<PAGE>
As filed with the Securities and Exchange Commission on June 9, 2000
Registration No. 333-_______
================================================================================
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-------------------
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
-------------------
COLONIAL DIRECT FINANCIAL GROUP, INC.
(Name of Small Business Issuer in Its Charter)
<TABLE>
<CAPTION>
<S> <C> <C>
Delaware 6211 22-3537523
(State or Other Jurisdiction of (Primary Standard Industrial (IRS Employer
Incorporation or Organization) Classification Code Number) Identification Number)
</TABLE>
3010 North Military Trail
Boca Raton, Florida 33431
(561) 981-1000
(Address and Telephone Number of Principal Executive Offices)
3010 North Military Trail, Boca Raton, Florida 33431
(Address of Principal Place of Business or Intended Principal
Place of Business)
-------------------
Michael Golden
Chief Executive Officer
Colonial Direct Financial Group, Inc.
3010 North Military Trail
Boca Raton, Florida 33431
(561) 981-1000
(Name, Address and Telephone Number of Agent for Service)
-------------------
Copies of Communications To:
Neil S. Baritz, Esq. Michael Grundei, Esq.
Dreier & Baritz LLP Wiggin & Dana
150 East Palmetto Park Road, Suite 401 3 Stamford Plaza
Boca Raton, Florida 33432 Stamford, Connecticut 06901
Telephone No.: (561) 750-0910 Telephone No.: (203) 363-7600
Facsimile No.: (561) 750-5045 Facsimile No.: (203) 363-7676
-------------------
Approximate Date of Commencement of Proposed Sale to the public: As
soon as practicable after this Registration Statement becomes effective.
-------------------
If this Form Is Filed to Register Additional Securities for an Offering
Pursuant to Rule 462(b) 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. [ ]
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. [ ]
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. [ ]
If Delivery of the Prospectus Is Expected to Be Made Pursuant to Rule
434, please Check the Following Box. [X]
-------------------
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 or Until This Registration Statement Shall Become
Effective on Such Date as The Commission, Acting Pursuant to Said Section 8(a),
May Determine.
<PAGE>
<TABLE>
<CAPTION>
============================================================================================================================
Calculation of Registration Fee
Proposed Proposed
Maximum Offering Maximum Amount of
Title of Each Class of Amount to Price Per Aggregate Offering Registration
Securities to be Registered be Registered Security (1) Price (1) Fee
---------------------------- -------------- ------------- ------------------ ------------
<S> <C> <C> <C> <C>
Common Stock, par value
$.01 per share ........... 2,300,000(2) $ 8.50 $19,550,000 $ 5,161.20
Warrants, each to purchase
one share of Common Stock ...... 2,300,000(2) $0.125 $ 287,500 $ 75.90
Common Stock, par value
$.01 per share, issuable
upon exercise of the Warrants (3) 2,300,000 $10.20 $23,460,000 $ 6,193.44
Underwriter's Warrants,
each to purchase one share
of Common Stock (4) ............ 200,000 $0.01 $ 2,000 (5)
Common Stock, par value
$.01 per share, issuable
upon exercise of the
Underwriter's Warrants (3)(4)... 200,000 $10.20 $ 2,040,000 $ 538.56
Underwriter's Warrants,
each to purchase one warrant (3) 200,000 $0.01 $ 2,000 (5)
Warrants issuable upon exercise
of the Underwriter's Warrants 200,000 $0.125 $ 25,000 $ 6.60
Common Stock, par value
$.01 per share, issuable
upon exercise of the warrants
underlying the Underwriter's
Warrants (3) .......... 200,000 $ 10.20 $ 2,040,000 $ 538.56
------------------------ -------- -------- ----------- ----------
Total Registration Fee $12,514.26
============================================================================================================================
</TABLE>
(1) Estimated solely for the purpose of calculating the registration fee.
(2) Assumes the Underwriter's over-allotment option to purchase up to 300,000
additional shares of Common Stock and/or 300,000 Warrants is exercised in full.
(3) Pursuant to Rule 416, there are also being registered such indeterminable
additional shares of Common Stock as may become issuable pursuant to
anti-dilution provisions contained in the Warrants, the Underwriter's Warrants
and the warrants underlying the Underwriter's Warrants.
(4) Represents warrants to be issued by the Company to the Underwriter at the
time of delivery and acceptance of the securities to be sold by the Company to
the public hereunder.
(5) None, pursuant to Rule 457(g).
<PAGE>
SUBJECT TO COMPLETION, DATED JUNE 9, 2000
INITIAL PUBLIC OFFERING PROSPECTUS
(COLONIAL DIRECT FINANCIAL GROUP, INC. LOGO)
2,000,000 SHARES OF COMMON STOCK AND REDEEMABLE COMMON STOCK WARRANTS
TO PURCHASE 2,000,000 SHARES OF COMMON STOCK, WITH A PRICE RANGE OF BETWEEN
$6.50 AND $8.50 PER SHARE OF COMMON STOCK AND $0.125 PER WARRANT
<TABLE>
<CAPTION>
<S> <C>
COLONIAL DIRECT FINANCIAL GROUP, INC. We provide brokerage and related financial
3010 North Military Trail services to investors and small to mid-sized
Boca Raton, Florida 33431 financial institutions through a variety of
(561) 981-1000 communication mediums.
PER SHARE OF
COMMON STOCK PER WARRANT TOTAL
------------ ----------- -----
THE OFFERING
Public offering price......
Underwriting discounts
and commissions........
Proceeds to us.......
</TABLE>
This is our initial public offering. Prior to this offering there was no public
market for our shares or warrants.
Proposed Nasdaq SmallCap Market Symbols -- "COLD" and "COLDW"
This Offering involves a high degree of risk. See Risk Factors
beginning on Page 4 of this Prospectus.
These shares of common stock and warrants have not been approved by the
Securities and Exchange Commission or any state securities commission. These
organizations have not determined whether this Prospectus is complete or
accurate. Any representation to the contrary is a criminal offense.
We have entered into a firm commitment underwriting agreement with
Werbel-Roth Securities, Inc. for the sale of the common stock and warrants in
this offering. We have granted to the underwriter a 45-day option to purchase up
to an additional 300,000 shares of common stock and 300,000 warrants to cover
over-allotments. The underwriters expect to deliver the common stock and
warrants to purchasers on __________, 2000.
WERBEL-ROTH SECURITIES, INC.
The date of this prospectus is , 2000
The information contained in this Prospectus is not complete and may be changed.
We may not sell these securities until the Registration Statement filed with the
Securities and Exchange Commission is effective. This Prospectus is not an offer
to sell these securities and it is not soliciting an offer to buy these
securities in any state where the offer or sale is not permitted.
<PAGE>
Table of Contents
PAGE
SUMMARY.....................................................................1
RISK FACTORS................................................................4
FORWARD-LOOKING STATEMENTS..................................................7
COLONIAL DIRECT FINANCIAL GROUP, INC........................................7
DETERMINATION OF OFFERING PRICE.............................................7
USE OF PROCEEDS.............................................................8
DIVIDEND POLICY.............................................................9
DILUTION....................................................................9
CAPITALIZATION.............................................................10
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS........................11
BUSINESS...................................................................15
MANAGEMENT.................................................................28
PRINCIPAL SHAREHOLDERS.....................................................34
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.............................34
DESCRIPTION OF CAPITAL STOCK...............................................36
SHARES ELIGIBLE FOR FUTURE SALE............................................39
UNDERWRITING...............................................................40
LEGAL MATTERS..............................................................43
EXPERTS....................................................................43
CHANGES IN ACCOUNTANTS.....................................................43
WHERE YOU CAN FIND MORE INFORMATION........................................45
FINANCIAL STATEMENTS......................................................F-1
You should rely only on the information contained in this prospectus.
We have not authorized anyone to provide you with information different from
that contained in this prospectus. We are offering to sell, and seeking offers
to buy, shares of common stock and warrants only in jurisdictions where offers
and sales are permitted. The information contained in this prospectus is
accurate only as of the date of this prospectus, regardless of the time of
delivery of this prospectus or of any sale of our common stock or warrants.
i
<PAGE>
Summary
Because this is a summary, it does not contain all of the information
that may be important to you. You should read the more detailed information
contained elsewhere in this prospectus. Except as otherwise indicated, all
information in this prospectus (1) assumes no exercise of the underwriters'
over allotment option; and (2) gives effect to a recapitalization of our capital
stock effected in June 2000.
About Us
Colonial Direct Financial Group, Inc. (the "Company") is a holding
company comprised of a group of diversified financial services companies, all
focused on delivering value to the consumer through traditional methods of
offering financial services and the Internet. First Colonial Securities Group,
Inc. ("First Colonial"), our principal operating subsidiary, is a registered
broker-dealer and member of the National Association of Securities Dealers, Inc.
("NASD"). First Colonial is a full service securities firm that has served the
investment community since 1990. First Colonial is engaged in securities
brokerage, investment banking, securities trading and other related financial
services activities. Our clientele is primarily composed of high net worth
individuals throughout the country. First Colonial also maintains a sales
department of seasoned financial consultants, a research department and an
equity syndicate department. First Colonial currently conducts its securities
business out of 15 offices, four of which are corporate owned and from which the
vast majority of our securities business is generated. The remaining offices are
operated under operating agreements with independent contractors.
During the fourth quarter of 1999, we completed the acquisitions of an
employee benefits company and an electronic tax return preparation company. In
the first quarter of 2000, we also organized a business services consulting
subsidiary, which acquired the assets, liabilities and service revenue of a
certified public accounting ("CPA") firm. In the second quarter of 2000, we
completed the acquisition of an insurance agency. We plan to grow these
subsidiaries and acquire similarly situated small businesses seeking growth
opportunities and exit strategies. We intend to add value to these businesses by
cross selling a wide array of financial service products, upgrading their
technology and creating an economy of scale, thereby reducing costs. We have
built, and plan to further enhance shareholder value, by continuing to construct
an extensive data base of customers with significant assets under our
management.
We intend to continue to offer traditional full service financial
products and services to our clients, while capitalizing on the rapid growth and
increasing demand for Internet-based business products. Through our acquisition
strategy and augmented by our sophisticated on-line services, we have become a
diversified on-line financial services company, providing "one-stop-shopping"
for a broad range of financial products and services.
Our strategy is directed at the emerging full service and mid-tier
brokerage client that is increasingly demanding online trading and one-stop
financial services. Research from leading industry analysts indicates that
significant growth is projected within these sectors, while deep discount
brokerage online trading is projected to grow at a much slower rate. We believe
that our strategy allows us to leverage our existing network of brokers, agents
and advisors, enabling them to serve more clients through the use of technology.
For example, brokers will be able to send an e-mail "e-lert" to an unlimited
number of clients simultaneously, while traditional telephone methods restrict
the number of clients that can be quickly contacted. Enhancing broker/client
communications and providing online access to enriched investment information
will further strengthen the relationship with our existing client base, as well
as potentially attracting new clients.
1
<PAGE>
Our unique e-commerce technology platform supports online client
service across our financial products and service lines. This proprietary
e-commerce Internet platform provides our full-service brokers and financial
advisors with the capability of efficiently providing the highest levels of
service to our clients. Through tiered levels of service, these same e-business
systems will avail our clients with online account opening, account information,
current financial news and analysis, as well as transaction capability.
Importantly, effective e-business tools can also be applied to support, manage,
and control financial advisors and brokers, who can market our financial
products and services nationwide.
Our website, www.colonialdirect.com, currently offers online services
for a suite of investing tools. Current website development is on schedule to
provide insurance, retirement services and tax return preparation capabilities
by the third quarter of 2000. We elected to develop the most technically
challenging element of the website, online investing, first, soon followed by
the other areas of functionality.
All of our financial service businesses will be linked together through
our proprietary data warehouse, increasing the utility of our information and
promoting the integration of our service lines. Utilizing state-of-the-art
analytical tools, we will be capable of effectively focusing our marketing
efforts, as well as facilitating strategic alliances through the use of the
Internet. Access to new clients through these methods will provide us with the
ability to acquire client assets at a lower cost than through traditional
advertising channels.
Our Internet-based customer care systems are fully integrated with
back-office support systems enabling us to add large numbers of financial
service professionals quickly, without having to correspondingly increase our
back-office support staff. In the highly regulated financial services industry,
the ability to efficiently assure compliance, while providing outstanding client
service, is critical to achieving and sustaining our growth and profitability.
About the Offering
<TABLE>
<CAPTION>
<S> <C>
Securities Offered........................ 2,000,000 Shares of Common Stock and 2,000,000 redeemable
common stock warrants
Common Stock to be
Outstanding after the Offering......... 6,000,000 shares
Use of Net Proceeds....................... Increasing marketing and promotional efforts (approximately
$4.0 million); Acquiring financial services companies pursuant
to our acquisition strategy (approximately $4.0 million);
Developing and integrating e-business technology
(approximately $2.0 million); Increasing the capital of First
Colonial and expansion of its branch office system
(approximately $2.0 million); Working capital and general
corporate purposes (approximately $1.2 million). See "Use of
Proceeds."
Proposed Nasdaq Symbols................... COLD, COLDW
</TABLE>
Prior to this offering there has been no public market for our common
stock or warrants. We cannot assure you that a trading market will develop or
how liquid that market might be. You may not be able to resell your common stock
or warrants at or above the initial public offering price.
2
<PAGE>
Summary Financial Information
The following is a summary of our Financial Statements for the years
ended December 31, 1998 and 1999, and for the three months ended March 31, 1999
and 2000, and should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the Financial
Statements including the notes thereto included in this prospectus.
<TABLE>
<CAPTION>
Year Ended Three Months Ended
December 31, March 31,
------------------------ --------------------
1999 1998 2000 1999
---- ---- ---- ----
(unaudited)
<S> <C> <C> <C> <C>
Statement of Operations Data:
Commissions $ 10,757,530 $ 14,638,530 $ 5,116,746 $ 3,261,778
Total revenues $ 12,516,925 $ 16,904,427 $ 5,972,746 $ 3,602,653
Net income (loss) $ (2,110,930) $ 36,021 $ (258,509) $ (25,791)
Net income (loss) per share (1) $ (0.65) $ (0.02) $ (0.06) $ (0.01)
------------ -------------- ----------- -----------
Weighted average number of
common shares outstanding (2) 3,271,005 3,088,166 4,210,223 3,088,166
March 31, 2000
--------------
Actual As Adjusted (3)
------ ---------------
(unaudited)
Balance Sheet Data:
Working capital (deficit) $(164,027) $13,035,973
Cash and cash equivalents $ 301,493 $13,501,493
Total assets $7,322,630 $20,522,630
Total liabilities $2,873,899 $ 2,873,899
Shareholders' equity $4,448,731 $17,648,731
</TABLE>
(1) A loss per share in 1998 occurred because dividends paid on preferred
stock exceeded our net income.
(2) This does not reflect the recapitalization of our shares in June 2000.
Does not include 360,204 pre-split shares of Common Stock from which
122,500 shares of our Series A Convertible Preferred Stock are
convertible and 821,042 (of which 75,200 have vested) pre-split shares
of our common stock obtainable upon the exercise of outstanding stock
options.
(3) Adjusted to reflect the sale of the shares of common stock and warrants
in this offering (based on an initial public offering price of $7.50
per share, the mid-point of the pricing range) and $0.125 per warrant
and the application of the net proceeds therefrom.
3
<PAGE>
Risk Factors
Our businesses are subject to industry, economic and market factors.
Our securities business is subject to numerous risks, the incurrence of
losses from underwriting and trading activities, customer inability to satisfy
commitments (such as margin obligations), customer fraud, employee misconduct
and errors, stringent regulation and litigation. We are also directly affected
by national and international economic and political conditions generally, and
in particular those affecting the markets for securities, such as recession,
inflation, the level of interest rates, discretionary income available for
investment and the availability of credit, any or all of which, particularly in
volatile or illiquid markets, could have a significant impact on our operations
and exacerbate the risks inherent in our business. Reduced trading volume and
prices generally result in lower commissions and investment banking revenue and
could result in substantial losses from declines in the market value of
securities held in trading and underwriting positions. Unfavorable conditions
and unpredictable adverse changes in the securities markets, such as sudden
declines in the market value of securities, and the failure of issuers,
customers and other dealers to perform their obligations, often result in
losses, which could be substantial. These industry, economic, market or other
factors, over which we have no control, may cause significant fluctuations in
our operating results from period to period or otherwise adversely effect our
performance.
We depend on Michael E. Golden, Ben Lichtenberg and Rodney Smith and the loss of
their services could harm our business.
Our business is dependent upon a small number of key executive
officers, principally Michael E. Golden, our Chairman and Chief Executive
Officer, Ben Lichtenberg, our Chief Financial Officer and Vice Chairman and
Rodney Smith, our President and a member of our Board of Directors. The loss of
services of any of these individuals could harm our business. We maintain "key
person" life insurance in the amount of $1.5 million for our benefit on Mr.
Golden. Competition for key personnel and other highly qualified technical and
managerial personnel is intense. The loss of the services of any of the key
personnel or the inability to identify, hire, train and retain other qualified
personnel in the future could harm our business.
Significant financial resources are required costs for our expansion.
We have expanded our infrastructure and client support capabilities in
anticipation of an expanded business and client base. Such expansion will
require us to make significant capital expenditures for computer and related
office equipment and to hire and train additional management and client support
personnel. Any disruptions in the service we provide could harm our business. We
anticipate that the cash requirement for this expansion over the next 12 months
will be approximately $2,000,000, representing personnel, computer and related
systems acquisitions programming, network expansion and integration and upgrade.
We also anticipate using approximately $4,000,000 of cash resources to acquire
financial services companies pursuant to our acquisition strategy.
There are risks associated with our planned expansion and acquisitions.
In connection with our expansion, including certain of the recently
completed acquisitions, there are certain additional risks we have undertaken
and will undertake in the future, many of which are not risks presently
associated with our core business and operations. For example, our management
will be presented with new challenges and risks associated with the development,
integration and
4
<PAGE>
implementation of the insurance, benefits, tax and consulting businesses we have
acquired or formed. These risks include, but are not limited to, sales practices
issues and related claims procedures. We believe that our management team and
the new internal procedures we are implementing in connection with the expansion
of our operations will be adequate to manage and supervise these new business
lines, however we cannot be sure that management will be able to address all of
the new risks associated with these businesses or that the policies and
procedures we implement will be sufficient.
Any possible compromises of our systems or security could harm our business.
The secure transmission of confidential information over public
networks is a critical element of our operations. We rely on encryption and
authentication technology to provide the security and authentication necessary
to effect secure transmission of confidential information over the Internet. To
the best of our knowledge, to date, we have not experienced any security
breaches in the transmission of confidential information. Moreover, we
continually evaluate advanced encryption technology to ensure the continued
integrity of our systems. However, we cannot assure you that advances in
computer capabilities, new discoveries in the field of cryptography or other
events or developments will not result in a compromise of the technology or
other algorithms used by us and our vendors to protect client transaction and
other data. Any compromise of our systems or security could harm our business.
We rely very heavily on Correspondent Services Corporation, our clearing firm,
and termination of our agreement with the clearing firm could harm our business.
Our clearing agreement with Correspondent Services Corporation, a
wholly owned subsidiary of PaineWebber, Inc. (the "Clearing Firm") may be
terminated by either party upon sixty days prior written notice. Pursuant to our
agreement, the Clearing Firm, on a fee basis, processes all securities
transactions for our account and the accounts of our clients. Services of the
Clearing Firm include billing and credit extension, control and receipt, custody
and delivery of securities, for which we pay a transaction charge. We are
dependent on the operational capacity and the ability of the Clearing Firm for
the orderly processing of transactions. In addition, by engaging the processing
services of a clearing firm, we are exempt from certain capital reserve
requirements and other complex regulatory requirements imposed by federal and
state securities laws. Moreover, we have agreed to indemnify and hold the
Clearing Firm harmless from certain liabilities or claims, including claims
arising from the transactions of our clients.
We extend credit to our clients and are subject to risks as a result.
Since August 1993, First Colonial, our brokerage subsidiary, has
cleared all transactions for its customers on a fully disclosed basis with the
Clearing Firm, which carries and clears all customer securities accounts. A
limited portion of our customer securities activities are transacted on a
"margin" basis, pursuant to which credit is extended to customers, which is
secured by cash and securities in customer accounts, or involve "short sales"
(i.e., the sale of securities not yet purchased) or the purchase and sale of
commodity futures contracts, substantially all of which are transacted on a
margin basis. These risks are increased during periods of volatile markets in
which the value of the collateral we hold could fall below the amount borrowed
by the client. If margin requirements are not sufficient to cover losses, we may
be required to sell or buy securities at prevailing market prices and incur
losses to satisfy client obligations.
5
<PAGE>
Failure to comply with net capital requirements could subject First Colonial to
suspension or revocation by the SEC or expulsion by the NASD.
The Securities and Exchange Commission ("SEC"), the National
Association of Securities Dealers ("NASD") and various other regulatory agencies
have stringent rules with respect to the maintenance of specific levels of net
capital by securities brokerage firms. Failure to maintain the required net
capital may subject a firm to suspension or revocation of registration by the
SEC and suspension or expulsion by the NASD and other regulatory bodies and
ultimately could require our liquidation. In addition, a change in the net
capital rules, the imposition of new rules or any unusually large charge against
net capital could limit our operations that require the intensive use of
capital, such as the financing of client account balances. A significant
operating loss or any unusually large charge against net capital could adversely
affect First Colonial's ability to expand or even maintain our present levels of
business, which could harm our business.
There must be a current prospectus and state blue sky registration for you to
exercise your warrants.
Holders of the warrants will have the right to exercise their warrants
for the purchase of shares of common stock only if a current prospectus relating
to such shares is then in effect and only if the shares have been qualified for
sale under the securities laws of the applicable state or states. We have
undertaken to use our best efforts to file and keep effective and current a
prospectus which will permit the purchase and sale of the warrants and the
common stock underlying the warrants, but there can be no assurances that we
will be able to do so. Although we have undertaken to use our best efforts to
qualify for sale the warrants and the shares of common stock underlying the
warrants in those states in which the securities are to be offered, no assurance
can be given that such qualifications will occur. The warrants may lose or be of
no value if a prospectus covering the shares issuable upon the exercise thereof
is not kept current or if such underlying shares are not, or cannot be,
registered in the applicable states.
The issuance of preferred stock, as well as certain anti-takeover provisions
included in our certificate of incorporation and Delaware law may discourage,
delay or prevent a change of control which might otherwise be beneficial to the
stockholders.
Preferred stock could be issued to discourage, delay or prevent a
change in our control. Our Certificate of Incorporation authorizes our Board of
Directors to issue 5,000,000 shares of "blank check" preferred stock with the
designations, rights, preferences, privileges and restrictions, including voting
rights, of these shares, without further stockholder approval. Accordingly, the
Board of Directors can, without stockholder approval, issue shares of preferred
stock with dividend, liquidation, conversion, voting or other rights that could
adversely affect the voting power or other rights of the holders of our common
stock. As of the date of this prospectus, of the 5,000,000 authorized preferred
shares, 122,500 shares of preferred stock have been designated Series A
Convertible Preferred Stock and are currently issued and outstanding. Currently,
we do not have any plans to issue any additional series of our preferred stock.
Additionally, certain provisions of Delaware law could delay, defer or impede
the removal of incumbent directors and could make more difficult a merger,
tender offer or proxy contest involving us, even if these events could be
beneficial to our stockholders. These provisions could also limit the price that
certain investors might be willing to pay in the future for our common stock. In
addition, Delaware has certain laws that may deter or frustrate takeovers of
Delaware corporations.
6
<PAGE>
We underwrite securities.
Our underwriting activities involve the purchase, sale or short sale of
securities as a principal. As an underwriter, our brokerage subsidiary agrees to
purchase securities on a "firm commitment" basis and is subject to risk that it
may be unable to resell securities or be required to dispose of securities at a
loss. In connection with our investment banking activities in which our
brokerage subsidiary acts as manager or co-manager of public offerings of
securities, we expect to make increased commitments of capital to market making
activities in securities of those issuers. Any additional concentration of
capital in the securities of those issuers held in inventory will increase the
risk of loss from possible declines in the market price of such securities. In
addition, under federal securities laws, other laws and court decisions with
respect to underwriters' liabilities and limitations on the indemnification of
underwriters by issuers, an underwriter is subject to substantial potential
liability for misstatements or omissions of material facts in prospectuses and
other communications with respect to securities offerings. Our potential
liability as an underwriter is generally not covered by insurance. Moreover,
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.
Forward-Looking Statements
Certain important factors may affect our actual results and could cause
those results to differ materially from any forward-looking statements made in
this prospectus or that are otherwise made by us or on our behalf.
"Forward-looking statements" are not based on historical facts and are typically
phrased using words such as "may," "will," "expect," "believe," "anticipate,"
"intend," "could," "estimate" or "continue" and similar expressions or
variations. Investing in our common stock is risky. You should carefully
consider the preceding risks before making an investment decision. These risks
are not the only ones that we face. Additional risks that generally apply to
publicly traded companies and companies in our industry, that we have not yet
identified or that we think are immaterial may also impair our business
operations. Our business, operating results and financial condition could be
adversely affected by any of the preceding risks. The trading price of our
common stock could decline due to any of these risks, and you could lose all or
part of your investment. You should also refer to the other information set
forth in this prospectus, including our financial statements and the related
notes.
Colonial Direct Financial Group, Inc.
We were incorporated in Delaware in August 1997 as First Colonial
Securities Holding Corp. to become the holding company for First Colonial
Securities Group, Inc., which was formed in 1989. In October 1999, we changed
our name to Colonial Direct Financial Group, Inc. and began doing business under
that name. Our principal executive offices are located at 3010 North Military
Trail, Boca Raton, Florida 33431, and our telephone number is (561) 981-1000.
Our World Wide Web site address is www.colonialdirect.com. Information contained
in our web site should not be considered part of this prospectus.
Determination of Offering Price
Prior to this offering, there has been no public market for our common
stock or warrants. As a result, the offering price for our common stock and
warrants, and the exercise price of the warrants, has
7
<PAGE>
been determined by negotiations between us and the representative of the
underwriters and is not necessarily related to our asset value, net worth, or
other established criteria of value. The factors considered in such
negotiations, in addition to prevailing market conditions, include the history
of and prospects for the industry in which we compete, an assessment of our
management, our prospects, our capital structure and other factors as were
deemed relevant.
Use of Proceeds
We estimate we will receive approximately $13,200,000 from the sale of
2,000,000 shares of common stock and 2,000,000 warrants offered at an initial
public offering price of $7.50 per share for the common stock, which is the
mid-range of the projected offering price, and $0.125 for the warrants, after
deducting the underwriting discount, underwriters' non-accountable expense
allowance and additional offering expenses payable by us. Such additional
offering expenses are estimated, in the aggregate, to be $220,000. The net
proceeds are expected to be used as follows:
o Increased marketing and promotional efforts. We plan to use
approximately $4.0 million of the net proceeds to market our
online brokerage services and other financial services and
products over the next twelve months.
o Acquiring financial services companies pursuant to our
acquisition strategy. We plan to set aside approximately
$4.0 million of the net proceeds to acquire companies in
businesses related and complementary to our subsidiary
companies and divisions.
o Developing and integrating e-business technology. We intend
to use approximately $2.0 million of the net proceeds on
continued development of our online trading systems and our
other Internet based e-business systems. We believe these
technology initiatives will result in an integrated data
warehouse of our client base across all of our service lines
so that we can (1) offer superior full service, (2) promote
cross selling throughout our client bases, (3) facilitate
integration of our business units, and (4) support
establishment of strategic alliances.
o For increasing the capital of First Colonial and expansion
of its branch office system. We intend to use approximately
$2.0 million of the net proceeds to increase the capital of
First Colonial, our broker-dealer subsidiary, to hire
additional personnel and to expand our branch office system.
o Working capital and general corporate purposes. We intend to
use the remaining approximately $1.2 million of the net
proceeds for working capital and general corporate purposes.
If the underwriter exercises its over-allotment option in full, we will
realize additional net proceeds of $2,013,000 which will be added to our working
capital.
The foregoing represents our best estimate of the allocation of the net
proceeds of this offering based upon the current status of our business. This
estimate is based on certain assumptions, including continued expansion of our
client base and corresponding increases in revenues and that our proposed
network expansion can be completed and new services can be introduced without
unanticipated delays or costs. If any of these factors change, we may find it
necessary to reallocate a portion of the proceeds
8
<PAGE>
within the above-described categories or use portions of the proceeds for other
purposes. Our estimates may prove to be inaccurate, new programs or activities
may be undertaken which will require considerable additional expenditures or
unforeseen expenses may occur.
Based on currently proposed plans and assumptions relating to the
implementation of our business plans, we believe that the proceeds of this
offering, combined with cash flow from operations, will enable us to fund our
planned operations for a period of at least 12 months from the date of this
prospectus. However, we cannot assure you we will realize cash flow from
operations or that the cash flow will be sufficient. If our plans change, our
assumptions change or prove to be inaccurate or if the proceeds of this offering
otherwise prove to be insufficient to implement our business plans, we may find
it necessary or desirable to reallocate a portion of the proceeds within the
above-described categories, use proceeds for other purposes, seek additional
financing or curtail our operations. We cannot assure you that any additional
financing will be available to us on acceptable terms, or at all.
Proceeds not immediately required for the purposes described above will
be invested principally in United States government securities, short-term
certificates of deposit, money market funds or other short-term interest-bearing
investments.
Dividend Policy
We pay dividends on our Series A Convertible Preferred Stock, however
we have never paid dividends on our common stock and do not intend to pay
dividends on our common stock in the foreseeable future. We intend to retain any
earnings to finance the development and expansion of our business. Payment of
dividends in the future will be subject to the discretion of our Board of
Directors and will depend upon our ability to generate earnings, our need for
capital and our overall financial condition, and as legally permissible, among
other factors.
Dilution
The difference between the initial public offering price per share of
common stock and the net tangible book value per share after this offering
constitutes the dilution to investors in this offering. Net tangible book value
per share of common stock is determined by dividing our net tangible book value
(total tangible assets less total liabilities) by the number of shares of common
stock outstanding. As of March 31, 2000, our net tangible book value was
$2,534,729 or $0.60 per share of common stock. Net tangible book value
represents the amount of our total assets, less any intangible assets and total
liabilities. After giving effect to the sale of the 2,000,000 shares of common
stock offered through this prospectus (assuming an initial public offering price
of $7.50 per share), and after deducting the underwriting discount and other
estimated expenses of the offering, our adjusted pro forma net tangible book
value as of March 31, 2000, would have been $15,734,729 or $2.53 per share. This
represents an immediate increase in net tangible book value of $1.93 per share
to existing shareholders and an immediate dilution of $4.97 per share to
investors in the offering. The following table illustrates this per share
dilution, but does not reflect the consideration paid for the warrants.
Initial public offering price per share.................................. $7.50
Net tangible book value per share before offering.................. $0.60
Increase per share attributable to investors in this offering ..... $1.93
-----
Net tangible book value per share after offering......................... $2.53
-----
Dilution per share to new investors...................................... $4.97
=====
9
<PAGE>
If the underwriters exercise their over-allotment option in full, the
pro forma adjusted net tangible book value per share of common stock after the
offering would be $2.72 per share (not reflecting consideration paid for the
warrants), which would result in dilution to your investment of $4.78 per share
of common stock.
In the past five years, we sold shares of our common stock and
preferred stock in two private placements, as follows:
o On December 31, 1997, we completed a private placement of
122,500 shares of our Series A Convertible Preferred Stock at
$10.00 per share. Such shares are convertible into 360,204
pre-split shares of our common stock.
o Between August 1999 and January 2000, we completed a private
placement of 749,620 shares of our common stock, on a
pre-split basis, at $5.10 per share.
10
<PAGE>
Capitalization
The following table sets forth our capitalization as of March 31, 2000,
adjusted to give effect to the sale of 2,000,000 shares of common stock offered
in this offering at an assumed initial public offering price of $7.50 per share
and 2,000,000 warrants at a price of $0.125 per warrant and the receipt of the
net proceeds from the sale. You should read this table in conjunction with our
financial statements and the notes included elsewhere in this prospectus.
<TABLE>
<CAPTION>
March 31, 2000
-----------------------------------------
Actual As Adjusted (1)
------ ---------------
(unaudited)
<S> <C> <C>
Long-term borrowings $ 62,967 $ 62,967
------ ------
Shareholders' equity:
Preferred stock, $0.01 par value,
5,000,000 shares authorized,
122,500 shares of Series A Convertible
Preferred Stock, stated value of $10.00
per share, issued and outstanding 1,225 1,225
Common stock, $0.01 par value,
20,000,000 shares authorized,
4,216,674 shares (actual, pre-split), 6,000,000 42,167 60,000
shares (as adjusted) issued and outstanding (2)
Additional paid-in capital 6,750,330 19,932,497
Retained earnings (deficit) (2,344,991) (2,344,991)
----------- -----------
Total shareholders' equity 4,448,731 17,648,731
------------ -----------
Total capitalization $ 4,511,698 $ 17,711,698
============= ============
</TABLE>
(1) Adjusted to reflect the sale of 2,000,000 shares of common stock
assuming an initial public offering price of $7.50 per share and
2,000,000 warrants at $0.125 per warrant in this offering and the
application of the net proceeds therefrom (after deducting the
underwriting discount, non-accountable expense allowance and the
estimated expenses of this offering).
(2) Common shares (actual) are as reflected in the accompanying
consolidated financial statements. Common shares (as adjusted) takes
into effect the reverse split of our common stock on June 2, 2000,
which reduces our issued shares to 4,000,000, and the issuance of
2,000,000 shares in this offering. The "as adjusted" amounts are,
accordingly, not reflected or included in the accompanying March 31,
2000 financial statements.
Management's Discussion and Analysis of Financial Condition
And Results of Operations
The following analysis of the results of our operations and financial
condition should be read in conjunction with our consolidated financial
statements included elsewhere in this prospectus.
Introduction
We are a holding company whose primary operating subsidiary is First
11
<PAGE>
Colonial, a fully disclosed securities brokerage firm registered with the SEC,
the NASD, and 49 state securities divisions and the District of Columbia.
Because our other operating subsidiaries and divisions were either acquired or
formed after November 1, 1999, we have yet to recognize any material benefit or
impact on our overall operations from these new lines of business. We expect
that in 2000 our new subsidiaries will generate up to 10% of our overall revenue
and operate on a break-even basis.
First Colonial has operated as a full service securities firm serving
the investment community since 1990. First Colonial is engaged in securities
brokerage, investment banking, securities trading and other related financial
services activities. Its clientele is primarily composed of high net worth
individuals throughout the country. First Colonial also maintains a sales
department of seasoned financial consultants, a research department and an
equity syndicate department.
Business environment
Our primary business operations, full service securities brokerage and
investment banking, are subject to general economic and market conditions and
the general volatility of the trading markets. Our other subsidiaries, which
offer other financial service products, are less subject to trading market
volatility, but are still affected by general economic and market conditions.
Utilizing our existing platform, and as supplemented by our recent
acquisitions, we intend to continue to offer traditional full service financial
products and services to our clients, while capitalizing on the rapid growth and
increasing demand for Internet-based business products. Through our acquisition
strategy and augmented by our sophisticated on-line services, we have become a
diversified on-line financial services company, providing "one-stop-shopping"
for financial products and services.
Beginning in April 2000 and continuing to date, a significant number of
securities traded in the over-the-counter market, as well as the securities
markets in general, have experienced significant price declines. Because a
substantial portion of our commission business is generated from transactions in
the over-the-counter markets, our brokerage-related revenues from April 1, 2000
through May 31, 2000 have declined in excess of 35% in comparison to the quarter
ended March 31, 2000. Accordingly, the results of operations for the three month
period ended March 31, 2000 are not necessarily indicative of the results which
can be expected for the balance of fiscal year 2000 or thereafter. Although we
believe the relative instability in the financial markets, and the
over-the-counter markets in particular, is temporary in nature, we have taken
certain steps to counter-balance such loss of revenues. Such steps include
substantial reductions in management compensation, a restructuring of our
healthcare benefits program and the implementation of concessions from our
Clearing Firm in the form of a 50% reduction in clearing costs for a three month
period. These reductions are expected to save us approximately $120,000 per
month over the three month period starting June 1, 2000.
Results of Operations
Three months ended March 31, 2000 compared with three months ended March 31,
1999
Our net loss for the three months ended March 31, 2000 was $258,509
compared with a net loss of $25,791 for the three months ended March 31, 1999.
Basic and fully diluted loss per share were $0.06 and $0.01 for the March 31,
2000 and March 31, 1999 periods, respectively.
12
<PAGE>
Revenues
Our total revenues for the three months ended March 31, 2000 were
$5,972,746, a 65.8% increase from our total revenues of $3,602,653 for the three
months ended March 31, 1999. $2,037,456 of this increase is attributable to
commissions, investment banking and other brokerage related income, as generated
by First Colonial. Beginning in the fourth quarter of 1999 and into the first
quarter of 2000, First Colonial significantly increased its number of commission
generating stockbrokers. The remainder of the increase, or $332,637, is
attributable to the revenues of our newly acquired subsidiaries.
Expenses
Our total expenses for the three months ended March 31, 2000 were
$6,231,255, a 71.7% increase from our total expense of $3,628,444 for the three
months ended March 31, 1999. During this period, we had an increase in payroll
and clearing and transaction costs from $2,667,843 to $4,834,301, an increase of
81.2%, which directly correlates to the increase in commission revenues.
During this period, we also had an increase of approximately $260,000
of non-cash expenses related to the amortization of goodwill, abandonment of
lease expense, write-down of forgivable loan balances and depreciation. About
$108,000 of this non-cash expense is a result of relocating our New York office,
our second largest office. To date, we have been unable to eliminate the
liability associated with the existing lease obligation, which has caused an
abandoned asset charge off. There were also certain one time charges due to this
relocation which were recorded in selling, general and administrative expenses,
and an increase in depreciation due to the added equipment purchased for the New
York office. This move was a direct result of hiring 13 new stockbrokers and
seven support staff.
Fiscal year ended December 31, 1999 compared with fiscal year ended December 31,
1998
Our net loss for the year ended December 31, 1999 was $2,110,930
compared to a net profit of $36,021 for the year ended December 31, 1998. Basic
and fully diluted loss per share were $0.65 and $0.02 for the years ended
December 31, 1999 and December 31, 1998, respectively. A loss per share in 1998
occurred because dividends paid on preferred stock exceeded our net income.
Revenues
Our total revenues for the year ended December 31, 1999 were
$12,516,925, a 26% decrease from our total revenues of $16,904,427 for the year
ended December 31, 1998. Total revenue decreased as a result of the downsizing
of our securities brokerage sales force during the first three quarters of 1999.
Beginning in the fourth quarter of 1999, we began increasing our number of
stockbrokers to include individuals whose focus was toward asset gathering as
opposed to transactional oriented business. This is evident in the type of
commissions earned, shifting from principal commissions to agency commissions.
Principal commissions are primarily transactional in nature and are therefore
more dependent on positive market conditions. Agency commissions are less
transactional in nature, and include significantly more recurring income, such
as that which is realized from mutual funds sales and fees generated from
independent money managers. Our agency commissions as a percentage of total
commissions were 87.6% in 1999 as compared to 67.2% in 1998.
During the year ended December 31, 1999, we also redirected the focus
of First Colonial's investment banking department toward acquiring complementary
businesses as principal instead of traditional investment banking transactions
completed on behalf of third parties. As a result, there were
13
<PAGE>
fewer investment banking transactions (initial public offerings, mergers, and
private placements) completed on behalf of third parties during the year ended
December 31, 1999, generating investment banking revenues of $489,217, as
compared to investment banking revenues of $1,133,150 for the year ended
December 31, 1998, a decrease of 56.8%.
Expenses
Our total expenses decreased to $14,627,855 for the year ended December
31, 1999 from $16,842,697 for the year ended December 31, 1998, a decrease of
13.2%. This decrease is primarily attributable to a reduction in commission
expense and clearing and transaction costs, which correlates directly to the
decrease in commission income and to a reduction of compensation to officers.
During 1999, we made significant changes to our executive compensation
structure. In 1998, we paid our chairman and our president aggregate
compensation of approximately $2,100,000. In prior years, we were profitable and
as a private company, our chairman and our president received bonuses which
approximated our profitability. In 1999, we paid our chairman and our president
aggregate compensation of $491,153.
Other significant expenses contributing to our $2,110,930 loss for the
year ended December 31, 1999 were a significant increase in costs of arbitration
actions and a correlating increase in professional fees to $1,593,901 as
compared to $436,729 in such expense for the corresponding period in 1998, an
increase of 265.0%. This increase is due in part to a disproportionate increase
in new arbitration claims commenced and resolved during 1999. (See "Legal
Proceedings").
Selling, general and administrative costs also increased to $2,839,480
for the year ended December 31, 1999 from $2,692,182 for the year ended December
31, 1998, an increase of 5.5%. This increase is attributable to expenses
associated with building our infrastructure in anticipation of implementing our
business strategy.
Liquidity and capital resources
Approximately 26.3% of our assets at March 31, 2000 were highly liquid,
consisting primarily of cash and cash equivalents, securities inventories and
receivables from other broker-dealers, all of which fluctuate depending upon the
levels of customer business and trading activity. Receivables from broker-
dealers, which are primarily from our clearing broker, turn over rapidly. As a
securities dealer, First Colonial may carry significant levels of securities
inventories to meet customer needs. Our inventory of securities is readily
marketable; however, holding large blocks of the same security may limit
liquidity and prevent realization of full market value for the securities. The
total assets or the individual components of total assets may vary significantly
from period to period because of changes relating to customer demand and
economic and market conditions.
First Colonial is subject to the net capital rules of the NASD and the
SEC. Therefore, we are subject to restrictions on the use of capital and related
liquidity. First Colonial's net capital as of March 31, 2000, was $693,452,
which was $443,452 in excess of its net capital requirements.
We have financed our operations from an initial infusion of capital
from the original shareholders of $300,000, from a private placement of our
Series A Convertible Preferred Stock in 1997 of $1,112,546 and from a private
placement of our common stock in 1999 of $3,195,877, which was completed in
January 2000 with the receipt of an additional $148,800 of proceeds. Of the
$3,344,677 proceeds raised from this private placement of common stock,
approximately $1,600,000 was used to
14
<PAGE>
recruit brokers utilizing a forgivable loan program, approximately $600,000 was
used to upgrade our technology and equipment, and approximately $400,000 was
used toward investments and other long term assets. The balance of approximately
$745,000 was used in the fourth quarter of 1999 to build our infrastructure and
for arbitration action costs and related professional fees.
We may experience substantial changes in net cash provided by operating
activities, as reported in our statements of cash flows, depending upon our
securities position at the reporting date. For example, securities owned at
March 31, 2000 was about $926,000 greater than the position owned at December
31, 1999. The majority of the securities owned position is in municipal
securities which securities are often only maintained for very short holding
periods.
Beginning in the fourth quarter of 1999, we implemented a forgivable
loan program. These loans are utilized to retain key management and to recruit
and attract high caliber brokers. The terms of these loans range from two to
five years and bear interest at a rate of 7.125%. For each year the employee is
in good standing with us, we forgive a ratable portion of the principal and
related interest. If the employee is terminated either voluntarily or for cause,
the principal plus accrued interest is due and payable within 120 days. If the
employee is terminated without cause or upon death or disability, the principal
balance plus accrued interest is immediately forgiven.
To finance First Colonial's investment banking underwriting activities,
we have, from time to time, obtained temporary subordinated loans which conform
to NASD requirements and are, by agreement with the lender, subordinated to the
claims of all other creditors. These loans are repaid within 45 days. No
subordinated loans were obtained in 1999. In 2000, we expect to obtain a
temporary subordinated loan to enable First Colonial to support its net capital
position in its role as an underwriter of this initial public offering. Upon
successful conclusion of the initial public offering and the approval of the
NASD, First Colonial will repay such subordinated loan.
We have issued 122,500 shares of our Series A Convertible Preferred
Stock. We are required to pay a quarterly cash dividend of 10%, or approximately
$30,000 per quarter.
We have an informal capital commitment to continue to upgrade our
technology with Kingland Systems, Inc. that will amount to approximately
$200,000 over the next six months. There are no other capital commitments.
As of March 31, 2000, we had cash of approximately $300,000 and a
working capital deficit of approximately $165,000. Our overall capital and
funding needs are continually reviewed to ensure that our capital base can
support the estimated needs of our business. These reviews take into account
business needs, as well as our regulatory capital requirements. In May 2000, we
expanded our line of credit from $100,000 to $250,000 and raised an additional
$250,000 from an unaffiliated investor by issuing a promissory note and
warrants. We intend to use the proceeds of this offering to fund our continued
growth and implement our acquisition strategy ( see "Use of Proceeds"). We
believe that the funds generated by this offering will be sufficient to fund our
capital and operational requirements for at least twelve months from the date of
this prospectus.
15
<PAGE>
BUSINESS
Overview
Colonial Direct Financial Group, Inc. (the "Company"), a Delaware
corporation incorporated in August, 1997, is a holding company comprised of a
group of diversified financial services companies, all focused on delivering
value to the consumer through traditional methods of offering financial services
and the Internet. First Colonial Securities Group, Inc. ("First Colonial"), our
principal operating subsidiary, and a registered broker-dealer and member of the
National Association of Securities Dealers, Inc. ("NASD"), is a full service
securities firm that has serviced the investment community since 1990. First
Colonial is engaged in securities brokerage, investment banking, securities
trading and other related financial services activities. Our clientele is
primarily composed of high net worth individuals throughout the country. First
Colonial also maintains a sales department of seasoned financial consultants, a
research department and an equity syndicate department. First Colonial currently
conducts its securities business out of 15 offices, four of which are corporate
owned and from which the vast majority of our securities business is generated.
The balance are operated under operating agreements with independent
contractors.
During the fourth quarter of 1999, we completed the acquisitions of an
employee benefits company and an electronic tax return preparation company. In
the first quarter of 2000, we also organized a business services consulting
subsidiary, which acquired the assets, liabilities and service revenue of a
certified public accounting ("CPA") firm. In the second quarter of 2000, we
completed the acquisition of an insurance agency. We plan to grow these
subsidiaries and acquire similarly situated small businesses seeking growth
opportunities and exit strategies. We intend to add value to these businesses by
cross selling a wide array of financial service products, upgrading their
technology and creating an economy of scale, thereby reducing costs. We have
built, and plan to further enhance shareholder value, by continuing to construct
an extensive data base of customers with significant assets under our
management.
We intend to continue to offer traditional full service financial
products and services to our clients, while capitalizing on the rapid growth and
increasing demand for Internet-based business products. Through our acquisition
strategy and augmented by our sophisticated online services, we have become a
diversified online financial services company, providing "one-stop-shopping" for
a broad range of financial products and services.
Our strategy is directed at the emerging full service and mid-tier
brokerage client that is increasingly demanding online trading and one-stop
financial services. Research from leading industry analysts indicates that
significant growth is projected for these sectors, while deep discount brokerage
online trading is projected to grow at a much slower rate. This strategy allows
us to leverage our existing network of brokers, agents and advisors, enabling
them to serve more clients through the use of technology. For example, brokers
will be able to send an e-mail "e-lert" to an unlimited number of clients
simultaneously, while traditional telephone methods restrict the number of
clients that can be quickly contacted. Enhancing broker/client communications
and providing online access to enriched investment information will further
strengthen the relationship with our existing client base, as well as
potentially attracting new clients.
16
<PAGE>
Our unique e-commerce technology platform supports online client
service across our financial products and service lines. The technology platform
integrates our online trading system which clears trades through PaineWebber,
with our content-rich website that will support all of our business lines. This
proprietary e-commerce Internet platform provides our full-service brokers and
financial advisors with the capability of efficiently providing the highest
levels of service to our clients. Through tiered levels of service, these same
e-business systems will avail our clients with online account opening, account
information, current financial news and analysis, and transaction capability.
Importantly, effective e-business tools can also be applied to support, manage,
and control financial advisors and brokers, who can market our financial
products and services nationwide.
Our website, www.colonialdirect.com, currently offers online services
for a suite of investing tools. Current website development is on schedule to
provide insurance, retirement services and tax preparation capabilities by the
third quarter of 2000. We elected to develop the most technically challenging
element of the website, online investing, first, soon followed by the other
areas of functionality.
All of our financial service businesses will be linked together through
our proprietary data warehouse, increasing the utility of our information and
promoting the integration of our service lines. Utilizing state-of-the-art
analytical tools, we will be capable of effectively focusing our marketing
efforts, as well as facilitating strategic alliances through the use of the
Internet. Access to new clients through these methods will provide us with the
ability to acquire client assets at a lower cost than through traditional
advertising methods.
Our Internet-based customer care systems are fully integrated with
back-office support systems enabling us to add large numbers of financial
service professionals quickly, without having to correspondingly increase our
back-office support staff. In the highly regulated financial services industry,
the ability to efficiently assure compliance, while providing outstanding client
service, is critical to achieving and sustaining our growth and profitability.
The Market
The financial services industry has changed considerably over the last
25 years. Before 1975, all stock exchanges required brokers to charge fixed
minimum commissions for trades of listed stock. Under pressure from Congress,
the Department of Justice and the SEC, in 1975, these policies were changed,
which allowed for negotiated commissions and the unbundling of investment
services. The unbundling of brokerage services from other financial services has
permitted investors to pick and choose among various financial providers for
specific services. This includes insurance agents, financial planners, bankers
and, most recently, accountants. Furthermore, financial institutions, including
insurance companies and commercial banks and savings and loan associations,
offer customers some of the services and products currently provided by
securities firms and numerous commercial banks and/or their affiliates have
entered into various additional business activities, such as underwriting equity
and debt securities. These developments have brought about a myriad of
possibilities and opportunities to the consumer. Does the investor seek advice
with a full service provider, or choose a discount broker and/or trade and
invest online via the Internet? Further, does the investor go to several
different sources, or is it easier to go to one company providing a menu of
different yet complementary products?
In recent years, the use of the Internet as a tool for obtaining
information, communicating and effecting commerce is also changing the financial
services industry. The Internet provides investors with a wealth of information
about investing, including stock picks, technical charts, analysis and financial
17
<PAGE>
corporate news. As a result, investors are more self-reliant and value
conscious, are managing their own money and are increasingly reluctant to pay
high fees to full-service retail brokers. This has led to significant growth in
online investing and the entry into the market of electronic or online trading
which has experienced phenomenal growth since the Internet "e-brokerages" were
introduced in 1994.
Traditionally, brokerage clients fell into two categories: full-service
and discount. With the emergence of online investing, a new class of brokerage
service emerged, mid-tier, through which clients seek and obtain a relatively
high level of service, more akin to full-service, by leveraging technology. In
her book "Now or Never: How Companies Must Change Today to Win the Battle for
Internet Consumers", (Harper Business 2000), Mary Modahl, Vice President of
Research, Forrester Research, Inc., predicts that by 2003, there will be
approximately 2.2 million full service investors trading online, up from 100,000
in 1999, representing 4.5 million accounts and assets of $1.4 trillion. Ms.
Modahl further predicts that by 2003, there will be approximately 5.4 million
mid-tier investors, up from 1.6 million in 1999, representing 10.7 million
accounts and assets of $1.5 trillion.
Until recently, the primary use of online trading systems has been for
deep discount clients, however, we expect that the significant growth in
accounts and assets will occur with the mid-tier and full service clients. We
have traditionally targeted and serviced the needs of full service clients, with
average account assets in excess of $100,000. While we intend to market our new
technology platform to the online trading needs of all types of accounts, we are
particularly well positioned to service the online trading needs of both the
full service and mid-tier client, and do not intend to target the deep discount
client base, which is projected to be the slowest growing segment.
As a result of the growth of the Internet as a tool to obtain
information, the ability to access and utilize financial management tools is
expected to continue to grow significantly. We believe we are positioned to
service financially sophisticated and technologically capable investors and in
particular, traditional brokerage customers. However, we see accountants and
similarly situated financial planners and advisors capturing more of the
investment and insurance business and investors seeking to consolidate their
financial service needs with companies that can provide "one-stop-shopping" with
numerous products. Through technology and the implementation of our acquisition
strategy, we intend to better service our clients, grow our data base of clients
and capture more of their assets to satisfy their current and ongoing financial
service needs.
Our Business
General Financial Brokerage Services
We provide full service traditional brokerage services primarily to
high net worth individuals and to small to mid-sized institutions (such as hedge
funds, money managers, mutual funds and pension funds). To support the
investment services provided to these investors, we effect transactions in
equity securities on a principal and agency basis for our clients. Our retail
sales division consists of 95 (25 of which are independent contractors)
registered representatives. First Colonial has contracted with Correspondent
Services Corp., a wholly owned subsidiary of PaineWebber, Inc. ("PaineWebber")
for clearing services (the "Clearing Firm"). Our retail customer accounts are
carried on a "fully disclosed" basis by the Clearing Firm, pursuant to a
clearing agreement. This agreement provides that our clients' securities
positions and credit balances in cash accounts are insured for up to $4.5
million through a private insurer that is supplemental to standard SIPC
protection, and our Resource Management and Business Services Accounts are
provided unlimited insurance coverage, up to the net equity in the account. All
customer credit balances are subject to immediate withdrawal from First
Colonial, at the discretion of the client.
18
<PAGE>
We also intend to provide our clients with computerized direct access
to our trading desks which are online directly with the various stock exchanges,
and institutional buyers and sellers, via our Clearing Firm and various
electronic networks (ECNs). Our brokers are committed to using our trading desks
to obtain for our clients the fastest execution of their order at the best
possible price at the time the order is given. In addition, as a result of the
technology we use, we can access the most up-to-date electronic news,
information and research reports.
Given the trend towards communicating, obtaining information and
effecting transactions through electronic means, we are committed to serving the
changing needs of our clients. As a result, we have a team of well-trained
registered brokers available to assist our clients by telephone, intranet or the
Internet.
Internet-based Brokerage Services
We are currently deploying the systems which will enable our clients to
have on-line access to their account information. This electronic access will
enable our clients to review and monitor the securities positions in their
portfolio, confirm their buying power, margin balances (if applicable), realized
and unrealized gains or losses, obtain stock quotes, enter orders for execution,
and review their recent trading activity. In addition to providing information
for their particular account, we will also provide our clients, via the
Internet, pertinent market information regarding timely analysts' reports, and
relevant earnings reports sorted by those companies that exceeded earning
expectations and those that fell below expected earnings. These systems are
based on industry standards that will allow us to rapidly deploy the latest in
voice recognition and wireless technologies as these technologies are introduced
into the marketplace. We will also make available to our clients through the use
of the Internet, information about the overnight markets and the futures
markets, stocks that are trading before the market opens, and major company news
through the Internet.
We are currently, and will in the future be utilizing the Internet in
various ways to help expand our business. First, we plan to use the Internet to
help our existing brokers better serve our clients. The Internet will help our
brokers disseminate information to clients simultaneously, thereby allowing our
brokers to efficiently serve more clients. Second, we intend to use the Internet
to serve an ever-growing number of investors who want to execute all of their
trading and investment decisions independently of a financial advisor. Prior to
providing this service, based upon the express representations and stated
qualifications of prospective clients, we will pre-qualify these prospects to
help ensure they are capable of making their own trading and investing
decisions.
We have a strong commitment to technology and are in the process of
upgrading the software and technology to enable our brokers and clients to more
efficiently use the Internet. A portion of the net proceeds of this offering
will be used to complete this upgrade. We are working with one of the premier
brokerage technology companies, Kingland Systems, Inc. ("Kingland") in
developing an innovative upgraded solution.
Proprietary Technology
Through our relationship with our Clearing Firm and Kingland, we are
assembling a unique set of technologies that will provide us with the ability to
truly integrate our financial products and services offerings to our clients.
This proprietary integration of technologies will provide both our professionals
19
<PAGE>
and our clients with the ability to view all of their investment instruments on
one consolidated statement, and be able to similarly view their portfolio
online. We believe that clients will find a complete online view of all of their
financial instruments, from securities to IRAs, 401(k)s and insurance, to be
appealing, and will help us retain our existing clients and attract new clients.
We believe our Internet-based technology will be instrumental in
cost-effectively supporting and controlling expanded brokerage operations, as
well as, our growing network of accountants and financial advisors. We believe
the efficiencies and controls provided through our technology will enable us to
grow our number of professionals, while maintaining traditional high levels of
customer service.
Tax Preparation
In the fourth quarter of 1999, we completed the acquisition of
Certified Tax Returns USA, Inc. and renamed it Colonial Direct Tax Preparation,
Inc. This company's revenues were insignificant to us in fiscal year 1999 and
the first quarter of 2000. This company is an electronic-tax return preparation
organization that is authorized by the Internal Revenue Service to
electronically prepare and file tax returns on a nationwide basis and offers a
quick refund service through an alliance with a major bank. It obtains its
clients from a variety of referral sources, including the Internet, retail
distributors and other small businesses. We are integrating these services into
our overall financial services operations, and after each tax season, plan to
cross-sell all of our financial service products to this data base of clients.
Benefits Consulting
In the fourth quarter of 1999, we completed the acquisition of KWT
Consultants, Inc. and renamed it Colonial Direct Retirement Services, Inc. This
company's revenues were insignificant to us in fiscal year 1999 and in the first
quarter of 2000. This company is a third party administrator of employee
benefits and retirement plans and provides plan design, implementation and
consulting, communication to employees, ongoing administration and compliance
testing and offers expert technical advice. According to the Profit
Sharing/401(k) Council of America (the "Council"), defined contribution plan
participation and corresponding assets grew from approximately $1.1 trillion in
1994 to approximately $2.2 trillion in 1998. At the same time, the number of
participants in these plans grew from approximately 45 million in 1994 to
approximately 55 million in 1998. The Council, in analyzing a study conducted by
Booz-Alan & Hamilton, Inc., further found that between 1994 and 1998, the
greatest increase in sponsor participation was in smaller companies, those with
100 to 499 employees, thus becoming the fastest growing segment of the
retirement market. This is the target market of Colonial Direct Retirement
Services. The Colonial Direct Retirement Services team of experienced
consultants and retirement plan specialists (either in-house or through
affiliations) includes actuaries, attorneys, plan administrators, and MIS
support personnel. Our pension business is comprised of three main areas: the
legal and design area of setting up the formalized qualified plans and
configuring a plan to meet the specific needs of the client, the annual
administration of the plan (including required governmental compliance), and the
financial management of the plan itself. The full range of retirement plans
available include: ESOPs, 401(k) plans, Profit Sharing and Defined Benefit
Pension plans and Cafeteria plans.
We believe our existing clients will benefit from the availability of
these products and services and that this company's clients will correspondingly
benefit from our unique technology platform and the products and services
offered by our various financial and investment professionals.
20
<PAGE>
Business Management and Consulting Services
In the fourth quarter of 1999, we formed a subsidiary called Colonial
Direct Business Services, Inc. whose purpose is to acquire and operate business
management and consulting services entities. In the first quarter of 2000, we
completed the acquisition of certain of the non-attest assets and liabilities of
Kopple & Gottlieb, LLP, a firm of certified public accountants, and are
operating that business under a newly formed entity named KG Business Services,
Inc., a subsidiary of Colonial Direct Business Services. This company
contributed revenues to us of approximately $250,000 in the first quarter of
2000. This company provides professional services in the areas of: accounting,
compilations, bookkeeping, litigation support, bankruptcy work, and management
and consulting services. It will also begin to offer all of the investment
services and insurance products and services already offered to our clients.
The accounting industry has experienced two trends in recent years. One
trend is that accountants have been allowed greater flexibility in offering
investment and insurance products. The other trend is that accounting firms are
consolidating with other accounting firms or larger diversified financial
service organizations. We plan to pursue a market niche by acquiring small
firms, often overlooked by the larger "consolidators" of accounting firms. We
will offer them improved technology, access to our financial service products
and an economy of scale, which we believe will result in cost savings.
Insurance
On June 1, 2000, we completed the acquisition of Solomon, Bardes &
Associates, Inc. and renamed it Colonial Direct Insurance Agency, Inc. We have
not yet recognized any revenues from this acquisition. This company, based in
Boca Raton, Florida, has traditionally offered insurance products to high net
worth individuals, and represents many insurance carriers and products.
Insurance is often a critical component of an individual's financial, estate and
retirement plan, and having the ability to handle in-house the complete needs of
a high net worth individual, including insurance, strengthens the overall
relationship with our clients.
Our insurance offerings will not be limited to only high net worth
individuals. Our unique technology platform will support the offering of
insurance products through the Internet. We believe that new client contacts
resulting from Internet insurance business will result in a significant source
of business for our other financial products and services.
Our Business Strategy
Due to the dramatic changes affecting the financial industry, we have
re-evaluated our business model to ensure we remain strong and maintain a
competitive advantage in the future. As a result, we have developed and
undertaken significant changes to our prior operating plans to create an
entirely new business model. The new plan will utilize the current strengths of
our already established franchise, along with the distinct business advantages
of Internet technology.
In late 1998, we determined that our future growth could be enhanced
and maximized by "rolling-up" related and complementary financial service
companies and by utilizing Internet commerce. We will continue to be a holding
company, and, together with our existing broker dealer subsidiary, serve as a
vehicle to offer diversified financial services, focusing on delivering value to
the consumer through their choice of a high level professional service or
through the convenience and lower costs of the Internet.
21
<PAGE>
Our web-site will provide a "one-stop-shop" for financial products and
services. It will be the hub for all or our clients' online financial
transactions. Our operating companies and divisions will host their own online
products and services, which include providing online investment execution,
insurance products, tax return preparation, accounting services, employee
benefits administration and consulting. We also intend to develop strategic
alliances with banks and mortgage companies using the Internet so that we can
cross-sell one another's financial products.
It is important to point out the distinct advantages cross-selling
opportunities will add to the new organization. We have acquired and intend to
continue to acquire related and complementary financial services companies. By
strategically incorporating our services into a centralized web-site, our
clients and those of our acquired companies and divisions will be able to select
from many different financial offerings, products and services, with utmost
convenience at competitive rates. Furthermore, should they so desire, clients
will continue to have the opportunity to directly access an appropriately
qualified professional.
Our goal is to acquire or form alliances with accountants, insurance
professionals, employee benefits companies, mortgage companies and banks and
provide them with more and more products and services, utilizing our technology
and network of existing professionals. As a result, we intend to build our
database of clients and assets under management, which we believe will increase
our value and maximize shareholder value.
Strategic Relationships
We currently utilize the services of the Clearing Firm for all
custodial and clearing issues associated with brokerage transactions. From this
relationship, we are able to offer quality safekeeping and protection on all
accounts, including increased insurance of clients' assets; cash accounts are
insured for up to $4,500,000 through a private insurer that is supplemental to
the $500,000 standard SIPC protection, and our Resource Management and Business
Services Accounts are provided unlimited insurance coverage, up to the net
equity in the account. In addition, we are able to offer our clients the ability
to participate in PaineWebber managed initial public offerings and other
investment banking transactions; access to its internationally recognized
research department; and the ability to participate in a large database of
no-load and load mutual funds.
We have forged a strategic relationship with Kingland Systems, Inc., a
significant provider of technologies to PaineWebber. We are currently
participating in an effort to optimize broker and clients screens to make them
more efficient and effective. Additionally, with Kingland, we are integrating
non- broker related financial investments (e.g. insurance products) in the
portfolio summary provided by the systems.
We are actively pursuing a number of additional strategic relationships
with various companies, most of whom have an Internet presence. We believe that
forging strategic relationships with other companies is an effective method to
obtain access to potential clients while avoiding prohibitively large
advertising expenses. For example, we have established a strategic relationship
with Cavion Technologies, Inc. ("Cavion") an Internet provider to the credit
union industry. Cavion provides Internet-connectivity options and solutions to
its credit union members and our future presence on their site will increase the
attractiveness of their site to credit unions, who are attempting to shift their
members towards Internet-based financial services. This relationship will enable
us to offer our products
22
<PAGE>
and services to approximately 1.5 million credit union members through their
credit union websites, and Cavion has advised us that this number is expected to
grow to over 5 million members within two years. We believe that the
relationship with Cavion, as well as other strategic relationships we are
currently developing, will provide us with low cost access to a significant
number of potential clients through the Internet.
Sales and Marketing
We have developed an innovative approach to marketing in response to
huge advertising budgets dedicated by other online companies. While we plan to
use some of the proceeds from this offering on traditional advertising, we
believe pursuing and developing strategic alliances will result in a greater
return on our marketing investment.
This approach requires us to invest a relatively modest amount of money
in marketing personnel, as well as website development and collateral materials,
to develop the alliances. The capital required to develop strategic alliances is
a small fraction of the capital required to use traditional advertising
techniques to reach a similar number of potential clients. As illustrated above,
we expect that our investment in the Cavion relationship should prove to be
extremely cost-beneficial when compared to traditional methods to reach an equal
number of target clients.
Our sales approach is also innovative. While we are continuing to build
our capacity through adding brokers to our key offices, we also expect to
increase sales capacity through creating a network of independent brokers,
agents, and financial advisors. Our investment in technology is intended to
support and control the network of independent personnel. Additionally, we
intend to increase sales through cross-selling between our service lines. The
cross-selling synergy will be generated through the establishment of a balanced
system of performance measures which reward brokers, agents, and advisors based
on cross-selling results.
Competition
The financial services industry is characterized by intense
competition. We face competition in all aspects of our business and compete
directly with numerous other securities and financial services firms, a
significant number of which offer their customers a broader range of financial
services, have substantially greater financial, personnel, marketing, research
and other resources, have greater operating efficiencies, and have established
reputations relating to product offerings and customer service. Over the past
several years, the securities industry has become increasingly competitive.
Numerous securities firms have either ceased operations or have been acquired by
other firms and certain corporations with substantial financial resources,
expertise and access to capital markets have entered the securities industry by
acquiring leading securities firms.
In addition, financial institutions, including insurance companies and
commercial banks and savings and loan associations, offer customers some of the
services and products currently provided by securities firms and numerous
commercial banks and/or their affiliates have entered into various additional
business activities, such as underwriting equity and debt securities. Moreover,
an increasing number of firms offer discount brokerage services to individual
retail customers and generally effect transactions at lower commission rates on
an "execution only" basis without offering other services such as investment
recommendations and research.
Current and potential competitors have established or may establish
cooperative relationships
23
<PAGE>
among themselves or with third parties or may consolidate to enhance their
services and products. We expect that new competitors or alliances among
competitors will emerge and may acquire significant market share. We can provide
no assurance that we will be able to compete effectively with current or future
competitors or that the competitive pressures we face will not harm our
business.
Government Regulation
Broker-Dealer Regulation
The securities industry is subject to extensive regulation under
federal and state law. The SEC is the federal agency responsible for
administering the federal securities laws. In general, broker-dealers are
required to register with the SEC under the Securities Exchange Act of 1934, as
amended (the "Exchange Act"). First Colonial is a broker-dealer registered with
the SEC. Under the Exchange Act, every registered broker-dealer that does
business with the public is required to be a member of and is subject to the
rules of the NASD. The NASD has established Conduct Rules for all securities
transactions among broker-dealers and private investors, trading rules for the
over-the-counter markets, and operational rules for its member firms. The NASD
conducts examinations of member firms, investigates possible violations of the
federal securities laws and its own rules, and conducts disciplinary proceedings
involving member firms and associated individuals. The NASD administers
qualification testing for all securities principals and registered
representatives for its own account and on behalf of the state securities
authorities. First Colonial is also subject to regulation under state law. First
Colonial is currently registered as a broker-dealer in 49 states, Puerto Rico
and the District of Columbia. A recent amendment to the federal securities laws
prohibits the states from imposing substantive requirements on broker-dealers
which exceed those imposed under federal law. The amendment, however, does not
preclude the states from imposing registration requirements on broker-dealers
that operate within their jurisdiction or from sanctioning these broker-dealers
who have engaged in misconduct.
Net Capital Requirements; Liquidity
As a registered broker-dealer and member of the NASD, First Colonial is
subject to NASD rule 15(c)3 (the "Net Capital Rule"). The Net Capital Rule,
which specifies minimum net capital requirements for registered brokers-dealers,
is designed to measure the general financial integrity and liquidity of a
broker-dealer and requires that at least a minimum part of its assets be kept in
relatively liquid form. In general, net capital is defined as net worth (assets
minus liabilities), plus qualifying subordinated borrowings and certain
discretionary liabilities, and less certain mandatory deductions that result
from excluding assets that are not readily convertible into cash and from
valuing conservatively certain other assets. Among these deductions are
adjustments (called "haircuts"), which reflect the possibility of a decline in
the market value of an asset prior to disposition.
Failure to maintain the required net capital may subject a firm to
suspension or revocation of registration by the SEC and suspension or expulsion
by the NASD and other regulatory bodies and ultimately could require the firm's
liquidation. The Net Capital Rule prohibits payments of dividends, redemption of
stock, the prepayment of subordinated indebtedness and the making of any
unsecured advance or loan to a shareholder, employee or affiliate, if the
payment would reduce the firm's net capital below a certain level.
The Net Capital Rule also provides that the SEC may restrict for up to
20 business days any withdrawal of equity capital, or unsecured loans or
advances to shareholders, employees or affiliates ("capital withdrawal") if the
capital withdrawal, together with all other net capital withdrawals during a
24
<PAGE>
30-day period, exceeds 30% of excess net capital and the SEC concludes that the
capital withdrawal may be detrimental to the financial integrity of the
broker-dealer. In addition, the Net Capital Rule provides that the total
outstanding principal amount of a broker-dealer's indebtedness under certain
subordination agreements, the proceeds of which are included in its net capital,
may not exceed 70% of the sum of the outstanding principal amount of all
subordinated indebtedness included in net capital, par or stated value of
capital stock, paid in capital in excess of par, retained earnings and other
capital accounts for a period in excess of 90 days. A change in the Net Capital
Rule, the imposition of new rules or any unusually large charge against net
capital could limit those parts of our operations that require the intensive use
of capital and also could restrict our ability to pay dividends, repay debt and
repurchase shares of our outstanding stock. A significant operating loss or any
unusually large charge against net capital could adversely affect our ability to
expand or even maintain our present levels of business, which could harm our
business. First Colonial is a member of SIPC which provides, in the event of the
liquidation of a broker-dealer, protection for clients' accounts up to $500,000,
subject to a limitation of $100,000 for claims for cash balances. Our clients'
accounts are carried on the books and records of the Clearing Firm. The Clearing
Firm has obtained additional insurance from a private insurer in an amount equal
to $4,500,000 for the benefit of our clients' accounts that is supplemental to
SIPC protection.
Additional Regulation
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. Moreover, the
recent increase in the number of complaints by online traders could lead to more
stringent regulations of online trading firms and their practices by the SEC,
NASD and other regulatory agencies. 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. Finally, as our services are
available over the Internet in multiple states, and as we have numerous clients
residing in these states, these jurisdictions may claim that our company is
required to qualify to do business as a foreign corporation in each such state.
While our company is currently registered as a broker-dealer in 49 states,
Puerto Rico and the District of Columbia, we are qualified to do business as a
foreign corporation in only a few states; failure to qualify as an out-of-state
or "foreign" corporation in a jurisdiction where it is required to do so could
subject our company to taxes and penalties for the failure to qualify. Our
business could be harmed by any new legislation or regulation, the application
of laws and regulations from jurisdictions whose laws do not currently apply to
our business or the applications of existing laws and regulations to the
Internet and other online services.
Other Regulatory Issues
Our accounting, benefits administration, pension plan and insurance
business services are vulnerable to legislative changes. Legislative changes may
expand or contract the types and amounts of business services that are required
by individuals and businesses. There can be no assurance that future laws will
provide the same or similar opportunities for business consulting and management
services to individuals and businesses that exist today. Further, our insurance
operations are vulnerable to both judicial and legislative changes. Judicial
expansion in terms of coverage can increase risk coverage beyond levels
contemplated in the underwriting and pricing process. Coverages established by
statute may be lowered or eliminated by legislative or administrative changes of
law.
25
<PAGE>
Employees
At June 1, 2000 we had 130 full-time employees, including 70 registered
representatives, 2 corporate finance specialists, 6 traders, 1 research analyst
and 35 persons engaged in back office operations, syndicate, accounting,
compliance, marketing, information technology, clerical and administration and
16 employees in our non broker-dealer subsidiaries. In addition, there are 25
registered non-employee representatives at the independently-owned offices. None
of our employees are covered by a collective bargaining agreement. We consider
our relationship with our employees to be good.
First Colonial's registered representatives are required to take
examinations administered by the NASD and state authorities in order to be
qualified to transact business, and are required to enter into agreements with
First Colonial obligating them, among other things, to adhere to industry rules
and regulations, First Colonial's supervisory procedures and not to solicit
customers in the event of termination of employment.
Facilities
Our corporate headquarters are currently located at 3010 North Military
Trail, Boca Raton, Florida 33431, where we lease approximately 15,750 square
feet at a rental of $271,791 per annum, under a lease which expires in 2008. As
of June 2, 2000, we entered into a sublease for the balance of the remaining
term of our prior corporate headquarters, located at 1499 West Palmetto Park
Road, Suite 312, Boca Raton, Florida 33486, where we leased approximately 7,400
square feet of space at a rental of $168,360 per annum.
The following information relates to the branch offices of First
Colonial:
<TABLE>
<CAPTION>
Approximate Annual
Office Locations Square Footage Lease Rental Exp. Date
---------------- -------------- ------------ ---------
<S> <C> <C> <C>
New York, NY ...................... 11,165 $474,513 December 31, 2006 (1)
Paramus, NJ ........................ 2,578 $ 43,182 December 31, 2001
Marlton, NJ ........................ 6,130 $123,519 September 1, 2002 (2)
</TABLE>
(1) We remain liable on our prior New York office lease which was for
approximately 4,425 square feet, at an annual rental rate of
approximately $126,500, for a term that expires May 16, 2002. We are
actively seeking a subtenant or assignee for this office space and
remain primarily responsible until such time as a subtenant or assignee
is located and approved by the landlord.
(2) We have entered into a sublease at our Marlton, NJ office location for
the balance of the lease term for approximately 1,469 of the total
square footage, at an annual rental rate of $13,263.
Legal Proceedings
From time to time we are named as parties to lawsuits which have arisen
in the ordinary course of business. Although it is possible that losses
exceeding amounts already recorded may be incurred upon ultimate resolution of
these existing legal proceedings, we believe that such losses, if any, will not
have a material adverse effect on our business, results of operations or
financial position; however, unfavorable resolution of each matter individually
or in the aggregate could affect the consolidated results of operations for the
quarterly and annual periods in which they are resolved.
26
<PAGE>
The business of First Colonial, our principal operating subsidiary,
involves 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 which generally seek rescission and
substantial damages.
In the ordinary course of business, First Colonial is a party to other
legal proceedings and regulatory inquiries, the outcome of which, either singly
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 First Colonial or the Company.
What follows below is a brief summary of certain matters pending against or
involving First Colonial.
First Colonial is subject to supervision and regulation by the NASD,
the SEC and various state securities commissions. As part of this regulatory
oversight, First Colonial is subject to periodic examination and inspections by
these authorities. First Colonial has been advised that as a result of an
examination performed by the Philadelphia office of the NASD for the years 1996
and 1997, several possible material deficiencies were identified by the NASD.
Following the move of First Colonial's headquarters to Boca Raton, Florida in
1998, the Atlanta office of the NASD conducted two subsequent examinations. We
believe that, based upon these subsequent examinations, the deficiencies noted
by the NASD in the 1996/1997 examination have been remedied, although the NASD
investigation is still pending.
The SEC has initiated formal investigations of First Colonial and one
of its current and one of its former senior executive officers as a result of
certain actions taken by one of its managers in an office located in Hazelton,
PA, claiming that the manager had misappropriated funds from his customers. The
SEC's investigation of First Colonial has focused on two primary issues: (i)
whether First Colonial had appropriate supervisory procedures to prevent the
type of alleged misconduct attributed to the branch manager, and (ii) whether
Michael Golden or Steven Schwartz, the former president of First Colonial,
should be held liable for failing to supervise the branch manager. First
Colonial, Mr. Golden and Mr. Schwartz have submitted an Offer of Settlement to
the SEC, without admitting or denying the allegations, which provides for
censures and fines for each of the aforementioned parties in the amounts of
$25,000, $15,000 and $10,000, respectively. In addition, Mr. Schwartz will be
barred from acting in a supervisory capacity for a period of nine months,
however this bar does not prevent Mr. Schwartz from continuing to serve in a
registered representative capacity. However, inasmuch as the SEC's investigation
is still pending against the parties, no final determination as to its outcome
can be made at this time.
In October 1999, First Colonial hired Larry Katz from Ladenburg
Thalmann & Co. Inc. ("Ladenburg") to become its President. Thereafter, several
of Mr. Katz' former associates contacted First Colonial about employment and in
fact joined the firm. As a result of the foregoing, Ladenburg commenced an
arbitration before the NASD against First Colonial and certain of its employees
claiming, among other things, that certain unspecified confidential information
and/or Ladenburg's trade secrets had been misappropriated in connection with
wrongfully soliciting these and certain other individuals to leave Ladenburg and
join First Colonial. Ladenburg sought preliminary injunctive relief in aid of
the arbitration from the Supreme Court of the State of New York, but that
request was denied. Ladenburg also sought a preliminary injunction from the
NASD, but that request was denied as well. First Colonial submitted an Answer
denying the material allegations contained in the Statement of Claim. First
27
<PAGE>
Colonial also served Counterclaims and Third-Party Claims based on statements
made by Ladenburg and its brokers to customers of the brokers who joined First
Colonial. Discovery is on-going and final hearings are scheduled to commence
June 26, 2000.
In November 1999, public customers Gaunitz and McCourt filed an Amended
Statement of Claim before the NASD against each of First Colonial, former
broker, Louis Cohen, and Michael Golden as chairman of First Colonial, alleging,
among other things, breach of fiduciary duty, negligence, violation of state and
federal securities laws, negligent hiring, negligent retention, negligent
supervision, breach of contract, common law fraud and civil theft. The Amended
Statement of Claim seeks compensatory damages of approximately $850,000 (plus
treble and punitive damages) arising out of alleged speculative option trading
which purport to be excessive and unsuitable for Claimants in light of their
financial circumstances and investment objectives. Respondents denied wrongdoing
and asserted various affirmative defenses. Discovery is on-going and final
hearing is scheduled for December 11, 2000.
On or about March 14, 2000, First Colonial was advised that one of its
customers, Carnegie Investment Management, Ltd. ("Carnegie"), whose account was
managed by another one of its customers, LMC Asset Corp., allegedly failed to
pay for approximately 1.9 million shares of Mattel, Inc. common stock, which
shares were purportedly acquired by Carnegie in a "mini-tender offer". LMC Asset
Corp. also served as the Information Agent for Carnegie in connection with the
mini-tender offer. On or about March 27, 2000, Carnegie filed for protection
under Chapter 11 of the Bankruptcy Code in the United States Bankruptcy Court,
Eastern District of Philadelphia. In its bankruptcy filing, LMC Asset Corp. is
scheduled as a creditor of Carnegie. On April 7, 2000, Deutsche Bank Securities,
Inc., another creditor scheduled in Carnegie's bankruptcy filing, commenced an
action against LMC Asset Corp. in United States District Court in the Southern
District of New York in which it sought an order of attachment against LMC Asset
Corp. to prevent it from disbursing or otherwise liquidating any funds or
securities in the account maintained at First Colonial. On April 19, 2000, the
Court granted the order of attachment as sought by Deutsche Bank Securities. On
May 21, 2000, a partial settlement agreement was agreed to in the bankruptcy
proceeding, which agreement was submitted to the Bankruptcy Court for
consideration on May 23, 2000. A hearing on the partial settlement agreement has
tentatively been set for June 6, 2000. The partial settlement agreement
provides, in relevant part, for a return to the tendering parties, on a pro-rata
basis, of all of the shares of Mattel, Inc. common stock maintained in the
Carnegie account. The settling parties reserved their rights to seek further
relief from, among other entities and individuals, First Colonial, Correspondent
Services Corp., First Colonial's clearing firm, and LMC Asset Corp. and its
principals. First Colonial has not been named in any action with respect to the
foregoing, however inasmuch as each of the accounts of Carnegie and LMC Asset
Corp. were maintained at First Colonial during the relevant time period, the
Company is closely monitoring each of the referenced proceedings.
28
<PAGE>
Management
The following table sets forth the names, ages and positions held with
respect to each director and executive officer of the Company and its principal
operating subsidiaries:
<TABLE>
<CAPTION>
Name Age Title/Position
---- --- --------------
<S> <C> <C>
Michael E. Golden 56 Chairman of the Board and Chief Executive Officer of the Company
Ben Lichtenberg 45 Vice Chairman of the Board and Chief Financial Officer of the
Company
Rodney Smith 47 President of the Company and Director
Jeffrey S. Kahn 48 President, Colonial Direct Retirement Services, Inc. and Director
Lewis Maniloff 60 Secretary of the Company and Director
Ralph Solomon 68 President, Colonial Direct Insurance Services, Inc. and Director
Michael E. Spoll 60 President, KG Business Services, Inc. and Director
Frederic L. Bor 56 Director
Richard G. Seidenberg 60 Director
Lawrence Katz 63 President, First Colonial Securities Group, Inc.
</TABLE>
The directors and officers of the Company and its principal operating
subsidiaries are as follows:
Michael E. Golden has been Chairman of the Board and Chief Executive
Officer of the Company since its inception. Beginning in 1968 until forming
First Colonial in 1989, Mr. Golden held positions of increasing responsibility
with E.F. Hutton, Shearson Loeb Rhodes and Smith, Barney, Harris, Upham & Co.
("Smith Barney"). From 1979 to 1989 he was the resident manager of Smith
Barney's Cherry Hill, New Jersey office which he personally opened. Mr. Golden
was the Vice Chairman of the Board of Directors and a founder of Carnegie Bank
N.A., a Nasdaq listed commercial bank located in Princeton, New Jersey and a
former director of three other banks, Admiralty Bancorp in Palm Beach Gardens,
FL, Unity Bancorp in Clinton, NJ and Boca Raton First National Bank in Boca
Raton, FL. He is also the founder and Chairman of Kid Academy, a chain of day
care centers and a former director of Suprema Specialties, Inc. and Microleague
Multimedia, Inc., both Nasdaq listed companies. Mr. Golden earned a BA in
Accounting from Temple University. He is a General Securities Principal and a
Registered Options Principal and is First Colonial's Senior Registered Municipal
Principal.
Ben Lichtenberg is Vice Chairman of the Board and Chief Financial
Officer, and has been the Director of Investment Banking of First Colonial since
1992. From 1981 until joining First Colonial, Mr. Lichtenberg was employed as an
investment banker in the securities industry primarily as Vice
President/Corporate Finance of Butcher and Singer Inc., a Philadelphia based
regional brokerage house which was subsequently acquired by Wheat, First
Securities, Inc. Mr. Lichtenberg has sat on the Board of Directors of three
public companies and serves as an advisor to the Board of Directors of several
other companies. He earned a BS in Economics from the Wharton School of the
University of Pennsylvania and is a Certified Public Accountant.
Rodney Smith has been President of the Company since October 1999 and
is a director. Prior to joining us, Mr. Smith was a Partner in the Miami office
of Arthur Andersen LLP, where he served in that capacity since 1996. He has over
twenty years of business consulting experience in the areas of technology and
business strategy across a broad range of industries including financial
services, retail/distribution, not-for-profit, high-tech manufacturing, and
telecommunications. His experience in
29
<PAGE>
financial services includes responsibility for production banking systems,
financial systems strategy and implementation in the insurance industry, and
artificial intelligence applications strategy. He directed the implementation of
Peoplesoft Financials for a multi-national retailer with significant operations
in the Americas and Europe. Furthermore, Mr. Smith directed an information
Systems Planning project for an insurance industry client with nationwide
operations. Follow up work included implementation of an ERP system, and custom
design and development of a warranty system. Mr. Smith holds a M.S. in Systems
Science from the Thomas Watson School of Technology of the State University of
New York at Binghamton, where he also obtained a B.A. in Geography and History.
He has attended numerous professional courses on technology, strategy, and
organizational development.
Jeffrey S. Kahn is a director and President of Colonial Direct
Retirement Services, Inc., one of our recently acquired subsidiaries formerly
known as KWT Consultants, Inc. Mr. Kahn, who founded KWT Consultants, Inc. in
1980, has been active in both the legal and administrative aspects of employee
benefits for 23 years. He is also a senior partner in the law firm of Kahn &
Waxman, P.A., where he is the Director of the firm's employee benefits practice
group, however Mr. Kahn will be devoting such time and resources as are
commensurate with his responsibilities to Colonial Direct Retirement Services.
Mr. Kahn's law firm will provide plan documents and other ancillary services to
Colonial Direct Retirement Services and assist our financial advisors and
brokers with sophisticated estate and retirement planning for our clients. He
has been a member of the Florida Bar since 1978 and the New York Bar since 1977.
He is a graduate of Case Western Reserve University (B.A. Political Science,
1973) and Hofstra University School of Law (J.D., 1976). Mr. Kahn holds
memberships in the Tax and Employee Benefit Sections of the Florida Bar
Association, as well as, the Committee on Employee Benefits of the Tax Law
Section of the New York State Bar Association. In addition, he is a member of
the National Center for Employee Ownership and the American Society for Pension
Actuaries. Mr. Kahn has written numerous articles on employee benefits and has
lectured extensively before charitable, professional, and financial
organizations on executive compensation, retirement plans, and other employee
benefit matters. He is the author of the Employee Benefits chapter in the four
volume Treatise "Responsibilities of Insurance Agents and Brokers" published by
Matthew Bender & Co.
Lewis Maniloff is Secretary and a director of the Company and is an
executive vice president of First Colonial and has served in that capacity since
1990. Mr. Maniloff has over 30 years of experience in the securities industry.
He was Associate Branch Manager with Smith Barney in their Mt. Laurel, NJ office
for ten years. Mr. Maniloff has been a member of our Board of Directors since
our inception.
Ralph M. Solomon is a director and President of Colonial Direct
Insurance Services, Inc., our recently acquired insurance subsidiary, formerly
known as Solomon, Bardes & Associates, Inc. Prior to the acquisition, Mr.
Solomon was the President of Solomon, Bardes & Associates, Inc., a company he
co-founded in 1993. Mr. Solomon received his degree from Temple University in
Philadelphia. He earned The American College's Chartered Life Underwriter
designation in 1963. He has served as an Agent, Agency Manager, and a Home
Office Vice President of the Equitable Life Assurance Society of the United
States. He is a Life and Qualifying Member of the Million Dollar Round Table and
a member of the Association for Advanced Life Underwriters. He current holds a
position as Chairman of the Legal Issues Committee for the Palm Beach County
Chapter of the American Society of CLU and ChFC. Mr. Solomon has over 40 years
of insurance experience in helping clients solve their life insurance and
financial problems.
Michael E. Spoll is a director and President of KG Business Services,
Inc., a division of our recently formed business services subsidiary. Mr. Spoll
has been a Certified Public Accountant in Pennsylvania since 1965. Since 1970,
Mr. Spoll has been a partner in the firm of Kopple & Gottlieb,
30
<PAGE>
LLP and since 1990 has been the managing partner of the firm. Upon the closing
of the acquisition of the assets of Kopple & Gottlieb, L.L.P., Mr. Spoll became
the president of our newly formed subsidiary formed to manage its accounting and
consulting business. He has been a member of the American and Pennsylvania
Institutes of CPA's and has served on the Pennsylvania Institute of CPA's
Committee on Health Care since 1991 and also has served on the Institute's
Members' Advisory Service for inquires regarding health care. He is a graduate
of St. Joseph's University in Philadelphia, PA. Mr. Spoll is also active in the
Boy Scouts of America, currently serving as district Chairman of the Frontier
District of the Cradle of Liberty Council.
Frederic L. Bor became a director in May 2000. Mr. Bor is currently
engaged in the general practice of law in Cherry Hill, PA and his practice is
focused on complex civil and criminal litigation. He is a member of the Bars of
New Jersey and Pennsylvania and has been a practicing attorney since 1972. Mr.
Bor is an Adjunct Professor of Trial Advocacy at Temple University of Law in
Philadelphia, PA. From 1979 to 1983, Mr. Bor was a Judge in New Jersey appointed
to and serving various Municipal Courts in the state. Mr. Bor holds a B.A., M.A.
and Ph.D. in Political Science and his J.D. from Rutgers School of Law where he
was Senior Editor of the Law Journal.
Richard G. Seidenberg became a director in May 2000. Mr. Seidenberg
founded Corporate Dynamics, a benefits brokerage and consulting firm, in 1967.
Subsequently, Mr. Seidenberg created two subsidiary companies; United Benefits,
Inc., which provides a full range of employee benefit consulting services, and
The National Health Insurance Agency, Inc., which provides individual health
insurance products. In December 1997, Corporate Dynamics was acquired by Summit
Bancorp. Mr. Seidenberg remained president and chief executive officer of
Corporate Dynamics until his retirement in January 2000. Mr. Seidenberg was also
a partner in Philadelphia Benefits Corporation which serves Pennsylvania
insurance brokers as the largest network broker for Independence Blue Cross and
Blue Shield. He is also co-founder of Power Play International, a company which
represents athletes in contract negotiations, promotion and endorsement and
financial planning.
Mr. Seidenberg is presently Chairman of the New Jersey chapter of
American Associates of Ben Gurion University. He has served as a member of the
Inter-County Brokers Advisory Board, is Vice Chairman of the Cooper Foundation,
serves as Chairman of the Board of the Helene Fuld School of Nursing and is a
member of the Blue Cross Council and U.S. Healthcare Brokers Advisory Board. Mr.
Seidenberg is past Chairman of the Philadelphia National Conference of
Christians and Jews, an organization that promotes racial harmony. He is a
member of the U.S. Committee Sports for Israel, a lifetime member of the Maxwell
Football Club and past president of the Woodcrest Country Club.
Lawrence Katz became President of First Colonial in November 1999. Mr.
Katz has been in the securities business since 1966 when he joined Standard &
Poor's as a securities analyst and for the next ten years, was in retail and
institutional sales, and was also Director of Research at Tessel, Paturick &
Ostav, and Haas securities. In 1976, Mr. Katz joined Bear Stearns as a retail
salesman and in 1986, he joined Ladenburg Thalmann & Co. At Ladenburg, Mr. Katz
was in retail sales and from December 1996 to February 1999, he was a Managing
Director in charge of the New York retail sales department and was responsible
for over 125 persons including approximately 75 brokers. Mr. Katz was a member
of Ladenburg's Board of Directors from March 1999 to June 1999. Prior to joining
the securities business, Mr. Katz was assistant comptroller at Deluxe Film
Laboratories, a subsidiary of 20th Century Fox. Mr. Katz obtained an economics
degree from Brooklyn College in January 1961.
There is no family relationship between any of our officers, key
employees and directors. Directors hold their offices until the next annual
meeting of our shareholders and until their successors
31
<PAGE>
have been duly elected and qualified or their earlier resignation, removal from
office or death. We recently formed audit, compensation and nominating
committees. There are currently no other committees of the Board of Directors.
Upon consummation of this offering, the audit and compensation committees will
consist of a majority of non-employee directors. Officers serve at the pleasure
of the Board of Directors and until the first meeting of the Board of Directors
following the next annual meeting of our shareholders and until their successors
have been chosen and qualified.
Director Compensation
We do not currently pay our directors any fees for attending Board
meetings.
Limitation on Liability of Directors
As permitted by Delaware law, our Certificate of Incorporation and
Bylaws contain provisions limiting the personal liability of directors. The
Certificate of Incorporation and Bylaws provide that each of our directors and
officers shall not be personally liable for monetary damages for a breach of
fiduciary duty as a director or officer. These provisions are intended to afford
directors and officers additional protection, and limit their potential
liability, from suits alleging a breach of duty of care by a director or
officer.
Executive Compensation
The following table summarizes all compensation paid by us during the
fiscal year ended December 31, 1999 for our Chief Executive Officer and each
other executive officer whose annual compensation from the Company exceeded
$100,000 during the fiscal year ended December 31, 1999 (collectively the "Named
Executive Officers"). Our directors do not receive compensation for serving in
this capacity.
<TABLE>
<CAPTION>
Summary Compensation Table
Securities
Underlying
Name and Principal Salary & Other Stock
Position Year Commissions Compensation (1) Options
-------------------- ---- ----------- ------------- -------
<S> <C> <C> <C> <C>
Michael Golden
Chairman and CEO 1999 $442,820 $220,000 -0-
Ben Lichtenberg
Vice Chairman
and CFO 1999 $100,000 $206,000 -0-
Lewis Maniloff
Secretary 1999 $266,119 -0- 20,000
</TABLE>
(1) Includes a payment in securities of various companies with a market value
of $220,000 and $206,000 to Michael Golden and Ben Lichtenberg,
respectively. These securities were received upon the exercise of
underwriter warrants which were issued to these individuals during prior
fiscal years.
32
<PAGE>
The following table sets forth the grant of stock options made during
the year ended December 31, 1999 to the persons named in the Summary
Compensation Table:
Option Grants in Last Fiscal Year
<TABLE>
<CAPTION>
% of Total Options
Number of Securities Granted to
Underlying Employee in Fiscal Exercise
Name Options Granted Period Price Expiration Date
---- --------------- ------ ----- ---------------
<S> <C> <C> <C> <C>
Michael Golden - - - -
Ben Lichtenberg - - - -
Lewis Maniloff 20,000 5.6% $6.60 December 15, 2009
</TABLE>
Employment Agreements
We have entered into employment agreements with Messrs. Golden,
Lichtenberg, Smith, Katz, Kahn, Spoll and Solomon for terms ranging from two to
five years, which provide for annual base compensation of $350,000, $150,000,
$290,000, $150,000, $150,000, $150,000 and $90,000 respectively. Messrs.'
Golden, Lichtenberg and Smith may receive bonuses based on achieving certain
revenue levels in fiscal years 2000, 2001 and 2002.
Each employment agreement contains a provision that the employee will
not compete, solicit or engage in a business competitive with our current or
anticipated businesses during the term of the employment agreement and for a
period of one year thereafter.
Messrs. Spoll, Kahn and Solomon have bonuses if their respective
subsidiaries ar profitable. Mr. Katz has a bonus incentive based on gross
production levels at our First Colonial subsidiary.
The employment agreements for each of Messrs. Golden and Lichtenberg
contain a provision providing for certain payments in the event of a change in
control of our company. In the event of a change in control, as defined in their
employment agreements, we will, in general terms, be required to pay Messrs.
Golden and Lichtenberg (i) two times their highest annual base salary in effect
within one hundred and eighty days prior to the change in control, (ii) two
times the highest annual bonus paid or payable for any of the last two completed
years, and (iii) any base salary, bonus, vacation pay or other deferred
compensation accrued or earned under law or in accordance with our applicable
policies, but not yet paid.
No payment shall be made to Messrs. Golden and Lichtenberg to the
extent that the payment when aggregated with all other payments considered for
purposes of calculating a parachute payment results in an excess parachute
payment as defined under Section 280G of the Code. Furthermore to the extent
that the Internal Revenue Service or other applicable governmental taxing
authority determines that there has been an "excess parachute payment" and a
notice of deficiency or similar notice has been issued, then we have agreed to
pay all expenses associated with professional fees (legal and tax accounting) in
connection with the protest, challenge, and defense of any such notice and the
appeal of any decision on such matter. We have also agreed not to settle the
matter short of the appellate level without Messrs. Golden or Lichtenberg's
written consent. In the event that the Internal Revenue Service or other
applicable governmental taxing authority ultimately determines that, in fact,
there has been an "excess parachute payment", then the amount necessary to
reduce the total payments such that there
33
<PAGE>
would be no "excess parachute payment" would be immediately and retroactively
characterized as a loan to Messrs. Golden or Lichtenberg.
Stock Option Plan
Under our 1998 Incentive Stock Option Plan (the "1998 Plan"), 1,500,000
shares of common stock are reserved for issuance upon exercise of the options.
The 1998 Plan is designed to serve as an incentive for retaining qualified and
competent employees, directors and consultants. Options will be granted to
certain persons in proportion to their contributions to our overall success, as
determined by the Board of Directors and our Compensation Committee in their
sole discretion.
Our Board of Directors, or a committee thereof, administers and
interprets the 1998 Plan and is authorized to grant options thereunder to all
eligible employees, directors and consultants. The 1998 Plan provides for the
granting of both "incentive stock options" (as defined in Section 422 of the
Internal Revenue Code of 1986, as amended) and nonstatutory stock options.
Incentive stock options may only be granted, however, to employees. Options can
be granted under the 1998 Plan on the terms and at the prices determined by the
Board, or a committee thereof, except that the per share exercise price of
incentive stock options granted under the 1998 Plan will not be less than the
fair market value of the common stock on the date of grant and, in the case of
an incentive stock option granted to a 10% shareholder, the per share exercise
price will not be less than 110% of the fair market value as defined in the 1998
Plan.
Options under the 1998 Plan that would otherwise qualify as incentive
stock options will not be treated as incentive stock options to the extent that
the aggregate fair market value of the shares covered by the incentive stock
options which are exercisable for the first time by any individual during any
calendar year exceeds $100,000.
Options granted under the 1998 Plan will be exercisable after the
period or periods specified in the option agreement. Incentive stock options
granted to employees will vest in equal installments over a period of five years
commencing on the first anniversary of the date of grant. Options granted under
the 1998 Plan are not exercisable after the expiration of ten years from the
date of the grant and are not transferable other than by will or by the laws of
descent and distribution. Adjustments in the number of shares subject to options
granted under the 1998 Plan can be made by the Board of Directors or the
appropriate committee in the event of a stock dividend or recapitalization
resulting in a stock split-up, combination or exchange of shares.
As of June 1, 2000, we have granted options under the 1998 Plan to
purchase 821,042 shares of common stock to certain of our employees. These
options are exercisable at varying prices, depending on the date of grant, and
will expire ten years from the date of such grant. In addition, exercise of the
options is contingent on the optionee's continued employment by us.
34
<PAGE>
Principal Shareholders
The following table sets forth information regarding beneficial
ownership of our common stock as of June 1, 2000, by (1) each person who owns
beneficially more than 5% of our outstanding common stock, (2) each of our
directors, (3) each of the Named Executive Officers, and (4) all directors and
executive officers as a group.
Number of
Shares % Owned % Owned
Name and Address of Beneficially Prior to After
Beneficial Owner (1) Owned Offering Offer
-------------------- ----- -------- -----
Michael Golden (2) 2,247,648 50.4 37.5
Ben Lichtenberg (3) 250,853 5.6 4.2
Lewis Maniloff (4) 346,384 7.8 5.8
Rodney Smith (5) 166,666 3.7 3.1
Jeffrey Kahn 72,222 1.6 1.2
Ralph Solomon 33,333 * *
Michael Spoll 64,667 1.4 1.1
Lawrence Katz (6) 24,000 * *
Frederic L. Bor 19,608 * *
Richard G. Seidenberg 39,216 * *
------- ------ ----
All Directors & Executive
Officers as a Group (10 persons) 3,291,305 73.8% 53.9%
(1) The business address of all directors and executive officers is c/o the
company, 3010 N. Military Trail, Boca Raton, Florida 33431
(2) Includes 30,000 options exercisable within sixty days. Also includes
20,000 options owned by Christine Golden, his wife and full-time
employee. Does not include 45,000 options which are not exercisable
within sixty days. Also does not include 30,000 options owned by
Christine Golden. Does not include 83,333 shares or 50,000 options, held
by Brett Golden, his son and full-time employee of the Company.
(3) Includes 30,000 options exercisable within sixty days. Does not include
45,000 options which are not exercisable within sixty days.
(4) Does not include 20,000 options which are not exercisable within sixty
days.
(5) Does not include 93,542 options which are not exercisable within sixty
days.
(6) Does not include 20,000 options which are not exercisable within sixty
days.
* Represents less than one percent of the outstanding shares of common
stock.
Certain Relationships and Related Transactions
Loans to or from Members of Management
In October 1999, we loaned Lawrence Katz the sum of $120,000. This
Promissory Note is unsecured and provides for a term of five years, with
interest payments, at a rate of 7.125% per annum, due on an annual basis, with a
balloon payment at maturity. In the event Mr. Katz remains an employee in good
standing for the term of the Promissory Note, one quarter of the principal
balance of the obligation, including accrued interest, will be forgiven on an
annual basis. In the event of a default of the terms of the Promissory Note, the
remaining unpaid or unforgiven balance, including principal and interest, will
become immediately due and payable.
35
<PAGE>
In November 1999, we loaned Rodney Smith $100,000. The Promissory Note
is unsecured and provides for a term of five years, with principal and interest
payments, at a rate of 7.0% per annum, due and payable on a monthly basis. In
the event of a default of the terms of the Promissory Note, the remaining unpaid
balance, including principal and interest, will become immediately due and
payable.
In December 1999, we loaned Michael Golden $150,000. The Promissory
Note is unsecured and provides for a term of five years, with interest payments,
at a rate of 7.125% per annum, due and payable on an annual basis, and principal
and accrued interest due at maturity. In the event of a default of the terms of
the Promissory Note, the remaining unpaid balance, including principal and
interest, will become immediately due and payable.
In January 2000, we loaned Mr. Smith the additional sum of $100,000.
This Promissory Note is unsecured and provides for a term of four years, with
interest payments, at a rate of 7.125% per annum, due on an annual basis, with a
balloon payment at maturity. In the event Mr. Smith remains an employee in good
standing for the term of the Promissory Note, one quarter of the principal
balance of the obligation, including accrued interest, will be forgiven on an
annual basis. In the event of a default of the terms of the Promissory Note, the
remaining unpaid or unforgiven balance, including principal and interest, will
become immediately due and payable.
In May 2000, we secured $250,000 in bridge financing from a non-related
individual. We issued an unsecured 9% Subordinated Promissory Note to the
investor. The principal and interest accrued thereon will be paid upon the
earlier of (i) the effective date of our initial public offering, or (ii) 18
months from the date of the Subordinated Promissory Note. In addition, we also
issued a warrant to the investor, which warrant provides for the right to
purchase 56,250 shares of our common stock, on a pre- split basis, at a 25%
discount to the initial public offering price of our common stock. The warrant
is for a term of three years and may be exercised upon the earlier of either (i)
the first anniversary of the completion of our initial public offering, or (ii)
January 1, 2002.
In June 2000, Mr. Golden loaned us the sum of $175,000. This loan is
unsecured and is evidenced by a Promissory Note which provides for a term of one
year, with interest payments, at a rate of 7.125% per annum, due on an annual
basis, with a balloon payment at maturity. The Note further provides that Mr.
Golden, in his discretion, may extend the maturity date for a period of up to
three and one half years. In the event of a default of the terms of the
Promissory Note, the remaining unpaid or unforgiven balance, including principal
and interest, will become immediately due and payable.
Approval of Affiliated Transactions
We believe that each of the foregoing transactions were on terms no
less favorable than those which could have been obtained from unaffiliated third
parties. Following completion of this offering, all transactions between us and
our directors, executive officers and principal shareholders will be on terms no
less favorable than could be obtained from unaffiliated third parties and have
been and will be approved by a majority of our independent outside directors,
when elected.
Subordinated Loans by Management
As co-underwriters of this offering, we may, if necessary, accept
temporary subordinated loans that will increase our net capital during the days
prior to the consummation of the offering to provide a
36
<PAGE>
reserve against the anticipated increase in securities we will be holding and
corresponding decrease in liquid assets.
Description of Capital Stock
General
We are authorized to issue 20,000,000 shares of common stock, par value
$0.01 per share, and 5,000,000 shares of preferred stock, par value $0.01 per
share. As of June 1, 2000, there were 4,283,340 shares of common stock issued
and outstanding. For purposes of our public offering and for purposes of
describing our capital stock, on June 2, 2000, we effected a stock split of our
shares such that as of such date, there were 4,000,000 shares of our common
stock issued and outstanding. 122,500 shares of preferred stock are currently
issued, outstanding and owned by non-affiliated individuals. As a result of the
stock split, such shares are convertible into 341,695 shares of Common Stock.
The Offering
We are offering 2,000,000 shares of common stock and redeemable
warrants to purchase 2,000,000 shares of common stock. The common stock and
warrants may be purchased separately and will be transferable immediately upon
issuance. Each warrant entitles the registered holder thereof to purchase one
share of common stock at a price equal to 120% of the initial offering price,
subject to adjustment in certain circumstances, at any time through and
including __________, 2005. The warrants are redeemable by us at any time
commencing __________, 2001, upon notice of not less than thirty (30) days, at a
price of $0.125 per warrant, provided that the closing bid quotation of the
common stock on thirty (30) consecutive trading days ending thirty days prior to
the day on which we give notice (the "Call Date") has been at least 150%
(currently $____, subject to adjustment) of the then effective exercise price of
the warrants. Prior to this offering, there has been no public market for the
common stock or warrants and there can be no assurance that any such market will
develop. It is anticipated that the common stock and warrants will be quoted on
the Nasdaq SmallCap Market ("Nasdaq") under the symbols "COLD" and "COLDW,"
respectively.
Common Stock
The holders of our common stock are entitled to one vote for each share
held of record on all matters to be voted on by the stockholders. There is no
cumulative voting with respect to the election of directors, with the result
that the holders of more than 50% of the shares voting for the election of
directors can elect all of the directors. The holders of common stock are
entitled to receive dividends when, as and if declared by the Board of Directors
out of funds legally available therefor. In the event of liquidation,
dissolution or winding up of the Company, the holders of common stock are
entitled to share ratably in all assets remaining available for distribution to
them after payment or all liabilities and after provision has been made for each
class of stock, if any, having liquidation preference over the common stock
(such as the preferred stock). Holders of shares of common stock, as such, have
no conversion, preemptive or other subscription rights, and there are no
redemption provisions applicable to the common stock. All of the outstanding
shares of common stock are, and the shares of common stock offered hereby, when
issued against the consideration set forth herein, will be, fully paid and
nonassessable.
37
<PAGE>
Preferred Stock
We are authorized to issue up to 5,000,000 shares of preferred stock
which may be issued in one or more classes and in one or more series within a
class with such designations, powers, preferences, rights, qualifications,
limitations and restrictions as may be established from time to time by
resolution of the Board of Directors at or prior to the time of issuance of
shares of such class or series. We designated 150,000 of the preferred shares as
Series A Convertible Preferred Stock, which series of "blank check" preferred
stock carries a ten percent coupon and is convertible at a rate of 2.78935
shares of common stock for each share of Series A Convertible Preferred Stock.
At present, 122,500 shares of are issued and outstanding under this designation.
Although it has no current intention to do so, the Board of Directors may
authorize and issue additional series of preferred stock with voting or
conversion rights that could adversely affect the voting power or other rights
of the holders of common stock. In addition, the issuance of preferred stock may
have the effect of deferring or preventing a change in control of the Company.
Warrants
The warrants will be issued in registered form pursuant to an agreement
dated the date of this Prospectus (the "Warrant Agreement"), between us and
Stocktrans, Inc., as Warrant Agent (the "Warrant Agent"). The following
discussion of certain terms and provisions of the warrants is qualified in its
entirety by reference to the Warrant Agreement. A form of the certificate
representing the warrants which form a part of the Warrant Agreement has been
filed as an exhibit to the Registration Statement of which this Prospectus forms
a part. We are offering 2,000,000 Redeemable Common Stock Purchase Warrants.
Each warrant entitles the holder to purchase one share of our common stock at
120% of the initial offering price, or _____ per share ("Warrant Exercise
Price"). We have arbitrarily determined the exercise price in consultation with
the Representative, which is subject to certain adjustments, commencing on the
date of closing and continuing until five years from the date of this
Prospectus. No fractional shares will be issued.
The warrants are entitled to the benefit of adjustments in their
exercise prices and in the number of shares of common stock or other securities
deliverable upon the exercise thereof in the event of a stock dividend, stock
split, reclassification, reorganization, consolidation or merger. The warrants
may be exercised at any time and continuing thereafter until the close of five
years from the date hereof, unless we extend the exercise period. After the
expiration date, warrant holders shall have no further rights. Warrants may be
exercised by surrendering the certificate evidencing the warrant, with the form
of election to purchase on the reverse side of the certificate properly
completed and executed, together with payment of the exercise price and any
transfer tax, to the Warrant Agent. If less than all of the warrants evidenced
by a warrant certificate are exercised, a new certificate will be issued for the
remaining number of warrants. Payment of the exercise price may be made by cash,
bank draft or official bank or certified check equal to the exercise price.
Warrant holders do not have any voting or any other rights as shareholders.
We have the right at any time beginning one year from the date hereof
to redeem the warrants, at a price of $0.125 per warrant. We may exercise this
right only if the average of the closing bid price for our common stock for
thirty (30) consecutive trading days ending no more than 30 days prior to the
date that the notice of redemption is given, equals or exceeds $_____, subject
to adjustment. Any redemption shall be for all outstanding warrants. If we
exercise our right to call warrants for redemption, the warrants may still be
exercised until the close of business on the day immediately preceding the
Redemption Date. If any warrant called for redemption is not exercised by such
time, it will cease to be
38
<PAGE>
exercisable, and the holder thereof will be entitled only to the redemption
price. Notice of redemption will be mailed to all holders of warrants of record
at least thirty (30) days, but not more than sixty (60) days, before the
Redemption Date. The foregoing notwithstanding, we may not call the warrants at
any time that a current registration statement under the Act is not then in
effect.
The Warrant Agreement permits us (together with the Warrant Agent)
without the consent of Warrant holders, to supplement or amend the Warrant
Agreement in order to cure any ambiguity, manifest error or other mistake, or to
address other matters or questions arising thereafter that we, together with the
Warrant Agent, deem necessary or desirable and that do not adversely affect the
interest of any warrant holder. Together with the Warrant Agent, we may also
supplement or amend the Warrant Agreement in any other respect with the written
consent of holders of not less than a majority in the number of the warrants
then outstanding; however no such supplement or amendment may make any
modification of the terms upon which the warrants are exercisable or may be
redeemed; provided, however, we, together with the Warrant Agent, may adjust the
exercise price downward without the written consent of the holders.
In order for the holder to exercise a warrant, there must be an
effective registration statement, with a current prospectus on file with the
Commission covering the shares of common stock underlying the warrants, and the
issuance of such shares to the holder must be registered, qualified or exempt
under the laws of the state in which the holder resides. If required, we will
file a new registration statement with the Commission with respect to the
securities underlying the warrants prior to the exercise of such warrants and
will deliver a prospectus with respect to such securities to all holders thereof
as required by Section 10(a)(3) of the Securities Act of 1933, as amended.
Each warrant may be exercised by surrendering the warrant certificate,
with the form of election to purchase on the reverse side of the warrant
certificate properly completed and executed, together with payment of the
exercise price to the Warrant Agent. The warrants may be exercised in whole or
from time to time in part. If less than all of the warrants evidenced by a
warrant certificate are exercised, a new warrant certificate will be issued for
the remaining number of warrants. Holders of the warrants are protected against
dilution of the equity interest represented by the underlying shares of common
stock upon the occurrence of certain events, including, but not limited to,
issuance of stock dividends. If we merge, reorganize or are acquired in such a
way as to terminate the warrants, the warrants may be exercised immediately
prior to such action. In the event of liquidation, dissolution or winding up,
holders of the warrants are not entitled to participate in the distribution of
our assets.
For the life of the warrants, subject to the redemption provision, the
holders thereof are given the opportunity to profit from a rise in the market
price of our common stock. The terms upon which we may obtain additional capital
may be adversely affected through the period that the warrants remain
exercisable. The holders of these warrants may be expected to exercise them at a
time when we would, in all likelihood, be able to obtain equity capital on terms
more favorable than those provided for by the warrants. In the event that the
warrants are called for redemption, the warrant holders may not be able to
exercise their warrants in the event that we have not updated this Prospectus in
accordance with the requirements of the Securities Act or these securities have
not been qualified for sale under the laws of the state where the warrant holder
resides. In addition, in the event that the warrants have been called for
redemption, such call for redemption could force the warrant holder to either
(i) assume the necessary updating to the Prospectus and state blue sky
qualifications have been effected, exercise the warrants and pay the exercise
price at a time when, in the event of a decrease in market price from the period
preceding the issuance of the call for redemption, it may be less than
advantageous economically to do so, or (ii) accept the redemption price, which,
in the event of an increase in the price of the stock, could
39
<PAGE>
be substantially less than the market value thereof at the time of redemption.
THE FOREGOING DISCUSSION DOES NOT ADDRESS THE TAX CONSIDERATIONS THAT MAY
INVOLVE A PARTICULAR PURCHASER. ACCORDINGLY, ALL PROSPECTIVE PURCHASERS ARE
ADVISED TO CONSULT THEIR OWN TAX ADVISERS REGARDING THE FEDERAL, STATE, LOCAL
AND FOREIGN TAX CONSEQUENCES OF THE PURCHASE, OWNERSHIP, AND DISPOSITION OF THE
SHARES OF COMMON STOCK AND WARRANTS.
Anti-takeover Effects of Our Certificate of Incorporation and Bylaws
General
Certain provisions of our Certificate of Incorporation and Bylaws may
be deemed to have an anti-takeover effect and may delay, defer or prevent a
tender offer or takeover attempt, including attempts that might result in a
premium being paid over the market price for the shares held by shareholders.
The foregoing provisions may not be amended in our Certificate of Incorporation
or Bylaws without the affirmative vote of the holders of a majority of the
outstanding shares of common stock.
Special Meeting of Shareholders
Our Certificate of Incorporation and Bylaws provide that special
meetings of our shareholders be called only by a majority of the Board of
Directors, our President or holders of not less than one-fifth of our
outstanding voting stock.
Amendment of Bylaws
The Bylaws may only be altered, amended or repealed by a resolution of
a majorit of the Board of Directors or the affirmative vote of the holders of at
least a majority of our outstanding shares of common stock.
Transfer Agent
The transfer agent for our common stock is Stocktrans, Inc. of Ardmore,
Pennsylvania.
Shares Eligible For Future Sale
Upon completion of the offering, we will have 6,000,000 shares of
common stock outstanding. Of these shares, the 2,000,000 shares of common stock
sold in the offering will be freely tradeable without restriction under the
Securities Act. The remaining 4,000,000 shares of common stock, plus 341,695
shares of common stock into which the Series A Convertible Preferred Stock are
convertible, will be "restricted securities" as defined in Rule 144 and will
become eligible for public sale subject to the restrictions of Rule 144
commencing one year from their issuance. 2,811,028 of the 4,000,000 restricted
shares are currently eligible for sale under Rule 144.
In general, under Rule 144, if a period of at least one year has
elapsed since the later of the date the "restricted shares" (as that phrase is
defined in Rule 144) were acquired from us and the date they were acquired from
an"affiliate" of ours, as that term is defined in Rule 144 (an "Affiliate"),
then the
40
<PAGE>
holder of the restricted shares (including an Affiliate) is entitled to sell a
number of shares within any three-month period that does not exceed the greater
of 1% of the then outstanding shares of the common stock or the average weekly
reported volume of trading of the common stock on The Nasdaq SmallCap Market
during the four calendar weeks preceding the sale. The holder may only sell the
shares through unsolicited brokers' transactions or directly to marketmakers.
Sales under Rule 144 are also subject to certain requirements pertaining to the
manner of the sales, notices of the sales and the availability of current public
information concerning us. An Affiliate may sell shares not constituting
restricted shares in accordance with the foregoing volume limitations and other
requirements but without regard to the one-year holding period.
Under Rule 144(k), if a period of at least two years has elapsed
between the later of the date restricted shares were acquired from us and the
date they were acquired from an Affiliate, as applicable, a holder of these
restricted shares who is not an Affiliate at the time of the sale and has not
been an Affiliate for at least three months prior to the sale would be entitled
to sell the shares immediately without regard to the volume limitations and
other conditions described above.
Our directors, executive officers and shareholders who own an aggregate
of 4,000,000 shares of common stock (representing all of the issued and
outstanding shares prior to this offering) have entered into written agreements
not to sell or otherwise dispose of the shares of common stock beneficially
owned by them for 24 months after the date of this prospectus without the
consent of the Representative.
We can make no predictions as to the effect, if any, that sales of
shares or the availability of shares for sale will have on the market price
prevailing from time to time. Nevertheless, sales of significant amounts of the
common stock in the public market, or the perception that these sales may occur,
could adversely affect prevailing market prices.
Underwriting
Underwriting Subject to certain terms and conditions contained in the
Underwriting Agreement among us, Werbel-Roth Securities, Inc., as the
representative of the underwriters (the "Representative"), the underwriters
named below have severally agreed to purchase from us, and we have agreed to
sell to the several underwriters, the number of shares of common stock and
warrants set forth opposite their names below:
Number
Name of Underwriter of Shares and Warrants
------------------- ----------------------
Werbel-Roth Securities, Inc....................................................
First Colonial Securities Group, Inc...........................................
Total..........................................................................
The Underwriting Agreement provides that the obligations of the several
underwriters to purchase the common stock and warrants are subject to approval
of certain legal matters by counsel and to various other conditions. If any of
the common stock or warrants are purchased by the underwriters pursuant to the
Underwriting Agreement, all the common stock and warrants (other than the common
stock and warrants covered by the over-allotment option described below) must be
so purchased.
We have agreed to indemnify the underwriters against certain
liabilities, including liabilities
41
<PAGE>
under the Securities Act, or to contribute to certain payments that the
underwriters may be required to make in respect thereof. Insofar as
indemnification for liabilities arising under the Securities Act may be
permitted to our directors, officers or controlling persons, we have been
advised that in the opinion of the SEC the indemnification is against public
policy as expressed in the Securities Act and is therefore unenforceable.
The underwriters propose to offer the common stock and warrants
directly to the public at a price of between $6.50 and $8.50 per share of common
stock and $0.125 per warrant. The underwriters have advised us that they will
not engage in sales to discretionary accounts without the prior specific written
approval of the customer. The underwriters may allow certain dealers, who are
members of the NASD, concessions, not in excess of $_____ per share of common
stock and $____ per warrant of which not in excess of $_____ per share of common
stock and $_____ per warrant may be reallowed to other dealers who are members
of the NASD. The offering prices, reallowances and concessions will not be
changed until after this offering has been completed.
We have granted a 45-day over-allotment option to the underwriters to
purchase up to 300,000 additional shares of common stock and 300,000 warrants at
the offering price less the underwriting discount. If the underwriters exercise
such over-allotment option, then each of the underwriters will be committed,
subject to certain conditions, to purchase the additional shares in
approximately the same proportion as set forth in the above table. The
underwriters may exercise this option only to cover over- allotments made in
connection with the sale of the common stock and warrants offered hereby.
We have agreed to pay the Representative a nonaccountable expense
allowance of three percent (3%) of the gross proceeds of this offering, of which
$40,000 has been paid as of the date of this prospectus. We have also agreed to
pay all expenses in connection with qualifying the shares of common stock
offered hereby for sale under the laws of the states the Representative
designates, including expenses of counsel retained for that purpose by the
Representative.
We have agreed to sell to the Representative and its designees for an
aggregate of _________ warrants (the "Underwriter's Warrants") to purchase up to
200,000 shares of common stock and 200,000 warrants at an exercise price of
$_____ per share and $____ per warrant (120% of the public offering price per
share and warrant, respectively). The Underwriter's Warrants may not be sold,
transferred, assigned or hypothecated for one year from the date of this
prospectus, except to the officers and partners of the Representative and
members of the underwriting syndicate and selling group and are exercisable at
any time and from time to time, in whole or in part, during the five-year period
commencing on the date of this prospectus (the "Warrant Exercise Term"). During
the Warrant Exercise Term, the holders of the Underwriter's Warrants are given,
at nominal cost, the opportunity to profit from a rise in the market price of
the common stock. To the extent that the Underwriter's Warrants are exercised,
dilution to the interests of our shareholders will occur. Further, the terms
upon which we will be able to obtain additional equity capital may be adversely
affected since the holders of the Underwriter's Warrants can be expected to
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 those provided in the
Underwriter's Warrants. Any profit realized by the Underwriter on the sale of
the Underwriter's Warrants or the underlying shares of common stock may be
deemed additional underwriting compensation. We have agreed, at the request of
the holders of a majority of the Underwriter's Warrants, at our expense, to
register the Underwriter's Warrants and the shares of common stock underlying
the Underwriter's Warrants under the Securities Act on one occasion during the
Warrant Exercise Term and to include the Underwriter's Warrants and the shares
of common stock underlying the Underwriter's Warrants in any appropriate
registration statement which is filed by us during the seven years following the
date of this prospectus.
42
<PAGE>
This offering is being conducted in accordance with Rule 2720 of the
NASD. That rule requires, among other things, that the initial public offering
price can be no higher than that recommended by a "qualified independent
underwriter,"as defined by the NASD, which underwriter has served in that
capacity and performed due diligence investigations and reviewed and
participated in the preparation of the Registration Statement of which this
prospectus forms a part. __________________________, of __________, __________ ,
served as the qualified independent underwriter and will receive $________ as
compensation for serving in this capacity.
Rule 2720 also requires that all proceeds realized as a result of the
public sale of securities by NASD members and their affiliates be accumulated in
an escrow account. Prior to consummation of the offering and disbursement of the
proceeds of the offering, we must provide notice to the NASD along with a
computation of our net capital pursuant to the provisions of the Net Capital
Rule. The proceeds from the securities of the member sold to the public may be
taken into account in connection with such computation.
In compliance with the provisions of Rule 2720, all proceeds received
by us with respect to the sale of the common stock and warrants will be promptly
delivered to the escrow agent and accumulated by the escrow agent in the manner
described above. Prior to consummation of the offering, we intend to immediately
notify the NASD of the proposed disbursement of proceeds and file such net
capital computation. We will immediately know if our net capital computation
meets the prescribed ratios and percentage amounts necessary for disbursement.
If our net capital complies with the Net Capital Rule, the offering will be
consummated and the proceeds of the offering will be delivered to us. If our net
capital does not meet the requirements of the Net Capital Rule, we will
immediately instruct the escrow agent to promptly refund the full amount paid by
investors, with interest.
Prior to this offering, there has been no public market for the common
stock or the warrants. Consequently, the initial public offering price for the
common stock and warrants has been determined by negotiations between us and the
underwriters and is not necessarily related to our asset value, net worth or
other established criteria of value. The factors considered in these
negotiations, in addition to prevailing market conditions, included the history
of and prospects for the industry in which we compete, an assessment of our
management, our prospects, our capital structure and certain other factors as
were deemed relevant.
In connection with this offering, certain underwriters and selling
group members and their respective affiliates may engage in transactions that
stabilize, maintain or otherwise affect the market price of the common stock or
the warrants. These transactions may include stabilization transactions effected
in accordance with Rule 104 of Regulation M, pursuant to which the underwriters
or selling group members may bid for or purchase common stock for the purpose of
stabilizing its market price. We will not act as a market maker for the common
stock until after our role in the offering has been completed.
The underwriters also may create a short position for the account of
the underwriters by selling more common stock or warrants in connection with the
offering than they are committed to purchase from us and in that case may
purchase common stock or warrants in the open market following completion of the
offering to cover all or a portion of that short position.
The underwriters may also cover all or a portion of that short
position, up to 300,000 shares of common stock and 300,000 warrants, by
exercising the over-allotment option. In addition, the Representative may impose
"penalty bids" under contractual arrangements with the underwriters,
43
<PAGE>
whereby it may reclaim from an underwriter (or dealer participating in the
offering) for the account of other underwriters, the selling concession with
respect to the shares of common stock and warrants that are distributed in any
offering but subsequently purchased for the account of the underwriters in the
open market. Any of the transactions described in this paragraph may result in
the maintenance of the price of the common stock or warrants at a level above
that which might otherwise prevail in the open market. None of the transactions
described in this paragraph is required, and, if they are undertaken, they may
be discontinued at any time.
Under the securities laws of certain states, the common stock and
warrants may be sold in those states only through registered or licensed
broker-dealers or pursuant to available exemptions from such requirements. In
addition, in certain states the securities may not be sold unless the securities
have been registered or qualified for sale in that state or an exemption from
that requirement is available and is complied with.
Legal Matters
Dreier & Baritz LLP, Boca Raton, Florida will give an opinion regarding
the validity of the shares of common stock and warrants offered under this
prospectus. Certain legal matters relating to the offering will be passed upon
for the Representative by Wiggin & Dana, Stamford, Connecticut.
Experts
The consolidated balance sheet of Colonial Direct Financial Group, Inc.
and subsidiaries as of December 31, 1999 and the related consolidated statements
of operations, changes in stockholders' equity and cash flows for the year then
ended included in this prospectus, and incorporated by reference in the
Registration Statement, have been audited by Ahearn, Jasco + Company, P.A.,
independent auditors, as stated in their report appearing with the financial
statements herein and incorporated by reference in the Registration Statement,
and are included in reliance upon the reports of such firm given upon their
authority as experts in accounting and auditing.
The consolidated balance sheet of Colonial Direct Financial Group, Inc.
and subsidiaries as of December 31, 1998 and the related consolidated statements
of operations, changes in stockholders' equity and cash flows for the year then
ended included in this prospectus and in the Registration Statement, have been
audited by Kopple & Gottlieb, L.L.P. of Jenkintown, Pennsylvania, independent
auditors, as stated in their report appearing herein, and are included in
reliance upon the reports of such firm given upon their authority as experts in
accounting and auditing.
Changes in Accountants
Subsequent to the completion of the audit for the year ended December
31, 1998 and the issuance of the consolidated financial statements for the year
then ended, we terminated our independent auditor relationship with Kopple &
Gottlieb, L.L.P. and entered into negotiations to acquire all of their
non-attest assets. A definitive agreement was entered into in January 2000.
Kopple & Gottlieb's report on our consolidated financial statements for the year
ended December 31, 1998 did not contain an adverse opinion or a disclaimer of
opinion and was not qualified or modified as to uncertainty, audit scope or
accounting principles. In connection with the audit of our consolidated
financial statements for
44
<PAGE>
the year ended December 31, 1998, and in subsequent interim periods through the
date of dismissal, there was never any disagreement with Kopple & Gottlieb on
any matter of accounting principle or practice, financial statement disclosure
or auditing scope of procedure, which disagreement, if not resolved to the
satisfaction of Kopple & Gottlieb, would have caused it to make reference to the
subject matter of the disagreement in connection with its report.
On December 15, 1999, we retained the firm of Ahearn, Jasco + Company,
P.A. of Pompano Beach, Florida, as our independent auditors for the fiscal year
ended December 31, 1999. Prior to engaging Ahearn, Jasco + Company, P.A., we had
never consulted Ahearn, Jasco + Company, P.A. concerning either: (1) the
application of accounting principles to a specified completed or uncompleted
transaction; (2) the type of audit opinion that might be rendered on our
financial statements; (3) a written report or oral advice that the new
accountant concluded was an important factor considered by us in reaching a
decision as to an accounting, auditing or financial reporting issue; or (4) any
matter that was the subject of a reportable event as described in paragraph
(a)(1)(iv) of Item 304 of Regulation S-B.
Where you can find more information
We have filed with the SEC a Registration Statement containing this
prospectus and encompassing any amendments thereto on Form SB-2 pursuant to the
Securities Act with respect to the shares of common stock and warrants being
offered in this offering. This prospectus does not contain all the information
set forth in the Registration Statement and the exhibits and schedules thereto,
certain portions of which are omitted as permitted by SEC rules and regulations.
Statements made in this prospectus as to the contents of any contract, agreement
or other document referred to are not necessarily complete; with respect to any
contract, agreement or other document filed as an exhibit to the Registration
Statement, please refer to the exhibit for a more complete description of the
matter involved, and each statement shall be deemed qualified in its entirety by
reference to the Registration Statement and to the financial statements,
schedules and exhibits filed as a part thereof.
The Registration Statement filed by us with the SEC can be inspected
and copied at the public reference facilities maintained by the SEC at Room
1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549 and the
Regional Offices of the SEC located in the Citicorp Center, 500 West Madison
Street, Suite 1400, Chicago, Illinois 60661, and at 7 World Trade Center, 13th
Floor, New York, New York 10048. Copies of those filings can be obtained from
the SEC's Public Reference Section, Judiciary Plaza, 450 Fifth Street, N.W.,
Washington, D.C. 20549 at prescribed rates and may also be obtained from the
website that the SEC maintains at http://www.sec.gov. You may also call the SEC
at 1-800-SEC-0330 for more information.
As of the date of this prospectus, we will become subject to the
reporting requirements of the Exchange Act and, in accordance therewith, will
file reports, proxy statements and other information with the Commission. These
reports, proxy statements and other information can be inspected and copied at
the public reference facilities of the Commission set forth above, and copies of
these materials can be obtained from the Commission's Public Reference Section
at prescribed rates. We intend to furnish our shareholders with annual reports
containing audited financial statements and any other periodic reports we deem
appropriate or as may be required by law.
45
<PAGE>
Colonial Direct Financial Group, Inc.
and Subsidiaries
----------------------------------
Financial Statements
----------------------------------
Management's Responsibility for Financial Statements F-2
Table of Contents - Financial Statements as of March 31, 2000
and December 31, 1999 F-3
Index to Consolidated Financial Statements, year ended
December 31, 1998 F-27
F-1
<PAGE>
MANAGEMENT'S RESPONSIBILITY FOR FINANCIAL STATEMENTS
The consolidated financial statements and other financial information appearing
in this prospectus were prepared by the management of Colonial Direct Financial
Group, Inc. and its subsidiaries (collectively, the "Company"), which is
responsible for the integrity and objectivity of this information. The
consolidated financial statements have been prepared in conformity with
generally accepted accounting principles consistently applied and therefore
include amounts that are based on information, judgments and management's best
estimates.
Management of the Company maintains a system of internal accounting controls and
procedures, which management believes is adequate under the circumstances. The
system is intended to provide reasonable assurance, in relation to reasonable
cost, that transactions are executed in accordance with management's
authorization, are recorded properly and accurately, and that accountability for
assets is maintained. These controls are supported by management's commitment to
the integrity of the system.
The Company's consolidated financial statements for the years ended December 31,
1999 and 1998 have been audited, respectively, by Ahearn, Jasco + Company, P.A.,
and Kopple & Gottlieb, L.L.P., independent certified public accountants, to the
extent required by generally accepted auditing standards. The role of the
auditor is to form an independent judgment as to the fairness with which the
statements present the financial condition of the Company and the results of its
operations. While the independent accountants make selective tests of Company
procedures and controls, it is neither practicable nor necessary for them to
scrutinize all of the Company's transactions. The auditors' reports appear with
the consolidated financial statements. The ultimate responsibility for the
Company's consolidated financial statements remains with management; the
auditors' responsibility is to express their opinion on the overall consolidated
financial statement presentation.
Also appearing in the prospectus are the interim consolidated financial
statements as of March 31, 2000 and 1999 and for the three-month periods then
ended, which have been prepared by the management of the Company, and are not
audited.
F-2
<PAGE>
COLONIAL DIRECT FINANCIAL GROUP, INC.
AND SUBSIDIARIES
TABLE OF CONTENTS
Page
--------------------------------------------------------------------------------
INDEPENDENT AUDITORS' REPORT F-4
----------------------------
FINANCIAL STATEMENTS, MARCH 31, 2000 and DECEMBER 31, 1999
----------------------------------------------------------
Consolidated Balance Sheets F-5
Consolidated Statements of Operations F-6
Consolidated Statement of Changes in Stockholders' Equity F-7
Consolidated Statements of Cash Flows F-8 and F-9
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS F-10 to F-26
------------------------------------------
F-3
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
Colonial Direct Financial Group, Inc.
We have audited the accompanying consolidated balance sheet of Colonial Direct
Financial Group, Inc. and subsidiaries (collectively, the "Company") as of
December 31, 1999, and the related consolidated statements of operations,
changes in stockholders' equity, and cash flows for the year then ended. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on the consolidated
financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the consolidated financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts 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 consolidated
financial statement presentation. We believe that our audit provides 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 Colonial Direct
Financial Group, Inc. and subsidiaries as of December 31, 1999, and the results
of their operations and their cash flows for the year then ended in conformity
with generally accepted accounting principles.
/s/ Ahearn, Jasco + Company, P.A.
--------------------------------------------
AHEARN, JASCO + COMPANY, P.A.
Certified Public Accountants
Pompano Beach, Florida
May 18, 2000
F-4
<PAGE>
COLONIAL DIRECT FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------------------------
March 31,
----------------------------- December 31,
2000 1999 1999
------------ ------------- -------------
(Unaudited)
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 301,493 $ 458,131 $ 1,035,809
Due from clearing broker - 1,147,443 560,037
Securities owned, at market value 1,563,244 1,005,138 636,885
Receivable from investment company 63,078 - 36,662
Accounts receivable, net 280,066 - -
Notes receivable, current portion 23,305 - 22,924
Forgivable loans, current portion 259,453 - 255,863
Prepaid expenses and other 156,266 83,487 124,112
------------ ------------- ------------
TOTAL CURRENT ASSETS 2,646,905 2,694,199 2,672,292
------------ ------------- ------------
PROPERTY AND EQUIPMENT, net 782,947 409,273 560,881
------------ ------------- ------------
OTHER ASSETS:
Notes receivable, less current portion 267,647 - 273,618
Forgivable loans, less current portion 1,254,850 - 912,345
Investment 150,000 - 150,000
Goodwill, net 1,914,002 - 1,063,030
Other assets 306,279 200,545 266,287
------------ ------------- ------------
TOTAL OTHER ASSETS 3,892,778 200,545 2,665,280
------------ ------------- ------------
TOTAL $ 7,322,630 $ 3,304,017 $ 5,898,453
============ ============= ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued liabilities $ 1,767,124 $ 1,333,677 $ 1,617,455
Accrued litigation 475,166 - 525,160
Due to clearing broker 333,299 - -
Securities sold, but not yet purchased, at market value - 342,845 4,902
Lines of credit 31,018 57,556 34,672
Long term debt, current portion 169,774 23,321 27,971
Capital lease obligations, current portion 34,551 5,718 30,615
------------ ------------- ------------
TOTAL CURRENT LIABILITIES 2,810,932 1,763,117 2,240,775
------------ ------------- ------------
LONG TERM DEBT, less current portion 1,255 30,921 5,382
------------ ------------- ------------
CAPITAL LEASE OBLIGATIONS, less current portion 61,712 19,850 63,233
------------ ------------- ------------
STOCKHOLDERS' EQUITY:
Preferred stock, $0.01 par value, $10 liquidation preference, 5,000,000
shares authorized; 150,000 shares designated
Series A, 122,500 shares issued and outstanding 1,225 1,225 1,225
Common stock, $0.01 par value, 20,000,000 shares authorized;
4,216,674 and 4,020,831 shares issued and outstanding at
March 31, 2000 and December 31, 1999, respectively 42,167 30,882 40,208
Additional paid-in capital 6,750,330 1,459,365 5,634,112
Deficit (2,344,991) (1,343) (2,086,482)
------------ ------------- ------------
TOTAL STOCKHOLDERS' EQUITY 4,448,731 1,490,129 3,589,063
------------ ------------- ------------
TOTAL $ 7,322,630 $ 3,304,017 $ 5,898,453
============ ============= ============
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE>
COLONIAL DIRECT FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------------------------
Three Months Ended
March 31,
------------------------ December 31,
2000 1999 1999
---- ---- ----
(Unaudited)
<S> <C> <C> <C>
REVENUES:
Commissions - agency $ 4,520,469 $ 2,317,893 $ 9,424,407
Commissions - principal 596,277 943,885 1,333,123
Other brokerage related income 438,123 314,671 1,249,110
Investment banking 85,240 26,204 489,217
Other income 332,637 - 21,068
----------- ----------- -----------
TOTAL REVENUES 5,972,746 3,602,653 12,516,925
----------- ----------- -----------
OPERATING EXPENSES:
Payroll and related costs 4,149,390 2,215,734 8,573,830
Selling, general and administrative 985,318 756,339 2,839,480
Clearing and transaction costs 684,911 452,109 1,260,588
Costs of arbitration actions - 75,138 732,417
Professional fees 166,277 77,082 861,484
Loss on abandoned assets 108,464 - -
Depreciation and amortization 76,339 29,788 146,920
Interest 60,556 22,254 213,136
----------- ----------- -----------
TOTAL OPERATING EXPENSES 6,231,255 3,628,444 14,627,855
----------- ----------- -----------
LOSS BEFORE PROVISION FOR INCOME TAXES (258,509) (25,791) (2,110,930)
PROVISION FOR INCOME TAXES - - -
----------- ----------- -----------
NET LOSS $ (258,509) $ (25,791) $ (2,110,930)
=========== =========== ============
LOSS PER SHARE:
Basic ($0.061) ($0.008) ($0.645)
=========== =========== ============
Diluted ($0.061) ($0.008) ($0.645)
=========== =========== ============
Weighted average common shares outstanding 4,210,223 3,088,166 3,271,005
=========== =========== ============
</TABLE>
See notes to consolidated financial statements.
F-6
<PAGE>
COLONIAL DIRECT FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEAR ENDED DECEMBER 31, 1999 AND
THREE MONTHS ENDED MARCH 31, 2000 (Unaudited)
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------------------
Preferred Preferred Common Common Additional Retained Total
Stock, Stock, at Stock, Stock, at Paid-in Earnings Stockholders'
# of Shares par value # of Shares par value Capital (Deficit) Equity
----------- --------- ----------- --------- ---------- -------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCES, January 1, 1999 122,500 $1,225 3,088,166 $30,882 $1,489,990 $ 24,448 $1,546,545
Stock issued pursuant to the Colonial
Tax acquisition - - 66,666 667 339,330 - 339,997
Stock issued pursuant to the Colonial
Retirement acquisition - - 144,444 1,444 735,220 - 736,664
Issuances of common stock for cash,
net of expenses - - 720,444 7,204 3,188,673 - 3,195,877
Stock issued for services - - 1,111 11 5,655 - 5,666
Dividends paid to preferred
shareholders - - - - (122,500) - (122,500)
Capital contribution - - - - 76,788 - 76,788
Capital distribution - - - - (79,044) (79,044)
Net loss for the year ended
December 31, 1999 - - - - - (2,110,930) (2,110,930)
------- ------ --------- ------- ---------- ---------- ----------
BALANCES, December 31, 1999 122,500 1,225 4,020,831 40,208 5,634,112 (2,086,482) 3,589,063
Issuances of common stock for cash,
net of expenses - - 29,176 292 148,508 - 148,800
Stock issued pursuant to the
K&G Business acquisition - - 166,667 1,667 998,335 1,000,002
Dividends paid to preferred
shareholders - - - - (30,625) - (30,625)
Net loss for the three months ended
March 31, 2000 - - - - - (258,509) (258,509)
------- ------ --------- ------- ---------- ---------- ----------
BALANCES, March 31, 2000 122,500 $1,225 4,216,674 $42,167 $6,750,330 $(2,344,991) $4,448,731
======= ====== ========= ======= ========== =========== ==========
</TABLE>
See notes to consolidated financial statements.
F-7
<PAGE>
COLONIAL DIRECT FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------------------------
Three Months Ended
March 31,
----------------------------- December 31,
2000 1999 1999
---- ---- ----
(Unaudited)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (258,509) $ (25,791) $ (2,110,930)
Adjustments to reconcile net loss to net cash (used in) provided by
operating activities:
Depreciation and amortization 76,339 29,788 146,920
Amounts forgiven under forgivable loans 78,905 - 41,792
Common stock issued for services - - 5,666
Loss on abandoned assets 108,464 - -
Changes in certain assets and liabilities, net of amounts
from acquisitions:
Due from clearing broker 560,037 163,754 751,160
Securities owned, at market value (926,359) (203,504) 214,137
Accounts receivable, net (280,066) - -
Receivable from investment company (26,416) - (32,580)
Prepaid expenses and other (32,154) 45,016 4,391
Other receivables - 42,691 43,684
Accounts payable and accrued liabilities 59,669 81,542 390,273
Accrued litigation (49,994) - 525,160
Securities sold, but not yet purchased, at market value (4,902) 213,272 (124,671)
Due to clearing broker 333,299 - -
--------- --------- -----------
NET CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES (361,687) 346,768 (144,998)
--------- --------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (148,773) (34,950) (207,256)
Forgivable loans issued (425,000) - (1,210,000)
Purchase of investment - - (150,000)
Notes receivable issued - - (300,000)
Payments on notes receivable 5,590 - 3,458
Change in other assets (39,992) (156,326) (221,168)
--------- --------- -----------
NET CASH USED IN INVESTING ACTIVITIES (608,175) (191,276) (2,084,966)
--------- --------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on long term debt and lines of credit (12,592) (17,329) (95,508)
Proceeds from long term debt and lines of credit 138,000 - -
Payments on capital lease obligations (8,037) (1,719) (12,765)
Net proceeds from private placement 148,800 - 3,195,877
Capital contribution - - 27,401
Capital distribution - - (79,044)
Preferred dividends (30,625) (30,625) (122,500)
--------- --------- -----------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 235,546 (49,673) 2,913,461
--------- --------- -----------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (734,316) 105,819 683,497
CASH AND CASH EQUIVALENTS, Beginning of period 1,035,809 352,312 352,312
--------- --------- -----------
CASH AND CASH EQUIVALENTS, End of period $ 301,493 $ 458,131 $ 1,035,809
========= ========= ===========
</TABLE>
See notes to consolidated financial statements.
F-8
<PAGE>
COLONIAL DIRECT FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------------------------
(continued)
Three Months Ended
March 31,
--------------------------- December 31,
2000 1999 1999
---- ---- ----
(Unaudited)
<S> <C> <C> <C>
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid in cash during the period $ 60,556 $ 22,254 $ 213,136
======== ======== =========
Income taxes paid in cash during the period $ - $ - $ -
======== ======== =========
</TABLE>
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
On October 21, 1999, the Company recorded net tangible assets of
approximately $6,400 and goodwill of approximately $333,600 in connection
with the Colonial Tax Prep acquisition (see Note 10).
On November 8, 1999, the Company recorded net tangible liabilities of
approximately $4,700 and goodwill of approximately $741,400 in connection
with the Colonial Retirement acquisition (see Note 10).
During 1999, shareholders made capital contributions to the Company in
the form of marketable securities for approximately $49,400.
During 1999, the Company entered into a capital lease for
approximately $79,300 for office equipment.
On January 1, 2000, the Company recorded net tangible assets of
approximately $116,000 and goodwill of approximately $884,000 in connection
with the K&G Business Services acquisition (see Note 10).
During the period ended March 31, 2000, the Company entered into a
capital lease for approximately $10,500 for office equipment.
See notes to consolidated financial statements.
F-9
<PAGE>
COLONIAL DIRECT FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 1999
--------------------------------------------------------------------------------
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
--------------------------------------------------------------------------------
Organization and Basis of Presentation
--------------------------------------
Colonial Direct Financial Group, Inc. was incorporated on August 14,
1997 in the State of Delaware under the name First Colonial Securities
Holding Corp., which was subsequently changed to Colonial Direct
Financial Group, Inc., during 1999, ("Colonial"). On July 7, 1989,
First Colonial Securities Group, Inc. ("First Colonial") was
incorporated in the State of New Jersey and, subsequent to the
formation of Colonial, was reorganized to be a wholly-owned subsidiary
of Colonial. On September 23, 1999, Colonial Direct Capital Management,
Inc. ("Management") was incorporated in the State of Florida, and
subsequent to the formation of Colonial, was reorganized to be a
wholly-owned subsidiary of Colonial. On October 21, 1999, Colonial
acquired Certified Tax Returns USA, Inc. as a wholly-owned subsidiary
of Colonial and, on November 17, 1999, amended the articles of
incorporation to change the name to Colonial Direct Tax Preparation,
Inc. ("Colonial Tax Prep"). On November 8, 1999, Colonial acquired KWT
Consultants, Inc. as a wholly-owned subsidiary of Colonial and, on
February 3, 2000, amended the articles of incorporation to change the
name to Colonial Direct Retirement Services, Inc. ("Colonial
Retirement"). Colonial and its subsidiaries are collectively referred
to as "the Company". All significant intercompany balances and
transactions are eliminated in consolidation.
The Company is a diverse group of financial service companies all
focused on delivering value to the consumer through the Internet and
traditional methods of offering financial services. First Colonial, the
principal subsidiary, operates as a registered securities broker/dealer
under the rules of the National Association of Securities Dealers (the
"NASD"). First Colonial also performs investment banking services,
principal trading activities and buying and selling domestic securities
for its own account. First Colonial currently operates out of 15
offices, of which four are corporate owned and the remainder are
operated under agreements with independent contractors. Management
provides administrative support services to the other subsidiaries as
well as Colonial under a management agreement. Colonial Tax Prep is a
tax return preparation company and Colonial Retirement is an employee
benefits company.
Unaudited Consolidated Financial Statements
-------------------------------------------
The unaudited consolidated March 31, 2000 and 1999 financial statements
presented herein have been prepared by the Company in accordance with
the rules and regulations of the Securities and Exchange Commission
(the "SEC") regarding interim financial reporting and, accordingly,
they do not include all the information and disclosures required by
generally accepted accounting principles. In the opinion of management,
the interim consolidated financial statements have been prepared on the
same basis as the audited consolidated financial statements and include
all adjustments, consisting mainly of normal recurring adjustments,
necessary for a fair presentation of the financial position and results
of operations for the periods shown. The interim consolidated financial
statements for the three month period ended March 31, 2000 have been
reviewed by an independent public accountant pursuant to Rule 310(b) of
SEC Regulation S-B and following applicable standards for conducting
such a review. The results of operations for the three months ended
March 31, 2000 are not necessarily indicative of the results for the
full fiscal year.
F-10
<PAGE>
COLONIAL DIRECT FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 1999
--------------------------------------------------------------------------------
NOTE 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 those estimates.
Securities Transactions
-----------------------
Proprietary securities in regular-way trades are recorded on the trade
date, as if they settled. Profit and loss arising from all securities
and commodities transactions entered into for the account and risk of
First Colonial are recorded on a trade date basis. Customers'
securities and commodities transactions are reported on a settlement
date basis to the customer with the related commission income and
expenses recorded on a trade date basis.
Marketable Securities
---------------------
Marketable securities are recorded at market value and securities not
readily marketable (if any) are recorded at fair value as determined by
the board of directors. The resulting difference between cost and
market (or fair value) is included in the statement of operations.
Investment Banking
------------------
Investment banking revenues include gains, losses, and fees, net of
syndicate expenses, arising from securities offerings in which First
Colonial acts as an underwriter or agent. Investment banking management
fees are recorded on offering date, sales concessions on settlement
date, and underwriting fees at the time the underwriting is completed
and the income is reasonably determinable.
Property and Equipment
----------------------
Property and equipment are recorded at cost and depreciated over the
estimate useful lives of the assets using accelerated and straight-line
methods. Expenditures for routine maintenance and repairs are charged
to expenses as incurred.
Intangible Assets
-----------------
The excess of investment cost over the fair value of net assets
acquired (goodwill) is being amortized using the straight-line method
over a period of 15 years. The goodwill arose from the acquisitions of
Colonial Tax Prep and Colonial Retirement. Amortization of goodwill for
the year ended December 31, 1999 was approximately $11,945.
F-11
<PAGE>
COLONIAL DIRECT FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 1999
--------------------------------------------------------------------------------
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
--------------------------------------------------------------------------------
Income Taxes
------------
The Company accounts for income taxes in accordance with the Statement
of Financial Accounting Standards No. 109 (SFAS No 109), "Accounting
for Income Taxes." Deferred taxes are provided on a liability method
whereby deferred tax assets are recognized for deductible temporary
differences, operating loss carry forwards, and tax credit carry
forwards, and deferred tax liabilities are recognized for taxable
temporary differences. Temporary differences are the differences
between the reported amounts of assets and liabilities and their tax
bases. Deferred tax assets are reduced by a valuation allowance when,
in the opinion of management, it is more likely than not that some
portion or all of the deferred tax assets may not be realized. Deferred
tax assets and liabilities are adjusted for the effects of changes in
tax laws and rates on the date of enactment. State minimum taxes are
generally expensed as paid.
Net Loss Per Common Share
-------------------------
The Company has adopted SFAS No. 128, "Earnings Per Share." SFAS 128
requires companies with complex capital structures or common stock
equivalents to present both basic and diluted earnings per share
("EPS") on the face of the income statement. Basic EPS is calculated as
the income or loss available to common stockholders divided by the
weighted average number of common shares outstanding during the period.
Diluted EPS is calculated using the "if converted" method for common
share equivalents such as convertible securities and options and
warrants.
Stock Based Compensation
------------------------
In October 1995, the Financial Accounting Standards Board (FASB) issued
SFAS No. 123, "Accounting for Stock-Based Compensation." SFAS No. 123
encourages, but does not require, companies to record compensation
plans at fair value. The Company has chosen, in accordance with the
provision of SFAS No. 123, to apply Accounting Principles Board Opinion
No. 25, "Accounting for Stock Issued to Employees" (APB 25) for its
stock plans. Under APB 25, if the exercise price of the Company's stock
options is less than the market price of the underlying stock on the
date of grant, the Company must recognize compensation expense. SFAS
No. 123 will be adopted for disclosure purposes only and will not
impact the Company's financial position, annual operating results, or
cash flows. For transactions with other than employees in which
services were performed in exchange for stock, the transactions, if
any, are recorded on the basis of the fair value of the services
received or the fair value of the issued equity instrument, whichever
was more readily measurable.
Cash and Cash Equivalents
-------------------------
Cash and cash equivalents include all highly liquid investments
purchased with an original maturity of three months or less. The
Company periodically maintains cash balances with financial
institutions that are in excess of the federally insured limits.
Fair Value of Financial Instruments
-----------------------------------
Cash, accounts payable and accrued liabilities are recorded in the
financial statements at cost, which approximates fair value because of
the short term maturity of those instruments. The estimated fair value
of the Company's capital lease obligations and debt is also the same as
the recorded amounts, as terms approximate current market conditions.
Receivables and notes from related parties and employees are not
subject to reasonable fair value estimation due to their unique nature.
F-12
<PAGE>
COLONIAL DIRECT FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 1999
--------------------------------------------------------------------------------
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
--------------------------------------------------------------------------------
Statement of Comprehensive Income
---------------------------------
In accordance with SFAS No. 130, "Reporting Comprehensive Income", the
Company is required to report its comprehensive income. Other
comprehensive income refers to revenue, expenses, gains, and losses
that under generally accepted accounting principles are included in
comprehensive income but are excluded from net income, as these amounts
are recorded directly as an adjustment to stockholder's equity. A
statement of comprehensive income is not presented since the Company
had no items of other comprehensive income. Comprehensive income is the
same as net income for the period presented herein.
Advertising Costs
-----------------
Advertising costs are expensed as incurred and amounted to $64,511 in
1999.
Segment Information
-------------------
The Company adopted SFAS No. 131, "Disclosure about Segments of an
Enterprise and Related Information," effective January 1, 1999. SFAS
No. 131 establishes standards for the way that public companies report
selected information about operating segments in annual and interim
financial reports to shareholders. It also establishes standards for
related disclosures about an enterprise's business segments, products,
services, geographic areas, and major customers.
Recent Accounting Pronouncements
--------------------------------
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities". Among other provisions, it
requires that entities recognize all derivatives as either assets or
liabilities in the statement of financial position and measure those
instruments at fair value. Gains and losses resulting from changes in
the fair values of those derivatives would be accounted for depending
on the use of the derivative and whether it qualifies for hedge
accounting. The effective date of this standard was delayed via the
issuance of SFAS No. 137. The effective date for SFAS No. 133 is now
for fiscal years beginning after June 15, 2000, though earlier adoption
is encouraged and retroactive application is prohibited. The Company
must adopt this standard no later than January 1, 2001. The Company
does not expect the adoption of this standard to have a material impact
on results of operations, financial position or cash flows.
--------------------------------------------------------------------------------
NOTE 2. PROPERTY AND EQUIPMENT
--------------------------------------------------------------------------------
Property and equipment at December 31, 1999 consists
of the following:
Equipment owned under capital leases $ 111,683
Furniture and equipment 786,835
Leasehold improvements 132,730
Less accumulated depreciation (470,367)
----------------------------------------------------------------
Property and equipment, net $ 560,881
================================================================
Depreciation expense for the year ended December 31, 1999 was
approximately $134,975, and it includes amortization of equipment owned
under capital leases. During 1999, the Company acquired $79,326 of
equipment under capital leases.
F-13
<PAGE>
COLONIAL DIRECT FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 1999
--------------------------------------------------------------------------------
NOTE 3. INVESTMENT
-------------------------------------------------------------------------------
At December 31, 1999, the investment consists of 223,327 shares of
restricted common stock of TradingGear.com, and the investment is
valued at cost, which management believes approximates its fair market
value. This investment was acquired in October 1999 for $150,000.
--------------------------------------------------------------------------------
NOTE 4. FORGIVABLE LOANS
--------------------------------------------------------------------------------
During 1999, the Company issued $1,210,000 of forgivable loans to 10
employees and one stockholder in lieu of sign on bonuses. The terms of
the loans range from two to five years and all loans bear interest at a
rate of 7.125%, with scheduled maturity dates from 2001 to 2005. The
shareholder's loan is for $120,000 (which is included in the
$1,210,000) with the same terms as described above. For each year the
employee and/or shareholder is in good standing with the Company, the
Company forgives a ratable portion of the principal and related
interest and charges this amount to compensation expense. If the
employee is terminated either voluntarily or for just cause the
principal balance plus accrued interest is due and payable within 120
days. If the employee is terminated without just cause or upon death or
disability the principal balance plus accrued interest is immediately
forgiven.
As of December 31, 1999, the balance of the forgivable loans was
$1,168,208, of which $255,863 is classified as current. The remaining
long-term portion of $912,345 is scheduled for forgiveness as follows:
$270,223 in 2001, $247,269 in 2002, $194,922 in 2003, $150,361 in 2004
and $49,570 thereafter.
--------------------------------------------------------------------------------
NOTE 5. SECURITIES OWNED AND SECURITIES SOLD BUT NOT YET PURCHASED
--------------------------------------------------------------------------------
Securities owned and securities sold but not yet purchased consist of
marketable trading and investment securities at quoted market values.
These securities consist of the following:
Sold But Not
Owned Yet Purchased
---------- ------------------
Corporate stocks $ 129,669 $ 4,902
State and municipal obligations 460,978 -
Options and warrants 46,238 -
----------------------------------------------------------------------
Total $ 636,885 $ 4,902
======================================================================
F-14
<PAGE>
COLONIAL DIRECT FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 1999
--------------------------------------------------------------------------------
NOTE 6. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
-------------------------------------------------------------------------------
Accounts payable and accrued liabilities consist of the following:
<TABLE>
<CAPTION>
March 31,
------------------------------- December 31,
2000 1999 1999
-------------- ------------- ----------------
(Unaudited)
<S> <C> <C> <C>
Accounts payable $346,905 $ 198,277 $ 322,058
Accrued liabilities:
Payroll and related expenses 1,241,579 1,079,655 1,128,908
Due to former owner of subsidiary 54,158 - -
Professional fees and other 93,857 25,120 135,864
Dividends payable 30,625 30,625 30,625
-------------- ------------- ----------------
Total $1,767,124 $1,333,677 $1,617,455
============== ============= ================
</TABLE>
--------------------------------------------------------------------------------
NOTE 7. DEBT OBLIGATIONS
--------------------------------------------------------------------------------
Lines of Credit
---------------
The Company has two revolving lines of credit with a financial services
company. The maximum amount available under these lines of credit is
$30,000 and $155,000, respectively. As of December 31, 1999, the lines
of credit had an outstanding balance of $12,634 and $22,038,
respectively. Interest on both lines of credit is payable at prime plus
1% (approximately 8.75% at December 31, 1999).
Notes Payable
-------------
The borrowings under notes payable as of December 31, 1999 consists of
the following:
<TABLE>
<CAPTION>
<S> <C>
Term loan payable to a financial services company in monthly
installments of $590 through 2000 plus interest payable monthly at
8.5%. $4,555
Term loan payable to a financial services company in monthly
installments of $1,908 through 2001 plus interest payable monthly at
8.5%. 26,851
Term loan payable to a financial services company in monthly
installments of $192 through 2000 plus interest payable monthly at
16.3%. Certain furniture and equipment serves as collateral under this
loan. 1,947
-------
Total long term debt 33,353
Less: current portion 27,971
-------
Long term portion $5,382
=======
</TABLE>
F-15
<PAGE>
COLONIAL DIRECT FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 1999
--------------------------------------------------------------------------------
NOTE 8. CAPITAL LEASE OBLIGATIONS
--------------------------------------------------------------------------------
Certain office equipment was acquired under the provisions of various
long-term leases and the Company has capitalized the minimum lease
payments. The leases vary from three years to five years beginning in
1997 and all leases terminate in 2002. As of December 31, 1999, the
leased property has a recorded cost of $111,683, and accumulated
depreciation totaled $20,740 (see Note 2).
Future minimum lease payments under the capital leases and the net
present value of the future minimum lease payments subsequent to
December 31, 1999 are as follows:
Future minimum lease payments $ 114,828
Less: amount representing interest (20,980)
-----------------------------------------------------------------------
Present value of minimum lease payments 93,848
Less: Current portion (30,615)
-----------------------------------------------------------------------
Long-term capital lease obligation $ 63,233
=======================================================================
Future minimum lease payments are as follows: $30,615 in 2000; $35,213
in 2001; and $28,020 in 2002.
--------------------------------------------------------------------------------
NOTE 9. INCOME TAXES
--------------------------------------------------------------------------------
A summary of income taxes for the year ended December 31, 1999 is as
follows:
Currently payable:
Federal $ -
State -
Deferred tax benefit 811,800
-----------------------------------------------------------------------
Income tax benefit 811,800
Valuation allowance (811,800)
-----------------------------------------------------------------------
Net income tax provision $ -
=======================================================================
Temporary differences between the financial statement carrying amounts
and tax bases of assets and liabilities that give rise to net deferred
income tax assets at December 31, 1999 relate to the following:
Net operating loss carryforward $ 607,700
Depreciation (9,600)
Accrued liabilities 234,800
Valuation allowance (826,200)
-----------------------------------------------------------------------
Net deferred income tax asset $ 6,700
=======================================================================
A combined estimated federal and state tax rate of approximately 40%
has been used for all deferred tax computations. The tax benefit prior
to the allowance differs from the Federal statutory rate of 34% because
of non-deductible expenses and the effect of the state income tax
benefit.
F-16
<PAGE>
COLONIAL DIRECT FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 1999
--------------------------------------------------------------------------------
NOTE 9. INCOME TAXES (continued)
--------------------------------------------------------------------------------
The Company has recorded a valuation allowance in accordance with the
provisions of SFAS No. 109 to reflect the estimated amount of deferred
tax assets that may not be realized. In assessing the realizability of
deferred tax assets, management considers whether it is more likely
than not that some portion or all of the deferred tax assets will not
be realized. The ultimate realization of deferred tax assets is
dependent upon the generation of future taxable income during the
periods in which temporary differences and/or carryforward losses
become deductible.
The Company has available tax net operating loss carryovers ("NOLs") as
of December 31, 1999 of approximately $1,519,000. The NOLs will begin
to expire in the year 2019. Certain provisions of the tax law may limit
the net operating loss carryforwards available for use in any given
year in the event of a significant change in ownership interest. There
have already been significant changes in stock ownership; however,
management believes that an ownership change has not yet occurred which
would cause the net operating loss carryover to be significantly
limited.
The tax provisions for the three month periods ended March 31, 2000 and
1999 are zero, as any benefit from the net operating losses have been
offset in their entirety by the valuation allowances.
--------------------------------------------------------------------------------
NOTE 10. ACQUISITION ACTIVITIES
--------------------------------------------------------------------------------
Colonial Tax Prep
-----------------
On October 21, 1999, Colonial completed the acquisition of Colonial Tax
Prep in a tax-free stock exchange. Management of Colonial placed a
value of $339,997 on the 66,666 shares of common stock issued to the
shareholders of Colonial Tax Prep a valuation based on a common share
private placement (see Note 11). The cost of the acquisition was
allocated to the assets using the purchase accounting method
approximately as follows:
Depreciable tangible property and equipment $ 5,164
Receivables and other assets, net 1,240
Goodwill 333,593
-----------------------------------------------------------------------
Total $ 339,997
=======================================================================
As a result, Colonial Tax Prep became a wholly owned subsidiary of
Colonial on this date. The financial statements of the Company include
the operating results of the acquired entity since the date of
acquisition.
F-17
<PAGE>
COLONIAL DIRECT FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 1999
--------------------------------------------------------------------------------
NOTE 10. ACQUISITION ACTIVITIES (continued)
--------------------------------------------------------------------------------
Colonial Retirement
-------------------
On November 8, 1999, Colonial completed the acquisition of Colonial
Retirement in a tax-free stock exchange. Management of Colonial placed
a value of $736,664 on the 144,444 shares of common stock issued to the
shareholders of Colonial Retirement a valuation based on a common share
private placement (see Note 11). The cost of the acquisition was
allocated to the assets using the purchase accounting method
approximately as follows:
Receivables and other assets, net $ 4,736
Liabilities assumed (9,454)
Goodwill 741,382
-----------------------------------------------------------------------
Total $ 736,664
=======================================================================
As a result, Colonial Retirement became a wholly owned subsidiary of
Colonial on this date. The financial statements of the Company include
the operating results of the acquired entity since the date of
acquisition. The acquisition agreement with Colonial Retirement also
contains a contingency clause, under which the transaction may be
unwound if the Company has not completed an initial public offering of
its common stock for at least $10,000,000 within 18 months of the
closing date of the acquisition.
Kopple & Gottlieb LLP
---------------------
On January 1, 2000, Colonial purchased certain assets and liabilities
of Kopple & Gottlieb LLP, a certified public accounting firm, in an
asset purchase agreement. Management of Colonial placed a value of
$1,000,002 on the 166,667 shares of common stock issued to the members
of Kopple & Gottlieb LLP. This acquisition will be accounted for as a
purchase. The Company anticipates allocating approximately $884,000 of
the acquisition cost to goodwill and the remaining $116,000 of the
acquisition cost to net assets as the purchase was primarily for
obtaining rights to the revenue stream of the acquired entity.
As a result, the successor entity to Kopple & Gottlieb LLP, K&G
Business Services, Inc., became a wholly owned subsidiary of Colonial
on this date. The financial statements of the Company will include the
operating results of the acquired entity since the date of acquisition.
F-18
<PAGE>
COLONIAL DIRECT FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 1999
--------------------------------------------------------------------------------
NOTE 10. ACQUISITION ACTIVITIES (continued)
--------------------------------------------------------------------------------
Pro Forma Financial Information
-------------------------------
The following pro forma summary presents the results of operations as
if the Colonial Tax Prep, Colonial Retirement, and K&G Business
Services acquisitions had occurred at January 1, 1999, after giving
effect to certain adjustments, including amortization of goodwill.
These pro forma results have been prepared for illustrative purposes
only and do not purport to be indicative of what would have occurred
had the acquisitions been made as of those dates, or results of which
may occur in the future.
1999 Consolidated
Pro forma (12 months)
-------------------------
(Unaudited)
Revenues $ 13,005,972
Goodwill charges 130,573
Other expenses 15,424,737
-----------------------------------------------------------------------
Loss from operations (2,549,338)
Interest income, net 372,577
-----------------------------------------------------------------------
Net loss $(2,176,761)
=======================================================================
--------------------------------------------------------------------------------
NOTE 11. STOCKHOLDERS' EQUITY
--------------------------------------------------------------------------------
Preferred Stock
---------------
The Company has authorized 5,000,000 shares of $0.01 par value
preferred stock. The Company is authorized to provide for the issuance
of shares of preferred stock and to establish the number of shares
included in each series and to fix the designation, voting powers,
preferences and relative rights and qualifications, limitations or
restrictions of each such series.
In November 1997, the Company designated 150,000 shares of the
preferred stock as Series A Convertible Preferred Stock. The holders of
Series A Preferred Stock have no voting rights, rights to convert into
common shares, a $10 liquidation preference, and preferential rights to
receive quarterly dividends at an annual rate of 10% before dividends
can be paid on the common shares. For the year ended December 31, 1999
the Company paid dividends to the Series A Preferred Stockholders in
the amount of $122,500. As of December 31, 1999 there are no amounts
due to the Series A Preferred Stockholders for dividends in arrears.
On June 30, 1999, the conversion ratio for the Series A Preferred Stock
was adjusted to provide for the receipt of 2.94 shares of common stock
upon the conversion of one share of Series A Preferred Stock.
Previously, the conversion ratio was one share of Series A Preferred
Stock for two shares of common stock. The new conversion ratio, which
was effective June 30, 1999, was determined pursuant to the stock split
of the Company's common stock.
The Company, at its option may redeem, in whole or in part, the shares
of Series A Preferred Stock outstanding at any time after November 26,
2000, the third anniversary of the date of the initial issuance of the
Series A Preferred Stock. The redemption price is set at $11 per share.
F-19
<PAGE>
COLONIAL DIRECT FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 1999
--------------------------------------------------------------------------------
NOTE 11. STOCKHOLDERS' EQUITY (continued)
--------------------------------------------------------------------------------
Common Stock
------------
The Company has authorized 20,000,000 shares of $0.01 par value common
stock. The holders of the common stock are entitled to one vote per
share and have non-cumulative voting rights. The holders are also
entitled to receive dividends when, as, and if declared by the Board of
Directors. Additionally, the holders of the common stock do not have
any preemptive right to subscribe for, or purchase, any shares of any
class of stock.
As described above, on June 30, 1999, the Board of Directors of the
Company resolved to split the common stock on a 1.47022 to 1 share
basis in anticipation of a private placement stock issuance. The
reported shares of the Company have been restated to January 1, 1999
for this stock split.
Private Placement of Common Stock
---------------------------------
On August 10, 1999, the Company issued a private offering memorandum to
sell up to 1,000,000 shares of common stock at $5.10 per share under
Rule 501(a) of Regulation D of the Securities Act of 1933. As of
December 31, 1999, the Company has sold a total of 720,444 shares that
resulted in net proceeds of $3,195,877. Subsequent to December 31,
1999, an additional 29,176 shares of common stock were sold for gross
proceeds totaling approximately $148,800.
Stock Option Plan
-----------------
In 1998, the Company established a stock option plan (the "Plan") and
issued stock options to key employees and officers. The Company has
authorized and reserved 1,000,000 shares of its common stock for this
Plan. In 1999, the Company amended the Plan to include directors and
consultants, and to increase the number of shares of common stock
reserved under the Plan to 1,500,000. At the date of each option grant,
the Plan Administrators have the sole discretion to set option terms,
including whether the option is an incentive option, the option price
per share, and its duration. Outstanding options until fully vested are
contingent upon continued service.
During 1999, the Plan Administrators granted options that are
exercisable for 362,542 shares of Common Stock at a per option exercise
price ranging from $6.00 to $6.60.
SFAS No. 123 requires entities that account for awards for stock-based
compensation to employees in accordance with APB 25 to present pro
forma disclosures of results of operations and earnings per share as if
compensation cost was measured at the date of grant based on the fair
value of the award. The fair value for these options was estimated at
the date of grant using a Black-Scholes options pricing model with the
following weighted-average assumptions: a risk-free interest rate of
5.75%, no dividend yield, no volatility since the Company common stock
is not traded on a public exchange and a weighted-average expected life
of the option of five years. The fair value of the options was
approximately $2.49 at December 31, 1999.
F-20
<PAGE>
COLONIAL DIRECT FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 1999
--------------------------------------------------------------------------------
NOTE 11. STOCKHOLDERS' EQUITY (continued)
--------------------------------------------------------------------------------
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options that have no vesting
restrictions and are fully transferable. In addition, option valuation
models require the input of highly subjective assumptions including the
expected stock price volatility. Because the Company's employee stock
options have characteristics different from those of traded options,
and because changes in the subjective input assumptions can materially
affect the fair value estimate, in management's opinion, the existing
models do not necessarily provide a reliable single measure of the fair
value of its employee stock options.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The
Company's net loss of $2,110,930 would have been increased to the pro
forma amount of $2,298,306 for the year ended December 31, 1999. The
Company's basic and diluted loss per share of $0.645 would have been
increased to the pro forma loss per share of $0.703 for the year ended
December 31, 1999.
The pro forma amounts may not be representative of the future effects
on reported net income and earnings per share that will result from the
future granting of stock options since future pro forma compensation
expense may be allocated over the periods in which options become
exercisable and new option awards may be granted each year. The
following table presents the Company's stock option activity for 1999:
<TABLE>
<CAPTION>
Optioned Weighted-Average
Shares Exercise Price
------------ ------------------
<S> <C> <C>
Options outstanding at January 1, 1999 376,000 $ 3.46
Issued in 1999 362,542 6.12
Forfeited in 1999 (3,500) 6.12
---------------------------------------------------------------------------------------
Options outstanding at December 31, 1999 735,042 $ 4.76
=======================================================================================
</TABLE>
The options outstanding at December 31, 1999 expire at various times
throughout 2003 and 2004. Of the options outstanding at December 31,
1999, 75,200 are available for exercise by the option holder.
F-21
<PAGE>
COLONIAL DIRECT FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 1999
--------------------------------------------------------------------------------
NOTE 12. RELATED PARTY TRANSACTIONS
--------------------------------------------------------------------------------
Capital Contributions
---------------------
In July 1999, a stockholder of the Company contributed municipal
securities with a market value of $49,388 to the Company as additional
paid-in capital. During 1999, the Company's primary stockholder
contributed capital to the Company in the form of cash for $27,400 and
a note receivable for $120,000. The corresponding payable is with First
Colonial and was issued under a satisfactory subordination agreement
approved by the NASD. The NASD must approve any prepayment or early
retirement on the subordinate note payable. The note receivable and
note payable do not appear on the consolidated balance sheet because
they were eliminated in consolidation.
Distribution to Shareholder
---------------------------
During 1999, the Company distributed $79,044 to the primary stockholder
as a return of his initial capital investment.
Employee Advances
-----------------
During 1999, the Company advanced approximately $60,000 to employees.
Subsequent to December 31, 1999 approximately $32,500 was repaid.
Notes Receivable - Shareholders
-------------------------------
During 1999, the primary stockholder received a loan from the Company
and executed a promissory note in return. The original loan balance was
$150,000 and bears no interest if paid in full by December 31, 1999.
The loan was not paid in full as of December 31, 1999 and as a result
interest will accrue at a rate of 7.125% per annum, effective
January 1, 2000.
During 1999, two shareholders received loans from the Company and
executed promissory notes in return. The original loan balances were
$50,000 and $100,000 and these loans bear interest at a rate of 6% and
7% per annum, respectively. The principal is paid monthly and the
interest is paid annually. As of December 31, 1999 the notes receivable
balance was $146,542 of which $22,924 is classified as current. The
remaining long-term portion of $123,618 is scheduled for repayment as
follows: $24,484 in 2001, $26,150 in 2002, $27,929 in 2003, $23,042 in
2004 and $22,013 thereafter.
--------------------------------------------------------------------------------
NOTE 13. COMMITMENTS AND CONTINGENCIES
--------------------------------------------------------------------------------
Lease Commitments
-----------------
Office Facilities
-----------------
The Company leases various office facilities under operating leases.
The total rental payments due under the leases are being amortized over
the lives of the leases on a straight-line basis in accordance with
applicable accounting standards. These leases have expiration dates
from 2000 to 2008 with initial lease periods ranging from one year to
eight years. Two leases were executed at the end of 1999 for which
occupancy is not scheduled until the year 2000. The Company executed a
$200,000 letter of credit in favor of the lessor for one of these two
leases.
F-22
<PAGE>
COLONIAL DIRECT FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 1999
--------------------------------------------------------------------------------
NOTE 13. COMMITMENTS AND CONTINGENCIES (continued)
--------------------------------------------------------------------------------
Office Facilities (continued)
-----------------
Future minimum rental payments subsequent to December 31, 1999 are as
follows:
Year Ending December 31:
2000 $ 1,227,225
2001 1,285,941
2002 1,021,636
2003 844,779
2004 844,779
Thereafter 2,430,089
-----------------------------------------------------------------------
Total lease commitments $ 7,654,449
=======================================================================
Total rent expense for office facilities for the year ended December
31, 1999 was approximately $424,000.
Office Equipment and Automobiles
The Company leases office equipment and automobiles under operating
leases. Future minimum rental payments subsequent to December 31, 1999
are as follows:
Year Ending December 31:
2000 $ 110,114
2001 101,207
2002 100,127
2003 92,250
2004 56,550
-----------------------------------------------------------------------
Total lease commitments $ 460,248
=======================================================================
Total rent expense for office equipment and automobiles for the year
ended December 31, 1999 was approximately $136,659.
F-23
<PAGE>
COLONIAL DIRECT FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 1999
--------------------------------------------------------------------------------
NOTE 13. COMMITMENTS AND CONTINGENCIES (continued)
--------------------------------------------------------------------------------
NASD Arbitration
----------------
Settled actions:
---------------
During the year ended December 31, 1999, the Company and/or First
Colonial settled approximately 10 separate NASD arbitration actions for
a total of approximately $255,220.
Pending actions:
----------------
The Company and/or First Colonial have been named in several separate
NASD arbitration actions filed by former clients for allegedly
violating securities laws and NASD rules. These actions have not been
settled as of December 31, 1999. Management intends to vigorously
defend against these claims, and the accompanying financial statements
include an accrual for losses that may result from the ultimate outcome
of certain of these actions. For certain other actions referred to
counsel, counsel has advised the Company that it is unable to opine on
the likelihood of an unfavorable outcome, therefore, the financial
statements are affected by an uncertainty, the outcome of which is not
susceptible to reasonable estimation. Management believes that the
settlement or resolution of all of these actions will not have an
additional material effect on the financial position or results of
operations of the Company, however, the amount accrued at December 31,
1999 may not be sufficient to cover all claims that may ultimately be
settled against the Company, and this potential additional charge may
be material.
--------------------------------------------------------------------------------
NOTE 14. CONCENTRATIONS AND CREDIT RISKS
--------------------------------------------------------------------------------
As part of its normal operations, the Company, through First Colonial,
will periodically sell securities that it does not currently own and
will therefore be obligated to purchase such securities at a future
date. The Company has recorded these obligations in the financial
statements at market values of the related securities and will incur a
loss if the market value of the securities increases subsequent to
December 31, 1999.
The Company's customer securities activities are transacted on either a
cash or margin basis. In margin transactions, the Company extends
credit to its customers, subject to various regulatory and internal
margin requirements, collateralized by cash and securities in the
customers' accounts. In connection with these activities, the Company
executes and clears customer transactions involving the sale of
securities not yet purchased, substantially all of which are transacted
on a margin basis subject to individual exchange regulations. Such
transactions may expose the Company to significant off-balance-sheet
risk in the event margin requirements are not sufficient to fully cover
losses that customers may incur. In the event the customer fails to
satisfy its obligations, the Company may be required to purchase or
sell financial instruments at prevailing market prices to fulfill the
customer's obligations.
The Company seeks to control the risks associated with its customer
activities by requiring customers to maintain margin collateral in
compliance with various regulatory and internal guidelines. The Company
and its clearing broker monitor required margin levels and, pursuant to
regulatory guidelines, require the customers to deposit additional
collateral or to reduce positions when necessary.
F-24
<PAGE>
COLONIAL DIRECT FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 1999
--------------------------------------------------------------------------------
NOTE 14. CONCENTRATIONS AND CREDIT RISKS (continued)
--------------------------------------------------------------------------------
The Company's customer financing and securities settlement activities
require the Company to pledge customer securities as collateral in
support of various secured financing sources such as bank loans and
securities loaned. In the event the counterpart is unable to meet its
contractual obligation to return customer securities pledged as
collateral, the Company may be exposed to the risk of acquiring the
securities at prevailing market prices in order to satisfy its
customers obligations. The Company controls this risk by monitoring the
market value of securities pledged and by requiring adjustments of
collateral levels in the event of excess market exposure. In addition,
the Company establishes credit limits for such activities and monitors
compliance.
The Company is engaged in various trading and brokerage activities in
which counterparties primarily include broker-dealers, banks, and other
financial institutions. In the event 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.
--------------------------------------------------------------------------------
NOTE 15. NET CAPITAL REQUIREMENTS
--------------------------------------------------------------------------------
First Colonial is subject to the Securities and Exchange Commission
uniform net capital rule (rule 15c3-1), which requires the maintenance
of minimal net capital and requires that the ratio of aggregate
indebtedness to net capital, both as defined, shall not exceed 15 to 1.
As of December 31, 1999, First Colonial (as a separate entity on an
unconsolidated basis) had net capital of $529,508, which was $279,508
in excess of its required net capital of $250,000. First Colonial had a
ratio of aggregate indebtedness to net capital of 1.92 to 1, based on
an aggregated indebtedness of $1,018,512 as of December 31, 1999.
--------------------------------------------------------------------------------
NOTE 16. NET LOSS PER COMMON SHARE
--------------------------------------------------------------------------------
For the year ended December 31, 1999 and the interim periods ended
March 31, 2000 and 1999, basic and diluted weighted average common
shares include only common shares outstanding. The inclusion of common
share equivalents would be anti-dilutive and, as such, they are not
included. However, the common stock equivalents, if converted, would
have increased common shares outstanding at December 31, 1999 by
1,095,192 shares, at March 31, 2000 by 1,181,192 shares and at March
31, 1999 by 736,150 shares.
A reconciliation of the number of common shares shown as outstanding in
the consolidated financial statements with the number of shares used in
the computation of weighted average common shares outstanding is shown
below:
<TABLE>
<CAPTION>
Three Months Ended Year Ended
March 31, December 31,
--------------------------- ----------------
2000 1999 1999
------------- ------------ ----------------
(Unaudited)
<S> <C> <C> <C>
Common shares outstanding 4,216,674 3,088,166 4,020,831
Effect of weighting 6,451 - 749,826
--------------------------------------------------------------------------------------------------------
Weighted average common shares outstanding 4,210,223 3,088,166 3,271,005
========================================================================================================
</TABLE>
F-25
<PAGE>
COLONIAL DIRECT FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 1999
--------------------------------------------------------------------------------
NOTE 17. OPERATING SEGMENT INFORMATION
-------------------------------------------------------------------------------
The Company's reportable operating segments are (a) First Colonial, a
registered securities broker/dealer under the rules of the NASD and (b)
all others. Transactions between segments affecting their reported
income are immaterial.
<TABLE>
<CAPTION>
December 31, 1999
---------------------------------------------------------------
First All Totals
Colonial Other
------------------- ---------------- -------------------
<S> <C> <C> <C>
Total revenues $ 12,487,228 $ 29,697 $ 12,516,925
Total operating expense 13,687,439 940,416 14,627,855
-------------- ------------- -------------
Net loss (1,200,211) (910,719) (2,110,930)
============== ============= =============
Total assets $ 2,015,924 $ 3,882,529 $ 5,898,453
============== ============= =============
</TABLE>
<TABLE>
<CAPTION>
March 31, 2000 (Unaudited)
---------------------------------------------------------------
First All Totals
Colonial Other
------------------- ---------------- -------------------
<S> <C> <C> <C>
Total revenues $ 5,606,240 $ 366,506 $ 5,972,746
Total operating expense 5,302,976 928,279 6,231,255
-------------- ------------- --------------
Net income (loss) 303,264 (561,773) (258,509)
============== ============= ==============
Total assets $ 2,191,058 $ 5,131,572 $ 7,322,630
============== ============= ==============
</TABLE>
For the three month period ended March 31, 1999, First Colonial was the
only operating entity and as a result operating segment information is
the same as the consolidated financial information for such period.
--------------------------------------------------------------------------------
NOTE 18. SUBSEQUENT EVENTS
--------------------------------------------------------------------------------
On January 25, 2000, a shareholder received a $100,000 loan from the
Company and executed a promissory note in return. The term of loan is
for four years and bears interest at a rate of 7.125%. For each year
this stockholder remains an employee in good standing with the Company,
the Company forgives a ratable portion of the principal and related
interest and charges this amount to compensation expenses. If the
employee is terminated either voluntarily or for just cause the
principal balance plus accrued interest is due and payable within 120
days. If the employee is terminated without cause or upon death or
disability the principal balance plus accrued interest is immediately
forgiven.
F-26
<PAGE>
COLONIAL DIRECT FINANCIAL GROUP, INC.
-------------------------------------
YEAR ENDED DECEMBER 31, 1998
----------------------------
Index to Consolidated Financial Statements
------------------------------------------
Page
----
Independent auditors' report F-28
Consolidated financial statements
Balance sheet F-29
Statement of operations F-30
Statement of changes in stockholders' equity F-31
Statement of cash flows F-32
Notes to consolidated financial statements F-33 - F-44
F-27
<PAGE>
INDEPENDENT AUDITOR'S REPORT
Board of Directors
Colonial Direct Financial Group, Inc.
We have audited the accompanying consolidated balance sheet of COLONIAL DIRECT
FINANCIAL GROUP, INC. (formerly doing business as First Colonial Securities
Holding Corp. and Subsidiary) as of December 31, 1998, and the related
consolidated statements of operations, changes in stockholders' equity and cash
flows for the year then ended. 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 audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of COLONIAL DIRECT
FINANCIAL GROUP, INC. as of December 31, 1998, and the results of its operations
and its cash flows for the year then ended in conformity with generally accepted
accounting principles.
KOPPLE & GOTTLIEB, LLP
February 18, 1999
F-28
<PAGE>
COLONIAL DIRECT FINANCIAL GROUP, INC.
-------------------------------------
CONSOLIDATED BALANCE SHEET
--------------------------
DECEMBER 31, 1998
-----------------
ASSETS
------
<TABLE>
<CAPTION>
<S> <C>
Current assets
Cash and cash equivalents $ 352,312
Due from clearing broker 1,311,197
Securities owned, at market 801,634
Other receivable 42,691
Employee advances 29,540
Prepaid expenses 98,963
-----------
Total current assets 2,636,337
-----------
Property and equipment, net 404,111
-----------
Other assets 44,219
-----------
Total $ 3,084,667
===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable and accrued liabilities $ 871,898
Payable to clearing broker 345,831
Securities sold, but not yet purchased, at market 129,573
Lines of credit 67,564
Long term debt, current portion 61,246
Capital lease obligations, current portion 5,718
-----------
Total current liabilities 1,481,830
-----------
Long term debt, less current portion 34,723
-----------
Long term portion, capital lease obligations 21,569
-----------
Stockholders' equity
Preferred stock, $0.01 par value, $10 liquidation preference,
5,000,000 shares authorized; 150,000 shares designated
Series A, 122,500 shares issued and outstanding 1,225
Common stock, $0.01 par value, 20,000,000 shares authorized;
3,088,166 shares issued and outstanding 30,882
Additional paid-in capital 1,489,990
Retained earnings 24,448
-----------
Total stockholders' equity 1,546,545
-----------
Total $ 3,084,667
===========
</TABLE>
See notes to consolidated financial statements.
F-29
<PAGE>
COLONIAL DIRECT FINANCIAL GROUP, INC.
-------------------------------------
CONSOLIDATED STATEMENT OF OPERATIONS
------------------------------------
YEAR ENDED DECEMBER 31, 1998
----------------------------
<TABLE>
<CAPTION>
<S> <C>
Revenues
Commissions - agency $ 9,835,701
Commissions - principal 4,802,829
Investment banking 1,133,150
Other brokerage related income 1,132,747
-----------
Total revenues 16,904,427
-----------
Operating expenses
Payroll and related costs 11,970,120
Clearing and transaction costs 1,697,723
Selling, general and administrative 2,692,182
Professional fees 280,784
Cost of arbitration actions 155,945
Interest 45,943
-----------
Total operating expenses 16,842,697
-----------
Income before provision for income taxes 61,730
Provision for income taxes 25,709
-----------
Net income 36,021
Dividends paid on preferred stock (108,247)
-----------
Net loss available to common stockholders $ (72,226)
===========
Loss per share
Basic $ (0.023)
===========
Diluted $ (0.023)
===========
Weighted average common shares outstanding 3,088,166
===========
</TABLE>
See notes to consolidated financial statements.
F-30
<PAGE>
COLONIAL DIRECT FINANCIAL GROUP, INC.
-------------------------------------
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
---------------------------------------------------------
YEAR ENDED DECEMBER 31, 1998
----------------------------
<TABLE>
<CAPTION>
Preferred Preferred Common Common Additional
Stock, Stock, at Stock, Stock, at Paid-in
# of Shares Par Value # of Shares Par Value Capital
----------- --------- ----------- --------- -------
<S> <C> <C> <C> <C> <C>
Balance, January 1, 1998 127,500 $ 1,275 3,088,166 $ 30,882 $ 1,539,940
Preferred dividends - - - - -
Repurchase and retirement
of preferred stock (5,000) (50) - - (49,950)
Net income 1998 - - - - -
------- ------- --------- -------- -----------
Balance, December 31, 1998 122,500 $ 1,225 3,088,166 $ 30,882 $ 1,489,990
======= ======= ========= ======== ===========
</TABLE>
(RESTUBBED TABLE)
<TABLE>
<CAPTION>
Total
Retained Stockholders'
Earnings Equity
-------- ------
<S> <C> <C>
Balance, January 1, 1998 $ 96,674 $ 1,668,771
Preferred dividends (108,247) (108,247)
Repurchase and retirement
of preferred stock - (50,000)
Net income 1998 36,021 36,021
-------- -----------
Balance, December 31, 1998 $ 24,448 $ 1,546,545
======== ===========
</TABLE>
See notes to consolidated financial statements.
F-31
<PAGE>
COLONIAL DIRECT FINANCIAL GROUP, INC.
-------------------------------------
CONSOLIDATED STATEMENT OF CASH FLOWS
------------------------------------
YEAR ENDED DECEMBER 31, 1998
----------------------------
<TABLE>
<CAPTION>
<S> <C>
Cash flows from operating activities
Net income $ 36,021
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization 103,167
Changes in certain assets and liabilities
Due from clearing broker 592,910
Securities owned, at market value (762,748)
Employee advances (18,036)
Other receivables (38,999)
Prepaid expenses (47,874)
Other assets (1,925)
Accounts payable and accrued liabilities 224,972
Securities sold, but not yet purchased 148,509
---------
Net cash provided by operating activities 235,997
---------
Cash flows from investing activities
Purchase of property and equipment (229,500)
Security deposits 2,124
---------
Net cash used in investing activities (227,376)
---------
Cash flows from financing activities
Payments on lines of credit (36,442)
Payments on long term debt (16,022)
Payments on capital lease obligations (4,069)
Redemption of preferred stock (50,000)
Preferred dividends (108,247)
---------
Net cash used in financing activities (214,780)
---------
Net decrease in cash and cash equivalents (206,159)
Cash and cash equivalents, beginning of year 558,471
---------
Cash and cash equivalents, end of year $ 352,312
=========
Supplemental cash flow disclosures
Cash paid during the year for
Interest $ 45,943
=========
Taxes $ 28,011
=========
Supplemental disclosure of non-cash investing
and financing activities
The Company recorded capital lease obligations
relating to the acquisition of equipment $ 5,642
=========
</TABLE>
See notes to consolidated financial statements.
F-32
<PAGE>
COLONIAL DIRECT FINANCIAL GROUP, INC.
-------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
YEAR ENDED DECEMBER 31, 1998
----------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization and Basis of Presentation
--------------------------------------
Colonial Direct Financial Group, Inc. was incorporated on August 14, 1997 in the
State of Delaware under the name First Colonial Securities Holding Corp., which
was subsequently changed to Colonial Direct Financial Group, Inc. ("Colonial")
during 1999. On July 7, 1989, First Colonial Securities Group, Inc. ("First
Colonial") was incorporated in the State of New Jersey and, subsequent to the
formation of Colonial, was reorganized to be a wholly-owned subsidiary of
Colonial. Colonial and its subsidiary are collectively referred to as "the
Company." All significant intercompany balances and transactions are eliminated
in consolidation.
Colonial is a holding company for First Colonial, the wholly owned subsidiary.
First Colonial operates as a registered securities broker/dealer under the rules
of the National Association of Securities Dealers (the "NASD"). First Colonial
also performs investment banking services, principal trading activities and
buying and selling domestic securities for its own account.
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 those estimates.
Securities Transactions
-----------------------
Proprietary securities in regular-way trades are recorded on the trade date, as
if they settled. Profit and loss arising from all securities and commodities
transactions entered into for the account and risk of First Colonial are
recorded on a trade date basis. Customers' securities and commodities
transactions are reported on a settlement date basis to the customer with the
related commission income and expenses recorded on a trade date basis.
Commissions
-----------
Commissions and related clearing expenses are recorded on a trade-date basis as
securities transactions occur.
F-33
<PAGE>
COLONIAL DIRECT FINANCIAL GROUP, INC.
-------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
------------------------------------------------------
YEAR ENDED DECEMBER 31, 1998
----------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Marketable Securities
---------------------
Marketable securities are recorded at market value and securities not readily
marketable (if any) are recorded at fair value as determined by the board of
directors. The resulting difference between cost and market (or fair value) is
included in the statement of operations.
Investment Banking
------------------
Investment banking revenues include gains, losses, and fees, net of syndicate
expenses, arising from securities offerings in which First Colonial acts as an
underwriter or agent. Investment banking management fees are recorded on
offering date, sales concessions on settlement date, and underwriting fees at
the time the underwriting is completed and the income is reasonably
determinable.
Property and Equipment
----------------------
Property and equipment are recorded at cost and depreciated over the estimated
useful lives of those assets using accelerated and straight-line methods.
Expenditures for routine maintenance and repairs are charged to expenses as
incurred.
Income Taxes
------------
The Company accounts for income taxes in accordance with the Statement of
Financial Accounting Standards No. 109 (SFAS No. 109), "Accounting for Income
Taxes." Deferred taxes are provided on a liability method whereby deferred tax
assets are recognized for deductible temporary differences, operating loss carry
forwards, and tax credit carry forwards, and deferred tax liabilities are
recognized for taxable temporary differences. Temporary differences are the
differences between the reported amounts of assets and liabilities and their tax
bases. Deferred tax assets are reduced by a valuation allowance when, in the
opinion of management, it is more likely than not that some portion or all of
the deferred tax assets may not be realized. Deferred tax assets and liabilities
are adjusted for the effects of changes in tax laws and rates on the date of
enactment. State minimum taxes are generally expensed as paid.
Net Loss Per Common Share
-------------------------
The Company has adopted SFAS No. 128, "Earnings Per Share." SFAS 128 requires
companies with complex capital structures or common stock equivalents to present
both basic and diluted earnings per share ("EPS") on the face of the income
statement. Basic EPS is calculated as the income or loss available to common
stockholders divided by the weighted average number of common shares outstanding
during the period. Diluted EPS is calculated using the "if converted" method for
common share equivalents such as convertible securities and options and
warrants.
F-34
<PAGE>
COLONIAL DIRECT FINANCIAL GROUP, INC.
-------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
------------------------------------------------------
YEAR ENDED DECEMBER 31, 1998
----------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Net Loss Per Common Share (Continued)
-------------------------------------
For the year ended December 31, 1998, basic and diluted weighted average common
shares include only common shares outstanding. The inclusion of common share
equivalents would be anti-dilutive and, as such, they are not included. However,
common stock equivalents, if converted, would have increased common shares
outstanding at December 31, 1998 by 736,150 shares.
Stock Based Compensation
------------------------
In October 1995, the Financial Accounting Standards Board (FASB) issued SFAS No.
123, "Accounting for Stock-Based Compensation." SFAS No. 123 encourages, but
does not require, companies to record compensation plans at fair value. The
Company has chosen, in accordance with the provisions of SFAS No. 123, to apply
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" (APB 25) for its stock plans. Under APB 25, if the exercise price of
the Company's stock options is less than the market price of the underlying
stock on the date of grant, the Company must recognize compensation expense.
SFAS No. 123 will be adopted for disclosure purposes only and will not impact
the Company's financial position, annual operating results, or cash flows.
For transactions with other than employees in which services were performed in
exchange for stock, the transactions, if any, are recorded on the basis of the
fair value of the services received or the fair value of the issued equity
instrument, whichever was more readily measurable.
Cash and Cash Equivalents
-------------------------
Cash and cash equivalents include all highly liquid investments purchased with
an original maturity of three months or less. The Company periodically maintains
cash balances with financial institutions that are in excess of the federally
insured limits.
Fair Value of Financial Instruments
-----------------------------------
Cash, accounts payable and accrued liabilities are recorded in the financial
statements at cost, which approximates fair value because of the short term
maturity of those instruments. The fair value of the Company's capital lease
obligations, as described in Note 7, is also the same as the recorded amounts
and terms approximate current market conditions. Receivables from related
parties are not subject to reasonable fair value estimation due to their unique
nature.
F-35
<PAGE>
COLONIAL DIRECT FINANCIAL GROUP, INC.
-------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
------------------------------------------------------
YEAR ENDED DECEMBER 31, 1998
----------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Statement of Comprehensive Income
---------------------------------
In accordance with SFAS No. 130, "Reporting Comprehensive Income," the Company
is required to report its comprehensive income. Other comprehensive income
refers to revenue, expenses, gains and losses that under generally accepted
accounting principles are included in comprehensive income but are excluded from
net income, as these amounts are recorded directly as an adjustment to
stockholders' equity. A statement of comprehensive income is not presented since
the Company had no items of other comprehensive income. Comprehensive income is
the same as net income for the period presented herein.
Advertising Costs
-----------------
Advertising costs are expensed as incurred and amounted to $15,817 in 1998.
NOTE 2 - PROPERTY AND EQUIPMENT
Property and equipment at December 31, 1998 consists of the following:
Equipment owned under capital leases $32,359
Furniture and equipment 581,091
Leasehold improvements 125.860
--------
739,310
Less accumulated depreciation 335,199
--------
Property and equipment, net $404,111
========
Depreciation expense for the year ended December 31, 1998, was approximately
$100,873.
NOTE 3 - SECURITIES OWNED AND SECURITIES SOLD BUT NOT YET PURCHASED
Securities owned and securities sold but not yet purchased consist of marketable
trading and investment securities at quoted market values. These securities
consist of the following:
Sold But Not
Owned Yet Purchased
-------- -------------
Corporate stocks $801,634 $127,473
Options and warrants - 2,100
-------- --------
$801,634 $129,573
======== ========
F-36
<PAGE>
COLONIAL DIRECT FINANCIAL GROUP, INC.
-------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
------------------------------------------------------
YEAR ENDED DECEMBER 31, 1998
----------------------------
NOTE 4 - ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
Accounts payable and accrued liabilities consist of the following at December
31, 1998:
Accounts payable $277,217
Accrued liabilities:
Payroll and related expenses 437,254
Other 86,923
Profit sharing 70,504
--------
Total $871,898
========
NOTE 5 - LINES OF CREDIT
The Company has two revolving lines of credit with a financial services company.
The maximum amount available to the Company under these lines of credit are
$30,000 and $155,000, respectively. As of December 31, 1998, the lines of credit
had an outstanding balance of $17,223 and $50,341, respectively. Interest is
payable at prime plus 1% (9.75% at December 31, 1998).
NOTE 6 - NOTES PAYABLE
<TABLE>
<CAPTION>
<S> <C>
The borrowings under notes payable as of December 31, 1998 consists of the
following:
Term loan payable to a financial services company in monthly installments of $590.28
through 2000 plus interest payable monthly at 8.5%. $10,931
Term loan payable to a financial services company in monthly installments of
$1,908.33 through 2001 plus interest payable monthly at 8.5%. 46,837
Term loan payable to an insurance financing company in monthly installments of
$8,707 through 1999 including interest payable monthly at 5.9%.
34,406
Term loan payable to a financial services company in monthly installments of $191.79
through 2000 plus interest payable monthly at 16.3%. Certain furniture and
equipment serves as collateral under this loan. 3,795
-------
Total long term debt 95,969
Less current portion 61,246
-------
Long term portion $34,723
=======
</TABLE>
F-37
<PAGE>
COLONIAL DIRECT FINANCIAL GROUP, INC.
-------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
------------------------------------------------------
YEAR ENDED DECEMBER 31, 1998
----------------------------
NOTE 7 - CAPITAL LEASE OBLIGATIONS
The Company acquired certain office equipment under the provisions of various
long-term leases and has capitalized the minimum lease payments. The leases vary
from three years to five years beginning in 1997 and all leases terminate in
2002. As of December 31, 1998, the leased property has a recorded cost of
$32,359 net of accumulated depreciation of $7,027 (see Note 2).
Future minimum lease payments under the capital leases and the net present value
of the future minimum lease payments subsequent to December 31, 1998 areas
follows:
Future minimum lease payments $37,028
Less amount representing interest 9,741
-------
Present value of minimum lease payments 27,287
Less current portion 5,718
-------
Long-term capital lease obligation $21,569
=======
Future minimum lease payments are as follows:
1999 $9,935
2000 9,935
2001 9,935
2002 7,223
-------
$37,028
=======
NOTE 8 - INCOME TAXES
A summary of income taxes for the year ended December 31, 1998 is as follows:
State income taxes
Current $ 8,991
Deferred (482)
-------
8,509
-------
Federal income taxes
Current 18,643
Deferred (1,443)
-------
17,200
-------
Total $25,709
=======
F-38
<PAGE>
COLONIAL DIRECT FINANCIAL GROUP, INC.
-------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
------------------------------------------------------
YEAR ENDED DECEMBER 31, 1998
----------------------------
NOTE 8 - INCOME TAXES (Continued)
Components of deferred tax balances as of December 31, 1998 are as follows:
Deferred tax liabilities:
Property, plant and equipment $(7,673)
-------
Deferred tax asset:
Accrued liabilities - payroll 28,754
Valuation allowance (14,377)
-------
14,377
-------
Net deferred tax asset $ 6,704
=======
Given the uncertainties surrounding the timing and eventual payment of the
accrued payroll, the Company has decided to establish a valuation allowance of
fifty percent of the deferred asset. The liabilities have been recorded at the
expected amounts payable; however, the timing of the payments may affect the
resultant realization of the tax benefits.
The Company has recorded a valuation allowance in accordance with the provisions
of SFAS No. 109 to reflect the estimated amount of deferred tax assets that may
not be realized. In assessing the realizability of deferred tax assets,
management considers whether it is more likely than not that some portion or all
of deferred tax assets will not be realized. The ultimate realization of
deferred tax assets is dependent upon the generation future taxable income
during the periods in which temporary differences and/or carryforward losses
become deductible.
NOTE 9 - STOCKHOLDERS' EQUITY
Preferred Stock
---------------
The Company has authorized 5,000,000 shares of $0.01 par value preferred stock.
The Company is authorized to provide for the issuance of shares of preferred
stock and to establish the number of shares included in each series and to fix
the designation, voting powers, preferences and relative rights and
qualifications, limitations or restrictions of each such series.
In November 1997, the Company designated 150,000 shares of the preferred stock
as Series A Convertible Preferred Stock. The holders of Series A Preferred Stock
have no voting rights, rights to convert into common shares, a $10 liquidation
preference, and preferential rights to receive quarterly dividends at an annual
rate of 10% before dividends can be paid on the common shares. For the year
ended December 31, 1998, the Company paid dividends to the Series A Preferred
Stockholders in the amount of $108,247. As of December 31, 1998, there are no
amounts due to the Series A Preferred Stockholders for dividends in arrears.
F-39
<PAGE>
COLONIAL DIRECT FINANCIAL GROUP, INC.
-------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
------------------------------------------------------
YEAR ENDED DECEMBER 31, 1998
----------------------------
NOTE 9 - STOCKHOLDERS' EQUITY (Continued)
The Company, at its option may redeem, in whole or in part, the shares of Series
A Convertible Preferred Stock outstanding at any time after November 26, 2000,
the third anniversary of the date of the initial issuance of the Series A
Preferred Stock. The redemption price is set at $11 per share.
Common Stock
------------
The Company has authorized 20,000,000 shares of $0.01 par value common stock.
The holders of the common stock are entitled to one vote per share and have
non-cumulative voting rights. The holders are also entitled to receive dividends
when, as, and if declared by the Board of Directors. Additionally, the holders
of the common stock do not have any preemptive right to subscribe for, or
purchase, any shares of any class of stock.
Stock Option Plan
-----------------
In 1998, the Company established a stock option plan (the "Plan") and issued
stock options to key employees and officers. The Company has authorized and
reserved 1,000,000 shares of its common stock for this Plan. At the date of each
option grant, the Plan Administrators have the sole discretion to set option
terms, including whether the option is an incentive option, the option price per
share, and its duration. Outstanding options until fully vested are contingent
upon continued service.
During 1998, the Plan Administrators granted 376,000 options that are
exercisable for 376,000 share of common stock at a per option exercise price
ranging from $3.35 to $3.69.
SFAS No. 123 requires entities that account for awards for stock-based
compensation to employees in accordance with APB 25 to present pro forma
disclosures of results of operations and earnings per share as if compensation
cost was measured at the date of grant based on the fair value of the award. The
fair value for these options was estimated at the date of grant using a
Black-Scholes options pricing model with the following weighted-average
assumptions: a risk-free interest rate of 6%, no dividend yield, no volatility
since the Company common stock is not traded on a public exchange and a
weighted-average expected life of the option of five years. The fair value of
the options was approximately $3.46 at December 31, 1998.
F-40
<PAGE>
COLONIAL DIRECT FINANCIAL GROUP, INC.
-------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
------------------------------------------------------
YEAR ENDED DECEMBER 31, 1998
----------------------------
NOTE 9 - STOCKHOLDERS' EQUITY (Continued)
Stock Option Plan (Continued)
-----------------------------
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options that have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility. Because
the Company's employee stock options have characteristics different from those
of traded options, and because changes in the subjective input assumptions can
materially affect the fair value estimate, in management's opinion, the existing
models do not necessary provide a reliable single measure of the fair value of
its employee stock options.
For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the options' vesting period. The Company's net
income of $36,021 would have been decreased to the pro forma amount of $2,699
for the year ended December 31, 1998.
The pro forma amounts may not be representative of the future effects on
reported net income or (loss) and earnings or (loss) per share that will result
from the future granting of stock options since future pro forma compensation
expense may be allocated over the periods in which options become exercisable
and new option awards may be granted each year. The pro forma information for
December 31, 1998 is summarized as follows:
Net loss available to common stockholders - as reported $ (72,226)
==========
Net loss available to common stockholders - pro forma $ (105,548)
==========
Loss per share basic and diluted - as reported $ (0.023)
==========
Loss per share basic and diluted - pro forma $ (0.034)
==========
The following table presents the Company's stock option activity for 1998:
Optioned Weighted-Average
Shares Exercise Price
-------- ----------------
Options outstanding at January 1, 1998 - $ -
Issued in 1998 376,000 3.46
Forfeited in 1998 - -
------- -------
Options outstanding at December 31, 1998 376,000 $ 3.46
======= =======
The options outstanding at December 31, 1998 expire on June 30, 2008. Of the
options outstanding at December 31, 1998, none are exercisable until June 30,
1999, at a rate of 20% per year.
F-41
<PAGE>
COLONIAL DIRECT FINANCIAL GROUP, INC.
-------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
------------------------------------------------------
YEAR ENDED DECEMBER 31, 1998
----------------------------
NOTE 10 - COMMITMENTS AND CONTINGENCIES
Lease Commitments
-----------------
Office Facilities
-----------------
The Company leases various office facilities under operating leases. The total
rental payments due under the leases are being amortized over the lives of the
leases on a straight-line basis in accordance with applicable accounting
standards. These leases have expiration dates from 2000 to 2004 with initial
lease periods ranging from one year to seven years.
Future minimum rental payments subsequent to December 31, 1998 are as follows:
Year Ending December 31:
1999 $ 456,745
2000 464,261
2001 461,611
2002 196,500
2003 136,782
Thereafter 22,797
----------
Total lease commitments $1,738,696
==========
Total rent expense for office facilities for the year ended December 31, 1998
was approximately $437,634.
Office Equipment and Automobiles
--------------------------------
The Company leases office equipment and automobiles under operating leases.
Future minimum rental payments subsequent to December 31, 1998 are as follows:
Year Ending December 31:
1999 $ 60,486
2000 34,714
2001 22,807
2002 24,727
2003 16,850
--------
Total lease commitments $159,584
========
Total rent expense for office equipment and automobiles for the year ended
December 31, 1998 was approximately $122,445.
F-42
<PAGE>
COLONIAL DIRECT FINANCIAL GROUP, INC.
-------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
------------------------------------------------------
YEAR ENDED DECEMBER 31, 1998
----------------------------
NOTE 10 - COMMITMENTS AND CONTINGENCIES (Continued)
Contingencies
-------------
During the year there have been several complaints brought against the Company
and/or First Colonial in the due course of business. Currently, there is one
case that is before the NASD, with the other matter in various stages of
investigation. The Company plans to actively defend these matters and feels
confident that there will not be any materially unfavorable outcome.
Additionally, there are two ongoing NASD regulatory inquiries into the trading
activities relative to two separate companies and the compliance, supervisory
policies and procedures of the company as to their brokers. It is not known at
this time what effect, if any, the results of these inquiries may have on the
financial statements; however, management feels confident that there will not be
any material adverse consequences.
During 1998, First Colonial agreed to a settlement with another member firm in a
dispute concerning their former employee and certain business they brought with
them to First Colonial. The total settlement was $160,000 and was offset by
reimbursement made by the employees, resulting in a net amount of $155,945
charged to operations for the year.
NOTE 11 - CONCENTRATIONS AND CREDIT RISKS
As part of its normal operations, the Company, through First Colonial, will
periodically sell securities that it does not currently own and will, therefore,
be obligated to purchase such securities at a future date. The Company has
recorded these obligations in the financial statements at market values of the
related securities and will incur a loss if the market value of the securities
increases subsequent to December 31, 1998.
The Company's customer securities activities are transacted on either a cash or
margin basis. In margin transactions, the Company extends credit to its
customers, subject to various regulatory and internal margin requirements,
collateralized by cash and securities in the customers' accounts. In connection
with these activities, the Company executes and clears customer transactions
involving the sale of securities not yet purchased, substantially all of which
are transacted on a margin basis subject to individual exchange regulations.
Such transactions may expose the Company to significant off-balance-sheet risk
in the event margin requirements are not sufficient to fully cover losses that
customers may incur. In the event the customer rails to satisfy its obligations,
the Company may be required to purchase or sell financial instruments at
prevailing market prices to fulfill the customer's obligations.
F-43
<PAGE>
COLONIAL DIRECT FINANCIAL GROUP, INC.
-------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
------------------------------------------------------
YEAR ENDED DECEMBER 31, 1998
----------------------------
NOTE 11 - CONCENTRATIONS AND CREDIT RISKS (Continued)
The Company seeks to control the risks associated with its customer activities
by requiring customers to maintain margin collateral in compliance with various
regulatory and internal guidelines. The Company and its clearing broker monitor
required margin levels and, pursuant to regulatory guidelines, require the
customers to deposit additional collateral or to reduce positions when
necessary.
The Company's customer financing and securities settlement activities require
the Company to pledge customer securities as collateral in support of various
secured financing sources such as bank loans and securities loaned. In the event
the counterparty is unable to meet its contractual obligation to return customer
securities pledged as collateral, the Company may be exposed to the risk of
acquiring the securities at prevailing market prices in order to satisfy its
customers obligations. The Company controls this risk by monitoring the market
value of securities pledged and by requiring adjustments of collateral levels in
the event of excess market exposure. In addition, the Company establishes credit
limits for such activities and monitors compliance.
The Company is engaged in various trading and brokerage activities in which
counterparties primarily include broker-dealers, banks, and other financial
institutions. In the event counterparties do not fulfill their obligations, the
Company may be exposed to risk. The risk of default depends of 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.
NOTE 12 - NET CAPITAL REQUIREMENTS
First Colonial is subject to the Securities and Exchange Commission uniform net
capital rule (rule 15c3-1), which requires the maintenance of minimal net
capital and requires that the ratio of aggregate indebtedness to net capital,
both as defined, shall not exceed 15 to 1. As of December 31, 1998, First
Colonial (as a separate entity on an unconsolidated basis) had net capital of
$836,680, which was $586,680 in excess of its required net capital of $250,000.
First Colonial had a ratio of aggregate indebtedness to net capital of 1.6 to 1,
based on an aggregated indebtedness of $1,310,048 as of December 31, 1998.
NOTE 13 - PROFIT SHARING PLAN
The Company has a profit sharing plan covering substantially all of its
employees. The profit sharing expense for the year ended December 31, 1998
amounted to $196,606.
F-44
<PAGE>
No dealer, salesman or any other person has been authorized to give any
information or to make any representations not contained in this Prospectus,
and, if given or made, such information or representation must not be relied
upon as having been authorized by the Company or any Underwriter. Neither the
delivery of this Prospectus nor any sale made hereunder shall, in any
circumstances, create an implication that there has been no change in the
affairs of the Company or that information contained herein is correct as of any
date subsequent to the date hereof. This Prospectus does not constitute an offer
to sell or a solicitation of an offer to buy any securities offered hereby by
anyone in any jurisdiction in which such offer or solicitation is not authorized
or in which the person making such offer or solicitation is not qualified to do
so or to any person to whom it is unlawful to make such offer or solicitation.
--------------------
Until _________, 2000__ (25 days after the date of this Prospectus),
all dealers effecting transactions in the registered securities, whether or not
participating in this distribution, may be required to deliver a Prospectus.
This delivery requirement is in addition to the obligations of dealers to
deliver a Prospectus when acting as underwriters and with respect to their
unsold allotments or subscriptions.
<PAGE>
2,000,000 SHARES OF
COMMON STOCK
AND
REDEEMABLE COMMON STOCK
WARRANTS TO PURCHASE 2,000,000
SHARES OF COMMON STOCK
--------------
COLONIAL DIRECT
FINANCIAL GROUP, INC.
-----------------------
PROSPECTUS
-----------------------
WERBEL-ROTH SECURITIES, INC.
_______, 2000
<PAGE>
Part II
Information Not Required in Prospectus
Item 24. Indemnification of Directors and Officers
The Registrant has authority under the Delaware General Corporation Law
to indemnify its directors and officers to the extent provided for in such
statute. The Registrant's Certificate of Incorporation and Bylaws provide that
the Registrant shall indemnify and may insure its officers and directors to the
fullest extent not prohibited by law.
Item 25. Other Expenses of Issuance and Distribution
The following table sets forth the costs and expenses, other than
underwriting discounts and commissions, payable by us in connection with the
sale of common stock and warrants being registered. All amounts are estimates
except the Securities Exchange Commission registration fee and the National
Association of Securities Dealers filing fees.
<TABLE>
<CAPTION>
<S> <C>
Securities and Exchange Commission registration fee................................... $ 12,514.26
National Association of Securities Dealers filing fee................................. 5,875.00
Nasdaq SmallCap Market listing fee.................................................... 10,000.00
Printing and engraving expenses*...................................................... 40,000.00
Accounting fees and expenses*......................................................... 35,000.00
Legal fees and expenses*.............................................................. 60,000.00
Blue Sky fees and expenses*........................................................... 30,000.00
Transfer Agent's fees and expenses*................................................... 5,000.00
Miscellaneous*........................................................................ 21,610.74
TOTAL..................................................................... $220,000.00
</TABLE>
-----------------
* Estimated
All amounts except the Securities and Exchange Commission registration
fee, the National Association of Securities Dealers filing fee and the Nasdaq
listing fee are estimated.
Item 26. Recent Sales of Unregistered Securities
On December 31, 1997, we completed a private placement of 122,500
shares of our Series A Convertible Preferred Stock at $10.00 per share. Such
shares are convertible into 360,204 pre-split shares of our common stock.
On January 31, 2000, we completed a private placement of 749,620 shares
of our common stock, on a pre-split basis, at $5.10 per share.
II-1
<PAGE>
In the fourth quarter of 1999 and during the first two quarters of
2000, we completed the following acquisitions for which we issued 444,443 shares
of our common stock, on a pre-split basis:
KWT Consultants, Inc. 144,444
Certified Tax Preparation 66,666
Kopple & Gottlieb 166,667
Solomon, Bardes & Assoc. 66,666
On May 23, 2000, we secured $250,000 in bridge financing from a
non-related individual. We issued an unsecured 9% Subordinated Promissory Note
to the investor. The principal and interest accrued thereon will be paid upon
the earlier of (i) the effective date of our initial public offering, or (ii) 18
months from the date of the Subordinated Promissory Note. In addition, we also
issued a warrant to the investor, which warrant provides for the right to
purchase 56,250 shares of our common stock, on a pre-split basis, at a 25%
discount to the initial public offering price of our common stock. The warrant
is for a term of three years and may be exercised upon the earlier of either (i)
the first anniversary of the completion of our initial public offering, or (ii)
January 1, 2002.
The above transactions were private transactions not involving a public
offering and were exempt from the registration requirements of the Securities
Act of 1933, as amended, pursuant to Section 4(2) thereof. The sales of
securities were without the use of an underwriter, and the certificates
evidencing the shares of common stock bear a restrictive legend permitting the
transfer only upon registration of the shares or an exemption under the
Securities Act, as amended.
II-2
<PAGE>
Item 27. Exhibits And Financial Statement Schedules
A. Exhibits
Exhibit No. Exhibits
----------- -------------------------------------------------------------------
1.1 Form of Underwriting Agreement (1)
3.1 Certificate of Incorporation
3.2 Amended and Restated Bylaws
4.1 Form of Warrant (1)
4.2 Form of Common Stock Certificate (1)
4.3 Form of Representative's Warrant (1)
5.1 Opinion of Dreier & Baritz LLP (1)
10.1 1998 Stock Option Plan
10.2 Cavion, Inc. Linking and Promotion Agreement
10.3 Kingland Systems, Inc. Master Subscriber Agreement
10.4 Certified Tax Returns USA, Inc. Stock Purchase Agreement
10.5 KWT Consultants, Inc. Stock Exchange Agreement
10.6 Kopple & Gottlieb, LLP Asset Purchase Agreement
10.7 Employment Agreement with Michael Golden
10.8 Employment Agreement with Ben Lichtenberg
10.9 Employment Agreement with Jeffrey Kahn
10.10 Employment Agreement with Lawrence Katz
10.11 Employment Agreement with Rodney Smith
10.12 Employment Agreement with Michael E. Spoll
10.13 Old Lease Agreement for Corporate Headquarters
10.14 New Lease Agreement for Corporate Headquarters
10.15 Agreement with Correspondent Services Corporation
10.16 Underwriters Warrant Agreement (1)
15 Letter regarding Unaudited Interim Financial Information
21 Subsidiaries
23.1 Consent of Dreier & Baritz LLP. (included in Exhibit 5.1)(1)
23.2 Consent of Ahearn, Jasco + Company, P.A.
23.3 Consent of Kopple & Gottlieb, L.L.P.
25.1 Power of Attorney (included on the signature page)
27.1 Financial Data Schedules (Securities Exchange Commission use only)
------------------
(1) to be filed by amendment
Item 28. Undertakings
The Registrant hereby undertakes to provide to the underwriters at the
closing specified in the Underwriting Agreement, certificates in such
denominations and registered in such names as required by the underwriters to
permit prompt delivery to each purchaser.
II-3
<PAGE>
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the Delaware General Corporation Law, the Certificate of
Incorporation or the Bylaws of the Registrant, the Underwriting Agreement, or
otherwise, the Registrant has been advised that in the opinion of the Securities
and Exchange Commission such indemnification is against public policy as
expressed in the Securities Act, 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 hereunder, 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 of whether such indemnification by it is against public policy as
expressed in the Securities Act and will be governed by the final adjudication
of such issue.
The Registrant hereby undertakes that:
(1) For purposes of determining any liability under the
Securities Act, the information omitted from the form of prospectus
filed as part of this registration statement in reliance upon Rule 430A
and contained in a form of prospectus filed by the Registrant pursuant
to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be
deemed to be part of this Registration Statement as of the time it was
declared effective.
(2) For the purpose of determining any liability under the
Securities Act, each post- effective amendment that contains a form of
prospectus 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.
(3) It will file, during any period in which it offers or
sells securities, a post- effective amendment to this registration
statement to:
(i) Include any prospectus required by Section 10(a)(3) of
the Securities Act;
(ii) Reflect in the prospectus any facts or events which,
individually or together, represent a fundamental change in the
information 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 end of the
estimated maximum offering range may be reflected in the form of
prospectus filed with the Commission pursuant to Rule 424(b) if, in the
aggregate, the changes in volume and price represent no more than a 20
percent change in the maximum aggregate offering price set forth in the
"Calculation of Registration Fee" table in the effective registration
statement; and
(iii) Include any additional or changed material information
on the plan of distribution.
(4) For determining liability under the Securities Act, it
will treat each post-effective amendment as a new registration
statement of the securities offered, and the offering of the securities
at that time to be the initial bona fide offering.
(5) It will file a post-effective amendment to remove from
registration any of the securities that remain unsold at the end of the
offering.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
Registrant has duly caused this Registration Statement on Form SB-2 to be signed
on its behalf by the undersigned, thereunto duly authorized, in the City of Boca
Raton, State of Florida, on this ___ day of June, 2000.
COLONIAL DIRECT FINANCIAL GROUP, INC.
By: /s/ MICHAEL GOLDEN
--------------------------
MICHAEL GOLDEN
Chairman and Chief Executive Officer
POWER OF ATTORNEY
Each person whose signature appears below constitutes and appoints
Michael Golden and Ben Lichtenberg or any of them, as his or her true and lawful
attorneys-in-fact and agents with full power of substitution and resubstitution
for him or her and in his or her name, place and stead in any and all capacities
to execute in the name of each person who is then an officer or director of the
Registrant any and all amendments (including post-effective amendments) to this
Registration Statement, and any registration statement relating to the offering
hereunder pursuant to Rule 462 under the Securities Act of 1933, as amended, and
to file the same with all exhibits thereto and other documents in connection
therewith with the Securities and Exchange Commission, granting unto said
attorneys-in-fact and agents and each of them full power and authority to do and
perform each and every act and thing required or necessary to be done in and
about the premises as fully as he or she might or could do in person, hereby
ratifying and confirming all that said attorneys-in-fact and agents, or any of
them, or their or his substitute or substitutes, may lawfully do or cause to be
done by virtue thereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the date indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Michael Golden Chairman, Chief Executive Officer and Director June __, 2000
----------------------------- (Principal Executive Officer)
Michael Golden
/s/ Ben Lichtenberg Vice Chairman, Executive Vice President and June __, 2000
----------------------------- Director (Principal Financial and Accounting
Ben Lichtenberg Officer)
/s/ Jeffrey Kahn President, Colonial Direct Retirements Services, June __, 2000
----------------------------- Inc. and Director
Jeffrey Kahn
/s/ Ralph Solomon President, Colonial Direct Insurance Services, Inc. June __, 2000
----------------------------- and Director
Ralph Solomon
/s/ Rodney Smith President and Director June __, 2000
-----------------------------
Rodney Smith
/s/ Michael E. Spoll President, KG Business Services, Inc. and Director June __, 2000
-----------------------------
Michael E. Spoll
/s/ Lewis Maniloff Secretary and Director June __, 2000
-----------------------------
Lewis Maniloff
/s/Frederic L. Bor Director June __, 2000
-----------------------------
Frederic L. Bor
/s/ Richard G. Seidenberg Director June __, 2000
-----------------------------
Richard G. Seidenberg
</TABLE>
II-5
<PAGE>
EXHIBIT INDEX
Exhibit No. Description
----------- -----------
1.1 Form of Underwriting Agreement
3.1 Certificate of Incorporation
3.2 Amended and Restated Bylaws
5.1 Opinion of Dreier & Baritz LLP
10.1 1998 Stock Option Plan
10.2 Cavion, Inc. Linking and Promotion Agreement
10.3 Kingland Systems, Inc. Master Subscriber Agreement
10.4 Certified Tax Returns USA, Inc. Stock Purchase Agreement
10.5 KWT Consultants, Inc. Stock Exchange Agreement
10.6 Kopple & Gottlieb, LLP Asset Purchase Agreement
10.7 Employment Agreement with Michael Golden
10.8 Employment Agreement with Ben Lichtenberg
10.9 Employment Agreement with Jeffrey Kahn
10.10 Employment Agreement with Lawrence Katz
10.11 Employment Agreement with Rodney Smith
10.12 Employment Agreement with Michael Spoll
10.13 Old Lease Agreement for Corporate Headquarters
10.14 New Lease Agreement for Corporate Headquarters
10.15 Agreement with Correspondent Services Corporation
10.16 Underwriters Warrant Agreement
15 Letter regarding Unaudited Interim Financial Information
21 Subsidiaries
23.1 Consent of Dreier & Baritz LLP. (included in Exhibit 5.1)
23.2 Consent of Ahearn, Jasco + Company, P.A.
23.3 Consent of Kopple & Gottlieb, L.L.P.
25.1 Power of Attorney (included on the signature page)
27.1 Financial Data Schedules (Securities Exchange Commission use only)
II-6
