a decline in the trading price of our common stock.
The
price of our common stock is volatile.
The
price
of our common stock has fluctuated substantially. The market price of its common
stock may be highly volatile as a result of factors specific to us and the
securities markets in general. Factors affecting volatility may include:
variations in our annual or quarterly financial results or those of its
competitors; economic conditions in general; and changes in applicable laws
or
regulations, or their judicial or administrative interpretations affecting
us or
our subsidiaries or the securities industry. In addition, volatility of the
market price of our common stock is further affected by its thinly traded
nature.
We
have restricted shares outstanding that may depress the price of our common
stock.
As
of
September 30, 2008, of the 16,421,538
outstanding
shares of our common stock, approximately 3,265,000 shares may be deemed
restricted shares and, in the future, may be sold in compliance with Rule 144
under the Securities Act. Rule 144, as amended, provides that a person who
is
not affiliated with the Company holding restricted securities for six months
may
sell such shares without restriction. A person who is affiliated with us and
who
has held restricted securities for six months may sell such shares in brokerage
transactions, subject to limitations based on the number of shares outstanding
and trading volume. Such sales may have a depressive effect on the price of
our
common stock in the open market.
Our
principal stockholders including its directors and officers control a large
percentage of shares of our common stock and can significantly influence our
corporate actions.
As
of
September 30, 2008, our executive officers, directors and/or entities that
these
individuals are affiliated with, owned approximately 22% of our outstanding
common stock, including shares of common stock issuable
upon conversion of our Series A preferred stock, and excluding stock options,
warrants and convertible notes, or approximately 45% on a fully-diluted basis.
Accordingly,
these individuals and entities will be able to significantly influence most,
if
not all, of our corporate actions, including the election of directors, the
appointment of officers, and potential merger or acquisition
transactions
Because
our common stock may be subject to "penny stock" rules, the market for our
common stock may be limited.
If
our
common stock becomes subject to the SEC's penny stock rules, broker-dealers
may
experience difficulty in completing customer transactions and trading activity
in our securities may be adversely affected. If at any time the common stock
has
a market price per share of less than $5.00, and we do not have net tangible
assets of at least $2,000,000 or average revenue of at least $6,000,000 for
the
preceding three years, transactions in the common stock may be subject to the
"penny stock" rules promulgated under the Securities Exchange Act of 1934,
as
amended (the “Exchange Act”). Under these rules, broker-dealers who recommend
such securities to persons other than institutional accredited
investors:
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must
make a special written suitability determination for the
purchaser;
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receive
the purchaser's written agreement to a transaction prior to
sale;
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provide
the purchaser with risk disclosure documents which identify certain
risks
associated with investing in "penny stocks" and which describe the
market
for these "penny stocks" as well as a purchaser's legal remedies;
and
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obtain
a signed and dated acknowledgment from the purchaser demonstrating
that
the purchaser has actually received the required risk disclosure
document
before a transaction in a "penny stock" can be
completed.
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If
our
common stock becomes subject to these rules, broker-dealers may find it
difficult to effectuate customer transactions and trading activity in our
securities may be adversely affected. As a result, the market price of our
securities may be depressed, and stockholders may find it more difficult to
sell
our securities.
There
are risks associated with our common stock trading on the OTC Bulletin Board
rather than on a national exchange.
There
may
be significant consequences associated with our common stock trading on the
OTC
Bulletin Board rather than a national exchange. The effects of not being able
to
list our common stock securities on a national exchange include:
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limited
release of the market price of our securities;
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limited
interest by investors in our securities;
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volatility
of our common stock price due to low trading volume;
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increased
difficulty in selling our securities in certain states due to "blue
sky"
restrictions; and
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limited
ability to issue additional securities or to secure additional
financing.
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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 our stockholders,
to
issue up to 200,000 shares of preferred stock in one or more series and to
fix
the rights, preferences, privileges and restrictions in each series of the
preferred stock, including:
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voting
rights, which may be greater or lesser than the voting rights of
our
common stock;
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rights
and terms of redemption;
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liquidation
preferences; and
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There
are
currently 50,000 shares of Series A preferred stock authorized, with 37,550
of
such shares issued and outstanding. The issuance of additional 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. Other than the issuance of
additional shares of our Series A preferred stock as in-kind dividends, 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.
We
will be subject to new requirements that we evaluate our internal controls
over
financial reporting under Section 404 of the Sarbanes-Oxley Act and other
corporate governance initiatives that may expose certain
risks.
For
the
year ending September 30, 2008, we will be subject to the requirements of
Section 404 of the Sarbanes-Oxley Act and the SEC rules and
regulations that require an annual management report on its internal controls
over financial reporting, including, among other matters, management's
assessment of the effectiveness of its internal control over financial
reporting. For the year ending September 30, 2010, an attestation report by
our
independent registered public accounting firm regarding our internal controls
will also be required.
We
cannot
be certain as to the timing of the completion of our evaluation, testing and
remediation actions or the impact of the same on our operations. If we are
not
able to implement the requirements of Section 404 in a timely manner or
with adequate compliance, we may be subject to sanctions or investigation by
regulatory authorities, including the SEC. Moreover, if we are unable to assert
that our internal control over financial reporting is effective in any future
period (or if its auditors are unable to express an opinion on the effectiveness
of its internal controls), we could lose investor confidence in the accuracy
and
completeness of our financial reports, which may have an a material adverse
effect on our business.
Our
compliance with the Sarbanes-Oxley Act may require significant expenses and
management resources that would need to be diverted from our other operations
and could require a restructuring of our internal controls over financial
reporting. Any such expenses, time reallocations or restructuring could have
a
material adverse effect on its operations. The applicability of the
Sarbanes-Oxley Act could make it more difficult and more expensive for us to
obtain director and officer liability insurance, and also make it more difficult
for us to attract and retain qualified individuals to serve on our boards of
directors, or to serve as executive officers.
We
do not expect to pay any dividends on our common stock in the foreseeable
future.
We
do not
anticipate that it will pay any dividends to holders of our common stock in
the
foreseeable future. Other than dividends paid on its Series A preferred stock,
we expect to retain all future earnings, if any, for investment in its business.
In addition, our Certificates of Designation setting forth the relative rights
and preferences of its Series A preferred stock, as well as our outstanding
convertible notes may limit our ability to pay dividends to the holders of
our
common stock.
RECENT
DEVELOPMENTS
The
following is a brief summary of the material provisions of the agreements
entered into in connection with our merger with vFinance, Inc. The summary
is
not complete and is qualified in its entirety by reference to the agreements,
which are incorporated herein by 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 vFinance, Inc. ("vFinance"), and vFin Acquisition Corporation
("Merger Sub"), a wholly-owned subsidiary of ours.
Under
the
terms and subject to the conditions set forth in the Merger Agreement, Merger
Sub was merged with and into vFinance (the "Merger"), the separate corporate
existence of Merger Sub ceased and vFinance continued as a surviving corporation
of the Merger and as a wholly-owned subsidiary of ours.
Pursuant
to the Merger Agreement, upon the closing of the Merger which occurred at 12:01
a.m. July 1, 2008 (the "Effective Date"), each share of vFinance common stock
outstanding immediately prior to the closing of the Merger (other than shares
held by us or vFinance or any of vFinance’s stockholders who properly exercise
dissenters' rights under Delaware law) were automatically converted into the
right to receive 0.14 shares of our common stock, rounded up to the nearest
whole share.
Each
option or warrant to purchase shares of vFinance common stock outstanding upon
the Effective Date were converted into options or warrants, as the case may
be,
to acquire the number of shares of our common stock determined by multiplying
(i) the number of shares of vFinance common stock underlying each outstanding
stock option or warrant immediately prior to the effective time of the Merger
by
(ii) 0.14, at a price per share of our common stock equal to (i) the exercise
price per share of each stock option or warrant otherwise purchasable pursuant
to the stock option or warrant divided by (ii) 0.14.
On
the
Effective Date, our board of directors consisted of Mark Goldwasser (Chairman
of
the Board), Leonard J. Sokolow (Vice Chairman of the Board), Christopher C.
Dewey (Vice Chairman of the Board), Charles R. Modica, Jorge A. Ortega, Marshall
S. Geller and Robert W. Lautz, Jr. Messrs. Modica, Ortega, Geller and Lautz
are
independent directors.
Voting
Agreement
Pursuant
to the Merger Agreement, Mark Goldwasser, our Chairman of the board of
directors, Christopher C. Dewey, a Vice Chairman of our board of directors,
and
Leonard J. Sokolow, the Chairman and Chief Executive Officer of vFinance (and
now a Vice Chairman of our board of directors and our President), entered into
an agreement (the "Director Voting Agreement") on the Effective Date to vote
their shares of our common stock 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) the Company’s merger, consolidation
or reorganization whereby the holders of our voting stock own less than 50%
of
the voting power of the Company 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 our outstanding voting
securities, (iv) upon the fifth anniversary of the Director Voting Agreement
or
(v) upon listing of our common stock on AMEX, the NASDAQ Capital Market or
the
NASDAQ Global Market.
Sokolow
Employment Termination Agreement Entered into on the Effective
Date
On
the
Effective Date, Mr. Sokolow's employment as Chairman and Chief Executive Officer
of vFinance and his employment agreement with vFinance dated November 16, 2004,
as amended, was terminated and vFinance’s principal office was relocated to New
York City, New York. Accordingly, pursuant to the terms of Mr. Sokolow's former
employment agreement with vFinance, Mr. Sokolow received a lump sum cash
payment of $1,150,000 as of the Effective Date. On the Effective Date, vFinance
entered into an employment termination agreement ("Termination Agreement")
with
Mr. Sokolow.
Notwithstanding
the fact that Mr. Sokolow’s stock options to purchase shares of vFinance common
stock that had not vested as of the Effective Date would have vested pursuant
to
his former employment agreement with vFinance, Mr. Sokolow agreed to waive
such
accelerated vesting. However, if: (i) Mr. Sokolow's employment is terminated
by
us with cause or (ii) Mr. Sokolow voluntarily resigns his employment with us,
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, vFinance 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 Entered into on the Effective Date
On
the
Effective Date, Mark Goldwasser and Leonard J. Sokolow each entered into
substantially identical five-year employment agreements with us, pursuant to
which Mr. Goldwasser is employed by us as Chairman and Chief Executive Officer
and Mr. Sokolow is employed by us 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 our Compensation Committee of not less than:
(i)
$225,000, (ii) 5% of our 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 may
determine based upon the Board's assessment of their performance in the
following areas: revenue growth, new business development, investor relations,
communications with the board of directors, and special projects as assigned
by
the board of directors.
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 were granted non-qualified stock options to purchase 1,000,000
shares of National's common stock at an exercise price of $1.64 per share,
which
was equal to the average of the 10-day closing market price of National's common
stock prior to the Effective Date. The options vested 25% upon the date of
grant
and become exercisable as to 25% of the shares underlying the options on the
second, third and fourth anniversaries of the date of grant. 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, the Chief Financial Officer of vFinance, entered into a one-year
employment agreement with us, pursuant to which he is employed as the Chief
Financial Officer of the Company. 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, new business development, investor
relations, communications with the board of directors, and other factors
including, without limitation, special projects as assigned by the Chief
Executive Officer or the board of directors of National.
SPECIAL
NOTE REGARDING FORWARD LOOKING STATEMENTS
This
prospectus contains certain forward-looking statements within the meaning of
Section 27A of the Securities Act and Section 21E of the Securities Exchange
Act
of 1934, as amended (the “Exchange Act”). Forward-looking statements deal with
our current plans, intentions, beliefs and expectations and statements of future
economic performance. Statements containing terms such as “believes,” “does not
believe,” “plans,” “expects,” “intends,” “estimates,” “anticipates” and other
phrases of similar meaning are considered to contain uncertainty and are
forward-looking statements.
Forward-looking
statements involve known and unknown risks and uncertainties that may cause
our
actual results in future periods to differ materially from what is currently
anticipated. We make cautionary statements in certain sections of this
prospectus, including under “Risk Factors” beginning on page 2. You should read
these cautionary statements as being applicable to all related forward-looking
statements wherever they appear in this prospectus, in the materials referred
to
in this prospectus, in the materials incorporated by reference into this
prospectus, or in our press releases.
No
forward-looking statement is a guarantee of future performance, and you should
not place undue reliance on any forward-looking statement.
The
proceeds from the sale of the common stock offered in this prospectus are solely
for the account of the selling stockholders. Accordingly, we will not receive
any proceeds from the sale of the shares by the selling stockholders. However,
we will receive the exercise price of any common stock we sell to the selling
stockholders upon exercise by them of their warrants. If warrants to purchase
all of the underlying 1,979,374 shares
of
common stock are exercised for cash, we would receive approximately
$3,302,455 of
total
proceeds, before expenses, subject to any adjustment due to the anti-dilution
provisions of the warrants. The selling stockholders are not obligated to
exercise the warrants, and if none are exercised we will not receive any
proceeds. In the event that any or all of the warrants are exercised, the
proceeds will be used for general corporate purposes.
On
March
20, 2006, our common stock commenced trading under the symbol “NHLD” on the
OTCBB reflecting the Company’s name change. Quotations
on the OTCBB reflect inter-dealer prices, without retail mark-up, mark-down
or
commission and may not necessarily represent actual transactions. From
October 1, 2005 to March 17, 2006, National's common stock traded on the OTC
Bulletin Board under the symbol "OLYD."
The
following table sets forth the high and low closing sales prices for the common
stock as reported on the OTC Bulletin Board for the period from October 1,
2005
to June 30, 2008.
|
|
High
|
|
Low
|
|
|
|
|
|
|
|
Year
Ended September 30, 2008 |
|
|
|
|
|
|
|
First
Quarter
|
|
$
|
2.55
|
|
$
|
1.42
|
|
Second
Quarter
|
|
|
2.80
|
|
|
1.96
|
|
Third
Quarter
|
|
|
2.25
|
|
|
1.50
|
|
Fourth
Quarter
|
|
|
1.68
|
|
|
0.70
|
|
|
|
|
|
|
|
|
|
Year
Ended September 30, 2007
|
|
|
|
|
|
|
|
First
Quarter
|
|
$
|
1.65
|
|
$
|
1.10
|
|
Second
Quarter
|
|
|
1.80
|
|
|
1.40
|
|
Third
Quarter
|
|
|
3.30
|
|
|
1.56
|
|
Fourth
Quarter
|
|
|
2.85
|
|
|
1.85
|
|
|
|
|
|
|
|
|
|
Year
Ended September 30, 2006
|
|
|
|
|
|
|
|
First
Quarter
|
|
$
|
1.20
|
|
$
|
0.53
|
|
Second
Quarter
|
|
|
1.60
|
|
|
0.75
|
|
Third
Quarter
|
|
|
1.55
|
|
|
1.05
|
|
Fourth
Quarter
|
|
|
1.60
|
|
|
1.20
|
|
The
closing price of our common stock on September 30, 2008, as quoted on the OTC
Bulletin Board, was $1.00 per share.
As
of
September 30, 2008, we are authorized to issue 50 million shares of common
stock, of which 16,421,538 shares were issued and outstanding. We are also
authorized to issue up to 200,000 shares of preferred stock, 50,000 of which
are
designated as Series A preferred stock with 37,550 of such shares issued and
outstanding as of such date. We had approximately 1,000 stockholders, including
stockholders holding stock in street name and trust accounts.
SELLING
STOCKHOLDERS
Background
We
issued
shares of common stock, Series A Preferred Stock convertible into shares of
common stock, Series B Preferred Stock convertible into shares of common stock,
10% convertible promissory notes convertible into shares of common stock, 11%
convertible promissory notes convertible into shares of common stock and
warrants exercisable into shares of common stock to certain selling stockholders
in the following private transactions:
|
o
|
In
the third quarter of fiscal year 2008, we consummated a private offering
of our securities to St. Cloud Capital Partners II, L.P (“St. Cloud II”)
pursuant to Rule 506 of Regulation D under the Securities Act. We
issued a
$3,000,000 principal amount, four-year, 10% convertible promissory
note,
which
is convertible into common stock at a price of $1.60 per
share,
and a five-year warrant to purchase an aggregate of 468,750 shares
of
common stock at an exercise price of $2.00 per share. Marshall S.
Geller,
the Senior Managing Member of SCGP II, LLC, the General Partner of
St.
Cloud II, is a member of the Board of Directors of the Company and
Robert
W. Lautz, Jr., a managing member of SCGP II, became a member of the
Board
of Directors of the Company simultaneous with the closing of the
private
offering. We agreed to include the shares of common stock issuable
upon
conversion of the 10% convertible promissory note and upon exercise
of the
warrant in the registration statement which this prospectus is a
part.
|
|
o
|
In
the second quarter of fiscal year 2008, we consummated a private
offering
of our securities to St. Cloud II pursuant to Rule 506 of Regulation
D
under the Securities Act. We issued a $3,000,000 principal amount,
four-year, 10% convertible promissory note,
which
is convertible into common stock at a price of $2.00 per
share,
and a five-year warrant to purchase an aggregate of 375,000 shares
of
common stock at an exercise price of $2.50 per share. We agreed to
include
the shares of common stock issuable upon conversion of the 10% convertible
promissory note and upon exercise of the warrant in the registration
statement which this prospectus is a
part.
|
|
o
|
In
the second quarter of fiscal year 2007, we consummated a private
offering
of our securities to three accredited investors pursuant to Rule
506 of
Regulation D under the Securities Act. We issued 10%
promissory notes in the aggregate principal amount of $1,000,000
and
warrants to purchase an aggregate of 250,000 shares of our common
stock.
The Investors included Christopher C. Dewey and St. Cloud Capital
Partners, L.P., a Los Angeles, California based private mezzanine
investment fund formed in December 2001 that invests in debt and
equity
securities of lower middle market companies (“St. Cloud”). Mr. Dewey and
Marshall S. Geller, the Co-Founder and Senior Managing Partner of
St.
Cloud, are each members of the Company’s board of directors.
|
|
o
|
In
the second quarter of fiscal year 2006, we consummated a private
offering
of our securities to three accredited investors pursuant to Rule
506 of
Regulation D under the Securities Act. We issued an aggregate of
10,000
shares of our newly created Series B Preferred Stock, which
was convertible into common stock at a price of $.75 per share, and
$1,000,000
in principal amount of five-year, 11% convertible promissory
notes,
which
was convertible into common stock at a price of $1.00 per share.
The
investors
included St. Cloud. Such noteholders received five-year warrants
to
purchase an aggregate of 300,000 shares of common stock at an exercise
price of $1.00 per share. Marshall S. Geller, the Senior Managing
Member
of SCGP, LLC, the General Partner of St. Cloud, became a member of
the
Board of Directors of the Company simultaneous with the closing of
the
private offering. In June 2007, we exercised the conversion option
contained in our 11% convertible promissory notes and issued 1,024,413
shares of our common stock in full payment of the $1,000,000 convertible
promissory notes, plus accrued interest. In July 2007, we exercised
the
conversion option contained in our Series
B preferred stock, and
issued 1,333,333 shares of our common stock for the retirement of
the
Series B preferred stock. We agreed to include the shares of common
stock
issuable upon conversion of the Series B Preferred Stock and the
11%
convertible promissory notes and upon exercise of the warrant in
the
registration statement which this prospectus is a
part.
|
|
o
|
In
the second quarter of fiscal year 2006, we consummated a private
offering
of our securities to an accredited investor pursuant to Rule 506
of
Regulation D under the Securities Act. We issued an aggregate of
159,090
shares of our common at a price of $1.10 per share. We agreed to
include
the shares of common stock in the registration statement which this
prospectus is a part.
|
|
o
|
In
the first quarter of fiscal year 2003, we consummated a private offering
of our securities to a limited number of accredited investors pursuant
to
Rule 506 of Regulation D under the Securities Act. Each unit in the
private offering sold for $0.65 and consisted of one share of our
common
stock and one three-year warrant, which was extended in December
2005 for
a fourth year, to purchase one share of our common stock at a per
share
price of $1.25. Net proceeds of $554,500 closed in the first quarter
of
fiscal year 2003, and we issued 1,016,186 shares of common stock
and
1,016,186 warrants.
|
|
·
|
Investment
Transaction.
On December 28, 2001, we completed a series of transactions under
which
certain new investors obtained a significant ownership in us through
purchasing 15,725 shares of Series A Preferred Stock for consideration
of
$1,572,500 ($100 per share) and by purchasing 285,000 shares of common
stock from Steven A. Rothstein, our former Chairman, Chief Executive
Officer and principal shareholder, and affiliates. The purchasers
in the
investment transaction were Triage Partners LLC (“Triage”) (of which
Steven B. Sands, a former Chairman of the Company, is the manager
and a
member) and One Clark LLC (of which Mark Goldwasser, our Chairman
and
Chief Executive Officer, is the manager) who participated on a equal
pro-rata basis with respect to the preferred stock purchase. The
Series A
Preferred Stock is convertible into common stock at a price of $1.50
per
share. As part of the investment transaction, Triage purchased 285,000
shares of common stock from Mr. Rothstein and his affiliates at a
price of
$1.25 per share.
|
|
o
|
Concurrent
with the investment transaction, two unrelated individual noteholders,
Gregory P. Kusnick and Karen Jo Gustafson, as Joint Tenants with
Right of
Survivorship, and Gregory C. Lowney and Maryanne K. Snyder, as Joint
Tenants with Right of Survivorship, holding $2.0 million of our debt
converted one-half of the principal amount of such debt into the
same
class of Series A Preferred Stock that was sold in the investment
transaction. In exchange for the instruments evidencing $1.0 million
of
the $2.0 million of the promissory notes and previously issued warrants
to
purchase 100,000 shares of common stock with an exercise price of
$5.00
per share, each noteholder was issued 5,000 shares of Series A Preferred
Stock, a warrant to purchase 50,000 shares of common stock with an
exercise price of $1.75 per share and a warrant to purchase 50,000
shares
of common stock with an exercise price of $5.00 per share. The exercise
price of the warrants were subsequently reduced to $1.25 and all
were
exercised in July 2007. In January 2006, we used $1.0 million of
the
proceeds from the private offering consummated in the second quarter
of
fiscal year 2006 to prepay in full the $1.0 million of notes. We
agreed to
include the shares issuable upon conversion of the Series A Preferred
Stock and the shares issuable upon exercise of the warrants in the
registration statement which this prospectus is a part.
|
|
·
|
Miscellaneous
Transaction.
|
|
o
|
In
February 2005, we issued 20,000 shares of common stock to Kelly J.
Moller,
5,000 of which she still holds, in connection with an arbitration
settlement. We agreed to include the shares of common stock in
the registration statement which this prospectus is a part.
|
Table
The
following table sets forth, to the best of our knowledge, the number of shares
of common stock beneficially owned by each of the selling stockholders as of
the
date of this prospectus, the number of shares owned by them covered by this
prospectus and the amount and percentage of shares to be owned by each selling
stockholder after the sale of all of the shares offered by this prospectus.
The
table also sets forth the number of shares of common stock certain selling
stockholders will receive upon conversion of the Series A Preferred Stock,
upon
conversion of the 10% convertible promissory notes and upon exercise of
warrants. The
number of shares owned are those beneficially owned, as determined under the
rules of the SEC, and such information is not necessarily indicative of
beneficial ownership for any other purpose. Under such rules, beneficial
ownership is deemed to include any shares of common stock as to which a person
has sole or shared voting power or investment power and any shares of common
stock which the person has the right to acquire within 60 days through the
exercise of any option, warrant or right, through conversion of any security
or
pursuant to the automatic termination of a power of attorney or revocation
of a
trust, discretionary account or similar arrangement. Except
as
indicated below, none of the selling stockholders has had any position, office
or other material relationship with us within the past three years other than
as
a result of the ownership of our shares or other securities. The information
included below is based on information provided by the selling stockholders,
or
where the selling shareholders have failed to provide us information regarding
their stock ownership, it is based on our records of shares issued in connection
with certain private transactions in the years 2002 through 2008. Because the
selling stockholders may offer some or all of their shares, no definitive
estimate as to the number of shares that will be held by the selling
stockholders after such offering can be provided and the following table has
been prepared on the assumption that all shares of common stock offered hereby
will be sold.
Unless
otherwise set forth below, the persons and entities named in the table have
sole
voting and sole investment power with respect to the shares set forth opposite
the selling stockholder’s name, subject to community property laws, where
applicable.
The
applicable percentages of ownership are based on an aggregate of 16,421,538
shares of common stock issued and outstanding as of the date of this prospectus.
This number does not include shares of common stock issuable upon conversion
of
the shares of Series A Preferred Stock, shares of common stock issuable upon
conversion of 10% convertible promissory notes or shares of common stock
issuable upon exercise of outstanding warrants and options held by the selling
stockholders.
Name
|
|
Shares
Owned (1)
|
|
Shares
Which May
Be
Acquired
Upon
Exercise Of
Warrants
|
|
Shares Which
May Be Acquired Upon Conversion of Convertible
Notes (2)
|
|
Percentage
of Shares
Owned Before Offering (3)
|
|
Shares
Offered
|
|
Shares
Owned
After
Offering (4)
|
|
Percentage
of Shares
Owned
After
Offering (5)
|
|
Triage
Partners LLC
|
|
|
1,055,534
|
(6)
|
|
0
|
|
|
0
|
|
|
6.11
|
%
|
|
856,560
|
(6)
|
|
198,974
|
|
|
1.15
|
%
|
One
Clark LLC
|
|
|
856,480
|
(7)
|
|
0
|
|
|
0
|
|
|
4.96
|
%
|
|
856,480
|
(7)
|
|
0
|
|
|
0
|
|
Gregory
P. Kusnick and Karen Jo Gustafson, as
Joint Tenants with Right of Survivorship
|
|
|
634,720
|
(8)
|
|
0
|
|
|
0
|
|
|
3.74
|
%
|
|
634,720
|
(8)
|
|
0
|
|
|
0
|
|
Gregory
C. Lowney and Maryanne K. Snyder, as
Joint Tenants with Right of Survivorship
|
|
|
646,720
|
(8)
|
|
0
|
|
|
0
|
|
|
3.81
|
%
|
|
646,720
|
(8)
|
|
0
|
|
|
0
|
|
St.
Cloud Capital Partners, L.P.
|
|
|
2,004,083
|
(9)
|
|
317,500
|
(9)
|
|
0
|
|
|
13.87
|
%
|
|
2,321,583
|
(9)
|
|
0
|
|
|
0
|
|
St.
Cloud Capital Partners II, L.P.
|
|
|
0
|
(10)
|
|
843,750
|
(10)
|
|
3,375,000
|
(10)
|
|
20.44
|
%
|
|
4,218,750
|
(10)
|
|
0
|
|
|
0
|
|
Fred
B. Tarter & Lois Tarter JTWROS
|
|
|
117,888
|
|
|
15,000
|
|
|
0
|
|
|
*
|
|
|
132,888
|
|
|
0
|
|
|
0
|
|
GKW
Unified Holdings, LLC
|
|
|
235,775
|
|
|
30,000
|
|
|
0
|
|
|
1.62
|
%
|
|
265,775
|
|
|
0
|
|
|
0
|
|
Barbara
Hulse IRA
|
|
|
24,040
|
|
|
0
|
|
|
0
|
|
|
*
|
|
|
24,040
|
|
|
0
|
|
|
0
|
|
Christopher
C. Dewey
|
|
|
575,674
|
(11)
|
|
125,000
|
|
|
0
|
|
|
4.19
|
%
|
|
201,924
|
|
|
498,750
|
(11)
|
|
2.98
|
%
|
Mark
Goldwasser
|
|
|
749,243
|
(12)
|
|
0
|
|
|
0
|
|
|
4.38
|
%
|
|
15,386
|
|
|
733,857
|
(12)
|
|
4.29
|
%
|
Agricultural
Benefits Assist III Inc.
|
|
|
40,500
|
|
|
0
|
|
|
0
|
|
|
*
|
|
|
40,500
|
|
|
0
|
|
|
0
|
|
F.N.
Holdings Ltd.
|
|
|
30,625
|
|
|
0
|
|
|
0
|
|
|
*
|
|
|
30,625
|
|
|
0
|
|
|
0
|
|
Ralph
W. Gitz
|
|
|
200,000
|
|
|
0
|
|
|
0
|
|
|
1.22
|
%
|
|
200,000
|
|
|
0
|
|
|
0
|
|
Richard
Mileham
|
|
|
68,750
|
|
|
0
|
|
|
0
|
|
|
*
|
|
|
68,750
|
|
|
0
|
|
|
0
|
|
Stephen
Jones
|
|
|
25,500
|
|
|
0
|
|
|
0
|
|
|
*
|
|
|
25,500
|
|
|
0
|
|
|
0
|
|
Terrance
Sayles
|
|
|
20,250
|
|
|
0
|
|
|
0
|
|
|
*
|
|
|
20,250
|
|
|
0
|
|
|
0
|
|
Michael
J. Lane
|
|
|
30,000
|
|
|
0
|
|
|
0
|
|
|
*
|
|
|
30,000
|
|
|
0
|
|
|
0
|
|
Peter
Rettman
|
|
|
0
|
|
|
150,000
|
(13)
|
|
0
|
|
|
*
|
|
|
150,000
|
(13)
|
|
0
|
|
|
0
|
|
David
Jones and Karen Grace Jones, Community Property
|
|
|
6,000
|
|
|
0
|
|
|
0
|
|
|
*
|
|
|
6,000
|
|
|
0
|
|
|
0
|
|
Lawrence
Jones
|
|
|
10,000
|
|
|
0
|
|
|
0
|
|
|
*
|
|
|
10,000
|
|
|
0
|
|
|
0
|
|
Kelly
J. Moller
|
|
|
5,000
|
|
|
0
|
|
|
0
|
|
|
*
|
|
|
5,000
|
|
|
0
|
|
|
0
|
|
Bedford
Oak Capital, L.P.
|
|
|
699,000
|
(14)
|
|
62,500
|
(14)
|
|
0
|
|
|
4.62
|
%
|
|
62,500
|
|
|
699,000
|
(14)
|
|
4.24
|
%
|
Bedford
Oak Advisors, LLC
|
|
|
393,011
|
(15)
|
|
0
|
|
|
0
|
|
|
2.39
|
%
|
|
159,090
|
|
|
233,921
|
(15)
|
|
1.42
|
%
|
DellaCamera
Capital Master Fund, Ltd.
|
|
|
951,742
|
(16)
|
|
0
|
|
|
0
|
|
|
5.73
|
%
|
|
197,520
|
|
|
754,222
|
(16)
|
|
4.54
|
%
|
Kathleen
Wallman
|
|
|
0
|
|
|
56,000
|
|
|
0
|
|
|
*
|
|
|
56,000
|
|
|
0
|
|
|
0
|
|
Wolf,
Haldenstein, Adler, Freeman & Herz, LLP
|
|
|
0
|
|
|
406
|
|
|
0
|
|
|
*
|
|
|
406
|
|
|
0
|
|
|
0
|
|
Strategic
Growth
|
|
|
0
|
|
|
14,000
|
|
|
0
|
|
|
*
|
|
|
14,000
|
|
|
0
|
|
|
0
|
|
John
Croce
|
|
|
0
|
|
|
994
|
|
|
0
|
|
|
*
|
|
|
994
|
|
|
0
|
|
|
0
|
|
Victor
Konig
|
|
|
0
|
|
|
1,883
|
|
|
0
|
|
|
*
|
|
|
1,883
|
|
|
0
|
|
|
0
|
|
Mitch
Acles
|
|
|
0
|
|
|
692
|
|
|
0
|
|
|
*
|
|
|
692
|
|
|
0
|
|
|
0
|
|
Brad
Barnard
|
|
|
0
|
|
|
799
|
|
|
0
|
|
|
*
|
|
|
799
|
|
|
0
|
|
|
0
|
|
Robert
Bledsoe
|
|
|
0
|
|
|
955
|
|
|
0
|
|
|
*
|
|
|
955
|
|
|
0
|
|
|
0
|
|
Tom
Chapman
|
|
|
0
|
|
|
698
|
|
|
0
|
|
|
*
|
|
|
698
|
|
|
0
|
|
|
0
|
|
David
Ginberg
|
|
|
0
|
|
|
2,019
|
|
|
0
|
|
|
*
|
|
|
2,019
|
|
|
0
|
|
|
0
|
|
Jody
Giraldo
|
|
|
0
|
|
|
719
|
|
|
0
|
|
|
*
|
|
|
719
|
|
|
0
|
|
|
0
|
|
Peter
Rajsingh
|
|
|
0
|
|
|
873
|
|
|
0
|
|
|
*
|
|
|
873
|
|
|
0
|
|
|
0
|
|
Dennis
De Marchena
|
|
|
307,733
|
|
|
355,586
|
|
|
0
|
|
|
3.95
|
%
|
|
355,586
|
|
|
307,733
|
|
|
1.83
|
%
|
TOTAL
|
|
|
9,688,268
|
|
|
1,979,374
|
|
|
3,375,000
|
|
|
-
|
|
|
11,616,185
|
|
|
3,227,483
|
|
|
-
|
|
_______________
*
Less
than 1%
(1)
|
Does
not include up to 1,000,000 shares of common stock which may become
issuable upon the conversion of share of our Series A Preferred Stock
in
the event additional shares of our Series A Preferred Stock are issued
in
the form of PIK dividends to the holders of such
shares.
|
(2)
|
Does
not include up to 100,000 shares of common stock which may be issued
to
the holders of our Convertible Notes upon conversion of accrued interest
on such notes.
|
(3)
|
Calculated
based on Rule 13d-3(d)(i). In calculating this amount for each selling
stockholder, we treated as outstanding the number of shares of common
stock issuable upon exercise of that selling stockholder’s warrants, the
number of shares of common stock issuable upon conversion of that
selling
stockholder’s 10% convertible promissory notes, the number of shares of
common stock issuable upon conversion of that selling stockholder’s Series
A Preferred Stock but we did not assume exercise of any other selling
stockholder’s warrants or conversion of any other selling stockholder’s
10% convertible promissory notes or Series A Preferred Stock.
|
(4)
|
Assumes
sale of all shares offered by the selling
stockholder.
|
(5)
|
Calculated
based on Rule 13d-3(d)(i).
|
(6)
|
Includes
856,560 shares of common stock issuable upon conversion of 10,707
shares of Series A Preferred Stock issued in connection with a private
placement transaction and subsequent in-kind dividends on the Series
A
Preferred Stock. Steven B. Sands, a former Chairman of the Company,
and
the manager and a member of Triage, has voting control over the shares.
|
(7)
|
Includes
856,480
shares
of common stock issuable upon conversion of 10,706 shares
of Series A Preferred Stock issued in connection with a private placement
transaction and subsequent in-kind dividends on the Series A Preferred
Stock. Mark Goldwasser, our Chairman and Chief Executive Officer,
and the
manager of One Clark LLC, has voting control over the shares. See
Footnote 12 for beneficial ownership and ownership percentages of Mr.
Goldwasser.
|
(8)
|
Includes
546,720 shares of common stock issuable upon conversion of 6,834
shares of
Series A Preferred Stock issued in connection with a private placement
transaction and subsequent in-kind dividends on the Series A Preferred
Stock.
|
(9)
|
Marshall
S. Geller, a director of the Company, is the Senior Managing Member
of SCGP, LLC, the General Partner of St. Cloud
Capital Partners, L.P. , and has voting control over the
shares.
|
(10)
|
Marshall
S. Geller, a director of the Company, is the Senior Managing Member
of SCGP II, LLC, the General Partner of St. Cloud
Capital Partners II, L.P., and has voting control over the
shares.
|
(11)
|
Mr.
Dewey is our Vice Chairman. Includes 185,000 shares of common stock
issuable upon the exercise of vested stock
options.
|
(12)
|
Mr.
Goldwasser is our Chairman and Chief Executive Officer. Includes
670,750
shares of common stock issuable upon the exercise of vested stock
options.
Excludes shares of common stock beneficially owned by One Clark LLC,
of
which Mr. Goldwasser is the Manager, including 856,480
shares
of common stock issuable upon conversion of 10,706
shares
of Series A Preferred Stock issued in connection with a private placement
transaction and subsequent in-kind dividends on the Series A Preferred
Stock. See Footnote 7.
|
(13)
|
Mr.
Rettman served on the Company’s Board of Directors from December 2001
until March 2007.
|
(14) |
Includes
shares owned directly and indirectly as provided in information filed
with
the SEC in a Schedule 13G on February 15, 2008, and includes 62,500
shares
issuable upon exercise of warrants.
|
(15) |
Includes
shares owned directly and indirectly as provided in information filed
with
the SEC in a Schedule 13G on February 15, 2008.
|
(16) |
Includes
shares owned directly and indirectly as provided in information filed
with
the SEC in a Schedule 13G filed on February 14, 2008, and includes
197,520
shares issuable upon conversion of Series A preferred
stock.
|
PLAN
OF DISTRIBUTION
The
selling stockholders, which as used herein includes donees, pledgees, assignees,
transferees or other successors-in-interest selling shares of common stock
or
interests in shares of common stock received after the date of this prospectus
from a selling stockholder as a gift, pledge, partnership distribution or other
transfer, may, from time to time, sell, transfer or otherwise dispose of any
or
all of their shares of common stock or interests in shares of common stock
on
any stock exchange, market or trading facility on which the shares are traded
or
in private transactions. These dispositions may be at fixed prices, at
prevailing market prices at the time of sale, at prices related to the
prevailing market price, at varying prices determined at the time of sale,
or at
negotiated prices.
The
selling stockholders may use any one or more of the following methods when
disposing of shares or interests therein:
·
ordinary
brokerage transactions and transactions in which the broker-dealer solicits
purchasers;
·
block
trades in which the broker-dealer will attempt to sell the shares as agent,
but
may position and resell a portion of the block as principal to facilitate the
transaction;
·
purchases
by a broker-dealer as principal and resale by the broker-dealer for its
account;
·
an
exchange distribution in accordance with the rules of the applicable
exchange;
·
privately
negotiated transactions;
·
short
sales effected after the date the registration statement of which this
Prospectus is a part is declared effective by the SEC;
·
through
the writing or settlement of options or other hedging transactions, whether
through an options exchange or otherwise;
·
broker-dealers
may agree with the selling stockholders to sell a specified number of such
shares at a stipulated price per share;
·
a
combination of any such methods of sale; and
·
any
other
method permitted pursuant to applicable law.
The
selling stockholders may, from time to time, pledge or grant a security interest
in some or all of the shares of common stock owned by them and, if they default
in the performance of their secured obligations, the pledgees or secured parties
may offer and sell the shares of common stock, from time to time, under this
prospectus, or under an amendment to this prospectus under Rule 424(b)(3) or
other applicable provision of the Securities Act amending the list of selling
stockholders to include the pledgee, transferee or other successors in interest
as selling stockholders under this prospectus. The selling stockholders also
may
transfer the shares of common stock in other circumstances, in which case the
transferees, pledgees or other successors in interest will be the selling
beneficial owners for purposes of this prospectus.
In
connection with the sale of our common stock or interests therein, the selling
stockholders may enter into hedging transactions with broker-dealers or other
financial institutions, which may in turn engage in short sales of the common
stock in the course of hedging the positions they assume. The selling
stockholders may also sell shares of our common stock short and deliver these
securities to close out their short positions, or loan or pledge the common
stock to broker-dealers that in turn may sell these securities. The selling
stockholders may also enter into option or other transactions with
broker-dealers or other financial institutions or the creation of one or more
derivative securities which require the delivery to such broker-dealer or other
financial institution of shares offered by this prospectus, which shares such
broker-dealer or other financial institution may resell pursuant to this
prospectus (as supplemented or amended to reflect such
transaction).
The
aggregate proceeds to the selling stockholders from the sale of the common
stock
offered by them will be the purchase price of the common stock less discounts
or
commissions, if any. Each of the selling stockholders reserves the right to
accept and, together with their agents from time to time, to reject, in whole
or
in part, any proposed purchase of common stock to be made directly or through
agents. We will not receive any of the proceeds from this offering. Upon any
exercise of the warrants by payment of cash, however, we will receive the
exercise price of the warrants.
The
selling stockholders also may resell all or a portion of the shares in open
market transactions in reliance upon Rule 144 under the Securities Act rather
than under this prospectus, provided that they meet the criteria and conform
to
the requirements of that rule.
The
selling stockholders and any underwriters, broker-dealers or agents that
participate in the sale of the common stock or interests therein may be
“underwriters” within the meaning of Section 2(11) of the Securities Act. Any
discounts, commissions, concessions or profit they earn on any resale of the
shares may be underwriting discounts and commissions under the Securities Act.
Discounts, concessions, commissions and similar selling expenses, if any, that
can be attributed to the sale of the shares of common stock will be
paid by the selling stockholder and/or the purchasers. Each selling stockholder
has represented and warranted to us that it acquired the securities subject
to
this registration statement in the ordinary course of such selling stockholder’s
business and, at the time of its purchase of such securities such selling
stockholder had no agreements or understandings, directly or indirectly, with
any person to distribute any such securities. Selling stockholders who are
“underwriters” within the meaning of Section 2(11) of the Securities Act will be
subject to the prospectus delivery requirements of the Securities
Act.
To
the
extent required, the shares of our common stock to be sold, the names of the
selling stockholders, the respective purchase prices and public offering prices,
the names of any agents, dealer or underwriter, any applicable commissions
or
discounts with respect to a particular offer will be set forth in an
accompanying prospectus supplement or, if appropriate, a post-effective
amendment to the registration statement that includes this
prospectus.
In
order
to comply with the securities laws of some states, if applicable, the common
stock may be sold in these jurisdictions only through registered or licensed
brokers or dealers. In addition, in some states the common stock may not be
sold
unless it has been registered or qualified for sale or an exemption from
registration or qualification requirements is available and is complied
with.
We
have
advised the selling stockholders that the anti-manipulation rules of Regulation
M under the Exchange Act may apply to sales of shares in the market and to
the
activities of the selling stockholders and their affiliates. In addition, we
will make copies of this prospectus (as it may be supplemented or amended from
time to time) available to the selling stockholders for the purpose of
satisfying the prospectus delivery requirements of the Securities Act. The
selling stockholders may indemnify any broker-dealer that participates in
transactions involving the sale of the shares against certain liabilities,
including liabilities arising under the Securities Act.
We
have
agreed to indemnify the selling stockholders against liabilities, including
liabilities under the Securities Act and state securities laws, relating to
the
registration of the shares offered by this prospectus.
We
have
agreed with the selling stockholders to keep the registration statement of
which
this prospectus constitutes a part effective until the earlier of (1) such
time
as all of the shares covered by this prospectus have been disposed of pursuant
to and in accordance with the registration statement or (2) the date on which
the shares may be sold without restrictions pursuant to Rule 144 of the
Securities Act.
UNAUDITED
PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION
The
accompanying unaudited pro forma condensed combined financial statements present
financial information from National and vFinance unaudited pro forma condensed
combined statements of operations for the years ended September 30, 2007
for National and December 31, 2007 for vFinance and for the nine months
ended June 30, 2008 for National and vFinance. The unaudited pro forma condensed
combined statement of financial condition as of June 30, 2008 is based on the
historical statements of financial condition of National and vFinance as of
that
date. The unaudited pro forma condensed combined statements of operations are
presented as if the merger had occurred on October 1, 2006 for the twelve
month period and for the nine month period. The unaudited pro forma condensed
combined statement of financial condition gives effect to the transaction as
if
it occurred on June 30, 2008.
The
unaudited pro forma condensed combined financial information is based on
estimates and assumptions, which are preliminary and subject to change, as
set
forth in the notes to such statements and which are provided for informational
purposes only. The unaudited pro forma condensed combined financial information
is not necessarily indicative of the financial position or operating results
that would have been achieved had the merger been consummated as of the dates
indicated, nor is it necessarily indicative of future financial position or
operating results. This information should be read in conjunction with the
historical financial statements and related notes of National and vFinance
included in this Form S-1 Registration Statement.
We
anticipate that the Merger will provide the combined company with financial
benefits that may include increased revenues due to departmental synergies,
cost
savings on business insurance including but not limited to general liability,
errors and omissions and directors and officers liability, salaries, clearing
costs, benefits, professional fees as well as other general and administrative
costs. The pro forma information, while helpful in illustrating the financial
characteristics of the combined company under one set of assumptions, does
not
reflect the benefits of increased revenues due to departmental synergies, cost
savings on business insurance including but not limited to general liability,
errors and omissions and directors and officers liability, salaries, clearing
costs, benefits, professional fees as well as other general and administrative
costs and, accordingly, does not attempt to predict or suggest future results.
It also does not necessarily reflect what the historical results of the combined
company would have been had our companies been combined during these
periods.
Unaudited
Pro Forma Condensed Combined Statement of Financial
Condition
The
accompanying notes are an integral part of these unaudited pro forma condensed
combined financial statements.
|
|
Historical
- June 30, 2008
|
|
Pro
Forma
|
|
|
|
National
|
|
vFinance
|
|
Adjustments
|
|
Combined
|
|
|
|
|
|
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
5,464,000
|
|
$
|
4,426,000
|
|
$
|
(1,150,000)
|
(D)
|
$
|
8,740,000
|
|
Deposits
with clearing organizations
|
|
|
402,000
|
|
|
991,000
|
|
|
-
|
|
|
1,393,000
|
|
Receivables
with broker-dealers and clearing organizations
|
|
|
3,639,000
|
|
|
-
|
|
|
-
|
|
|
3,639,000
|
|
Other
receivables, net
|
|
|
534,000
|
|
|
135,000
|
|
|
-
|
|
|
669,000
|
|
Advances
to registered representatives
|
|
|
4,469,000
|
|
|
8,000
|
|
|
-
|
|
|
4,477,000
|
|
Securities
owned
|
|
|
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Marketable,
at market value
|
|
|
341,000
|
|
|
75,000
|
|
|
-
|
|
|
416,000
|
|
Not
readily marketable, at estimated market value
|
|
|
-
|
|
|
56,000
|
|
|
-
|
|
|
56,000
|
|
Fixed
assets, net
|
|
|
300,000
|
|
|
768,000
|
|
|
-
|
|
|
1,068,000
|
|
Secured
demand note
|
|
|
500,000
|
|
|
-
|
|
|
-
|
|
|
500,000
|
|
Identifiable
intangible assets, net
|
|
|
-
|
|
|
2,874,000
|
|
|
13,916,000
|
(A)
|
|
16,790,000
|
|
Other
assets
|
|
|
1,144,000
|
|
|
857,000
|
|
|
(450,000)
|
(B)
|
|
1,551,000
|
|
Total
Assets
|
|
$
|
16,793,000
|
|
$
|
10,190,000
|
|
$
|
12,316,000
|
|
$
|
39,299,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payable
to broker-dealers and clearing organizations
|
|
$
|
35,000
|
|
$
|
239,000
|
|
$
|
-
|
|
$
|
274,000
|
|
Securities
sold, but not yet purchased, at market
|
|
|
306,000
|
|
|
1,000
|
|
|
-
|
|
|
307,000
|
|
Accounts
payable, accrued expenses and other liabilities
|
|
|
5,239,000
|
|
|
5,785,000
|
|
|
(1,200,000)
|
(B)(D)
|
|
9,824,000
|
|
Notes
payable, net of debt discounts
|
|
|
935,000
|
|
|
-
|
|
|
-
|
|
|
935,000
|
|
Senior
subordinated convertible promissory note, net of debt
discounts
|
|
|
4,841,000
|
|
|
-
|
|
|
-
|
|
|
4,841,000
|
|
Capital
lease obligations
|
|
|
-
|
|
|
481,000
|
|
|
-
|
|
|
481,000
|
|
Total
Liabilities
|
|
|
11,356,000
|
|
|
6,506,000
|
|
|
(1,200,000
|
)
|
|
16,662,000
|
|
Subordianted
borrowings
|
|
|
500,000
|
|
|
-
|
|
|
-
|
|
|
500,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commitments
and contingencies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders'
Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
stock
|
|
|
172,000
|
|
|
556,000
|
|
|
(400,000)
|
(C)
|
|
328,000
|
|
Additional
paid-in capital
|
|
|
21,474,000
|
|
|
32,475,000
|
|
|
(15,431,000)
|
(C)
|
|
38,518,000
|
|
Accumulated
deficit
|
|
|
(16,709,000
|
)
|
|
(29,347,000
|
)
|
|
29,347,000
|
(C)
|
|
(16,709,000
|
)
|
Total
Shareholders' Equity
|
|
|
4,937,000
|
|
|
3,684,000
|
|
|
13,516,000
|
|
|
22,137,000
|
|
Total
Liabilities and Shareholders' Equity
|
|
$
|
16,793,000
|
|
$
|
10,190,000
|
|
$
|
12,316,000
|
|
$
|
39,299,000
|
|
Unaudited
Pro Forma Condensed Combined Statement of Operations
|
|
For
the Twelve Months Ended(1)
|
|
|
|
Historical
|
|
Pro
Forma
|
|
|
|
National
|
|
vFinance
|
|
Adjustments
|
|
Combined
|
|
|
|
|
|
|
|
|
|
|
|
REVENUES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commissions
|
|
$
|
39,237,000
|
|
$
|
25,869,000
|
|
$
|
-
|
|
$
|
65,106,000
|
|
Net
dealer inventory gains
|
|
|
15,729,000
|
|
|
12,707,000
|
|
|
-
|
|
|
28,436,000
|
|
Investment
banking
|
|
|
9,097,000
|
|
|
5,020,000
|
|
|
-
|
|
|
14,117,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
commission and fee revenues
|
|
|
64,063,000
|
|
|
43,596,000
|
|
|
-
|
|
|
107,659,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
and dividends
|
|
|
2,824,000
|
|
|
480,000
|
|
|
-
|
|
|
3,304,000
|
|
Transfer
fees and clearing services
|
|
|
4,075,000
|
|
|
5,634,000
|
|
|
-
|
|
|
9,709,000
|
|
Other
|
|
|
1,857,000
|
|
|
943,000
|
|
|
-
|
|
|
2,800,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
72,819,000
|
|
|
50,653,000
|
|
|
-
|
|
|
123,472,000
|
|
EXPENSES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commissions
and fees
|
|
|
52,271,000
|
|
|
35,734,000
|
|
|
-
|
|
|
88,005,000
|
|
Employee
compensation and related expenses
|
|
|
7,464,000
|
|
|
5,979,000
|
|
|
1,328,000
|
(E)
|
|
14,771,000
|
|
Clearing
fees
|
|
|
1,745,000
|
|
|
2,918,000
|
|
|
-
|
|
|
4,663,000
|
|
Communications
|
|
|
1,719,000
|
|
|
536,000
|
|
|
-
|
|
|
2,255,000
|
|
Occupancy
and equipment costs
|
|
|
2,996,000
|
|
|
1,438,000
|
|
|
-
|
|
|
4,434,000
|
|
Professional
fees
|
|
|
2,266,000
|
|
|
1,995,000
|
|
|
-
|
|
|
4,261,000
|
|
Amortization
expense
|
|
|
-
|
|
|
828,000
|
|
|
2,530,000
|
(F)
|
|
3,358,000
|
|
Interest
|
|
|
531,000
|
|
|
85,000
|
|
|
516,000
|
(G)
|
|
1,132,000
|
|
Taxes,
licenses and registration
|
|
|
666,000
|
|
|
235,000
|
|
|
-
|
|
|
901,000
|
|
Other
administrative expenses
|
|
|
1,789,000
|
|
|
2,652,000
|
|
|
-
|
|
|
4,441,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
71,447,000
|
|
|
52,400,000
|
|
|
4,374,000
|
|
|
128,221,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss)
|
|
|
1,372,000
|
|
|
(1,747,000
|
)
|
|
(4,374,000)
|
(H)
|
|
(4,749,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred
stock dividends
|
|
|
(409,000
|
)
|
|
-
|
|
|
-
|
|
|
(409,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss) attributable to common stockholders
|
|
$
|
963,000
|
|
$
|
(1,747,000
|
)
|
$
|
(4,374,000
|
)
|
$
|
(5,158,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss) per common share, basic
|
|
$
|
0.16
|
|
$
|
(0.03
|
)
|
$
|
(0.56
|
)
|
$
|
(0.37
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average common shares outstanding, basic
|
|
|
6,042,646
|
|
|
54,805,200
|
|
|
7,800,000
|
|
|
13,842,646
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss) per common share, diluted
|
|
$
|
0.13
|
|
$
|
(0.03
|
)
|
$
|
(0.56
|
)
|
$
|
(0.37
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average common shares outstanding, diluted
|
|
|
9,699,531
|
|
|
54,805,200
|
|
|
7,800,000
|
|
|
13,842,646
|
|
(1) |
As
reported in National’s audited Annual Report on Form 10-K for the year
ended September 30, 2007. Derived from vFinance’s audited Annual Report on
Form 10-K for the year ended December 31, 2007 and internal
records.
|
The
accompanying notes are an integral part of these unaudited pro forma condensed
combined financial statements.
Unaudited
Pro Forma Condensed Combined Statement of Operations
|
|
For
the Nine Months Ended June 30, 2008
(2)
|
|
|
|
Historical
|
|
Pro
Forma
|
|
|
|
National
|
|
vFinance
|
|
Adjustments
|
|
Combined
|
|
|
|
|
|
|
|
|
|
|
|
REVENUES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commissions
|
|
$
|
34,644,000
|
|
$
|
20,453,000
|
|
$
|
-
|
|
$
|
55,097,000
|
|
Net
dealer inventory gains
|
|
|
11,035,000
|
|
|
8,778,000
|
|
|
-
|
|
|
19,813,000
|
|
Investment
banking
|
|
|
1,277,000
|
|
|
4,473,000
|
|
|
-
|
|
|
5,750,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
commission and fee revenues
|
|
|
46,956,000
|
|
|
33,704,000
|
|
|
-
|
|
|
80,660,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
and dividends
|
|
|
2,647,000
|
|
|
427,000
|
|
|
-
|
|
|
3,074,000
|
|
Transfer
fees and clearing services
|
|
|
3,378,000
|
|
|
3,672,000
|
|
|
-
|
|
|
7,050,000
|
|
Other
|
|
|
2,347,000
|
|
|
1,053,000
|
|
|
-
|
|
|
3,400,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
55,328,000
|
|
|
38,856,000
|
|
|
-
|
|
|
94,184,000
|
|
EXPENSES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commissions
and fees
|
|
|
43,449,000
|
|
|
27,796,000
|
|
|
-
|
|
|
71,245,000
|
|
Employee
compensation and related expenses
|
|
|
6,334,000
|
|
|
4,965,000
|
|
|
1,125,000
|
(E)
|
|
12,424,000
|
|
Clearing
fees
|
|
|
1,676,000
|
|
|
2,169,000
|
|
|
-
|
|
|
3,845,000
|
|
Communications
|
|
|
907,000
|
|
|
415,000
|
|
|
-
|
|
|
1,322,000
|
|
Occupancy
and equipment costs
|
|
|
2,564,000
|
|
|
1,253,000
|
|
|
-
|
|
|
3,817,000
|
|
Professional
fees
|
|
|
1,597,000
|
|
|
1,287,000
|
|
|
-
|
|
|
2,884,000
|
|
Amortization
expense
|
|
|
-
|
|
|
|
|
|
2,518,000
|
(F)
|
|
2,518,000
|
|
Interest
|
|
|
319,000
|
|
|
68,000
|
|
|
387,000
|
(G)
|
|
774,000
|
|
Taxes,
licenses and registration
|
|
|
330,000
|
|
|
199,000
|
|
|
-
|
|
|
529,000
|
|
Other
administrative expenses
|
|
|
1,590,000
|
|
|
4,557,000
|
|
|
-
|
|
|
6,147,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
58,766,000
|
|
|
42,709,000
|
|
|
4,030,000
|
|
|
105,505,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
|
(3,438,000
|
)
|
|
(3,853,000
|
)
|
|
(4,030,000)
|
(H)
|
|
(11,321,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred
stock dividends
|
|
|
(253,000
|
)
|
|
-
|
|
|
-
|
|
|
(253,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss attributable to common stockholders
|
|
$
|
(3,691,000
|
)
|
$
|
(3,853,000
|
)
|
$
|
(4,030,000
|
)
|
$
|
(11,574,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss per common share, basic and diluted
|
|
$
|
(0.43
|
)
|
$
|
(0.07
|
)
|
$
|
(0.52
|
)
|
$
|
(0.71
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average common shares outstanding, basic and diluted
|
|
|
8,611,602
|
|
|
55,635,066
|
|
|
7,800,000
|
|
|
16,411,602
|
|
(2) |
As
reported in National’s unaudited Quarterly Report on Form 10-Q for the
nine months ended June 30, 2008. Derived from vFinance’s internal records
for the three months ended December 31, 2007 and the three months
ended
June 30, 2008, combined with their unaudited Quarterly Report on
Form 10-Q
for the three months ended March 31,
2008.
|
The
accompanying notes are an integral part of these unaudited pro forma condensed
combined financial statements.
Notes
to Unaudited Pro Forma Condensed Combined Financial
Information
Note
1 Purchase
Accounting
The
purchase price allocation is based upon a valuation of tangible and intangible
assets acquired and liabilities assumed. The purchase price allocation included
within this unaudited pro forma condensed combined financial information is
based upon a purchase price of approximately $17.6 million, as
follows:
Issuance
of National common stock to vFinance stockholders
|
|
|
|
|
(7.8
million shares at est. $2.00 per share)(A)
|
|
$
|
15,600,000
|
|
Fair
value of National options and warrants to be issued in exchange for
options
|
|
|
|
|
and
warrants to acquire vFinance common stock(B)
|
|
|
1,500,000
|
|
National
transaction costs
|
|
|
500,000
|
|
|
|
|
|
|
Total
preliminary purchase price
|
|
$
|
17,600,000
|
|
(A)For
the
purposes of the unaudited pro forma condensed combined financial statements,
we
have used the exchange ratio for the merger of 0.14 shares of National common
stock for each share of vFinance common stock, based upon the terms of the
Merger Agreement. The fair value of each share of National common stock is
based
on an average of the closing price of National’s common stock during the two
business days preceding and the two business days subsequent to November 7,
2007, the date the Merger Agreement was signed.
(B)The
merger also provides the vFinance option and warrant holders the right to
receive options to acquire National common stock in exchange for their options
and warrants to acquire vFinance common stock. For the purposes of the unaudited
pro forma condensed combined financial statements, we have assumed that
approximately 1.7 million exercisable National options will be exchanged for
exercisable options and warrants to acquire approximately 12.0 million shares
of
vFinance common stock.
The
following table represents an allocation of the total estimated consideration,
based on management’s estimate of their respective fair values as of the date of
the merger:
|
|
$
|
810,000
|
|
Identifiable
intangible assets (avg. five year life)
|
|
|
16,790,000
|
|
|
|
|
|
|
Total
consideration
|
|
$
|
17,600,000
|
|
Note
2 Summary
of Adjustments
Adjustments
included in the unaudited pro forma condensed combined statements of financial
condition and unaudited pro forma condensed combined statements of operations
are summarized as follows:
|
(A)
|
To
record the estimated $16.4 million of identifiable intangible assets
acquired and to eliminate vFinance’s historical intangible assets. See
Note 1.
|
|
(B)
|
To
record $500,000 of National transaction costs, included as a component
of
total purchase price. These costs include, but are not limited to,
fees
for financial advisors, accountants and attorneys and other related
costs.
$450,000 of these expenses has already been incurred.
|
|
(C)
|
To
eliminate vFinance’s historical stockholders’ equity accounts and to
reflect the issuance of 7.8 million shares of National’s $0.02 par value
common stock with a value of approximately $15.6 million in exchange
for
all common stock of vFinance, including an adjustment to additional
paid-in capital to reflect the fair value of exercisable options
and
warrants to be issued by National in the merger in exchange for
exercisable options and warrants to acquire vFinance common
shares.
|
|
(D)
|
To
reflect the $1.15 million lump sum payment to be made to Mr. Sokolow
pursuant to the Termination Agreement, which was accrued by vFinance
prior
to the merger, and paid subsequent to the
merger.
|
|
(E)
|
To
reflect stock compensation expense in connection with the issuance
of 1.0
million options to acquire National common stock to each of Messrs.
Goldwasser and Sokolow in connection with the merger and the issuance
of
unvested options to acquire National common stock in exchange for
unvested
options to acquire vFinance common stock. Additionally, vFinance
recorded
$450,000 of stock compensation expense as a result of the accelerated
vesting of options to acquire 3.6 million shares of vFinance common
stock
as a result of change of control provisions of certain options. No
pro-forma adjustment is reflected for this amount, since the vFinance
equity accounts will be eliminated. See Footnote
(C).
|
|
(F)
|
To
record amortization expense for identifiable intangible assets using
an
average estimated useful life of five years and to eliminate vFinance’s
historical amortization expense.
|
|
(G)
|
To
record interest expense, accretion of debt discount and amortization
of
deferred debt issuance costs of $516,000 and $387,000, for the twelve
months ended September 30, 2007 and nine months ended June 30, 2008
respectively on $3.0 million face value senior subordinated convertible
promissory note issued by National in connection with the
financing.
|
|
(H)
|
The
pro forma adjustments do not include any related income tax effects
as
National provides a full valuation allowance on its deferred tax
assets.
Additionally, the pro forma adjustments do not include fair value
adjustments related to the net tangible assets acquired because vFinance
net assets approximate fair value and due to existing
losses.
|
DESCRIPTION
OF OUR BUSINESS
Statements
made in this report that relate to future plans, events, financial results
or
performance are forward-looking statements as defined under the Private
Securities Litigation Reform Act of 1995. These statements are based upon
current information and expectations. Actual results may differ materially
from
those anticipated as a result of certain risks and uncertainties. For details
concerning these and other risks and uncertainties, see Part I,
Item 1A, “Risk Factors” of this report, as well as the Company’s other
reports on Forms 10-K, 10-Q and 8-K subsequently filed with the SEC from
time to time. Readers are cautioned not to place undue reliance on these
forward-looking statements, which speak only as of the date hereof. The Company
undertakes no obligation to republish revised forward-looking statements to
reflect events or circumstances after the date hereof or to reflect the
occurrence of unanticipated events.
General
National
is a Delaware financial services corporation organized in 1996 operating through
its wholly owned subsidiaries, National Securities Corporation, vFinance
Investments, Inc. and EquityStation, Inc. (collectively, the “Broker Dealer
Subsidiaries”).
Though
our Broker Dealer Subsidiaries, we conduct a national securities brokerage
business through our main offices in New York, New York, Boca Raton, Florida,
and Seattle, Washington, as well as 94 other locations throughout the country
and four offices outside the country. Our business includes securities brokerage
for individual and institutional clients, market-making trading activities,
asset management and corporate finance services.
The
Broker Dealer Subsidiaries provide a broad range of securities brokerage and
investment services to a diverse retail and institutional clientele, as well
as
corporate finance and investment banking services to corporations and
businesses. Our brokers operate primarily as independent contractors. An
independent contractor registered representative who becomes an affiliate of
a
Broker Dealer Subsidiary establishes his own office and is responsible for
the
payment of expenses associated with the operation of such office, including
rent, utilities, furniture, equipment, stock quotation machines and general
office supplies. The independent contractor registered representative is
entitled to retain a higher percentage of the commissions generated by his
sales
than an employee registered representative at a traditional employee-based
brokerage firm. This arrangement allows us to operate with a reduced amount
of
fixed costs and lowers the risk of operational losses for
non-production.
In
July 1994, National Securities formed a wholly owned
subsidiary, National Asset Management, Inc., a Washington corporation (“NAM”).
NAM is a federally-registered investment adviser providing asset management
advisory services to high net worth clients for a fee based upon a percentage
of
assets managed. In March 2008, all of the issued and outstanding stock of NAM
was transferred from National Securities to National.
In
the
third quarter of fiscal year 2006, the Company formed a wholly owned subsidiary,
National Insurance Corporation,
a
Washington corporation (“National Insurance”).
National Insurance provides fixed insurance products to its clients, including
life insurance, disability insurance, long term care insurance and fixed
annuities. National Insurance finalized certain requisite state registrations
during the second quarter of fiscal year 2007 and commenced business operations
that have been diminimus.
vFinance
Lending Services, Inc. originally formed as a
wholly owned subsidiary of vFinance, Inc., was established in May 2002. It
is a
mortgage lender focused primarily on the commercial sector, providing bridge
loans, and commercial mortgage through its nationwide network of lenders. Its
operations to date have been de minimus.
Clearing
Relationships
The
Broker Dealer Subsidiaries having clearing arrangements with National Financial
Services LLC (“NFS”), Penson Financial Services, Inc. (“Penson”), Legent
Clearing LLC (“Legent”) and Fortis Securities, LLC. We believe that the overall
effect of our clearing relationships has been beneficial to our cost structure,
liquidity and capital resources.
Financial
Information about Industry Segments
The
Company realized approximately 88% of its total revenues in fiscal year 2007
from brokerage services, principal and agency transactions, and investment
banking. During fiscal year 2007, brokerage services that consist of retail
brokerage commissions represent 54% of total revenues, principal and agency
transactions that consist of net dealer inventory gains represent 22% of total
revenues, and investment banking, that consist of corporate finance commissions
and fees, represent 12% of total revenues.
Brokerage
Services
Our
Broker Dealer Subsidiaries are each registered as a broker-dealer with the
SEC
and are licensed in all 50 states, the District of Columbia and Puerto Rico.
The
Broker Dealer Subsidiaries are also members of the FINRA, MSRB and the
Securities Investor Protection Corporation ("SIPC") and vFinance Investments
is
also a member of NFA. Brokerage
services to retail clients are provided through our sales force of investment
executives at the Broker Dealer Subsidiaries.
Our
goal
is to meet the needs of its investment executives and their clients. To foster
individual service, flexibility and efficiency and to reduce fixed costs, our
investment executives primarily act as independent contractors responsible
for
providing their own office facilities, sales assistants, telephone and quote
service, supplies and other items of overhead. Investment executives are given
broad discretion to structure their own practices and to specialize in different
areas of the securities market subject to supervisory procedures. In addition,
investment executives have direct access to research materials, management,
traders, and all levels of support personnel.
The
brokerage services provided by our investment executives include execution
of
purchases and sales of stocks, bonds, mutual funds, annuities and various other
securities for individual and institutional customers. In fiscal year 2007,
stocks represent approximately 78% of our business, bonds represent
approximately 12% of our business, and mutual funds and annuities make up the
remaining 10% of our business. The percentage of each type of business varies
over time as the investment preferences of our customers change based on market
conditions.
Typically,
our Broker Dealer Subsidiaries do not recommend particular securities to
customers. Rather, recommendations to customers are determined by individual
investment executives based upon their own research and analysis, subject to
applicable FINRA customer suitability standards. Most investment executives
perform fundamental (as opposed to technical) analysis. Solicitations may be
by
telephone, seminars or newsletters.
We
generally act as an agent in executing customer orders to buy or sell listed
and
over-the-counter securities in which it does not make a market, and charges
commissions based on the services we provides to our customers. In executing
customer orders to buy or sell a security in which we make a market, we may
sell
to, or purchase from, customers at a price that is substantially equal to the
current inter-dealer market price plus or minus a mark-up or mark-down. We
may
also act as agent and execute a customer's purchase or sale order with another
broker-dealer market-maker at the best inter-dealer market price available
and
charge a commission. We believe our mark-ups, mark-downs and commissions are
competitive based on the services we provide to our customers. In each instance
the commission charges, mark-ups or mark-downs, are in compliance with
guidelines established by the FINRA. In order to increase revenues generated
from these activities, we continuously seek to hire additional registered
representatives, and work with our current registered representatives to
increase their productivity.
Our
registered representatives are primarily independent contractors, not salaried
employees. As such, payments to these persons are based on commissions
generated, and represent a variable cost rather than a fixed cost of operating
our business. Commission expense represents a significant majority of our total
expenses. We work to control its fixed costs in order to achieve profitability
based upon our expectation of market conditions and the related level of
revenues. Additionally, we
require
most of our registered
representatives to
absorb
their own overhead and expenses, thereby reducing our share of the fixed
costs.
Investment
executives in the brokerage industry are traditionally compensated on the basis
of set percentages of total commissions and mark-ups generated. Most brokerage
firms bear substantially all of the costs of maintaining their sales forces,
including providing office space, sales assistants, telephone service and
supplies. The average commission paid to investment executives in the brokerage
industry generally ranges from 30% to 50% of total commissions
generated.
Since
we
require most of our investment executives to absorb their own overhead and
expenses, we pay a higher percentage of the net commissions and mark-ups
generated by our investment executives, as compared to traditional investment
executives in the brokerage industry. This arrangement also reduces fixed costs
and lowers the risk of operational losses for non-production. Our operations
include execution of orders, processing of transactions, internal financial
controls and compliance with regulatory and legal requirements.
As
of
August 31, 2008, we had 189 employees and 768 independent contractors. Of these
totals, 651 were registered representatives. Persons who have entered into
independent contractor agreements are not considered employees for purposes
of
determining our obligations for federal and state withholding, unemployment
and
social security taxes. Our independent contractor arrangements conform to
accepted industry practice, and therefore, we do not believe there is a material
risk of an adverse determination from the tax authorities that would have a
significant effect on our ability to recruit and retain investment executives
or
on our current operations and financial results of operations. No employees
are
covered by collective bargaining agreements, and we believe our relations are
good with both our employees and independent contractors.
Our
business plan includes the growth of its retail and institutional brokerage
business, while recognizing the volatility of the financial markets. In response
to historical market fluctuations, we have periodically adjusted certain
business activities, including, proprietary trading and market-making trading.
We believe that consolidation within the industry is inevitable. Concerns
attributable to the volatile market, and increased competition, result in a
number of acquisition opportunities being introduced to us. We are focused
on
maximizing the profitability of its existing operations, while it continues
to
seek selective strategic acquisitions.
Periodic
reviews of controls are conducted and administrative and operations personnel
meet frequently with management to review operating conditions. Compliance
and
operations personnel monitor compliance with applicable laws, rules and
regulations.
Principal
and Agency Transactions
We
buy
and maintain inventories in equity securities as a "market-maker" for sale
of
those securities to other dealers and to our customers. We may also maintain
inventories in corporate, government and municipal debt securities for sale
to
customers. The level of our market-making trading activities will increase
or
decrease depending on the relative strength or weakness of the broader markets.
We make
markets in over 3,500 micro and small-cap stocks. We anticipate that we will
continue market-making trading activity in the future, which may include
companies for which we managed or co-managed a public offering.
Our
trading departments require a commitment of capital. Most principal transactions
place our capital at risk. Profits and losses are dependent upon the skill
of
the traders, price movements, trading activity and the size of inventories.
Since our trading activities occasionally may involve speculative and thinly
capitalized stocks, including stabilizing the market for securities which we
have underwritten, we impose position limits to reduce our potential for
loss.
In
executing customer orders to buy or sell a security in which we make a market,
we may sell to, or purchase from, customers at a price that is substantially
equal to the current inter-dealer market price plus or minus a mark-up or
mark-down. We may also act as agent and execute a customer's purchase or sale
order with another broker-dealer market-maker at the best inter-dealer market
price available and charge a commission. We believe our mark-ups, mark-downs
and
commissions are competitive based on the services we provide to our
customers.
In
executing customer orders to buy or sell listed and over-the-counter securities
in which we do not make a market, we generally act as an agent and charge
commissions that we believe are competitive, based on the services we provide
to
our customers.
Investment
Banking
We
provide corporate finance and investment banking services, including
underwriting the sale of securities to the public and arranging for the private
placement of securities with investors. Our corporate finance operations provide
a broad range of financial and corporate advisory services, including mergers
and acquisitions, project financing, capital structure and specific financing
opportunities. We also act as an underwriter of equity securities in both
initial and secondary public offerings. Corporate
finance revenues will vary depending on the number of private and public
offerings completed by us during a particular fiscal year.
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
August 31, 2008, we employed or had contractual relationships with approximately
20 people providing institutional services, approximately ten of which provide
hedge fund related services. We service approximately 200 institutional
customers, of which approximately 85 are hedge funds. For the calendar year
ended December 31, 2007, hedge fund related services accounted for approximately
$5 million in revenue.
Internet
Strategy
Our
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
Broker Dealer Subsidiaries 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. 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 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. Our Broker Dealer Subsidiaries have agreed to
indemnify the clearing brokers for losses they incur on these credit
arrangements.
Competition
The
Company is engaged in a highly competitive business. With respect to one or
more
aspects of its business, its competitors include member organizations of the
New
York Stock Exchange and other registered securities exchanges in the United
States and Canada, and members of the FINRA. Many of these organizations have
substantially greater personnel and financial resources and more sales offices
than the Company. Discount brokerage firms affiliated with commercial banks
provide additional competition, as well as companies that provide electronic
on-line trading. In many instances, the Company is also competing directly
for
customer funds with investment opportunities offered by real estate, insurance,
banking, and savings and loans industries.
The
securities industry has become considerably more concentrated and more
competitive since we were founded, as numerous securities firms have either
ceased operations or have been acquired by or merged into other firms. In
addition, companies not engaged primarily in the securities business, but with
substantial financial resources, have acquired leading securities firms. These
developments have increased competition from firms with greater capital
resources than ours.
Since
the
adoption of the Gramm-Leach-Bliley Act of 1999, commercial banks and thrift
institutions have been able to engage in traditional brokerage and investment
banking services, thus increasing competition in the securities industry and
potentially increasing the rate of consolidation in the securities
industry.
We
also
compete with other securities firms for successful sales representatives,
securities traders and investment bankers. Competition for qualified employees
in the financial services industry is intense. Our continued ability to compete
effectively depends on our ability to attract new employees and to retain and
motivate our existing employees. For
a
further discussion of risks facing the Company, please see “Risk
Factors.”
Government
Regulation and Supervision
The
securities industry and our Broker Dealer Subsidiaries businesses are subject
to
extensive regulation by the SEC, FINRA, NFA and state securities regulators
and
other governmental regulatory authorities. The principal purpose of these
regulations is the protection of customers and the securities markets. The
SEC
is the federal agency charged with the administration of the federal securities
laws. Much of the regulation of broker-dealers, however, has been delegated
to
self-regulatory organizations, such as the FINRA, that adopt rules, subject
to
approval by the SEC, which govern their members and conduct periodic
examinations of member firms' operations. Securities firms are also subject
to
regulation by state securities commissions in the states in which they are
registered. All of our Broker Dealer Subsidiaries are registered broker-dealers
with the SEC and members of the FINRA. It is licensed to conduct activities
as a
broker-dealer in all 50 states, the District of Columbia and Puerto Rico.
In
addition, as registered broker-dealers and members of the FINRA, our Broker
Dealer Subsidiaries are subject to the SEC's Uniform
Net Capital Rule 15c3-1,
which
is designed to measure the general financial integrity and liquidity of a
broker-dealer and requires
the maintenance of minimum net capital.
Net
capital is defined as the net worth of a broker-dealer subject to certain
adjustments. In computing net capital, various adjustments are made to net
worth
that exclude assets not readily convertible into cash. Additionally, the
regulations require that certain assets, such as a broker-dealer's position
in
securities, be valued in a conservative manner so as to avoid over-inflation
of
the broker-dealer's net capital. National
Securities has elected to use the alternative standard method permitted by
the
rule. This requires that National Securities maintain minimum net capital equal
to the greater of $250,000 or a specified amount per security based on the
bid
price of each security for which National Securities is a market maker. At
August 31, 2008, National Securities’ net capital exceeded the requirement by
$623,000. Due to its market maker status, vFinance Investments is required
to
maintain a minimum net capital of $1,000,000 and EquityStation is required
to
maintain $100,000, and at August 31, 2008 the firms had excess net capital
of
$390,000 and $97,000 respectively.
The
Securities Exchange Act of 1934, as amended (the “Exchange Act”), and the FINRA
Conduct Rules require National Securities to supervise the activities of its
investment executives. As part of providing such supervision, National
Securities maintains Written Supervisory Procedures and a Compliance Manual.
Compliance personnel and outside auditors conduct inspections of branch offices
periodically to review compliance with the Company's procedures. A registered
principal provides onsite supervision at each of the Company's larger offices.
The other offices (averaging two investment executives per office) are not
required by FINRA rules to have a registered principal on site and are therefore
supervised by registered principals of National Securities. Designated
principals review customer trades to ensure compliance with the FINRA Conduct
Rules including mark-up guidelines.
In
November 2006, without admitting or denying the alleged violations, National
Securities accepted and consented to the entry of the following findings by
NASD
Regulation: Pursuant to NASD Rules 2110, 3010, 6230(A), MSRB Rules G-14, G-17,
the firm failed to report to trace, transactions in trace eligible securities
executed on a business day during trace system hours within 30 minutes of the
time of execution; the firm’s supervisory system did not provide for supervision
reasonably designed to achieve compliance with applicable securities laws,
regulations and NASD rules concerning trace reporting; and failed to report
to
the MSRB customer transaction in municipal securities within 15 minutes of
the
time of execution. The firm was censured and fined $30,000 in a settlement
dated
November 21, 2006.
In
July
2007, without admitting or denying the alleged violations, National Securities
accepted and consented to the entry of the following findings by NASD
Regulation: Pursuant to NASD
Rules 2110, 3010(A) AND (B), the firm ignored red flags that a representative
was circumventing his heightened supervision plan. The
firm
was censured and fined $20,000 in a settlement dated July 19, 2007.
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).
Employees
At
August
31, 2008, we employed the following personnel:
|
|
(Employees)
|
|
(Independent)
|
|
|
|
Position
|
|
Salaried
|
|
Contract
|
|
TOTAL
|
|
Officers
|
|
|
18
|
|
|
0
|
|
|
18
|
|
Administration
|
|
|
97
|
|
|
132
|
|
|
229
|
|
Brokers
|
|
|
36
|
|
|
615
|
|
|
651
|
|
Traders
|
|
|
25
|
|
|
2
|
|
|
27
|
|
Investment
Bankers
|
|
|
13
|
|
|
12
|
|
|
25
|
|
Lenders
|
|
|
0
|
|
|
7
|
|
|
7
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTALS
|
|
|
189
|
|
|
768
|
|
|
957
|
|
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.
Description
of Properties
The
Company owns no real property. Its corporate headquarters are shared with
National Securities in leased space in New York, New York and Chicago, Illinois.
The Company leases office space in Boca Raton, Florida, and through its
subsidiaries, the Company leases office space in Chicago, New York, Seattle,
Washington and Tinton Falls, New Jersey. Independent contractors individually
lease the branch offices that are operated by those independent contractors.
Leases
expire at various times through August 2014.
The
Company believes the rent at each of its locations is reasonable based on
current market rates and conditions.
The
Company leases office space in the following locations. The following chart
provides information related to these lease obligations:
Office
Location
|
|
Approximate
Square Footage
|
|
Lease
Rental
|
|
Expiration
Date
|
|
120
Broadway, New York, NY
|
|
|
30,699
|
|
$
|
1,326,197
|
|
|
8/31/2013
|
|
875
N. Michigan Ave., Chicago, IL
|
|
|
3,721
|
|
|
83,722
|
|
|
12/31/2008
|
|
1001
Fourth Ave, Seattle, WA
|
|
|
16,421
|
|
|
511,308
|
|
|
6/30/2012
|
|
2424
N. Federal Highway, Boca Raton, FL
|
|
|
10,177
|
|
|
173,004
|
|
|
12/31/2013
|
|
4000
Rt. 66, Tinton Falls, NJ
|
|
|
3,798
|
|
|
96,852
|
|
|
9/30/2012
|
|
3010
N. Military Trail, Boca Raton, FL
|
|
|
18,390
|
|
|
666,930
|
|
|
2/28/2009
|
|
131
Gaither Drive, Mount Laurel, NJ
|
|
|
1,400
|
|
|
19,600
|
|
|
9/30/2009
|
|
1200
N. Federal Highway, Boca Raton FL
|
|
|
16,250
|
|
|
542,100
|
|
|
8/21/2014
|
|
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.
Legal
Proceedings
In
September 2006, the
former
chairman and chief executive officer of the Company, Steven A. Rothstein,
commenced an arbitration against the current chairman and chief executive
officer of the Company, Mark Goldwasser, in the matter Rothstein
et al. vs. Goldwasser,
FINRA
No. 06-04000. Rothstein alleged fraud and inequitable conduct relating
to his attempts to sell his investment in the Company in calendar year
2001, and was seeking approximately $5,750,000 in damages. On August
27,
2008, we
received notification from FINRA that Rothstein’s claim had been
dismissed.
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, the former Present and Chief
Operating Officer of vFinance Investments, 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
vFinance Investments on August 4, 2006, and has not been associated with us
since that date. Mr. Campenalla’s employment with us was terminated on September
12, 2008 and he has not been associated with us since that date. During the
hearing we have asserted as part of the defense that Mr. Campanella complied
to
the best of his ability promptly and reasonably with the SEC's requests for
documents, that we have policies and procedures in place to maintain all
required communications, and that we did not violate any record keeping or
production duties. Post-hearing briefs have been filed by the parties. We expect
a decision by the Administrative Law Judge before the end of 2008.
On
or
about February 28, 2005, Knight Equity Markets, LP ("Knight") filed an
arbitration action (NASD Case No. 05-01069) against vFinance Investments,
claiming that vFinance Investments received roughly $6.5 million in dividends
that 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 was seeking approximately
$6.5 million in damages plus costs, attorney fees and punitive damages. In
January 2008, the vFinance settled this claim for $325,000 in cash.
On
March
4, 2008, vFinance 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 also a defendant in various other arbitrations and administrative
proceedings, lawsuits and claims seeking
in the aggregate damages of approximately $6,000,000. The
Company
believes
such claims are substantially without merit, and estimates that its liability,
primarily for attorney representation, will approximate less than $500,000
(exclusive of unspecified punitive damages related to certain claims and
inclusive of expected insurance coverage). These matters arise in the
normal course of business. The Company intends to vigorously defend itself
in these actions, and believes that the eventual outcome of these matters will
not have a material adverse effect on the Company. However,
the ultimate outcome of these matters cannot be determined at this time.
The
amounts related to arbitrations
and administrative proceedings
that are
reasonably estimable and which have been accrued at September 30, 2007 and
2006,
is $62,000 and $241,000 (primarily legal fees), respectively, and
have
been included in “Accounts Payable, Accrued Expenses and Other Liabilities” in
the accompanying consolidated statements of financial condition.
The
Company has included in “Professional fees” litigation and other FINRA related
expenses of $1,444,000, $799,000 and $790,000 for the fiscal years ended
September 30, 2007, 2006 and 2005, respectively.
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
For
a
discussion of our management's analysis of our results of operations and
financial condition as of and for each of the years ended September 30, 2005,
2006 and 2007, respectively, and the three and nine months ended June 30, 2007
and 2008, please see our Annual report on Form 10-K for the year ended September
30, 2007, as filed with the SEC on December 14, 2007, and out Quarterly Report
on Form 10-Q for the quarter ended June 30, 2008, as filed with the SEC on
August 13, 2008. The discussion should be read in conjunction with our Audited
and Unaudited Condensed Consolidated Financial Statements and the notes related
thereto which appear in such filings.
DIRECTORS
AND EXECUTIVE OFFICERS
The
following table sets forth the names, ages and positions of our executive
officers and directors as of September 30, 2008. Our board of directors is
divided into three classes of directors, each class as nearly equal in number
as
possible but not less than one director. Each director serves for a three-year
term, staggered by class so only one class of directors stands for reelection
each year. Under our bylaws, each director holds office until the election
and
qualification of his successor or until his earlier resignation or removal
.
Name
|
|
Title
|
|
Age
|
|
Class
|
|
Term
Expires
|
|
|
|
|
|
|
|
|
|
Mark
Goldwasser(1)
|
|
Chairman,
Chief Executive Officer and Director
|
|
49
|
|
Class
III
|
|
2010
|
|
|
|
|
|
|
|
|
|
Leonard
J. Sokolow(2)
|
|
Vice
Chairman, President and Director
|
|
51
|
|
Class
III
|
|
2010
|
|
|
|
|
|
|
|
|
|
Christopher
C. Dewey(3)
|
|
Vice
Chairman and
Director
|
|
63
|
|
Class
I
|
|
2011
|
|
|
|
|
|
|
|
|
|
Marshall
S. Geller(1)(3)
|
|
Director
|
|
69
|
|
Class
I
|
|
2011
|
|
|
|
|
|
|
|
|
|
Charles
R. Modica(2)(3)
|
|
Director
|
|
59
|
|
Class
II
|
|
2009
|
|
|
|
|
|
|
|
|
|
Robert
W. Lautz, Jr.(2)
|
|
Director
|
|
60
|
|
Class
III
|
|
2010
|
|
|
|
|
|
|
|
|
|
Jorge
A. Ortega(1)
|
|
Director
|
|
44
|
|
Class
II
|
|
2009
|
|
|
|
|
|
|
|
|
|
Non-
director executive officers
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Alan
B. Levin
|
|
Chief
Financial Officer
|
|
44
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Brian
Friedman
|
|
Executive
Vice President
|
|
36
|
|
|
|
|
Jonathan
C. Rich
|
|
Executive
Vice President
|
|
39
|
|
|
|
|
|
|
|
|
|
|
|
|
|
William
L. Groeneveld
|
|
President
of vFinance Investments and Equity Station and Head Trader at vFinance
Investments
|
|
43
|
|
|
|
|
|
(1)
|
Member
of Governance Committee
|
|
(2)
|
Member
of Audit Committee
|
|
(3)
|
Member
of Compensation Committee
|
All
officers serve at the discretion of the board of directors. No family
relationships exist among the officers and directors.
Mark
Goldwasser has
served as a director of National
since
December 28, 2001. Mr. Goldwasser joined National
in June
2000. Mr. Goldwasser was named President in August 2000, Chief Executive Officer
in December 2001 and Chairman in April 2005. Prior to joining National,
Mr.
Goldwasser was the Global High Yield Sales Manager at ING Barings from 1997
to
2000. From 1995 to 1997, Mr. Goldwasser was the Managing Director of High Yield
Sales at Schroders & Co., and from 1991 to 1995, the Vice President of
Institutional High Yield Sales at Lazard Freres & Co. From 1984 to 1991, Mr.
Goldwasser served as the Associate Director of Institutional Convertible Sales
and Institutional High Yield Sales at Bear Stearns & Co., Inc. From 1982 to
1984, Mr. Goldwasser was a Floor member of the New York Mercantile Exchange
(NYMEX) and the Commodity Center (COMEX). Mr. Goldwasser received his B.A.
with
Honors from the University of Capetown in 1979.
Leonard
J. Sokolow
has been
the chairman of the board of directors of vFinance since January 1, 2007, one
of
its directors since November 8, 1997 and its Chief Executive Officer since
November 8, 1999. Following the merger, Mr. Sokolow will join National as its
Vice Chairman and President and become a member of the board of directors as
the
nominee of vFinance. From January 5, 2001 through December 31, 2006, Mr. Sokolow
was President of vFinance. From November 8, 1999 through January 4, 2001, Mr.
Sokolow was Vice Chairman of vFinance's board of directors. 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 vFinance. 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. (Nasdaq: CWCO) and Chairman of its audit committee, a position
he
has held since May 2006.
Marshall
S. Geller
has
served
as a director of National
since
January 11, 2006. Mr.
Geller is Founder and Senior Managing Director
of St.
Cloud Capital, a Los Angeles based private equity fund formed in December 2001.
Mr. Geller has spent more than 40 years in corporate finance and investment
banking, including 21 years as Senior Managing Director for Bear, Stearns &
Co., with oversight of all operations in Los Angeles, San Francisco, Chicago,
Hong Kong and the Far East. Currently he serves as a director on the boards
of
1st Century Bank N.A. (Nasdaq:FCTY), GP Strategies Corporation (NYSE.GPX),
SCPIE
Holdings, Inc. (NYSE.SKP), ValueVision Media, Inc. (Nasdaq:VVTV) and Guidance
Software, Inc. (Nasdaq:GUID). Mr. Geller is also on the Board of Governors
of
Cedars Sinai Medical Center, Los Angeles and serves on the Dean’s Advisory
Council for the College of Business & Economics at California State
University, Los Angeles and was recently appointed to the Little Hoover
Commission, an independent California state oversight agency. Mr. Geller
graduated from California State University, Los Angeles, with a BS in Business
Administration.
Christopher
C. Dewey has
served as a director of National since December 27, 2006. From 1993 to prior
to
joining National, Mr. Dewey served as Executive Vice President of Jefferies
& Company, Inc. Prior to joining Jefferies & Company, Inc., Mr.
Dewey was a partner of Merrion Group (1990-1993) and Bear Stearns (1979-1990).
Mr. Dewey currently serves as a director of Mako Surgical Corp. (Nasdaq: MAKO).
Mr. Dewey earned an M.B.A. from the Wharton School in 1987.
Charles
R. Modica
has been
a director of vFinance since January 3, 2007. Following the merger, Mr. Modica
will become a member of National's board of directors as the nominee of
vFinance. 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
a director of vFinance since June 6, 2007. Following the merger, Mr. Ortega
will
become a member of National's board of directors as the nominee of vFinance.
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.
Robert
W. Lautz, Jr.
has
served as a Managing Director of St. Cloud Capital, a Los Angeles based private
equity fund formed, since December 2001. Mr. Lautz was formerly the Chairman
of
REO.com, the nations leading Internet-based sales mechanism for bank foreclosed
properties. Prior to that he served as the CEO of ListingLink, the original
Internet-based residential property multiple listing service. Mr. Lautz formed
and was Chairman and CEO of Indenet, Inc., a Nasdaq listed private
satellite-based network that delivered digital advertisements and programming
to
the 3000+ national broadcast and cable television networks. From 1994 to 1997,
he built Indenet from a public shell with $4 million in cash to a company with
over $50 million in revenue, $120 million in market value and 650 employees
in
19 facilities around the world. Mr. Lautz also owned and operated Peerless
Capital, a venture capital business which invested in various management led
leveraged buyouts and private equity transactions. Mr. Lautz began his career
within Citibank's Operating Group where he rose to become the Senior Financial
Officer, responsible for all financial functions and strategic planning for
his
division. He currently serves on the board of directors of Compact Power, Inc.,
Security Contractor Services, Inc., MEDirect Latino, Inc. (MLTO.PK), and
SecureOne Data Solutions, LLC, and as a board observer for XLNT Veterinary
Care,
Inc. Mr. Lautz earned a Master's degree from the American Graduate School of
International Management (Thunderbird), and a BS in Business Administration
from
Miami University in Oxford, Ohio.
Alan
B. Levin
has
served as Chief Financial Officer of vFinance since January 2007. Prior to
that
date, he served as its Interim Chief Financial Officer since July 2006 and
its
Controller since June 2005. Since the merger, Mr. Levin is serving as Chief
Financial Officer of National. Prior to joining vFinance, Mr. Levin served
as
Chief Financial Officer for United Capital Markets, Inc. from September 2000
to
January 2005. Mr. Levin has over ten years experience in the brokerage industry
serving as a Financial and Operations Principal and 20 years experience serving
in accounting management roles in various industries. He received a B.S. degree
in Economics with a concentration in Accounting from Southern Connecticut State
University in New Haven, Connecticut in 1986.
Brian
Friedman
has
served as an Executive Vice President of National since March 2006. Mr. Friedman
joined National Securities in 1997 as a member of the Corporate Finance
Department. From 1997 until 2001, Mr. Friedman worked primarily in the
areas of corporate finance and business development. From 2001 until present,
Mr. Friedman was instrumental in implementing business changes to improve the
profitability and business of National. Mr. Friedman continues to serve as
National Securities' Managing Director and Head of Investment Banking. Prior
to
joining National, he worked as an associate at Liberty Hampshire, LLC, a
boutique investment bank. Mr. Friedman earned his J.D./M.B.A. in finance at
Illinois Institute of Technology's Chicago Kent College of Law and his BA in
finance from the University of Iowa.
Jonathan
C. Rich
has been
the Executive Vice President and Director of Investment Banking of vFinance
Investments since July 1, 2005. Since the Merger, Mr. Rich is serving as an
Executive Vice President of vFinance. From January 15, 2001 through December
30,
2005, Mr. Rich was a Senior Vice President in the Investment Banking division
of
vFinance Investments. From April 1, 1997 through January 15, 2001, Mr. Rich
was
a Vice President and Senior Vice President in the Investment Banking division
of
First Colonial Securities Group, Inc., a 13 office investment banking and
brokerage firm based out of Marlton, New Jersey. Mr. Rich received his B.A.
degree in Political Economy from Tulane University and a J.D./M.B.A. from
Fordham University.
William
L. Groeneveld
was
promoted to President of vFinance Investments in September 2008 and has been
Head Trader of vFinance Investments since October 2002. Mr. Groeneveld had
been
vFinance Investments' Trading Manager from October of 2001 to October 2002.
In
addition to his Head Trader duties, Mr. Groeneveld also has been President
of
Equity Station since March 2006. Prior to joining vFinance, Mr. Groeneveld
was a
partner of Program Trading Corp., a registered broker-dealer specializing in
algorithmic and "black box" trading, where he was Executive Vice President
and
Head Trader from 1994 until 2001. Mr. Groeneveld attended West Virginia
University majoring in Aerospace Engineering.
Corporate
Governance
The
Company’s business affairs are conducted under the direction of the Board of
Directors in accordance with the Delaware Business Corporation Act and the
Company’s Certificate of Incorporation and Bylaws. Members of the Board of
Directors are informed of the Company’s business through discussions with
management, by reviewing materials provided to them and by participating in
meetings of the Board of Directors and its committees. Certain corporate
governance practices that the Company follows are summarized below.
Code
of Ethics and Business Conduct
We
have
adopted the National Holdings Corporation Code of Ethics and Business Conduct
(the “Code of Conduct”), a code of conduct that applies to our directors,
officers and employees. The Code of Conduct was filed as an exhibit to our
Annual Report on Form 10-K for the fiscal year ended September 30, 2003 and
is
publicly available on the SEC’s website at www.sec.gov.
If we
make any substantive amendments to the Code of Conduct or grant any waiver,
including any implicit waiver from a provision of the Code of Conduct to our
directors or executive officers, we will disclose the nature of such amendment
or waiver in a report on Form 8-K.
Committees
of the Board of Directors
The
Board
of Directors has an Audit Committee, a Compensation Committee, and a Corporate
Governance Committee.
Director
Qualifications.
The
Board of Directors does not currently have a nominating committee, as the
Company believes that having the full Board deliberate the nomination process
is
in the Company’s best interest. Board of Director nominations are recommended by
the directors. In making its nominations, the Board of Director identifies
candidates who meet the current challenges and needs of the Board of Directors.
In determining whether it is appropriate to add or remove individuals, the
Board
of Directors will consider issues of judgment, diversity, age, skills,
background and experience. In making such decisions, the Board of Directors
considers, among other things, an individual’s business experience, industry
experience, financial background and experiences. The Board of Directors also
considers the independence, financial literacy and financial expertise standards
required by our Board of Directors committees’ charters and applicable laws,
rules and regulations, and the ability of the candidate to devote the time
and
attention necessary to serve as a director and a committee member.
Identifying
and Evaluating Nominees for Director. In
the event that vacancies are anticipated or otherwise arise, the Board of
Directors considers various potential candidates for director. Candidates may
come to the attention of the Board through current directors, professional
search firms engaged by us, shareholders or other persons. Candidates are
evaluated at regular or special meetings of the Board of Directors and may
be
considered at any point during the year.
Shareholder
Nominees. Candidates
for director recommended by shareholders will be considered by the Board of
Directors. Such recommendations should include the candidate’s name, home and
business contact information, detailed biographical data, relevant
qualifications for membership on our Board of Directors, information regarding
any relationships between the candidate and us within the last three years,
including stockholdings in us, and a written indication by the recommended
candidate of the candidate’s willingness to serve, and should be sent to the
Board of Directors at the address listed on page nine of this proxy
statement.
The
Board
of Directors will evaluate recommendations for director nominees submitted
by
directors, management or qualifying shareholders in the same manner, using
the
criteria stated above. All directors and director nominees will submit a
completed form of directors’ and officers’ questionnaire as part of the
nominating process. The process may also include interviews and additional
background and reference checks for non-incumbent nominees, at the discretion
of
the Board of Directors.
Audit
Committee
The
Audit
Committee consists of Leonard J. Sokolow (Chairman), Robert W. Lautz, Jr. and
Charles Modica. Messrs. Lautz and Modica are “independent” as defined in SEC
Rule 10A-3 under the Securities Exchange Act of 1934, as amended (the “Exchange
Act”) and Rule 4200 of the Nasdaq Market Place Rules.
On
January 22, 2003, the Board adopted a charter for the Audit Committee, as
amended and restated on January 12, 2004. The Audit Committee oversees the
Company's financial reporting process on behalf of the Board of Directors.
Management is responsible for the Company's internal controls, financial
reporting process and compliance with laws and regulations and ethical business
standards. The independent public accountants are responsible for performing
an
independent audit of the Company's consolidated financial statements in
accordance with generally accepted auditing standards and to issue a report
thereon. The Audit Committee has the power and authority to engage the
independent public accountants, reviews the preparations for and the scope
of
the audit of the Company’s annual financial statements, reviews drafts of the
statements and monitors the functioning of the Company’s accounting and internal
control systems through discussions with representatives of management and
the
independent public accountants.
Under
SEC
rules, companies are required to disclose whether their audit committees have
an
“audit committee financial expert” as defined in Item 401(h) of Regulation S-K
under the Securities Exchange Act of 1934 and whether that expert is
“independent” as that term is used in Item 7(d)(3)(iv) of Schedule 14A under the
Exchange Act. The Board of Directors has determined that Mr.
Sokolow is a “financial expert”. Mr. Sokolow is not considered to
“independent.” The
Audit
Committee meets quarterly and on an on-needed basis. .
Compensation
Committee
The
Company’s Compensation Committee consists of Charles Modica (Chairman), Marshall
S. Geller and Christopher
C. Dewey. Messrs. Modica and Geller are
considered to be “independent.” Mr. Dewey is not considered to be “independent”
under SEC rules. On January 12, 2004, the Compensation Committee adopted a
formal Compensation Committee Charter, which contains a detailed description
of
the committee's duties and responsibilities. The Compensation Committee meets
annually and on an on-needed basis.
Governance
Committee
The
Governance Committee consists of Marshall S. Geller (Chairman), Mark Goldwasser
and Jorge Ortega. Messrs. Geller and Ortega are “independent” as defined in SEC
Rule 10A-3 under the Exchange Act and Rule 4200 of the Nasdaq Market Place
rules. The Governance Committee was created with certain duties and
responsibilities, including setting the Company’s trading policy, monitoring
Sarbanes-Oxley matters, resolving Board conflicts and/or such other duties
and
responsibilities as set forth in the Corporate Governance Committee charter.
The
Governance Committee meets on an on-needed basis.
COMPENSATION
DISCUSSION AND ANALYSIS
For
a
discussion of our compensation policies and executive compensation paid to
our
executive officers for the years ended September 30, 2005, 2006 and 2007,
respectively, please see our Annual report on Form 10-K for the year ended
September 30, 2007, as filed with the SEC on December 14, 2007, which is hereby
incorporated herein by reference. The discussion should be read in conjunction
with our Audited Condensed Consolidated Financial Statements and the notes
related thereto which appear in such filing.
In
connection with the Merger with vFinance, Messrs. Sokolow, Levin, Rich and
Groeneveld became executive officers or key employees of the Company. The follow
is a brief description of the employment terms of such individuals:
Employment
Agreements with Mark Goldwasser and Leonard J. Sokolow
In
connection with the Merger Agreement, on the Effective Date, each of Mark
Goldwasser and Leonard J. Sokolow entered into a five-year employment agreement
with the Company, pursuant to which Mr. Goldwasser is employed by the Company
as
Chairman of the board of directors and Chief Executive Officer and Mr. Sokolow
is employed by the Company as Vice Chairman and President. Under the terms
of
the employment agreement, Messrs. Goldwasser and Sokolow 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, they will each
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 the
Company of not less than: (i) $225,000, (ii) 5% of the Company’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 the Company may determine based upon the
Board’s assessment of their performance in the following areas: revenue growth
of the Company, new business development, investor relations, communications
with the board of directors and special projects as assigned by the board of
directors.
The
employment agreements terminate upon the earliest to occur of: (i) the death
of
the employee; (ii) a termination by the Company by reason of the disability
of
the employee; (iii) a termination by the Company with or without cause; (iv)
a
termination by the employee with or without good reason, (v) upon a Change
of
Control or (vi) the non-renewal of the agreement. Upon the termination due
to
the death or disability of the employee, by the Company without cause, by the
employee with good reason, upon a Change of Control or upon the expiration
of
the employment agreement if the Company or the employee refuses to extend the
term of the employment agreement, Messrs. Goldwasser and Sokolow will each
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 the Company 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 the employment agreements, Messrs. Goldwasser and Sokolow were each granted
non-qualified stock options to purchase 1,000,000 shares of the Company’s common
stock at a purchase price of $1.64 (equal to the average of the 10-day closing
market price of the Company’s Common Stock prior to the Effective Date of the
Merger). The options vest and become exercisable as to 25% of the shares
underlying the options on the Effective Date and 25% thereafter on the second,
third and fourth anniversaries of the date of grant. The options expire seven
years from the Effective Date.
Employment
Agreement with Alan B. Levin
In
accordance with the terms of the Merger Agreement, on the Effective Date Alan
B.
Levin, the Chief Financial Officer of vFinance, entered into a one-year
employment agreement with the Company, pursuant to which he is employed as
the
Chief Financial Officer. Under the terms of the agreement, Mr. Levin receives
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 the Company based upon its assessment of Mr. Levin’s
performance in the following areas: revenue, net income and revenue growth
of
the Company, new business development, investor relations, communications with
the board of directors and other factors including, without limitation, special
projects as assigned by the President or the board of directors of the Company.
Employment
of Messrs. Groeneveld and Rich
William
L. Groeneveld currently serves as President and Head Trader of vFinance
Investments and President of EquityStation. Jonathan
C. Rich currently serves as Executive Vice President and Director of Investment
Banking of vFinance Investments. Neither of Messrs. Groeneveld or Rich have
an
employment agreement with the Company.
SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The
following table sets forth certain information as of September 30, 2008 with
respect to each director, each of the named executive officers as defined in
Item 402(a) (3) of Regulation S-K and all directors and executive officers
of
the Company as a group, and to the persons known by us to be the beneficial
owner of more than five percent of any class of our voting securities.
NAME OF OFFICER, DIRECTOR,
STOCKHOLDER AND ADDRESS
|
|
NUMBER OF
SHARES OWNED
|
|
PERCENTAGE OF SHARES
OUTSTANDING (1)
|
|
|
|
|
|
|
|
Marshall
S. Geller
10866
Wilshire Boulevard, Suite, 1450
Los
Angeles, CA 90024
|
|
|
6,641,383
|
(2)
|
|
31.6
|
%
|
|
|
|
|
|
|
|
|
Mark
Goldwasser
120
Broadway, 27th
Floor
New
York, NY 10271
|
|
|
1,605,723
|
(3)
|
|
8.9
|
%
|
|
|
|
|
|
|
|
|
Leonard
J. Sokolow
3010
North Military Trail
Suite
300
Boca
Raton, FL 33431
|
|
|
1,251,621
|
(4)
|
|
7.4
|
%
|
|
|
|
|
|
|
|
|
Christopher
C. Dewey
120
Broadway, 27th
Floor
New
York, NY 10271
|
|
|
700,674
|
(5)
|
|
4.2
|
%
|
|
|
|
|
|
|
|
|
Charles
R. Modica
3010
North Military Trail
Suite
300
Boca
Raton, FL 33431
|
|
|
28,000
|
(6)
|
|
*
|
|
|
|
|
|
|
|
|
|
Jorge
A. Ortega
3010
North Military Trail
Suite
300
Boca
Raton, FL 33431
|
|
|
28,000
|
(6)
|
|
*
|
|
|
|
|
|
|
|
|
|
Robert
W. Lautz, Jr.
10866
Wilshire Boulevard, Suite 1450
Los
Angeles, CA 90024
|
|
|
0
|
|
|
*
|
|
|
|
|
|
|
|
|
|
Alan
B. Levin
3010
North Military Trail
Suite
300
Boca
Raton, FL 33431
|
|
|
176,400
|
(7)
|
|
1.1
|
%
|
|
|
|
|
|
|
|
|
Brian
Friedman
875
N. Michigan Ave
Suite
1560
Chicago,
IL 60611
|
|
|
167,500
|
(8)
|
|
1.0
|
%
|
NAME OF OFFICER, DIRECTOR,
STOCKHOLDER AND ADDRESS
|
|
NUMBER OF
SHARES OWNED
|
|
PERCENTAGE OF SHARES
OUTSTANDING
(1)
|
|
|
|
|
|
|
|
Jonathan
Rich
3010
North Military Trail
Suite
300
Boca
Raton, FL 33431
|
|
|
91,700
|
(9)
|
|
*
|
|
|
|
|
|
|
|
|
|
William
Groeneveld
3010
North Military Trail
Suite
300
Boca
Raton, FL 33431
|
|
|
72,232
|
(10)
|
|
*
|
|
|
|
|
|
|
|
|
|
Triage
Partners LLC
90
Park Avenue, 39th
Floor
New
York, NY 10016
|
|
|
1,055,534
|
(11)
|
|
6.1
|
%
|
|
|
|
|
|
|
|
|
Strategic
Turnaround Equity Partners, LP
c/o
Galloway Capital Management, LLC
720
Fifth Avenue, 10th
FL
New
York, NY 10019
|
|
|
880,625
|
(12)
|
|
5.4
|
%
|
|
|
|
|
|
|
|
|
Bedford
Oak Advisors, LLC
100
South Bedford Road
Mt.
Kisco, NY 10549
|
|
|
1,154,511
|
(13)
|
|
7.0
|
%
|
|
|
|
|
|
|
|
|
DellaCamera
Capital
200
Park Avenue
Suite
3300
New
York, NY 10166
|
|
|
951,742
|
(14)
|
|
5.7
|
%
|
|
|
|
|
|
|
|
|
Timothy
E. Mahoney
68
Cayman Place
Palm
Beach Gardens, FL
|
|
|
963,201
|
(15)
|
|
5.8
|
%
|
|
|
|
|
|
|
|
|
All
Officers and Directors as a group (11) persons
|
|
|
10,763,233
|
(16)
|
|
45.2
|
%
|
|
(1)
|
The
information regarding beneficial ownership of our common stock has
been
presented in accordance with the rules of the SEC. Under these rules,
a
person may be deemed to beneficially own any shares as to which such
person, directly or indirectly, has or shares voting power or investment
power and also any shares of common stock as to which such person
has the
right to acquire voting or investment power within 60 days through
the
exercise of any stock option or other right. The percentage of beneficial
ownership as to any person as of a particular date is calculated
by
dividing (a) (i) the number of shares beneficially owned by such
person
plus (ii) the number of shares as to which such person has the right
to
acquire voting or investment power within 60 days by (b) the total
number
of shares outstanding as of such date, plus any shares that such
person
has the right to acquire within 60 days. For purposes of calculating
the
beneficial ownership percentages set forth above, the total number
of
shares of our common stock deemed to be outstanding as of September
30,
2008 was 16,421,538. As used in this prospectus, "voting power" is
the
power to vote or direct the voting of shares and "investment power"
is the
power to dispose or direct the disposition of shares. Except as noted,
each stockholder listed has sole voting and investment power with
respect
to the shares shown as being beneficially owned by such
stockholder.
|
|
(2) |
Includes
(i) 317,500 shares issuable upon exercise of warrants owned indirectly
through St.
Cloud Capital Partners, L.P., (ii) 843,750
shares issuable upon exercise of warrants and 3,375,000 shares issuable
upon conversion of notes owned indirectly through St.
Cloud Capital Partners II, L.P. and (ii) 40,000 shares issuable
upon exercise
of
vested stock options.
Mr. Geller disclaims beneficial ownership of the securities owned
by
St.
Cloud Capital Partners, L.P. and St. Cloud Capital Partners II,
L.P.
|
|
(3) |
Includes
856,480 shares issuable upon conversion of 10,706 shares of Series
A
preferred stock owned indirectly through One Clark LLC, 20,425 shares
owned by direct family members and 670,750 shares issuable upon exercise
of vested stock options.
|
|
(4) |
Includes
(i) 31,110 shares held by or on behalf of Mr. Sokolow’s sons, (ii) 1,763
shares held by Mr. Sokolow and his wife as joint tenants and (iii)
425,000
shares issuable upon exercise
of
vested
stock options. Mr. Sokolow disclaims beneficial ownership of the
shares
held by his sons.
|
|
(5) |
Includes
25,000 shares owned by Mr. Dewey's daughters, 125,000 shares issuable
upon
exercise of warrants and 185,000 shares issuable upon exercise of
vested
stock options. Mr. Dewey disclaims beneficial ownership of the securities
owned by his daughters.
|
|
(6) |
Includes
28,000 shares issuable upon exercise
of
vested
stock options.
|
|
(7) |
Includes
165,900 shares issuable upon exercise
of
vested
stock options.
|
|
(8) |
Includes
157,500 shares issuable
upon exercise
of
vested stock options.
|
|
(9) |
Includes
91,700 shares issuable upon exercise
of
vested
stock options.
|
|
(10) |
Includes
65,232 shares issuable upon exercise
of
vested
stock options.
|
|
(11) |
Includes
856,560 shares issuable upon conversion of 10,707 shares of Series
A
preferred stock.
|
|
(12) |
Includes
shares owned directly and indirectly as provided in information filed
with
the SEC in a Schedule 13D/A dated September 12, 2007.
|
|
(13) |
Includes
shares owned directly and indirectly as provided in information filed
with
the SEC in a Schedule 13G filed February 15, 2008, and includes 62,500
shares issuable upon exercise of
warrants.
|
|
(14) |
Includes
shares owned directly and indirectly as provided in information filed
with
the SEC in a Schedule 13G filed on February 14, 2008, which includes
197,250 shares issuable upon conversion of 2,469 shares of Series
A
preferred stock.
|
|
(15) |
Includes
210,000 shares issuable upon exercise
of
vested
stock options and 304,500 shares of common stock issued in the name
of
Highland Group Holdings, Inc.
|
|
(16) |
Includes
856,480 shares issuable upon conversion of 10,706 shares of Series
A
Preferred Stock, 1,857,082 shares issuable upon exercise of vested
stock
options, 3,375,000 shares issuable upon conversion of convertible
notes
and 1,286,250 shares issuable upon exercise of
warrants.
|
As
of the
date of this prospectus, we are authorized to issue 50,000,000 shares of common
stock par value $0.02 per share, and 200,000 shares of preferred stock, par
value $0.01 per share, 50,000 of which have been designated as Series A
Convertible Preferred Stock and 20,000 of which have been designated as Series
B
Convertible Preferred Stock.
As
of the
date of this prospectus, we had 16,421,538 shares of common stock issued and
outstanding, and had reserved an additional (1) 1,979,373 shares of common
stock for issuance upon exercise of outstanding warrants, (2) 3,375,000
shares of common stock for issuance upon conversion of our 10% convertible
promissory notes, (3) 3,004,000 shares of common stock for issuance upon
conversion of our Series A Preferred Stock, (4) 2,000,000 shares of common
stock for issuance under options granted to Messrs. Goldwasser and Sokolow
in
connection with the Merger and (5) 5,037,640 shares of common stock for issuance
under our Stock Option Plans.
Voting
Rights.
Each
holder of shares of common stock shall be entitled to one vote for each share
of
such common stock held by such holder, and voting power with respect to all
classes of our securities shall be vested solely in the common stock. Under
our
By-laws, the holders of a majority of the voting power of our issued and
outstanding stock entitled to vote thereat, present in person or represented
by
proxy, shall constitute a quorum for the transaction of business at all meetings
of stockholders, except as otherwise provided by statute or by our certificate
of incorporation. When a quorum is present at any meeting, the vote of the
holders of a majority of the voting power of our issued and outstanding stock
entitled to vote thereon, present in person or represented by proxy, shall
decide any questions brought before such meeting, unless the question is one
upon which by express provision of statute or of the certificate of
incorporation or of the By-laws, a different vote is required, in which case
such express provision shall govern and control the decision of such
question.
Special
Meetings of Stockholders.
A
special meeting of stockholders may be called at any time by the Board of
Directors or the Chairman of the Board, if one shall have been elected, or
the
President and shall be called by the Secretary upon the request in writing
of a
stockholder or stockholders holding of record at least 33-1/3 % of the voting
power of our issued and outstanding shares of stock entitled to vote at such
meeting.
Stockholder
action by written consent.
Our
certificate of incorporation provides that any action required to be taken
at
any annual or special meeting of the holders of common stock, may be taken
by
written consent without a meeting, provided that such written consent is signed
by the holders of all of the outstanding shares of common stock.
Dividends.
Subject
to the dividend rights of the outstanding shares of issued and outstanding
preferred stock, holders of common stock are entitled to receive dividends,
when, as and if declared by the Board of Directors out of assets lawfully
available for such purposes. No dividends shall be paid on any shares of common
stock unless the same dividend is paid on all shares of common stock outstanding
at the time of such payment.
Rights
upon Liquidation, Dissolution or Winding Up.
In the
event of any distribution of assets upon liquidation, dissolution or winding
up
of our affairs, holders of common stock will be entitled to share ratably and
equally all of our assets and funds remaining after payment to the holders
of
our preferred stock of the specific amounts which they are entitled to receive
upon such liquidation, dissolution or winding up of the Corporation as herein
provided.
Other
Rights.
Holders
of common stock have no subscription, redemption or conversion rights, nor
do
they have any preemptive or other rights to acquire or subscribe for additional,
unissued or treasury shares. Accordingly, if we were to elect to sell additional
shares of common stock, persons acquiring common stock in this offering would
have no right to purchase additional shares and, as a result, their percentage
equity interest in National would be reduced.
Certain
Provisions of Delaware Law and Our Certificate of Incorporation and By-Laws
A
number
of provisions of our certificate of incorporation and By-laws concern matters
of
corporate governance and the rights of stockholders. Certain of these
provisions, as well as the ability of our Board of Directors to issue shares
of
preferred stock and to set the voting rights, preferences and other terms
thereof, may be deemed to have an anti-takeover effect and may discourage
takeover attempts not first approved by the Board of Directors (including
takeovers which certain stockholders may deemed to be in their best interests).
To the extent takeover attempts are discouraged, temporary fluctuations in
the
market price of the common stock, which may result from actual or rumored
takeover attempts, may be inhibited. These provisions, together with the ability
of our Board to issue preferred stock without further stockholder action, also
could delay or frustrate the removal of incumbent directors or the assumption
of
control by stockholders, even if such removal or assumption would be beneficial
to stockholders. These provisions also could discourage or make more difficult
a
merger, tender offer or proxy contests, even if they could be favorable to
the
interests of stockholders, and could potentially depress the market price of
the
common stock. The Board of Directors believes these provisions are appropriate
to protect the interests of National and all of its stockholders.
Number
of Directors; Filling Vacancies. Our
certificate of incorporation and By-laws provide that the number of directors
constituting the board of directors will be determined by the affirmative vote
of the entire Board of Directors or by action of our stockholders. Any vacancy
occurring in the board of directors, including any vacancy created by reason
of
an increase in the number of directors, shall be filled for the unexpired term
by the concurring vote of a majority of the directors then in office, whether
or
not a quorum, or by the sole remaining director or by the stockholders at the
next annual meeting thereof or at a special meeting thereof. Each director
so
elected shall hold office for the remainder of the full term of the class of
directors in which the new directorship was created or the vacancy occurred
and
until such director’s successor shall have been elected and qualified.
Classification
of Directors.
Our
By-laws provide that the directors shall be classified in respect to the time
for which they shall severally hold office, by dividing them into three classes.
The number of directors in each class shall be as nearly equal as possible.
At
each annual election, any vacancy in any class of directors may be filled and
successors to the class of directors whose terms shall expire that year shall
be
elected to hold office for a term of three years, so that the term of office
of
one class of directors shall expire in each year. In the event the number of
directors is increased, election may be made to a class of directors with terms
expiring in three years or less in order to maintain proportionate equality
between the classes. Any decrease in the number of directors shall be effective
at the time of the next succeeding annual meeting of stockholders unless there
are vacancies in the board of directors, in which case such decrease may become
effective at any time prior to the next succeeding annual meeting to the extent
of the number of such vacancies. Each director shall hold office until the
expiration of the term for which he is elected and until his successor has
been
elected and qualified, or until his prior resignation or removal.
Amendments
to By-laws.
Our
By-laws provide that they may be amended or repealed or new by-laws may be
adopted by action of the stockholders entitled to vote thereon at any annual
or
special meeting of stockholders or by action of the Board of Directors at a
regular or special meeting thereof.
Section 203
of the DGCL. We
are
subject to Section 203 of the Delaware General Corporation Law. Under this
provision, we may not engage in any business combination with any interested
stockholder for a period of three years following the date the stockholder
became an interested stockholder, unless:
|
·
|
prior
to such time our board of directors approved either the business
combination or the transaction which resulted in the stockholder
becoming
an interested stockholder;
|
|
·
|
upon
consummation of the transaction which resulted in the stockholder
becoming
an interested stockholder, the interested stockholder owned at least
85%
of our voting stock outstanding at the time the transaction commenced,
excluding for purposes of determining the voting stock outstanding
(but
not the outstanding voting stock owned by the interested stockholder)
those shares owned (i) by persons who are directors and also officers
and
(ii) employee stock plans in which employee participants do not have
the
right to determine confidentially whether shares held subject to
the plan
will be tendered in a tender or exchange offer;
or
|
|
·
|
at
or subsequent to such time the business combination is approved by
the
board of directors and authorized at an annual or special meeting
of
stockholders, and not by written consent, by the affirmative vote
of at
least 66 2/3% of the outstanding voting stock which is not owned
by the
interested stockholder.
|
Section 203
defines “business combination” to include the following:
|
·
|
any
sale, transfer, pledge or other disposition of 10% or more of the
assets
of the corporation involving the interested stockholder;
|
|
·
|
subject
to some exceptions, any transaction that results in the issuance
or
transfer by the corporation of any stock of the corporation to the
interested stockholder;
|
|
·
|
any
transaction involving the corporation that has the effect of increasing
the proportionate share of the stock of any class or series of the
corporation beneficially owned by the interested stockholder; or
|
|
·
|
the
receipt by the interested stockholder of the benefit of any loans,
advances, guarantees, pledges or other financial benefits provided
by or
through the corporation.
|
In
general, Section 203 defines an “interested stockholder” as any entity or
person beneficially owning 15% or more of the outstanding voting stock of the
corporation and any entity or person affiliated with or controlling or
controlled by the entity or person.
Our
common stock is issued in registered form, and our transfer agent is
Computershare Trust Company, Inc., 350 Indiana Street, Suite 800, Golden,
Colorado 80401.
The
validity of the issuance of the common stock offered by this prospectus has
been
passed upon for us by Littman Krooks LLP, 655 Third Avenue, New York, New York
10017.
EXPERTS
Our
consolidated financial statements as of and for the years ended September 30,
2007, 2006 and 2005 incorporated into this prospectus by reference to our 2007
Annual Report on Form 10-K have been so incorporated in reliance on the report
of Marcum & Kliegman LLP, a registered independent public accounting firm,
given upon the authority of such firm as experts in accounting and
auditing.
vFinance’s
consolidated
financial statements as of and for the three years ended December 31, 2007,
have
been included in the registration statement of which this prospectus is a part
in reliance upon the report of Sherb & Co., LLP, an independent registered
public accounting firm, and upon the authority of said firm as experts in
accounting and auditing.
WHERE
YOU CAN FIND MORE INFORMATION
We
have
filed with the SEC, a registration statement on Form S-1, of which this
prospectus is a part, under the Securities Act with respect to the common stock
offered hereby. This prospectus does not contain all of the information included
in the registration statement. Statements in this prospectus concerning the
provisions of any document are not necessarily complete. You should refer to
the
copies of the documents filed as exhibits to the registration statement or
otherwise filed by us with the SEC for a more complete understanding of the
matter involved. Each statement concerning these documents is qualified in
its
entirety by such reference.
We
are
subject to the informational requirements of the Exchange Act, and, accordingly,
file reports, proxy statements and other information with the SEC. The SEC
maintains a web site at http://www.sec.gov
that
contains reports and information statements and other information regarding
registrants that file electronically with the SEC. You may read and copy the
registration statement, these reports and other information at the public
reference facility maintained by the SEC at the SEC’s Public Reference Room at
100 F Street, N.E., Washington, DC 20549. You may obtain information on the
operation of the public reference room by calling the SEC at 1-800-SEC-0330.
You
may
read and copy our SEC reports, proxy statements and other information at the
American Stock Exchange at 86 Trinity Place, New York, New York 10006.
INCORPORATION
BY REFERENCE
The
SEC
allows us to “incorporate by reference” in this prospectus the information that
we file with them. This means that we can disclose important information to
you
in this document by referring you to other filings we have made with the SEC.
The information incorporated by reference is considered to be part of this
prospectus, and later information we file with the SEC will update and supersede
this information. We incorporate by reference the documents listed below and
any
future filings made with the SEC under Section 13(a), 13(c), 14 or 15(d) of
the Exchange Act prior to the completion of the offering covered by this
prospectus:
|
· |
our
Annual Report on Form 10-K for our fiscal year ended September 30,
2007,
filed with the SEC on December 12, 2007;
|
|
· |
our
Quarterly Reports on Form 10-Q for our fiscal quarters ended December
31,
2007, March 31, 2008 and June 30, 2008, filed with the SEC on February
13,
2008, May 15, 2008 and August 13, 2008, respectively;
|
|
· |
our
Current Reports on Form 8-K filed with the SEC on November
8, 2007, April 2, 2008, April 16, 2008, June 17, 2008 and July 2,
2008,
and our amended Current Report on Form 8-K/A filed with the SEC on
September 12, 2008; and
|
|
· |
our
Definitive Proxy Statement on Schedule 14A filed with the SEC on
January 24, 2008.
|
This
prospectus may contain information that updates, modifies or is contrary to
information in one or more of the documents incorporated by reference in this
prospectus. You should rely only on the information incorporated by reference
or
provided in this prospectus. We have not authorized anyone else to provide
you
with different information. You should not assume that the information in this
prospectus is accurate as of any date other than the date of this prospectus
or
the date of the documents incorporated by reference in this prospectus.
Upon
your
written or oral request, we will provide at no cost to you a copy of any and
all
of the information that is incorporated by reference in this prospectus.
Requests
for such documents should be directed to:
Robert
H.
Daskal
Vice
President Finance
National
Holdings Corporation
875
North
Michigan Avenue, Suite 1560
Chicago,
Illinois 60611
Telephone:
(312)
751-8833
You
may
also access the documents incorporated by reference in this prospectus through
our website www.nationalsecurities.com
. Except
for the specific incorporated documents listed above, no information available
on or through our website shall be deemed to be incorporated in this prospectus
or the registration statement of which it forms a part.
FINANCIAL
STATEMENTS
Index
to Financial Statements of vFinance,
Inc.
vFinance,
Inc. and Subsidiaries
|
|
|
Unaudited
Interim Consolidated Financial Statements:
|
|
|
Condensed
Balance Sheet as of June 30, 2008 and December 31, 2007
|
|
F-2
|
Condensed
Consolidated Statements of Operations for the Three and Six Months
Ended
June 30, 2008 and 2007
|
|
F-3
|
Condensed
Consolidated Statements of Cash Flows for the Six Months Ended June
30,
2008 and 2007 (Restated and Revised)
|
|
F-4
|
Notes
to Condensed Consolidated Financial Statements
|
|
F-5
|
Annual
Financial Statements:
|
|
|
Report
of Independent Auditors
|
|
F-6
|
Consolidated
Statements of Financial Condition as of December 31, 2007 and 2006
(Restated)
|
|
F-7
|
Consolidated
Statements of Operations for the Years Ended December 31, 2005
(Restated), 2006 (Restated) and 2007
|
|
F-8
|
Consolidated
Statements of Shareholder’s Equity for the Years Ended
December 31, 2005 (Restated), 2006 (Restated), and
2007
|
|
F-9
|
Consolidated
Statements of Cash Flows for the Years Ended December 31, 2005
(Restated), 2006 (Restated), and 2007 (Restated)
|
|
F-10
|
Notes
to Financial Statements
|
|
F-11
|
VFINANCE,
INC.
CONSOLIDATED
BALANCE SHEET
|
|
Actual
|
|
Actual
|
|
|
|
June 30, 2008
|
|
December 31, 2007
|
|
|
|
(unreviewed)
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
Current
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
4,426,000
|
|
$
|
5,454,000
|
|
Due
from clearing broker
|
|
|
991,000
|
|
|
631,000
|
|
Marketable
Investment Securities
|
|
|
|
|
|
|
|
Trading
securities
|
|
|
75,000
|
|
|
817,000
|
|
Available-for-sale
securities
|
|
|
56,000
|
|
|
452,000
|
|
Accounts
receivable, net of allowance for doubtful accounts
|
|
|
132,000
|
|
|
156,000
|
|
Forgivable
loans - employees, current portion
|
|
|
8,000
|
|
|
27,000
|
|
Notes
receivable - employees, net of allowance for doubtful
accounts
|
|
|
3,000
|
|
|
8,000
|
|
Prepaid
expenses and other current assets
|
|
|
206,000
|
|
|
156,000
|
|
Total
Current Assets
|
|
|
5,897,000
|
|
|
7,701,000
|
|
|
|
|
|
|
|
|
|
Property
and equipment, net
|
|
|
768,000
|
|
|
801,000
|
|
|
|
|
|
|
|
|
|
Customer
relationships, net
|
|
|
2,874,000
|
|
|
3,288,000
|
|
Other
Assets
|
|
|
651,000
|
|
|
580,000
|
|
Total
Assets
|
|
$
|
10,190,000
|
|
$
|
12,370,000
|
|
|
|
|
|
|
|
|
|
Liabilities
and Shareholders' Equity:
|
|
|
|
|
|
|
|
Current
Liabilities:
|
|
|
|
|
|
|
|
Accounts
payable
|
|
$
|
813,000
|
|
$
|
694,000
|
|
Accrued
compensation
|
|
|
2,522,000
|
|
|
3,306,000
|
|
Comm.
payable tri-party
|
|
|
239,000
|
|
|
0
|
|
Other
accrued liabilities
|
|
|
2,193,000
|
|
|
1,548,000
|
|
Securities
sold, not yet purchased
|
|
|
1,000
|
|
|
177,000
|
|
Capital
lease obligations, current portion
|
|
|
234,000
|
|
|
247,000
|
|
Other
|
|
|
257,000
|
|
|
273,000
|
|
Total
Current Liabilities
|
|
|
6,259,000
|
|
|
6,245,000
|
|
|
|
|
|
|
|
|
|
Capital
lease obligations, long term
|
|
|
247,000
|
|
|
298,000
|
|
|
|
|
|
|
|
|
|
Shareholders'
Equity:
|
|
|
|
|
|
|
|
Common
stock $0.01 par value, 100,000,000 shares authorized
|
|
|
556,000
|
|
|
548,000
|
|
Additional
paid-in-capital on common stock
|
|
|
32,475,000
|
|
|
31,668,000
|
|
Accumulated
deficit
|
|
|
(29,347,000
|
)
|
|
(26,389,000
|
)
|
Total
shareholders' equity
|
|
|
3,684,000
|
|
|
5,827,000
|
|
Total
liabilities and shareholders' equity
|
|
$
|
10,190,000
|
|
$
|
12,370,000
|
|
VFINANCE,
INC AND SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS
(In
thousands, except per share data)
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
|
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commissions
|
|
$
|
7,233,000
|
|
$
|
6,877,000
|
|
$
|
13,177,000
|
|
$
|
12,553,000
|
|
Net
dealer inventory gains
|
|
|
2,716,000
|
|
|
3,239,000
|
|
|
5,756,000
|
|
|
6,835,000
|
|
Investment
banking
|
|
|
1,253,000
|
|
|
697,000
|
|
|
2,101,000
|
|
|
2,134,000
|
|
Total
commission and fee revenue
|
|
|
11,202,000
|
|
|
10,813,000
|
|
|
21,034,000
|
|
|
21,522,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
and dividends
|
|
|
127,000
|
|
|
144,000
|
|
|
338,000
|
|
|
297,000
|
|
Transfer
fees and clearing services
|
|
|
1,228,000
|
|
|
1,923,000
|
|
|
2,284,000
|
|
|
2,970,000
|
|
Other
|
|
|
207,000
|
|
|
216,000
|
|
|
697,000
|
|
|
365,000
|
|
Total
revenues
|
|
|
12,764,000
|
|
|
13,096,000
|
|
|
24,353,000
|
|
|
25,154,000
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commissions
and fees
|
|
|
8,789,000
|
|
|
8,804,000
|
|
|
17,062,000
|
|
|
17,017,000
|
|
Employee
compensation and related expenses
|
|
|
1,886,000
|
|
|
1,446,000
|
|
|
3,234,000
|
|
|
2,896,000
|
|
Clearing
fees
|
|
|
734,000
|
|
|
789,000
|
|
|
1,424,000
|
|
|
1,493,000
|
|
Communications
|
|
|
138,000
|
|
|
128,000
|
|
|
283,000
|
|
|
251,000
|
|
Occupancy
and equipment costs
|
|
|
495,000
|
|
|
380,000
|
|
|
906,000
|
|
|
713,000
|
|
Professional
fees
|
|
|
407,000
|
|
|
681,000
|
|
|
733,000
|
|
|
1,000,000
|
|
Litigation
settlement
|
|
|
33,000
|
|
|
300,000
|
|
|
123,000
|
|
|
314,000
|
|
Interest
|
|
|
18,000
|
|
|
18,000
|
|
|
48,000
|
|
|
36,000
|
|
Taxes,
licenses & registration
|
|
|
82,000
|
|
|
75,000
|
|
|
155,000
|
|
|
137,000
|
|
Other
administrative expenses
|
|
|
2,520,000
|
|
|
720,000
|
|
|
3,343,000
|
|
|
1,483,000
|
|
Total
expenses
|
|
|
15,102,000
|
|
|
13,341,000
|
|
|
27,311,000
|
|
|
25,340,000
|
|
Net
income (loss) from operations
|
|
$ |
(2,338,000
|
)
|
$ |
(245,000
|
)
|
$ |
(2,958,000
|
)
|
$ |
(186,000
|
)
|
VFINANCE,
INC AND SUBSIDIARIES
UNAUDITED
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
|
|
|
|
|
|
Six Months Ended June 30,
|
|
|
|
2008
|
|
2007 (Restated
and Revised)
|
|
|
|
|
|
|
|
CASH
PROVIDED BY (USED IN) OPERATING ACTIVITIES:
|
|
|
|
|
|
|
|
Net
income (loss)
|
|
|
(2,958,000
|
)
|
|
(186,000
|
)
|
Adjustments
to reconcile net income (loss) to net
cash provided by (used in) operating activities:
|
|
|
|
|
|
|
|
Non-cash
fees received
|
|
|
(587,000
|
)
|
|
(681,000
|
)
|
Non-cash
compensation paid
|
|
|
391,000
|
|
|
488,000
|
|
Depreciation
and amortization
|
|
|
646,000
|
|
|
639,000
|
|
Stock-based
compensation
|
|
|
691,000
|
|
|
230,000
|
|
Provision
for doubtful accounts
|
|
|
-
|
|
|
-
|
|
Amounts
forgiven under forgivable loans
|
|
|
14,000
|
|
|
37,000
|
|
Changes
in operating assets and liabilities:
|
|
|
|
|
|
|
|
(Increase)
decrease in:
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
23,000
|
|
|
(805,000
|
)
|
Forgivable
loans
|
|
|
5,000
|
|
|
(30,000
|
)
|
Due
from clearing broker
|
|
|
(360,000
|
)
|
|
(1,153,000
|
)
|
Notes
receivable - employees
|
|
|
6,000
|
|
|
76,000
|
|
Investments
in marketable securities
|
|
|
742,000
|
|
|
(1,638,000
|
)
|
Investments
in not readily marketable securities
|
|
|
555,000
|
|
|
-
|
|
Other
current assets
|
|
|
(50,000
|
)
|
|
61,000
|
|
Other
assets and liabilities, net
|
|
|
1,849,000
|
|
|
1,442,000
|
|
Increase
(decrease) in:
|
|
|
|
|
|
|
|
Accounts
payable and accrued liabilities
|
|
|
(1,682,000
|
)
|
|
1,677,000
|
|
Securities
sold, not yet purchased
|
|
|
(176,000
|
)
|
|
841,000
|
|
|
|
|
|
|
|
|
|
Cash
provided by (used in) operating activities
|
|
|
(891,000
|
)
|
|
998,000
|
|
|
|
|
|
|
|
|
|
CASH
USED IN INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
Proceeds
from sales of investments
|
|
|
-
|
|
|
47,000
|
|
Purchase
of property and equipment
|
|
|
89,000
|
|
|
(53,000
|
)
|
|
|
|
|
|
|
|
|
Cash
used in investing activities
|
|
|
89,000
|
|
|
(6,000
|
)
|
|
|
|
|
|
|
|
|
CASH
PROVIDED BY (USED IN) FINANCING ACTIVTIES:
|
|
|
|
|
|
|
|
Repayments
of capital lease obligations
|
|
|
(351,000
|
)
|
|
(126,000
|
)
|
Proceeds
from exercises of warrants
|
|
|
125,000
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Cash
used in financing activities
|
|
|
(226,000
|
)
|
|
(126,000
|
)
|
|
|
|
|
|
|
|
|
Increase
(decrease) in cash and cash equivalents
|
|
|
(1,028,000
|
)
|
|
866,000
|
|
Cash
and cash equivalents at beginning of period
|
|
|
5,454,000
|
|
|
4,205,000
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents at end of period
|
|
|
4,426,000
|
|
|
5,071,000
|
|
VFINANCE,
INC. AND SUBSIDIARIES
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1.
DESCRIPTION
OF BUSINESS AND BASIS OF PRESENTATION
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").
The
unaudited condensed consolidated financial statements include the accounts
of
the Company and its wholly-owned subsidiaries. All intercompany accounts
have
been eliminated in consolidation.
The
unaudited condensed consolidated financial statements have been prepared
in
accordance with generally accepted accounting principles for interim financial
information. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation
have
been included. The results of operations for the three month period ended
March
31, 2008 are not necessarily indicative of the results to be expected for
the
year ended December 31, 2008. The interim financial statements should be
read in
connection with the audited financial statements and footnotes contained
in the
Company's Annual Report on Form 10-K for the year ended December 31,
2007.
Reclassifications
Certain
items in the 2007 unaudited condensed consolidated financial statements have
been reclassified to conform to the presentation in the 2008 unaudited condensed
consolidated financial statements. Such reclassifications did not have a
material impact on the presentation of the overall financial
statements.
Use
of Estimates
The
preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements
and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from these estimates.
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
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.
CONSOLIDATED
STATEMENTS OF OPERATIONS
For
the Years Ended December 31,
(In
Thousands, Except per Share Data)
|
|
2007
|
|
2006
|
|
2005
|
|
|
|
|
|
(Restated)
|
|
(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: basic and diluted
|
|
|
54,805.2
|
|
|
48,714.8
|
|
|
40,049.7
|
|
The
accompanying notes are an integral component of these financial
statements.
CONSOLIDATED
STATEMENTS OF SHAREHOLDERS’ EQUITY
For
the Years Ended December 31, 2007, 2006 and 2005
(In
Thousands)
|
|
Common
Stock
Holders
|
|
Common
Stock
Amount
|
|
Additional
Paid-In
Capital
|
|
Deferred
Compensation
|
|
Accumulated
Deficit
|
|
Total
Shareholders’
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.
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.
vFINANCE,
INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(All
Tables in Thousands, Except per Share Data)
1.
Summary of Significant Accounting Policies
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.
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.
vFINANCE,
INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(All
Tables in Thousands, Except per Share Data)
1.
Summary of Significant Accounting Policies
- (continued)
The
net
effect of the restatements on the beginning accumulated deficit, accumulated
other comprehensive income and total shareholders’ equity are as
follows:
|
|
Begining
Equity - December 31, 2004
|
|
|
|
As
Reported
December
31, 2006
Form
10-K
|
|
Effect
of Restatement
|
|
Restated
|
|
|
|
|
|
2004
|
|
2003
|
|
2002
|
|
Cumulative
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
|
|
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
Form
10-K
|
|
Effect
of 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
Form
10-K
|
|
Effect
of 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.
vFINANCE,
INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(All
Tables in Thousands, Except per Share Data)
1.
Summary of Significant Accounting Policies
- (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.
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.
vFINANCE,
INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(All
Tables in Thousands, Except per Share Data)
1.
Summary of Significant Accounting Policies
- (continued)
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.
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.
vFINANCE,
INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(All
Tables in Thousands, Except per Share Data)
1.
Summary of Significant Accounting Policies
- (continued)
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.
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.
vFINANCE,
INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(All
Tables in Thousands, Except per Share Data)
1.
Summary of Significant Accounting Policies
- (continued)
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.
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.
vFINANCE,
INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(All
Tables in Thousands, Except per Share Data)
1.
Summary of Significant Accounting Policies
- (continued)
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%
|
|
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.
vFINANCE,
INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(All
Tables in Thousands, Except per Share Data)
1.
Summary of Significant Accounting Policies
- (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.
vFINANCE,
INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(All
Tables in Thousands, Except per Share Data)
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.
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.
vFINANCE,
INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(All
Tables in Thousands, Except per Share Data)
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.
Pro
Forma Financial Information
The
following unaudited Pro Forma Combined Financial Statements of Sterling
and
vFinance gives effect to the acquisition of certain assets of Sterling
Financial, as though the transactions occurred as of January 1, 2005.
This
unaudited pro forma information is presented for informational purposes,
based
upon available data and assumptions that management believes are reasonable,
and
is not necessarily indicative of future results:
|
|
2006
|
|
|
|
vFinance
|
|
Sterling
|
|
Adjustments
|
|
Pro
Forma
|
|
|
|
(Restated)
|
|
|
|
|
|
|
|
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
|
|
Sterling
|
|
Adjustments
|
|
Pro
Forma
|
|
|
|
(Restated)
|
|
|
|
|
|
|
|
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
|
|
vFINANCE,
INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(All
Tables in Thousands, Except per Share Data)
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
|
|
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.
vFINANCE,
INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(All
Tables in Thousands, Except per Share Data)
7.
Related Party Transactions - (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’s 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.
vFINANCE,
INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(All
Tables in Thousands, Except per Share Data)
8.
Shareholders’ Equity - (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:
|
|
Number
of
Shares
|
|
Weighted
Average
Exercise
Price
|
|
Range
of
Exercise
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:
Exercise
Prices
|
|
Number
Outstanding
|
|
Weighted
Average
Remaining
Contractual
Life
|
|
Weighted
Average
Exercise
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
|
|
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.
vFINANCE,
INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(All
Tables in Thousands, Except per Share Data)
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:
|
|
Shares
|
|
Weighted
Average
Exercise
Price
|
|
Weighted
Average
Remaining
Contractual
Terms
(Years)
|
|
Aggregate
Intrinsic
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
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
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
|
|
vFINANCE,
INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(All
Tables in Thousands, Except per Share Data)
9.
Stock Options - (continued)
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.
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
|
|
vFINANCE,
INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(All
Tables in Thousands, Except per Share Data)
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)
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
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.
vFINANCE,
INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(All
Tables in Thousands, Except per Share Data)
12.
Income Taxes - (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.
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
|
|
vFINANCE,
INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(All
Tables in Thousands, Except per Share Data)
13.
Commitments and Contingencies - (continued)
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.
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.
vFINANCE,
INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(All
Tables in Thousands, Except per Share Data)
13.
Commitments and Contingencies - (continued)
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.
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.
vFINANCE,
INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(All
Tables in Thousands, Except per Share Data)
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
|
|
$
|
—
|
|
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.
vFINANCE,
INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(All
Tables in Thousands, Except per Share Data)
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
Ended
March
31,
2007
|
|
Three
Months
Ended
June
30,
2007
|
|
Three
Months
Ended
September
30, 2007
|
|
Three
Months
Ended
December
31, 2007
|
|
|
|
(Unaudited)
|
|
(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
|
|
vFINANCE,
INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(All
Tables in Thousands, Except per Share Data)
16.
Quarterly Financial Data - (continued)
|
|
Three
Months Ended March 31, 2006
|
|
Three
Months Ended June 30,
2006
|
|
Three
Months Ended
September
30, 2006
|
|
Three
Months Ended
December
31, 2006
|
|
|
|
(Unaudited)
|
|
(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.
|
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.
vFINANCE,
INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(All
Tables in Thousands, Except per Share Data)
17.
Subsequent Events - (continued)
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.
12,716,185 Shares
Common
Stock
NATIONAL
HOLDINGS
CORPORATION
National
Holdings Corporation
PROSPECTUS
October
3, 2008
PART
II
INFORMATION
NOT REQUIRED IN THE PROSPECTUS
Item 13.
Other Expenses of Issuance and Distribution.
Set
forth
below are the expenses expected to be incurred in connection with the issuance
and distribution of the securities registered hereby. With the exception of
the
Securities and Exchange Commission registration fee, the amounts set forth
below
are estimates.
|
|
Amount
|
|
SEC
Registration Fee
|
|
$
|
479
|
|
Printing
Expenses
|
|
|
2,500
|
|
Accounting
Fees and Expenses
|
|
|
5,000
|
|
Legal
Fees and Expenses
|
|
|
15,000
|
|
Miscellaneous
|
|
|
2,021
|
|
Total
|
|
$
|
25,000
|
|
All
of
the above fees are estimates. All of the above expenses will be borne by the
Registrant.
Item 14.
Indemnification of Directors and Officers.
Section
145(a) of the DGCL provides in relevant part that “[a] corporation shall have
the power to indemnify any person who was or is a party or is threatened to
be
made a party to any threatened, pending or completed action, suit or proceeding,
whether civil, criminal, administrative or investigative (other than an action
by or in the right of the corporation) by reason of the fact that the person
is
or was a director, officer, employee or agent of the corporation, or is or
was
serving at the request of the corporation as a director, officer, employee
or
agent of another corporation, partnership, joint venture, trust or other
enterprise, against expenses (including attorneys’ fees), judgments, fines and
amounts paid in settlement actually and reasonably incurred by the person in
connection with such action, suit or proceeding if the person acted in good
faith and in a manner the person reasonably believed to be in or not opposed
to
the best interests of the corporation, and, with respect to any criminal action
or proceeding, had no reasonable cause to believe the person’s conduct was
unlawful.” With respect to derivative actions, Section 145(b) of the DGCL
provides in relevant part that “[a] corporation shall have the power to
indemnify any person who was or is a party or is threatened to be made a party
to any threatened, pending or completed action or suit by or in the right of
the
corporation to procure a judgment in its favor . . . [by reason of the person’s
service in one of the capacities specified in the preceding sentence] against
expenses (including attorneys’ fees) actually and reasonably incurred by the
person in connection with the defense or settlement of such action or suit
if he
acted in good faith and in a manner the person reasonably believed to be in
or
not opposed to the best interest of the corporation except that no
indemnification shall be made in respect of any claim, issue or matter as to
which such person shall have been adjudged to be liable to the corporation
unless and only to the extent that the Court of Chancery or the court in which
such action or suit was brought shall determine upon application that, despite
the adjudication of liability but in view of all the circumstances of the case,
such person is fairly and reasonably entitled to indemnity for such expenses
which the Court of Chancery or such other court shall deem proper.”
Our
Certificate of Incorporation, as amended, includes a provision that eliminates
the personal liability of our directors for monetary damages for breach of
fiduciary duty to the full extent permitted by Delaware law.
Our
Amended and Restated By-laws provide that the Company is required
to
indemnify and hold harmless its
directors, officers, employees and agents in any threatened, pending or
completed action, suit or proceeding, whether
civil, criminal, administrative or investigative
(other
than an action by or in the right of the Company) by reason of any action
alleged to have been taken or omitted in such capacity, against costs, charges,
expenses (including attorneys' fees), judgments, fines and amounts paid in
settlement actually and reasonably incurred in connection with such action,
suit
or proceeding and any appeal therefrom, if the party being indemnified acted
in
good faith and in a manner such party reasonably believed to be in or not
opposed to the best interests of the Company, and, with respect to any criminal
action or proceeding, had no reasonable cause to believe such party’s conduct
was unlawful. In proceedings by or in the right of the Company, a party seeking
to be indemnified may be indemnified if the above standards of conduct are
met
and to the extent as set forth above, however, if a court judges a party seeking
to be indemnified liable to the corporation, no indemnification shall be
provided except to the extent that the court deems proper. To the extent that
a
director, officer, employee or agent of the Company has been successful on
the
merits or otherwise, including without limitation, the dismissal of an action
without prejudice, in defense of any action, suit or proceeding, or in defense
of any claim, issue or matter therein, such party shall be indemnified against
all costs, charges and expenses (including attorneys' fees) actually and
reasonably incurred in connection therewith.
We
maintain insurance on behalf of our officers and directors, insuring them
against liabilities that they may incur in such capacities or arising out of
this status.
The
above
discussion of the our Certificate of Incorporation, as amended, and Amended
and
Restated By-laws and of Section 145 of the Delaware General Corporation Law
is
not intended to be exhaustive and is respectively qualified in its entirety
by
such Certificate of Incorporation, as amended, Amended and Restated By-laws
and
statute.
Item 15.
Recent Sales of Unregistered Securities.
The
Company sold the securities described below during past three years from the
date hereof without being registered under the Securities Act of 1933, as
amended (the “Securities Act”):
In
January 2006, the Company consummated a private placement of its securities
to a
limited number of accredited investors. We issued an aggregate of 10,000 shares
of our newly created Series B Preferred Stock, which
were convertible into common stock at a price of $.75 per share, and
$1,000,000
in principal amount of five-year, 11% convertible promissory notes,
which
were convertible into common stock at a price of $1.00 per share.
The
noteholders received five-year warrants to purchase an aggregate of 300,000
shares of common stock at an exercise price of $1.00 per share. In June 2007,
pursuant to the mandatory conversion provisions of these notes, the Company
issued
1,024,413 shares of its common stock in full payment of the $1,000,000
convertible promissory notes, plus accrued interest.
In July
2007, the Company exercised
the conversion option contained in its Series B preferred
stock and issued
1,333,333 shares of its common stock for the retirement of the
Series B
preferred stock.
In
March
2006, the Company consummated
a
private
placement of its securities to an accredited investor. We issued an aggregate
of
159,090 shares of our common stock, at a price of $1.10 per share.
On
February 22, 2007, the Company consummated a private placement of its securities
to a limited number of accredited investors. We sold to the Investors
10%
promissory notes in the aggregate principal amount of $1,000,000 and
warrants
to purchase an aggregate of 250,000 shares of our common stock at an exercise
price of $1.40. The securities were sold for a gross purchase price of $1.0
million. The Company also entered into a registration rights agreement in
connection with the private placement.
On
March
31, 2008, the Company consummated a private placement of its securities to
one
institutional investor. In connection with the private placement, we sold to
a
10%
senior
subordinated convertible promissory note in the principal amount of $3,000,000
and
a
warrant to purchase 375,000 shares of our common stock at an exercise price
of
$2.50 per share. The Company also entered into a registration rights agreement
in connection with the private placement.
On
June
30, 2008, the Company consummated a private placement of its securities to
one
institutional investor. In connection with the private placement, we sold to
a
10%
senior
subordinated convertible promissory note in the principal amount of $3,000,000
and
a
warrant to purchase 468,750 shares of our common stock, at an exercise price
of
$2.00. The Company also entered into a registration rights agreement in
connection with the private placement.
Item 16.
Exhibits.
The
following documents are filed as exhibits to this registration statement:
|
2.1
|
Agreement
and Plan of Merger, dated as of November 7, 2007 by and among National,
vFinance, Inc. and vFin Acquisition Corporation, previously filed
as
Exhibit 2.1 to the Company’s Current Report on Form 8-K dated November 8
2007 and hereby incorporated by reference.
|
|
2.2
|
Amendment
No. 1 to the Agreement and Plan of Merger, dated April 17, 2008 by
and
among National, vFinance, Inc. and vFin Acquisition Corporation,
previously filed as Exhibit 2.2 to the Company’s Registration Statement on
Form S-4 in April 2008 and hereby incorporated by
reference.
|
|
3.1
|
Certificate
of Incorporation, as amended, previously filed as Exhibit 3.5. to
Form
10-Q in May 2004 and hereby incorporated by reference.
|
|
3.2
|
The
Company’s Bylaws, as amended, previously filed as Exhibit 3.3 to Form 10-Q
in February 2002, and hereby incorporated by reference.
|
|
3.3
|
The
Company’s By-Laws, as amended and restated on December 12,
2001.
|
|
3.4
|
Certificate
of Designations, Preferences, and Relative Optional or Other Special
Rights of Preferred Stock and Qualifications, Limitations and Restrictions
Thereof of Series A Convertible Preferred Stock, as amended, previously
filed as Exhibit 3.6 to Form 10-Q in May 2004 and hereby incorporated
by
reference.
|
|
3.5
|
Certificate
of Designation of Series B Preferred Stock, filed with the Secretary
of
State of the State of Delaware on January 11, 2006, previously filed
as
Exhibit 3.5 to Form 8-K in January 2006 and hereby incorporated by
reference.
|
|
3.6
|
Certificate
of Amendment to the Certificate of Incorporation, filed with the
Secretary
of State of the State of Delaware on March 15, 2006 filed as Exhibit
3.6
to Form 10-Q in May 2006 and hereby incorporated by
reference.
|
|
3.7
|
Certificate
of Amendment to the Certificate of Designation of Series A Preferred
Stock, filed with the Secretary of State of the State of Delaware
on March
15, 2006 filed as Exhibit 3.7 to Form 10-Q in May 2006 and hereby
incorporated by reference.
|
|
3.8
|
Certificate
of Amendment to the Certificate of Incorporation, previously filed
as
Exhibit 3.8 to Amendment No. 1 to the Company’s Registration Statement on
Form S-4, dated May 6, 2008 and hereby incorporated by
reference.
|
|
4.1
|
Form
of Warrant, previously filed as Exhibit 4.1 to Form 8-K in January
2006
and hereby incorporated by reference.
|
|
4.2
|
Form
of Promissory Note, previously filed as Exhibit 4.2 to Form 8-K in
January
2006 and hereby incorporated by reference.
|
|
4.3
|
Amendment
No. 1 to 11% Convertible Promissory Note filed as Exhibit 4.3 to
Form 10-Q
in February 2007 and hereby incorporated by reference.
|
|
4.4
|
Form
of Warrant filed as Exhibit 4.4 to Form 8-K in February 2007 and
hereby
incorporated by reference.
|
|
4.5
|
Form
of 10% Promissory Note filed as Exhibit 4.5 to Form 8-K in February 2007
and hereby incorporated by reference.
|
|
4.6
|
Form
of Warrant filed as Exhibit 4.6 to Form 8-K in April 2008 and hereby
incorporated by reference.
|
|
4.7
|
Form
of 10% Senior Subordinated Convertible Promissory Note filed as Exhibit
4.7 to Form 8-K in April 2008 and hereby incorporated by
reference.
|
|
4.8
|
Warrant,
dated as of June 30, 2008, filed as Exhibit 4.8 to Form 8-K in July
2008
and hereby incorporated by reference.
|
|
4.9
|
10%
Senior Subordinated Convertible Promissory Note, dated June 30, 2008
filed
as Exhibit 4.9 to Form 8-K in July 2008 and hereby incorporated by
reference.
|
|
5.1***
|
Opinion
of Littman Krooks LLP as to the legality of the securities being
registered.
|
|
10.1
|
Office
lease, Chicago, Illinois, previously filed as Exhibit 10.27 to Form
10-K
in December 1996 and hereby incorporated by reference.
|
|
10.2
|
Amended
office lease, Chicago, Illinois, previously filed as Exhibit 10.29
to Form
10-K in December 1996 and hereby incorporated by
reference.
|
|
10.3
|
Office
lease, Seattle, Washington previously filed as Exhibit 10.20 to Form
10-K
in December 1999 and hereby incorporated by reference.
|
|
10.4
|
Office
lease, Seattle, Washington previously filed as Exhibit 10.20 to Form
10-K
in December 1999 and hereby incorporated by reference.
|
|
10.5
|
Form
of Note payable agreement dated January 2001, previously filed as
Exhibit
10.23 to Form 10-Q in May 2001 and hereby incorporated by
reference.
|
|
10.6
|
Secured
Demand Note dated February 2001, previously filed as Exhibit 10.24
to Form
10-Q in May 2001 and hereby incorporated by reference.
|
|
10.7
|
Loan
and security agreement dated January 2001, previously filed as Exhibit
10.25 to Form 10-Q in February 2001 and hereby incorporated by
reference.
|
|
10.8
|
2001
Stock Option Plan, previously included in the Proxy Statement-Schedule
14A
filed in January 2001 and hereby incorporated by
reference.
|
|
10.9
|
Audit
committee charter, previously filed as Exhibit 10.22 to Form 10-Q
in
August 2000 and hereby incorporated by reference.
|
|
10.10
|
Purchase
Agreement by and among Olympic Cascade Financial Corporation, Mark
Goldwasser and Triage Partners, LLC dated as of December 14, 2001,
previously filed as Exhibit 10.30 to Form 8-K in January 2002 and
hereby
incorporated by reference.
|
|
10.11
|
Stock
Purchase Agreement between Steven A. Rothstein, certain other persons
or
entities and Triage Partners, LLC dated as of December 14, 2001,
previously filed as Exhibit 10.31 to Form 8-K in January 2002 and
hereby
incorporated by reference.
|
|
10.12
|
Securities
Exchange Agreement by and among Olympic Cascade Financial Corporation,
Gregory P. Kusnick, Karen Jo Gustafson, Gregory C. Lowney and Maryanne
K.
Snyder dated as of December 14, 2001, previously filed as Exhibit
10.32 to
Form 8-K in January 2002 and hereby incorporated by
reference.
|
|
10.13
|
Form
of Warrant issued in December 2002.
|
|
10.14
|
Form
of Securities Purchase Agreement, previously filed as Exhibit 10.36
to
Form 8-K in February 2004 and hereby incorporated by
reference.
|
|
10.15
|
Form
of Note, previously filed as Exhibit 10.37 to Form 8-K in February
2004
and hereby incorporated by reference.
|
|
10.16
|
Form
of Warrant, previously filed as Exhibit 10.38 to Form 8-K in February
2004
and hereby incorporated by reference.
|
|
10.17
|
Form
of Registration Rights Agreement, previously filed as Exhibit 10.39
to
Form 8-K in February 2004 and hereby incorporated by
reference.
|
|
10.18
|
Clearing
Agreement previously filed as Exhibit 10.36 to Form 10-K in June
2004 and
hereby incorporated by reference.
|
|
10.19
|
Form
of Warrant issued in August 2004 filed as Exhibit 10.40 to Form 8-K
in
August 2004 and hereby incorporated by reference.
|
|
10.20
|
Form
of Registration Rights Agreement dated in August 2004 filed as Exhibit
10.41 to Form 8-K in August 2004 and hereby incorporated by
reference.
|
|
10.21
|
Severance
Agreement dated February 4, 2005 between Michael A. Bresner and National
Securities Corporation filed as Exhibit 10.43 to Form 8-K in February
2005
and hereby incorporated by reference.*
|
|
10.22
|
Securities
Purchase Agreement dated as of January 11, 2006 by and among Olympic
Cascade Financial Corporation and the investors set forth therein,
previously filed as Exhibit 10.48 to Form 8-K in January 2006 and
hereby
incorporated by reference.
|
|
10.23
|
Registration
Rights Agreement dated as of January 11, 2006 by and among Olympic
Cascade
Financial Corporation and the investors set forth therein, previously
filed as Exhibit 10.49 to Form 8-K in January 2006 and hereby incorporated
by reference.
|
|
10.24
|
Securities
Purchase Agreement dated as of March 17, 2006 filed as Exhibit 10.51
to
Form 10-Q in May 2006 and hereby incorporated by
reference.
|
|
10.25
|
Securities
Purchase Agreement, dated as of February 22, 2007 by and among National
Holdings Corporation and the investors set forth therein filed as
Exhibit
10.52 to Form 8-K in February 2007 and hereby incorporated by
reference.
|
|
10.26
|
Registration
Rights Agreement, dated as of February 22, 2007 by and among National
Holdings Corporation and the investors set forth therein filed as
Exhibit
10.53 to Form 8-K in February 2007 and hereby incorporated by
reference.
|
|
10.27
|
2006
Stock Option Plan, previously included in the Proxy Statement-Schedule
14A
filed in January 2006 and hereby incorporated by
reference.*
|
|
10.28
|
2008
Stock Option Plan, previously included in the Proxy Statement-Schedule
14A
filed in January 2008 and hereby incorporated by
reference.*
|
|
10.29
|
Securities
Purchase Agreement, dated as of March 31, 2008 by and among National
Holdings Corporation and St. Cloud Capital Partners II, L.P., previously
filed as Exhibit 10.31 to Form 8-K in April 2008 and hereby incorporated
by reference.
|
|
10.30
|
Registration
Rights Agreement, dated as of March 31, 2008 by and among National
Holdings Corporation and St. Cloud Capital Partners II, L.P., previously
filed as Exhibit 10.32 to Form 8-K in April 2008 and hereby incorporated
by reference.
|
|
10.31
|
Agreement,
dated April 16, 2008, by and between the Company and St. Cloud Capital
Partners II, L.P, previously filed as Exhibit 10.33 to Amendment
No. 1 to
the Company’s Registration Statement on Form S-4, filed may 9, 2008 and
hereby incorporated by reference.
|
|
10.32
|
Securities
Purchase Agreement, dated as of June 30, 2008 by and between National
Holdings Corporation and St. Cloud Capital Partners II, L.P., previously
filed as Exhibit 10.34 to Form 8-K in July 2008 and hereby incorporated
by
reference.
|
|
10.33
|
Registration
Rights Agreement, dated as of June 30, 2008 by and between National
Holdings Corporation and St. Cloud Capital Partners II, L.P., previously
filed as Exhibit 10.35 to Form -K in July 2008 and hereby incorporated
by
reference.
|
|
10.34
|
Employment
Agreement, dated as of July 1, 2008, by and between the Company and
Mark
Goldwasser, previously filed as Exhibit 10.36 to Form 8-K in July
2008 and
hereby incorporated by reference.*
|
|
10.35
|
Employment
Agreement, dated as of July 1, 2008, by and between the Company and
Leonard J. Sokolow, previously filed as Exhibit 10.37 to Form 8-K
in July
2008 and hereby incorporated by reference.*
|
|
10.36
|
Employment
Agreement, dated as of July 1, 2008, by and between the Company and
Alan
B. Levin previously filed as Exhibit 10.38 to Form 8-K in July 2008
and
hereby incorporated by reference.*
|
|
10.37
|
Option
Agreement, dated as of July 1, 2008, by and between the Company and
Mark
Goldwasser, previously filed as Exhibit 10.39 to Form 8-K in July
2008 and
hereby incorporated by reference.*
|
|
10.38
|
Option
Agreement, dated as of July 1, 2008, by and between the Company and
Leonard J. Sokolow previously filed as Exhibit 10.40 to Form 8-K
in July
2008 and hereby incorporated by reference.*
|
|
10.39
|
Voting
Agreement, dated as of July 1, 2008, by and among the Company, Mark
Goldwasser, Leonard J. Sokolow and Christopher C. Dewey previously
filed
as Exhibit 10.41 to Form 8-K in July 2008 and hereby incorporated
by
reference.
|
|
10.40
|
Termination
Agreement, dated as of July 1, 2008, by and between vFinance, Inc.
and
Leonard J. Sokolow previously filed as Exhibit 10.42 to Form 8-K
in July
2008 and hereby incorporated by reference.
|
|
14.
|
The
Code of Ethics.
|
|
16.1
|
Change
in Certifying Accountant, previously filed in Form 8-K in August
1998 and
hereby incorporated by
reference.
|
|
16.2
|
Investment
Transaction previously filed in Form 8-K in January 2002 and hereby
incorporated by reference.
|
|
16.3
|
Resignation
of Director previously filed in Form 8-K in April 2002 and hereby
incorporated by reference.
|
|
16.4
|
Change
in its Independent Public Accountants, previously filed in Form 8-K
in May
2003 and hereby incorporated by reference.
|
|
16.5
|
Change
in its Independent Public Accountants, previously filed in Form 8-K
in
October 2003 and hereby incorporated by reference.
|
|
23.1**
|
Consent
of Marcum & Kliegman LLP.
|
|
23.2***
|
Consent
of Littman Krooks LLP, included in the opinion filed as Exhibit
5.1.
|
|
23.3**
|
Consent
of Sherb & Co., LLP.
|
|
24.1**
|
Power
of Attorney, included in the signature page of this Registration
Statement.
|
*
Compensatory agreements
**
Filed herewith
***
To be filed by amendment
Item 17.
Undertakings.
(a) The
undersigned Registrant hereby undertakes:
(1)
To
file,
during any period in which offers or sales are being made, a post-effective
amendment to this registration statement:
|
(i)
|
To
include any prospectus required by Section 10(a)(3) of the Securities
Act
of 1933, as amended; and
|
|
(ii)
|
To
reflect in the prospectus any facts or events arising after the effective
date of the registration statement (or the most recent post-effective
amendment thereof) which, individually or in the aggregate, represent
a
fundamental change in the information set forth in the registration
statement. Notwithstanding the foregoing, any increase or decrease
in
volume of securities offered (if the total dollar value of securities
offered would not exceed that which was registered) and any deviation
from
the low or high and of the estimated maximum offering range may be
reflected in the form of prospectus filed with the Securities and
Exchange
Commission pursuant to Rule 424(b) if, in the aggregate, the changes
in
volume and price represent no more than 20% change in the maximum
aggregate offering price set forth in the “Calculation of Registration
Fee” table in the effective registration statement;
and
|
|
(iii)
|
To
include any material information with respect to the plan of distribution
not previously disclosed in the registration statement or any material
change to such information in the registration
statement.
|
(2)
That,
for
purposes of determining any liability under the Securities Act of 1933, as
amended, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering as such securities at that time shall be deemed to be the initial
bona
fide offering thereof.
(3)
To
remove
from registration by means of a post-effective amendment any of the securities
being registered which remain unsold at the termination of the
offering.
(4)
That,
for
purposes of determining any liability under the Securities Act of 1933, as
amended, each filing of the Registrant’s annual report pursuant to Section 13(a)
or Section 15(d) of the Securities Exchange Act of 1934, as amended (and, where
applicable, each filing of an employee benefit plan’s annual report pursuant to
Section 15(d) of the Securities Exchange Act of 1934, as amended) that is
incorporated by reference in the registration statement shall be deemed to
be a
new registration statement relating to the securities offered therein, and
the
offering of such securities at that time shall be deemed to be the initial
bona
fide offering thereof.
(b) The
undersigned registrant hereby undertakes to deliver or cause to be delivered
with the prospectus, to each person to whom the prospectus is sent or given,
the
latest annual report to security holders that is incorporated by reference
in
the prospectus and furnished pursuant to and meeting the requirements of Rule
14a-3 or Rule 14c-3 under the Securities Exchange Act of 1934; and, where
interim financial information required to be presented by Article 3 of
Regulation S-X are not set forth in the prospectus, to deliver, or cause to
be
delivered to each person to whom the prospectus is sent or given, the latest
quarterly report that is specifically incorporated by reference in the
prospectus to provide such interim financial information.
(c) Insofar
as indemnification for liabilities arising under the Securities Act of 1933,
as
amended, may be permitted to directors, officers and controlling persons of
the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the commission such indemnification
is
against public policy as expressed in the Securities Act of 1933, as amended,
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer or controlling person of the Registrant
in the successful defense of any action, suit or proceeding) is asserted by
such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act of 1933, as amended, and will be
governed by the final adjudication of such issue.
Pursuant
to the requirements of the Securities Act of 1933, as amended, the registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-1 and has duly caused this registration
statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of New York, State of New York on this 3rd
day of
October, 2008.
|
|
By:
|
/s/
Mark Goldwasser
|
|
Mark
Goldwasser
|
|
Chairman
and Chief Executive Officer
|
KNOW
ALL
MEN BY THESE PRESENTS, that each person whose signature appears below
substitutes and appoints Mark Goldwasser his true and lawful attorney-in-fact
and agent, with full power of substitution and resubstitution, for him and
in
his name, place and stead, in any and all capacities, to sign any and all
amendments (including post-effective amendments) to this Registration Statement,
and to file the same, with all exhibits thereto, and other documents in
connection therewith, with the Securities and Exchange Commission, granting
unto
said attorney-in-fact and agent full power and authority to do and perform
each
and every act and thing requisite and necessary to be don in and about the
premises, as fully to all intents and purposes as he might or could do in
person, hereby ratifying and confirming all that said attorney-in-fact and
agent
or his substitute, may lawfully do or cause to be done by virtue
hereof.
Pursuant
to the requirements of the Securities Act of 1933, this registration statement
has been signed below by the following persons on National's behalf and in
the
capacities and on the dates indicated.
Name
|
|
Title
|
|
Date
|
|
|
|
|
|
/s/
Mark Goldwasser
|
|
Chairman,
Chief Executive Officer and
|
|
October
3, 2008
|
Mark
Goldwasser
|
|
Director
(principal executive officer)
|
|
|
|
|
|
|
|
/s/
Leonard J. Sokolow
|
|
Vice
Chairman of the Board, President
|
|
October
3, 2008
|
Leonard
J. Sokolow
|
|
and
Director
|
|
|
|
|
|
|
|
/s/
Christopher C. Dewey
|
|
Vice
Chairman of the Board and
|
|
October
3, 2008
|
Christopher
Dewey
|
|
Director
|
|
|
|
|
|
|
|
/s/
Marshall S. Geller
|
|
Director
|
|
October
3, 2008
|
Marshall
S. Geller
|
|
|
|
|
|
|
|
|
|
/s/
Robert W. Lautz, Jr.
|
|
Director
|
|
October
3, 2008
|
Robert
W. Lautz, Jr.
|
|
|
|
|
|
|
|
|
|
/s/
Jorge A. Ortega
|
|
Director
|
|
October
3, 2008
|
Jorge
A. Ortega
|
|
|
|
|
|
|
|
|
|
|
|
Director
|
|
October
3, 2008
|
Charles
R. Modica
|
|
|
|
|
|
|
|
|
|
/s/
Alan B. Levin
|
|
Chief
Financial Officer (principal
|
|
October
3, 2008
|
Alan
B. Levin
|
|
accounting
and financial officer)
|
|
|
EXHIBIT
INDEX
|
|
Opinion
of Littman Krooks LLP as to the legality of the securities being
registered.
|
|
23.1** |
Consent of
Marcum & Kliegman LLP.
|
|
23.2*** |
Consent
of Littman Krooks LLP, included in the opinion filed as Exhibit
5.1.
|
|
23.3** |
Consent of Sherb & Co.,
LLP. |
|
24.1*** |
Power
of Attorney, included in the signature page of this Registration
Statement.
|
*
Compensatory agreements
**
Filed herewith
***
To be
filed by amendment