Report of Independent Registered Public Accounting
Firm
To the Board of Directors and Stockholders of
Velocity Asset Management, Inc. and Subsidiaries
Ramsey, New Jersey
We have audited the accompanying consolidated balance
sheets of Velocity Asset Management, Inc. and Subsidiaries, as of December 31, 2005 and the
related consolidated statements of operations, consolidated statements of changes in equity
and the consolidated statements of cash flows for Velocity Asset Management, Inc. and
Subsidiaries for the year ended December 31, 2005. 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 audit.
We conducted our audits in accordance with the standards
of the Public Company Accounting Oversight Board (United States). Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements
referred to above present fairly, in all material respects, the financial position of
Velocity Asset Management, Inc. and Subsidiaries as of December 31, 2005, and the results
of its operations and its cash flows for the year ended December 31, 2005, in conformity
with accounting principles generally accepted in the United States of America.
/s/ Cowan, Gunteski & Co., P.A.
Toms River, New Jersey
March 17, 2006
F-3
VELOCITY ASSET MANAGEMENT, INC. AND
SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
|
|
|
|
|
|
|
|
|
|
September 30,
2007
(Unaudited)
|
|
December 31,
2006
(Audited)
|
|
|
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
648,346
|
|
$
|
2,444,356
|
|
|
|
|
|
|
|
|
|
Notes receivable
|
|
|
205,127
|
|
|
180,641
|
|
Note receivable from related party
|
|
|
205,000
|
|
|
—
|
|
Deposits on properties
|
|
|
90,000
|
|
|
240,000
|
|
Properties held for sale
|
|
|
6,820,812
|
|
|
6,133,705
|
|
Tax certificates held and accrued interest receivable,
net
|
|
|
324,360
|
|
|
472,071
|
|
Consumer receivables, net
|
|
|
46,618,422
|
|
|
38,327,926
|
|
Property and equipment, net of accumulated
depreciation
|
|
|
68,765
|
|
|
68,619
|
|
Deferred income tax asset, net
|
|
|
361,100
|
|
|
306,900
|
|
Security deposits
|
|
|
30,224
|
|
|
30,100
|
|
Other assets
|
|
|
475,428
|
|
|
229,841
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
55,847,584
|
|
$
|
48,434,159
|
|
|
|
|
|
|
|
|
|
See accompanying notes to the consolidated financial
statements.
F-4
VELOCITY ASSET MANAGEMENT, INC. AND
SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
|
|
|
|
|
|
|
|
|
|
September 30,
2007
(Unaudited)
|
|
December 31,
2006
(Audited)
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable and accrued expenses
|
|
$
|
1,369,897
|
|
$
|
873,507
|
|
Estimated court and media costs
|
|
|
7,309,904
|
|
|
8,446,319
|
|
Lines of credit
|
|
|
17,442,758
|
|
|
13,791,388
|
|
Notes payable to related parties
|
|
|
2,370,000
|
|
|
2,370,000
|
|
Notes and mortgage payable
|
|
|
1,015,000
|
|
|
780,000
|
|
Convertible subordinated notes
|
|
|
2,350,000
|
|
|
—
|
|
Income taxes payable
|
|
|
492,905
|
|
|
600,974
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
32,350,464
|
|
|
26,862,188
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series A 10% convertible preferred stock, $0.001 par value,
10,000,000 shares authorized, 1,380,000 shares issued and outstanding
(liquidation preference of $13,800,000)
|
|
|
1,380
|
|
|
1,380
|
|
Common stock, $0.001 par value, 40,000,000 shares authorized,
16,879,321 and 16,129,321 shares issued and outstanding,
respectively
|
|
|
16,879
|
|
|
16,129
|
|
Additional paid-in-capital
|
|
|
24,901,631
|
|
|
23,502,381
|
|
Accumulated deficit
|
|
|
(1,422,770
|
)
|
|
(1,947,919
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stockholders’ equity
|
|
|
23,497,120
|
|
|
21,571,971
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders’ equity
|
|
$
|
55,847,584
|
|
$
|
48,434,159
|
|
|
|
|
|
|
|
|
|
See accompanying notes to the consolidated financial
statements.
F-5
VELOCITY ASSET MANAGEMENT, INC. AND
SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Nine Months Ended
September 30,
|
|
For the Years Ended
December 31,
|
|
|
|
|
|
|
|
|
|
2007
(Unaudited)
|
|
2006
(Unaudited)
|
|
2006
(Audited)
|
|
2005
(Audited)
|
|
|
|
|
|
|
|
|
|
|
|
REVENUES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales of real property
|
|
$
|
747,656
|
|
$
|
1,059,732
|
|
$
|
1,585,175
|
|
$
|
3,685,338
|
|
Income on consumer receivables
|
|
|
9,901,507
|
|
|
5,653,159
|
|
|
8,431,259
|
|
|
3,633,945
|
|
Interest income on tax certificates held
|
|
|
89,957
|
|
|
205,685
|
|
|
268,048
|
|
|
782,461
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
10,739,120
|
|
|
6,918,576
|
|
|
10,284,482
|
|
|
8,101,744
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OPERATING
EXPENSES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of real property sold
|
|
|
640,754
|
|
|
718,991
|
|
|
1,041,588
|
|
|
3,326,021
|
|
Impairment of property held for sale
|
|
|
220,948
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Professional fees (including fees paid to related parties of
$873,484 and $964,397 for the nine month periods ended September 30, 2007 and
2006, respectively and $1,241,244 and $1,140,783 for the years ended December
31, 2006 and 2005, respectively)
|
|
|
3,598,106
|
|
|
2,514,296
|
|
|
3,355,899
|
|
|
2,017,875
|
|
General and administrative expenses
|
|
|
2,169,074
|
|
|
1,527,097
|
|
|
2,232,846
|
|
|
1,121,724
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
6,628,882
|
|
|
4,760,384
|
|
|
6,630,333
|
|
|
6,465,620
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
4,110,238
|
|
|
2,158,192
|
|
|
3,654,149
|
|
|
1,636,124
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OTHER
EXPENSE
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense (including interest incurred to related parties
of $175,059 and $172,272 for the nine month periods ended September 30, 2007
and 2006, respectively and $234,797 and $181,314 for the years ended December
31, 2006 and 2005, respectively)
|
|
|
(1,437,699
|
)
|
|
(971,932
|
)
|
|
(1,363,418
|
)
|
|
(760,674
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
before provision for income taxes
|
|
|
2,672,539
|
|
|
1,186,260
|
|
|
2,290,731
|
|
|
875,450
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision
for income taxes
|
|
|
1,112,390
|
|
|
482,537
|
|
|
972,041
|
|
|
401,583
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
|
1,560,149
|
|
|
703,723
|
|
|
1,318,690
|
|
|
473,867
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred
dividend
|
|
|
(1,035,000
|
)
|
|
(506,005
|
)
|
|
(851,005
|
)
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
attributable to common shareholders
|
|
$
|
525,149
|
|
$
|
197,718
|
|
$
|
467,685
|
|
$
|
473,867
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average common shares - basic
|
|
|
16,176,207
|
|
|
15,980,409
|
|
|
16,008,653
|
|
|
15,937,002
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
per common share - basic
|
|
$
|
0.03
|
|
$
|
0.01
|
|
$
|
0.03
|
|
$
|
0.03
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average common shares - diluted
|
|
|
17,869,236
|
|
|
17,285,341
|
|
|
17,276,877
|
|
|
17,740,110
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
per common share - diluted
|
|
$
|
0.03
|
|
$
|
0.01
|
|
$
|
0.03
|
|
$
|
0.03
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to the consolidated financial
statements.
F-6
VELOCITY ASSET MANAGEMENT, INC. AND
SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN
STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred Stock
|
|
Common Stock
|
|
Additional
Paid in
Capital
|
|
Accumulated
Deficit
|
|
Total
Stockholders’
Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
Shares
|
|
Par Value
|
|
Number of
Shares
|
|
Par Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCES,
December 31, 2004
|
|
|
—
|
|
$
|
—
|
|
|
15,794,348
|
|
$
|
15,795
|
|
$
|
10,680,133
|
|
$
|
(2,889,471
|
)
|
$
|
7,806,457
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Private
Offering of up to 3,500,000 Units. Each unit is comprised of one share of
common stock for $2.50 per share within the next five years:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January 5,
2005 - Fourth Tranche Closing
|
|
|
—
|
|
|
—
|
|
|
133,350
|
|
|
133
|
|
|
199,891
|
|
|
—
|
|
|
200,024
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commissions
Paid in Conjunction with Private Offering
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(135,268
|
)
|
|
—
|
|
|
(135,268
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of
stock pursuant to right to receive clause
|
|
|
—
|
|
|
—
|
|
|
44,623
|
|
|
44
|
|
|
(44
|
)
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of
warrants for services rendered by an independent consultant
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
21,088
|
|
|
—
|
|
|
21,088
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of
warrants pursuant to secured debenture
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
72,851
|
|
|
—
|
|
|
72,851
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
473,867
|
|
|
473,867
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCES,
December 31, 2005
|
|
|
—
|
|
|
—
|
|
|
15,972,321
|
|
|
15,972
|
|
|
10,838,651
|
|
|
(2,415,604
|
)
|
|
8,439,019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred
stock offering of up to 1,200,000 shares of Series A convertible preferred
stock
|
|
|
1,200,000
|
|
|
1,200
|
|
|
—
|
|
|
—
|
|
|
11,998,800
|
|
|
—
|
|
|
12,000,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred
stock sale to underwriter in conjunction with preferred stock offering of
180,000 shares of Series A convertible preferred stock
|
|
|
180,000
|
|
|
180
|
|
|
—
|
|
|
—
|
|
|
1,799,820
|
|
|
—
|
|
|
1,800,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commissions
and expenses related to preferred stock offering
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(1,404,000
|
)
|
|
—
|
|
|
(1,404,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sale of
warrants pursuant to preferred stock offering
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
120
|
|
|
—
|
|
|
120
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends
paid on preferred stock
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(851,005
|
)
|
|
(851,005
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of
warrants pursuant to secured debenture
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
12,347
|
|
|
—
|
|
|
12,347
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based
compensation
|
|
|
|
|
|
|
|
|
157,000
|
|
|
157
|
|
|
256,643
|
|
|
—
|
|
|
256,800
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1,318,690
|
|
|
1,318,690
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCES,
December 31, 2006
|
|
|
1,380,000
|
|
|
1,380
|
|
|
16,129,321
|
|
|
16,129
|
|
|
23,502,381
|
|
|
(1,947,919
|
)
|
|
21,571,971
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unaudited:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends
paid on preferred stock
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(1,035,000
|
)
|
|
(1,035,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based
compensation
|
|
|
—
|
|
|
—
|
|
|
75,000
|
|
|
75
|
|
|
109,925
|
|
|
—
|
|
|
110,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Private
placement offering of 675,000 shares of common stock. Shares at a purchase
price of $2.00 per share; delivered warrants to purchase an aggregate of
165,000 shares of the Company’s common stock (net of issuance costs of
$60,000)
|
|
|
—
|
|
|
—
|
|
|
675,000
|
|
|
675
|
|
|
1,289,325
|
|
|
—
|
|
|
1,290,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1,560,149
|
|
|
1,560,149
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCES,
September 30, 2007 (Unaudited)
|
|
|
1,380,000
|
|
$
|
1,380
|
|
|
16,879,321
|
|
$
|
16,879
|
|
$
|
24,901,631
|
|
$
|
(1,422,770
|
)
|
$
|
23,497,120
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to the consolidated financial
statements.
F-7
VELOCITY ASSET MANAGEMENT, INC. AND
SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Nine Months Ended
September 30,
|
|
For the Years Ended
December 31,
|
|
|
|
|
|
|
|
|
|
2007
(Unaudited)
|
|
2006
(Unaudited)
|
|
2006
(Audited)
|
|
2005
(Audited)
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM OPERATING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
1,560,149
|
|
$
|
703,723
|
|
$
|
1,318,690
|
|
$
|
473,867
|
|
Adjustments to reconcile net income to net cash used in
operating activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
140,281
|
|
|
24,056
|
|
|
32,518
|
|
|
26,287
|
|
Non-cash expenses relating to stock compensation
|
|
|
110,000
|
|
|
182,347
|
|
|
269,147
|
|
|
93,941
|
|
Deferred income tax benefit
|
|
|
(54,200
|
)
|
|
11,900
|
|
|
(159,100
|
)
|
|
61,900
|
|
Property impairment charge
|
|
|
220,948
|
|
|
—
|
|
|
—
|
|
|
—
|
|
(Increase) decrease in:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
785,251
|
|
Notes receivable
|
|
|
(24,486
|
)
|
|
5,020
|
|
|
—
|
|
|
—
|
|
Note receivable from related party
|
|
|
(205,000
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
Properties held for sale
|
|
|
(908,055
|
)
|
|
479,350
|
|
|
124,894
|
|
|
(4,288,380
|
)
|
Deposits on properties
|
|
|
150,000
|
|
|
41,000
|
|
|
1,000
|
|
|
(121,000
|
)
|
Tax certificates held and accrued interest receivable
|
|
|
147,711
|
|
|
65,228
|
|
|
66,855
|
|
|
163,191
|
|
Consumer receivables
|
|
|
(8,334,894
|
)
|
|
(12,561,876
|
)
|
|
(20,569,265
|
)
|
|
(14,520,809
|
)
|
Security deposits
|
|
|
(124
|
)
|
|
61,000
|
|
|
57,400
|
|
|
(87,500
|
)
|
Other assets
|
|
|
(64,618
|
)
|
|
(77,736
|
)
|
|
(76,584
|
)
|
|
(48,257
|
)
|
Increase (decrease) in:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable and accrued expenses
|
|
|
496,390
|
|
|
179,332
|
|
|
425,536
|
|
|
446,034
|
|
Estimated court and media costs
|
|
|
(1,136,414
|
)
|
|
2,441,034
|
|
|
4,646,673
|
|
|
3,799,646
|
|
Income taxes payable
|
|
|
(108,069
|
)
|
|
41,340
|
|
|
467,842
|
|
|
119,582
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in operating activities
|
|
|
(8,010,381
|
)
|
|
(8,404,282
|
)
|
|
(13,394,394
|
)
|
|
(13,096,247
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisition of property and equipment
|
|
|
(24,242
|
)
|
|
(13,915
|
)
|
|
(13,915
|
)
|
|
(66,311
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(24,242
|
)
|
|
(13,915
|
)
|
|
(13,915
|
)
|
|
(66,311
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from borrowings
|
|
|
3,858,113
|
|
|
5,482,402
|
|
|
7,696,926
|
|
|
10,674,460
|
|
Repayments of borrowings
|
|
|
—
|
|
|
(3,350,000
|
)
|
|
(3,480,000
|
)
|
|
(709,157
|
)
|
Proceeds received from stock and warrants sales and
offerings
|
|
|
1,290,000
|
|
|
13,800,120
|
|
|
13,800,120
|
|
|
200,024
|
|
Proceeds from convertible subordinated notes, net
|
|
|
2,125,500
|
|
|
—
|
|
|
—
|
|
|
1,800,000
|
|
Commissions and related expenses paid on stock
offering
|
|
|
—
|
|
|
(1,404,000
|
)
|
|
(1,404,000
|
)
|
|
(135,268
|
)
|
Payment of dividends
|
|
|
(1,035,000
|
)
|
|
(506,005
|
)
|
|
(851,005
|
)
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities
|
|
|
6,238,613
|
|
|
14,022,517
|
|
|
15,762,041
|
|
|
11,830,059
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash
equivalents
|
|
|
(1,796,010
|
)
|
|
5,604,320
|
|
|
2,353,732
|
|
|
(1,332,499
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, beginning of period
|
|
|
2,444,356
|
|
|
90,624
|
|
|
90,624
|
|
|
1,423,123
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of period
|
|
$
|
648,346
|
|
$
|
5,694,944
|
|
$
|
2,444,356
|
|
$
|
90,624
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of cash flow information:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid for interest
|
|
$
|
1,184,610
|
|
$
|
735,903
|
|
$
|
1,018,573
|
|
$
|
730,674
|
|
Cash paid for income taxes
|
|
$
|
926,886
|
|
$
|
461,054
|
|
$
|
680,836
|
|
$
|
510,141
|
|
See accompanying notes to the consolidated financial
statements.
F-8
VELOCITY ASSET MANAGEMENT, INC. AND
SUBSIDIARIES
NOTES TO THE CONSOLIDATED
FINANCIAL STATEMENTS
(Unaudited for the information related to September 30, 2007 and 2006 and
audited for the information related to December 31, 2006 and 2005)
NOTE 1 - ORGANIZATION AND BUSINESS
Nature of Operations
On February 3, 2004, Velocity Asset Management, Inc.
(formerly known as Tele-Optics, Inc), the “Company”), through its wholly-owned
subsidiary TLOP Acquisition Company, L.L.C. (“TLOP”), entered into a reverse
acquisition (the “Reverse Merger”) with STB, Inc. and its subsidiaries. On
February 3, 2004, STB, Inc. became a wholly owned subsidiary of TLOP. As a result of the
Reverse Merger, the Company operates all of its current business activities through its
wholly-owned subsidiary TLOP.
The Company was incorporated in the state of Delaware on
December 31, 1986. In 1987, the Company issued shares of its common stock pursuant to a
public offering. The Company was engaged in the manufacture of optical products until 1991
when all assets and operations were sold.
Effective April 8, 2004, the Company changed its name
from Tele-Optics, Inc. to Velocity Asset Management, Inc. The entities that are included in
these consolidated financial statements are as follows:
TLOP Acquisition Company, L.L.C. - TLOP Acquisition
Company, LLC (“TLOP”) was incorporated in New Jersey as a limited liability
company. TLOP is a wholly-owned subsidiary of the Company and pursuant to the Reverse
Merger owns 100% of STB, Inc.
STB, INC. - STB, Inc. (“STB”) was
incorporated in New Jersey in 2003. Its primary purpose was to act as a holding company for
three subsidiaries, namely, J. Holder, Inc., VOM, LLC and Velocity Investments,
LLC.
J. Holder, Inc. - J. Holder, Inc. (“J.
Holder”) was formed in 1998 to invest in, and maximize the return on real property
being sold at sheriff’s foreclosure sales and judgment execution sales, defaulted
mortgages, partial interests in real property and the acquisition of real property with
clouded title.
VOM, L.L.C. - VOM, LLC (“VOM”) was formed in
2002 to invest in and maximize the return on New Jersey municipal tax liens. VOM focuses on
maximization of profit through legal collections and owned real estate opportunities
presented by the current tax lien environment.
Velocity Investments, L.L.C. - Velocity Investments, LLC
(“Velocity”) was established in 2002 to invest in, and maximize the return on,
consumer debt purchased on the secondary market. Velocity purchases consumer receivable
portfolios at a discount and then liquidates these portfolios through legal collection
means.
The Company has one continuing industry segment - the
acquisition, management, collection and servicing of distressed assets.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
Principles of Consolidation
The consolidated financial statements of the Company are
prepared in accordance with accounting principles generally accepted in the United States
of America. All significant intercompany payables, receivables, revenues and expenses have
been eliminated for purposes of this consolidation.
Unaudited Interim Financial
Statements
The accompanying balance sheet as of September 30, 2007,
the statements of income, changes in stockholders’ equity and cash flows for the nine
months ended September 30, 2007 and 2006 are unaudited. In the opinion of management, such
information includes all adjustments consisting of normal recurring adjustments necessary
for a fair presentation of this interim information when read in connection with the
audited financial statements and notes hereto. Results for the nine months ended September
30, 2007 are not necessarily indicative of the results that may be expected for the year
ending December 31, 2007.
Cash and Cash Equivalents
The Company considers all highly liquid investments with
a maturity of nine months or less when purchased to be cash equivalents.
F-9
VELOCITY ASSET MANAGEMENT, INC. AND
SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited for the information related to September 30, 2007 and 2006 and
audited for the information related to December 31, 2006 and 2005)
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)
Concentrations of Credit Risk
Financial instruments, which potentially expose the
Company to concentrations of credit risk, consist primarily of cash and cash equivalents
and consumer receivables. The Company places its cash and cash equivalents with high
quality financial institutions. At times, cash balances may be in excess of the amounts
insured by the Federal Deposit Insurance Corporation.
Properties Held for Sale
Properties held for sale consist of real property
purchased by the Company for resale and are carried at the lower of cost or market value.
This includes the cost to purchase the property and repairs or other costs required to
present the property ready for resale. The Company recognizes income and related expenses
from the sale of real property at the date the sale closes.
Tax Certificates Held and Accrued Interest
Receivable
The Company records its New Jersey municipal tax liens at
cost plus accrued interest. Interest income is recognized using the effective interest
method (“interest method”).
Consumer Receivables
The Company purchases consumer receivable portfolios at a
substantial discount from their face amount due to a deterioration of credit quality
between the time of origination and the Company’s acquisition of the portfolios.
Income is recognized using either the interest method or cost recovery method. Upon
acquisition, the Company reviews each consumer receivable portfolio to determine whether
each such portfolio is to be accounted for individually or whether such portfolio will be
assembled into static pools of consumer receivable portfolios based on common risk
characteristics. Once the static portfolio pools are created, management estimates the
future anticipated cash flows for each pool. If management can reasonably estimate the
expected timing and amount of future cash flows, the interest method is applied. However,
if the expected future cash flows cannot be reasonably estimated, the Company uses the cost
recovery method.
Prior to January 1, 2005, the Company accounted for its
investment in consumer receivable portfolios using the interest method under the guidance
of Practice Bulletin 6, “Amortization of Discounts on Certain Acquired Loans
(“PB-6”).” Effective January 1, 2005, the Company adopted and began to
account for its investment in consumer receivable portfolios using the interest method
under the guidance of American Institute of Certified Public Accountants
(“AICPA”) Statement of Position (“SOP”) 03-3, “Accounting for
Loans or Certain Securities Acquired in a Transfer.” SOP 03-3 addresses accounting
for differences between contractual cash flows and cash flows expected to be collected from
an investor’s initial investment in loans or debt if those differences are
attributable, at least in part to credit quality. Increases in expected cash flows are
recognized prospectively through adjustment of the internal rate of return
(“IRR”) while decreases in expected cash flows are recognized as
impairment.
Under both the guidance of SOP 03-3 and PB-6, as amended,
when expected cash flows are higher than prior projections, the increase in expected cash
flows results in an increase in the IRR and therefore, the effect of the cash flow increase
is recognized as increased revenue prospectively over the remaining life of the affected
pool. However, when expected cash flows are lower than prior projections, SOP 03-3 requires
that the expected decrease be recognized as impairment by decreasing the carrying value of
the affected pool (rather than lowering the IRR) so that the pool will amortize over its
expected life using the original IRR. A pool can become fully amortized (zero carrying
balance on the balance sheet) while still generating cash collections. In this case, all
cash collections are recognized as revenue when received.
Under the cost recovery method, no revenue is recognized
until the Company has fully collected the cost of the portfolio, or until such time that
the Company considers the collections to be probable and estimable and begins to recognize
income based on the interest method as described above. For the periods and years presented
herein, the Company had no consumer receivable portfolios accounted for under the cost
recovery method.
F-10
VELOCITY ASSET MANAGEMENT, INC. AND
SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited for the information related to September 30, 2007 and 2006 and
audited for the information related to December 31, 2006 and 2005)
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)
Consumer Receivables (Continued)
The Company estimates and capitalizes certain fees paid
to third parties related to the direct acquisition of a portfolio of accounts. These fees
are added to the cost of the individual portfolio and amortized over the life of the
portfolio using the interest method. An offsetting liability is included as
“Estimated court and media costs” on the balance sheet.
Estimated court and media costs were as
follows:
|
|
|
|
|
|
|
|
|
|
September 30,
2007
|
|
December 31,
2006
|
|
|
|
|
|
|
|
|
Estimated court and media costs
|
|
$
|
7,309,904
|
|
$
|
8,446,319
|
|
|
|
|
|
|
|
|
|
The Company establishes valuation allowances for all
acquired loans subject to SOP 03-3 to reflect only those losses incurred after acquisition
(that is, the present value of cash flows initially expected at acquisition that are no
longer expected to be collected). Valuation allowances are established only subsequent to
acquisition of the receivables. At September 30, 2007 and December 31, 2006, the Company
had no valuation allowance on its consumer receivables.
Property and Equipment
Property and equipment, including improvements that
significantly add to the productive capacity or extend useful life, are recorded at cost,
while maintenance and repairs are expensed currently. Property and equipment are
depreciated over their estimated useful lives using the straight-line method of
depreciation. Software and computer equipment are depreciated over three to five years.
Furniture and fixtures are depreciated over five years.
Office equipment is depreciated over five to seven years.
Leasehold improvements are depreciated over the lesser of the estimated useful life or the
remaining life of the lease, which ranges from three to ten years. When property is sold or
retired, the cost and related accumulated depreciation are removed from the balance sheet
and any gain or loss is included in the statement of operations.
Income Taxes
The Company follows the provisions of Statement of
Financial Accounting Standards No. 109, “Accounting for Income Taxes” (SFAS
109). SFAS 109 requires recognition of deferred tax liabilities and assets for the expected
future tax consequences of events that have been included in the financial statements or
tax returns. Under this method, deferred tax liabilities and assets are determined based on
the difference between the financial statement and tax bases of assets and liabilities
using enacted tax rates in effect for the year in which the differences are expected to
reverse.
F-11
VELOCITY ASSET MANAGEMENT, INC. AND
SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited for the information related to September 30, 2007 and 2006 and
audited for the information related to December 31, 2006 and 2005)
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)
Stock Based Compensation
The Company adopted SFAS No. 123 (revised 2004),
“Share-Based Payment” (“SFAS No. 123R”), which supersedes
Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock
Issued to Employees” (“APB No. 25”). The revised statement addresses the
accounting for share-based payment transactions with employees and other third parties,
eliminates the ability to account for share-based transactions using APB No. 25 and
requires that the compensation costs relating to such transactions be recognized in the
consolidated financial statements. SFAS No. 123R requires additional disclosures relating
to the income tax and cash flow effects resulting from share-based payments. The Company
adopted the modified prospective application method of SFAS No.123R, effective January 1,
2006, and the adoption of SFAS No. 123R had an immaterial impact on its consolidated
results of operations and earnings per share. There were no outstanding awards at the date
of adoption.
Additionally, regarding the treatment of non-employee
stock based compensation, the Company follows the guidance of the Emerging Issues Task
Force (“EITF”) 96-18, “Accounting for Equity Instruments That Are Issued
to Other Than Employees for acquiring, or in Conjunction with Selling, Goods or
Services”.
Change in Presentation and
Reclassifications
Certain amounts in previously issued financial statements
were reclassified to conform to current presentations. These reclassifications had no
effect on retained earnings.
Use of Estimates
The preparation of financial statements in conformity
with accounting principles generally accepted in the United States of America 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.
With respect to income recognition under the interest
method, significant estimates have been made by management with respect to the
collectibility of future cash flows of portfolios. The Company takes into consideration the
relative credit quality of the underlying receivables constituting the portfolio acquired,
the strategy implemented to maximize collections thereof as well as other factors to
estimate the anticipated cash flows. Actual results could differ from these estimates
making it reasonably possible that a change in these estimates could occur within one year.
On a quarterly basis, management reviews the estimate of future cash collections, and
whether it is reasonably possible that its assessment of collectibility may change based on
actual results and other factors.
Fair Value of Financial
Instruments
SFAS No. 107, “Disclosures About Fair Value of
Financial Instruments,” requires that the Company disclose estimated fair values for
its financial instruments. The fair value of consumer receivables, tax certificates held,
accounts payable, accrued expenses, borrowings and other assets are considered to
approximate their carrying amount because they are (i) short term in nature and/or (ii)
carry interest rates which are comparable to market based rates.
F-12
VELOCITY ASSET MANAGEMENT, INC. AND
SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited for the information related to September 30, 2007 and 2006 and
audited for the information related to December 31, 2006 and 2005)
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)
Recent Accounting Pronouncements
In June 2006, the FASB issued FASB Interpretation (FIN)
No. 48, “Accounting for Uncertainty in Income Taxes—An Interpretation of FASB
Statement No. 109” (FIN 48). This Interpretation clarifies the accounting for
uncertainty in income taxes recognized in a company’s financial statements. FIN 48
requires companies to determine whether it is “more likely than not” that a tax
position will be sustained upon examination by the appropriate taxing authorities before
any part of the benefit can be recorded in the financial statements. It also provides
guidance on the recognition, measurement and classification of income tax uncertainties,
along with any related interest and penalties. FIN 48 will also require significant
additional disclosures. This Interpretation will be effective for fiscal years beginning
after December 15, 2006. The Company will implement this Interpretation in the first
quarter of 2007, with the cumulative effect of the change in accounting principle recorded
as an adjustment to opening retained earnings. The Company is currently evaluating the
potential impact this Interpretation will have on its financial position and results of
operations, but does not believe the impact of the adoption will be material.
In September 2006, the FASB issued SFAS No. 157,
“Fair Value Measurements” (SFAS 157), which provides guidance on how to measure
assets and liabilities that use fair value. SFAS 157 will apply whenever another US GAAP
standard requires (or permits) assets or liabilities to be measured at fair value but does
not expand the use of fair value to any new circumstances. This standard also will require
additional disclosures in both annual and quarterly reports. SFAS 157 will be effective for
financial statements issued for fiscal years beginning after November 15, 2007, and will be
adopted by us beginning in the first quarter of 2008. The Company is currently evaluating
the potential impact this standard may have on its financial position and results of
operations.
In February 2007, the FASB issued SFAS No. 159,
“The Fair Value Option for Financial Assets and Financial Liabilities - Including an
Amendment of FASB Statement No. 115.” This statement permits entities to choose to
measure many financial instruments and certain other items at fair value. Most of the
provisions of SFAS No. 159 apply only to entities that elect the fair value option.
However, the amendment to SFAS No. 115, “Accounting for Certain Investments in Debt
and Equity Securities,” applies to all entities with available-for-sale and trading
securities. SFAS No. 159 is effective as of the beginning of an entity’s first fiscal
year that begins after November 15, 2007. Early adoption is permitted as of the beginning
of a fiscal year that begins on or before November 15, 2007, provided the entity also
elects to apply the provision of SFAS No. 157, “Fair Value Measurements.”
Management has not determined whether the Company will voluntarily choose to measure any of
its financial assets and financial liabilities at fair value. Management has not determined
whether the adoption of this statement will affect its reported results of operations or
financial condition.
In September 2006, the SEC staff issued Staff Accounting
Bulletin (SAB) No. 108, “Considering the Effects of Prior Year Misstatements when
Quantifying Misstatements in Current Year Financial Statements” (SAB 108). SAB 108
was issued in order to eliminate the diversity of practice in how public companies quantify
misstatements of financial statements, including misstatements that were not material to
prior years’ financial statements. The Company will initially apply the provisions of
SAB 108 in connection with the preparation of its annual financial statements for the year
ending December 31, 2006. The Company has evaluated the potential impact SAB 108 may have
on its financial position and results of operations and does not believe the impact of the
application of this guidance will be material.
F-13
VELOCITY ASSET MANAGEMENT, INC. AND
SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited for the information related to September 30, 2007 and 2006 and
audited for the information related to December 31, 2006 and 2005)
NOTE 3 - INVESTMENTS
Properties Held for Sale
Properties held for sale consist of the following:
|
|
|
|
|
|
|
|
|
|
September 30,
2007
|
|
December 31,
2006
|
|
|
|
|
|
|
|
Real property inventory
|
|
$
|
6,071,307
|
|
$
|
6,109,008
|
|
Assignments and judgments
|
|
|
749,505
|
|
|
24,697
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total properties held for sale
|
|
$
|
6,820,812
|
|
$
|
6,133,705
|
|
|
|
|
|
|
|
|
|
Tax Certificates Held and Accrued Interest
Receivable
|
|
|
|
|
|
|
|
|
|
September 30,
2007
|
|
December 31,
2006
|
|
|
|
|
|
|
|
Tax certificates held
|
|
$
|
147,808
|
|
$
|
243,796
|
|
Accrued interest
|
|
|
176,552
|
|
|
228,275
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total tax certificates held and accrued interest
|
|
$
|
324,360
|
|
$
|
472,071
|
|
|
|
|
|
|
|
|
|
NOTE 4 -CONSUMER RECEIVABLES
Consumer receivable activity consists of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Nine Months Ended
|
|
For the Years Ended
|
|
|
|
|
|
|
|
|
|
September 30,
2007
|
|
September 30,
2006
|
|
December 31,
2006
|
|
December 31,
2005
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of period
|
|
$
|
38,327,926
|
|
$
|
17,758,661
|
|
$
|
17,758,661
|
|
$
|
3,237,852
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisitions and capitalized costs, net of returns
|
|
|
11,491,501
|
|
|
14,858,873
|
|
|
22,915,748
|
|
|
16,291,794
|
|
Amortization of capitalized costs
|
|
|
(44,397
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11,447,104
|
|
|
14,858,873
|
|
|
22,915,748
|
|
|
16,291,794
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash collections
|
|
|
(13,058,115
|
)
|
|
(7,950,156
|
)
|
|
(10,777,742
|
)
|
|
(5,404,930
|
)
|
Income recognized on finance receivables
|
|
|
9,901,507
|
|
|
5,653,159
|
|
|
8,431,259
|
|
|
3,633,945
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash collections applied to principal
|
|
|
(3,156,608
|
)
|
|
(2,296,997
|
)
|
|
(2,346,483
|
)
|
|
(1,770,985
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of period
|
|
$
|
46,618,422
|
|
$
|
30,320,537
|
|
$
|
38,327,926
|
|
$
|
17,758,661
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-14
VELOCITY ASSET MANAGEMENT, INC. AND
SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited for the information related to September 30, 2007 and 2006 and
audited for the information related to December 31, 2006 and 2005)
NOTE 4 -CONSUMER RECEIVABLES (Continued)
As of December 31, 2006, the Company had $38,327,926 in
consumer receivables. Based upon management’s current estimation of projected future
collections, principal reductions will be as follows:
|
|
|
|
|
|
|
December 31,
|
|
|
|
|
|
2007
|
|
$
|
6,136,832
|
|
2008
|
|
|
7,991,264
|
|
2009
|
|
|
9,642,643
|
|
2010
|
|
|
9,002,646
|
|
2011
|
|
|
5,554,541
|
|
|
|
|
|
|
Total
|
|
$
|
38,327,926
|
|
|
|
|
|
|
As of September 30, 2007, the Company had $46,618,422 in
consumer receivables. Based upon management’s current estimation of projected future
collections, principal reductions will be as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
$
|
8,689,584
|
|
|
|
|
2009
|
|
|
10,988,193
|
|
|
|
|
2010
|
|
|
11,084,377
|
|
|
|
|
2011
|
|
|
11,576,736
|
|
|
|
|
2012
|
|
|
3,974,378
|
|
|
|
|
Thereafter
|
|
|
305,154
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
$
|
46,618,422
|
|
|
|
|
|
|
|
|
|
The accretable yield represents the amount of income the
Company can expect to generate over the remaining lives of its existing portfolios based on
estimated cash flows as of the nine months ended September 30, 2007 and 2006 and the years
ended December 31, 2006 and 2005. Changes in the accretable yield are as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Nine Months Ended
|
|
For the Years Ended
|
|
|
|
|
|
|
|
|
|
September 30,
2007
|
|
September 30,
2006
|
|
December 31,
2006
|
|
December 31,
2005
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of period
|
|
$
|
29,643,803
|
|
$
|
15,618,641
|
|
$
|
15,618,641
|
|
$
|
2,879,823
|
|
Income recognized on finance receivables
|
|
|
(9,901,507
|
)
|
|
(5,653,159
|
)
|
|
(8,431,259
|
)
|
|
(3,633,945
|
)
|
Additions
|
|
|
15,214,460
|
|
|
15,486,259
|
|
|
22,456,421
|
|
|
16,372,763
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of period
|
|
$
|
34,956,756
|
|
$
|
25,451,741
|
|
$
|
29,643,803
|
|
$
|
15,618,641
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NOTE 5 - PROPERTY AND EQUIPMENT
Property and equipment at consist of the following:
|
|
|
|
|
|
|
|
|
|
September 30,
2007
|
|
December 31,
2006
|
|
|
|
|
|
|
|
Office Equipment
|
|
$
|
109,773
|
|
$
|
103,889
|
|
Furniture and Fixtures
|
|
|
28,163
|
|
|
12,587
|
|
Leasehold Improvements
|
|
|
18,878
|
|
|
16,095
|
|
|
|
|
|
|
|
|
|
|
|
|
156,814
|
|
|
132,571
|
|
Less: Accumulated Depreciation
|
|
|
(88,049
|
)
|
|
(63,952
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
68,765
|
|
$
|
68,619
|
|
|
|
|
|
|
|
|
|
Depreciation expense for the year ended December 31, 2006
and 2005 was $32,518 and $26,287 and for the nine months ended September 30, 2007 and 2006
was $24,097 and $24,056, respectively.
F-15
VELOCITY ASSET MANAGEMENT, INC. AND
SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited for the information related to September 30, 2007 and 2006 and
audited for the information related to December 31, 2006 and 2005)
NOTE 6 - LINES OF CREDIT
On January 27, 2005 (the “Closing Date”),
Velocity entered into a Loan and Security Agreement (the “Loan Agreement”) with
Wells Fargo Inc., a California corporation (the “Lender”), pursuant to which
the Lender agreed to provide Velocity with a $12,500,000 credit facility to finance the
acquisition of individual pools of unsecured consumer receivables that are approved by the
Lender under specific eligibility criteria set forth in the Loan Agreement.
On the Closing Date, the following agreements were also
entered into with the Lender: a Continuing Guaranty, under which the Company provides a
secure guaranty of Velocity’s obligations under the Loan Agreement; a Security and
Pledge Agreement, by and among the Company and the Lender, under which the Company pledged
all of the Company’s assets to secure the credit facility; and a Subordination
Agreement, by and among the Company and the Lender. In addition, three of our executive
officers provided joint and several limited guarantees of Velocity Investment’s
obligations under the Loan and Security Agreement.
Use of the senior credit facility is subject to Velocity
complying with certain restrictive covenants under the Loan and Security Agreement,
including but not limited to: a restriction on incurring additional indebtedness or liens;
a change of control; a restriction on entering into transactions with affiliates outside
the course of Velocity Investments ordinary business; and a restriction on making payments
to Velocity Asset Management, Inc. in compliance with the Subordination Agreement. In
addition, Velocity has agreed to maintain certain ratios with respect to outstanding
advances on the credit facility against the estimated remaining return value on Wells Fargo
financed portfolios, and, Velocity has agreed to maintain at least $6,000,000 in
member’s equity and subordinated debt. The Company has also agreed to maintain at
least $21,000,000 in stockholder’s equity and subordinated debt for the duration of
the facility.
Pursuant to the Loan Agreement, the Lender has agreed to
advance to Velocity up to $12,500,000 to be used to finance up to 60% of the purchase price
of individual pools of unsecured consumer receivables that are approved by the Lender under
specific eligibility criteria set forth in the Loan Agreement. The interest rate on the
loan was 3.50% above the prime rate of Wells Fargo Bank, N.A. Amounts borrowed under the
credit facility had been due and payable ratably over a twenty-four month
period.
On February 27, 2006, Velocity entered into a First
Amendment to the Loan Agreement with the Lender, pursuant to which the Lender agreed to
amend the Loan Agreement dated January 27, 2005. Pursuant to the Amended and Restated Loan
Agreement, the Lender extended the Credit Facility until January 27, 2009 and agreed to
increase the advance rate under the credit facility to 67.5% of the purchase price of
individual pools of unsecured consumer receivables that are approved by the Lender. The
Lender also agreed to reduce the interest rate on the loan from 3.50% above the prime rate
of Wells Fargo Bank, N.A. to 2.50% above such prime rate. In addition, repayment terms
under the credit facility were extended to thirty months.
On May 19, 2006, as a result of the Series A 10%
Convertible Preferred Stock Offering (the “offering”) discussed in NOTE 12 -
PREFERRED STOCK OFFERING, the Lender agreed to reduce the interest rate on Velocity’s
credit facility from 2.50% to 1.50% above the prime rate of Wells Fargo Bank, N.A.
immediately and increase the advance rate on the credit facility to 75.0% effective June 1,
2006. The rate of interest at December 31, 2006 was 9.75%.
On December 8, 2006, Velocity entered into a Second
Amendment to the Loan Agreement with the Lender, pursuant to which the Lender agreed to
amend the Loan Agreement dated January 27, 2005. Pursuant to the Amended and Restated Loan
Agreement, the Lender agreed to temporarily increase the credit facility up to $14,500,000
until March 8, 2007.
On February 23, 2007, Velocity entered into a Third
Amendment to the Loan and Security Agreement (the “Loan Agreement”) with Wells
Fargo Inc., a California corporation (the “Lender”), dated January 27, 2005.
Pursuant to the Loan Agreement, as amended and restated, the Lender agreed to permanently
increase the credit facility up to $17,500,000. In addition, Velocity agreed to maintain
certain ratios with respect to outstanding advances on the credit facility against the
estimated remaining return value on Wells Fargo financed portfolios, and to maintain at
least $6,500,000 in member’s equity plus 50% of Velocity’s net income for each
calendar quarter that ends on or after September 30, 2007. The Company has also agreed to
maintain at least $21,000,000 in stockholder’s equity plus 50% of the net income of
the Company for each calendar quarter that ends on or after June 30, 2007.
F-16
VELOCITY ASSET MANAGEMENT, INC. AND
SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited for the information related to September 30, 2007 and 2006 and
audited for the information related to December 31, 2006 and 2005)
NOTE 6 - LINES OF CREDIT (Continued)
As of September 30, 2007 and December 31, 2006, the
Company had $16,801,758 and $13,791,388 outstanding on the credit facility,
respectively.
The maturity date of the credit facility is January 27,
2009.
On June 14, 2007, the Company entered into an agreement
to secure a revolving credit line in the maximum principal sum of $800,000 with Northern
State Bank. During the term of the credit line, interest shall accrue on the outstanding
principal balance of the credit line at a rate of the lenders’ prime rate plus
one-half percent per annum. The Company can draw upon the credit line during the twelve
month period commencing on June 14, 2007. Any sums loaned under the note may be repaid at
any time, without premium or penalty, and reborrowed from time to time, until July 1, 2008.
Payments of interest only are due on the 1st day of each and every month until July 1,
2008, on which date the entire balance or principal, interest and fees then unpaid shall be
due and payable. The credit line is secured by various mortgages of real property held and
owned by the Company’s subsidiary, J. Holder, Inc. The Company had $641,000
outstanding on the credit line as of September 30, 2007.
As of September 30, 2007 and December 31, 2006, the
Company had an aggregate of $17,442,758 and $13,791,388 outstanding on its credit
facilities, respectively.
Annual minimum principal payments due as of December 31,
2006 are as follows:
|
|
|
|
|
2007
|
|
$
|
7,340,924
|
|
2008
|
|
|
5,512,260
|
|
2009
|
|
|
938,204
|
|
|
|
|
|
|
|
|
$
|
13,791,388
|
|
|
|
|
|
|
Annual minimum principal payments for each of the twelve
month periods ended September 30 are as follows:
|
|
|
|
|
|
|
September 30
|
|
|
|
|
|
2008
|
|
$
|
8,604,427
|
|
2009
|
|
|
7,969,963
|
|
2010
|
|
|
868,368
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
17,442,758
|
|
|
|
|
|
|
F-17
VELOCITY ASSET MANAGEMENT, INC. AND
SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited for the information related to September 30, 2007 and 2006 and
audited for the information related to December 31, 2006 and 2005)
|
|
|
|
|
|
|
|
NOTE 7 - NOTES AND MORTGAGES
PAYABLE
|
|
|
|
|
|
|
|
|
|
September 30,
2007
|
|
Decemeber 31,
2006
|
|
|
|
|
|
|
|
On June 2, 2005, J. Holder, Inc. acquired a
residential property in Melbourne, Florida (the “Melbourne
Property”). Acquisition financing of $3,350,000 was provided by a group
of investors (“Investors Group”), including J. Holder, Inc., that
will receive 10% per annum and 2% of the loaned amount along with a pro rata
share of 20% of the net profit realized by J. Holder, Inc. upon the sale of the
property. Of the $3,350,000 in financing, $2,170,000 was obtained from related
parties -- See NOTE 9 - RELATED PARTY TRANSACTIONS. On September 19, 2006,
$400,000 of the outstanding note was redeemed by J. Holder, Inc. As part of the
redemption, $51,222 of accrued interest was forgiven, but not the pro-rata
share of the profits.
|
|
$
|
2,950,000
|
|
$
|
2,950,000
|
|
|
|
|
|
|
|
|
|
On April 15, 2005, the Company issued three
promissory notes in the principal amounts of $100,000, $150,000 and $100,000 to
accredited investors -- See NOTE 8 - RELATED PARTY TRANSACTIONS in a private
placement. Each of the notes bore interest at the rate of 7% per annum and
interest was payable in quarterly installments commencing September 30, 2005.
The entire principal for each note was initially due and payable on April 15,
2006 unless the holder thereof provided written notice 90 days prior to April
15, 2006 that it elected to extend the note, in which event, the entire
principal amount would become due and payable on April 15, 2007. On May 14,
2006, the $150,000 promissory note was redeemed at the Company’s option.
The remaining notes were extended. As of December 31, 2006, the remaining notes
in the aggregate amount of $200,000 were held by a related party to the
president and CEO. These notes are due and payable on April 15, 2007. This note
was extended through April 15, 2008.
|
|
|
200,000
|
|
|
200,000
|
|
|
|
|
|
|
|
|
|
On April 25, 2007, the Company issued two
promissory notes of $35,000 and $200,000 to accredited investors in a private
placement. Each of the notes bears interest at a rate of 10% per annum plus 15%
of the net profit related to the sale of specified real property owned by the
Company’s subsidiary, J. Holder, Inc. All amounts owed are due no later
than April 25, 2008 and may be redeemed at any time before the due date without
penalty.
|
|
|
235,000
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total notes payable
|
|
$
|
3,385,000
|
|
$
|
3,150,000
|
|
|
|
|
|
|
|
|
|
NOTE 8 - CONVERTIBLE SECURED DEBENTURES
On October 27, 2005, the Company issued a 10% Secured
Convertible Debenture, due April 27, 2007, in the aggregate principal amount of $1.8
million (the “Debenture”). In addition, the Company issued a warrant to
purchase 200,000 shares of the Company’s common stock at an exercise price of $3.10
per share.
The Debenture was issued with an initial conversion price
of $4.00 per share. The Debenture bore interest at 10% per annum, payable monthly on the
first day of each calendar month, beginning on November 1, 2005. Interest was payable in
cash or, at the Company’s option, in shares of common stock provided certain
conditions were satisfied. The holder of the Debenture was granted (i) a security interest
in the assets of the Company, and (ii) a pledge of VAMI’s ownership of its
subsidiaries, which is subject to existing liens, existing indebtedness, permitted liens
and permitted indebtedness. Additionally, the subsidiaries guaranteed the obligations of
the Company under the Debenture. The Debenture was also guaranteed personally by John C.
Kleinert, the Company’s President and Chief Executive Officer, W. Peter Ragan, Sr.,
the Company’s Vice President and W. Peter Ragan, Jr., President of
Velocity.
F-18
VELOCITY ASSET MANAGEMENT, INC. AND
SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited for the information related to September 30, 2007 and 2006 and
audited for the information related to December 31, 2006 and 2005)
NOTE 8 - CONVERTIBLE SECURED DEBENTURE
(Continued)
The holder may not exercise the warrant to the extent
that, after giving effect to exercise, as the case may be, the holder would beneficially
own in excess of 4.99% of the outstanding common stock of the Company.
On April 1, 2006, the holder extended the initial payment
due date of the Debenture to June 1, 2006, and in consideration thereof, the Company issued
an additional warrant to purchase 50,000 shares of the Company’s common stock at an
exercise price of $3.10 per share. On May 19, 2006, the Company used $1,823,000 of the
proceeds related to a preferred stock offering to repay in full the interest and principal
under the Debenture.
On June 29, 2007, VAMI consummated an initial closing
(final closing July 27, 2007) of its private placement offering of 10% Convertible
Subordinated Notes (the “Notes”) due 2017 (the “Offering”) to
accredited investors (“Investors”). The Notes were offered and sold pursuant to
exemption from registration under Section 4(2) of the Securities Act of 1933, as amended
(the “Securities Act”). The Notes were sold by the Company through an NASD
member firm which served as placement agent. In connection with the Offering, the Company
issued the Notes and also entered into a Subscription Agreement with each of the Note
holders.
Pursuant to the Offering, the Company has issued Notes in
the aggregate principal amount of $2,350,000. Interest on the Notes is payable monthly in
arrears commencing on September 30, 2007. The Notes are subordinated in liquidation
preference and in right of payment to all of the Company’s existing debt. The Notes
are senior in right of payment and in liquidation preference to any future long term debt
of the Company. To the extent the Company were to complete a subsequent financing with the
placement agent on or before March 29, 2008 (“Subsequent Financing”), the Notes
will automatically convert into the underlying securities (either convertible debt or
preferred stock) sold in the Subsequent Financing (the “Underlying
Securities”). To the extent the new issue in the Subsequent Financing contains an
interest rate less than 10% per annum; the exchange ratio of the Notes will automatically
adjust to maintain a 10.0% yield. To the extent the Company does not complete a Subsequent
Financing; the Notes may be converted, at the option of the holder, into shares of the
Company’s common stock at a price of $2.50 per share, subject to certain
adjustments.
The Company used the net proceeds from the Offering
primarily for the purchase of portfolios of consumer receivables and for general corporate
purposes, including working capital.
For its services in connection with the Offering, the
placement agent received a placement fee computed at the rate of 7% of the aggregate
principal amount of the Notes sold. In addition, the Company paid an accountable expense
allowance of 1% of the aggregate principal amount of the Notes sold. As a result, after
other Offering expenses of approximately $41,500 (legal and blue sky filing fees), the
Company received net proceeds of approximately $2,125,500. Costs of $224,500 related to
this offering have been capitalized and will be amortized over the life of the
notes.
NOTE 9 - RELATED PARTY TRANSACTIONS
The Company has a note receivable from an officer and
related party. For the assignment of membership interests in Ridgedale Avenue Commons, LLC,
and Morris Avenue Commons, LLC, previously owned by J. Holder, Inc., the Company is holding
a promissory note in the sum of $205,000, along with interest at the rate of 12% which
shall accrue only on and after December 31, 2007, by means of one lump sum payment of
principal and accrued interest on August 25, 2008.
Of the $3,350,000 in acquisition financing on the
Melbourne Property referenced in NOTE 7, $1,270,000 was provided by Dr. Michael Kelly and
Mr. David Granatell, who subsequently became members of the Board of Directors.
Additionally, Mr. Robert Kleinert and Ms. Cornelia Yoke, related parties of the President
and CEO of the Company, provided an additional $900,000 of financing in connection with the
financing. Interest on related party notes with respect to the Melbourne Property accrued
in the amounts of $216,528 and $171,397 for the years ended December 31, 2006 and 2005.
Interest paid to other related parties as referenced in NOTE 7 totaled $18,269 and $9,917,
for the years ended December 31, 2006 and 2005.
F-19
VELOCITY ASSET MANAGEMENT, INC. AND
SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited for the information related to September 30, 2007 and 2006 and
audited for the information related to December 31, 2006 and 2005)
NOTE 9 - RELATED PARTY TRANSACTIONS
(Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Nine Months Ended
|
|
For the Years Ended
|
|
|
|
|
|
|
|
|
|
September 30,
2007
|
|
September 30,
2006
|
|
December 31,
2006
|
|
December 31,
2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest incurred to related parties
|
|
$
|
175,059
|
|
$
|
172,272
|
|
$
|
234,797
|
|
$
|
181,314
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In connection with the Company’s independent
consulting agreement with The Del Mar Consulting Group Inc., two of the Company’s
executive officers, W. Peter Ragan, Sr. and W. Peter Ragan, Jr. granted an option to RB
& AJ Associated Holdings, Inc., a corporation majority owned by the president of the
consulting group, to purchase 13,600 warrants owned by the executive officers to purchase
an aggregate of 85,000 (42,500 from each) shares of common stock at $1.04 per share. In
addition, the executive officers granted an employee of the Consultant an option to
purchase 2,400 warrants owned by the executive officers to purchase an aggregate of 15,000
(7,500 from each) shares of common stock at $1.04 per share. Both of these options were
exercised on March 15, 2005.
Until June 1, 2005, the Company’s business office
at 3100 Route 138 West, Wall, NJ 07719 had been leased for a two year period from a company
owned by Messrs. Ragan & Ragan. Total payments under the lease amounted to $3,750 for
the year ended December 31, 2005.
The Company engages Ragan & Ragan, PC an entity owned
by Messrs. Ragan & Ragan, to pursue legal collection of its receivable portfolios with
respect to obligors and properties located in the State of New Jersey. The fee arrangements
between the Company’s subsidiaries Velocity, J. Holder and VOM and Ragan & Ragan,
P.C., each dated as of January 1, 2005, have been reviewed and approved by all the members
of a committee appointed by the Board of Directors other than Mr. Ragan, Sr. who abstained.
John C. Kleinert and James J. Mastriani comprised the committee. In May 2007, the fee
arrangements were approved by Unanimous Written Consent of the Board of Directors other
than Mr. Ragan, Sr. who abstained.
Ragan and Ragan, P.C. routinely advances court costs
associated with their servicing of consumer receivable portfolios, which are subsequently
reimbursed by the Company. These costs are included in the estimated court and media costs
in the consolidated balance sheets.
Legal fees paid to Ragan & Ragan, P.C., by the
individual subsidiaries were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Nine Months Ended
|
|
For the Years Ended
|
|
|
|
|
|
|
|
|
|
September 30,
2007
|
|
September 30,
2006
|
|
December 31,
2006
|
|
December 31,
2005
|
|
|
|
|
|
|
|
|
|
|
|
Velocity Investments, LLC
|
|
$
|
868,761
|
|
$
|
951,899
|
|
$
|
1,225,577
|
|
$
|
1,062,196
|
|
J. Holder, Inc.
|
|
|
4,500
|
|
|
10,139
|
|
|
10,139
|
|
|
63,574
|
|
VOM, LLC
|
|
|
223
|
|
|
2,359
|
|
|
5,528
|
|
|
15,013
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
873,484
|
|
$
|
964,397
|
|
$
|
1,241,244
|
|
$
|
1,140,783
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-20
VELOCITY ASSET MANAGEMENT, INC. AND
SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited for the information related to September 30, 2007 and 2006 and
audited for the information related to December 31, 2006 and 2005)
NOTE 10 - STOCK BASED COMPENSATION
Stock Based Consideration to
Employees
The 2004 Equity Incentive Program of the Company, (the
“Employee Plan”) authorizes the issuance of up to 1,000,000 shares of common
stock in connection with the grant of options or issuance of restricted stock
awards.
To the extent that the Company derives a tax benefit from
options exercised by employees, if any, such benefit will be credited to additional paid-in
capital when realized on our income tax return. There were no tax benefits realized by the
Company. No options have been granted to date.
During the year ended December 31, 2006, the Company has
issued restricted stock awards. Prior to the year ended December 31, 2006, the Company had
not issued any restricted stock awards. The following summarizes the transactions of shares
of common stock under the Employee Plan through December 31, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-Based Compensation Expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Nine
Months Ended
|
|
For the Years Ended
|
|
|
|
|
|
|
|
|
|
|
|
Employee
|
|
Number of
Shares
Granted
|
|
Number of
Shares
Vested
|
|
Market Value
|
|
September 30,
2007
|
|
September 30,
2006
|
|
December 31,
2006
|
|
December 31,
2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
James J. Mastriani
|
|
|
200,000
|
|
|
125,000
|
|
|
1.55
|
|
$
|
116,250
|
|
$
|
155,000
|
|
$
|
200,000
|
|
$
|
—
|
Craig Buckley
|
|
|
25,000
|
|
|
25,000
|
|
|
1.50 to 1.90
|
|
|
—
|
|
|
12,000
|
|
|
44,300
|
|
|
—
|
Adam Atkinson
|
|
|
3,000
|
|
|
3,000
|
|
|
1.50 to 1.90
|
|
|
—
|
|
|
1,500
|
|
|
5,300
|
|
|
—
|
Lisa Cullen
|
|
|
3,000
|
|
|
3,000
|
|
|
1.50 to 1.90
|
|
|
—
|
|
|
1,500
|
|
|
5,300
|
|
|
—
|
Kristina Vingara
|
|
|
1,000
|
|
|
1,000
|
|
|
1.90
|
|
|
—
|
|
|
—
|
|
|
1,900
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
116,250
|
|
$
|
170,000
|
|
$
|
256,800
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mr. Mastriani’s remaining shares will vest in
increments of 25,000 shares on February 27, 2007, May 27, 2007 and August 27, 2007,
provided that he is employed by the Company on each date. As of September 30, 2007, all of
Mr. Mastriani’s shares had vested.
In accordance with SFAS 123(R), the Company recorded
approximately $256,800 of expense related to grants of common stock which vested during the
year ended December 31, 2006.
The Company recorded approximately $116,250 of expense
related to grants of common stock which vested during the nine month period ended September
30, 2007. For the nine month period ended September 30, 2007, there were no tax benefits
realized related to stock based compensation issued to employees in 2006.
The intrinsic value for restricted stock is calculated
based on the market price of our Common Stock as of the end of the period. As of December
31, 2006, approximately $142,500 of unrecognized stock compensation expense on 75,000
shares of Common Stock related to unvested restricted stock awards (net of estimated
forfeitures) is expected to be recognized through August 2007.
Stock Based Consideration to
Non-employees
On September 1, 2005, the Company entered into an
Independent Consulting Agreement (the “Agreement”) with Lomond International,
Inc., an unrelated corporation (the “Consultant”), pursuant to which the
Consultant agreed to provide certain specified business advisory services for a period of
one year. As compensation for such services, the Company agreed to sell to the Consultant,
as a commencement bonus, a warrant to purchase 50,000 shares of the Company’s common
stock with an exercise price of $2.50 per share, and an expiration date of September 30,
2009, for an aggregate purchase price of $2,500. The warrant will participate in all
forward and reverse stock splits and stock dividends and will have a one-time piggy-back
registration right on the warrant and the shares of common stock underlying the warrant. On
November 11, 2005, the Business Advisory Agreement, dated September 1, 2005, between the
Company and Lomond International, Inc. was amended, retroactive to the date of the
agreement, to eliminate any compensation payable by the Company to Lomond International
Inc. in connection with any debt or equity investment of any kind. As consideration for
such amendment, Lomond was paid a fee of $25,000.
F-21
VELOCITY ASSET MANAGEMENT, INC. AND
SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited for the information related to September 30, 2007 and 2006 and
audited for the information related to December 31, 2006 and 2005)
NOTE 11 - COMMON STOCK OFFERING
On September 26, 2007, VAMI consummated a closing of its
private placement offering (the “Offering”) of shares of common stock (the
“Shares”) and warrants to purchase shares of common stock (the
“Warrants”, together with the Shares, the “Securities”) to
accredited investors (“Investors”). The Securities were offered and sold
pursuant to an exemption from registration under Section 4(2) of the Securities Act of
1933, as amended (the “Securities Act”). In connection with the Offering, the
Company issued the Securities and also entered into a Securities Purchase Agreement and a
Registration Rights Agreement with the investors in the Offering (the
“Investors”). The Registrant sold an aggregate of 675,000 Shares at a purchase
price of $2.00 per Share and delivered Warrants to purchase an aggregate of 165,000 Shares.
Net proceeds from the financing were to be used primarily for working capital purposes
including, but not limited to, the purchase of distressed consumer receivable
portfolios.
The Warrants entitle the holders to purchase shares of
the Company’s common stock reserved for issuance hereunder (the “Warrant
Shares”) for a period of three years from the date which is six months after the date
of issuance at an exercise price of $2.50 per share. The Warrants contain certain
anti-dilution rights on terms specified in the Warrants. In addition, pursuant to the
Securities Purchase Agreement, the Investors will be entitled to additional shares of
common stock if, during the six month period after the Initial Closing, the Company sells
or issues additional shares of Common Stock, or securities (debt and/or equity) convertible
into common stock, with a purchase, exercise or conversion price of less than
$2.00.
Pursuant to the Registration Rights Agreement, the
Company agreed to file with the Securities and Exchange Commission a registration statement
on appropriate form providing for the resale by the investors of the Shares and the Warrant
Shares. The Company agreed to file the registration statement within 45 days of the initial
closing and to use its best efforts to cause the registration statement to become effective
within 90 or 120 days, depending on the nature of the review. If such Registration
Statement is not filed within the required timeframe, or does not become effective within
the required timeframe, or does not remain effective for any thirty (30) consecutive days,
the Company has agreed to pay to the Investors an amount in cash equal to 1% of the
aggregate purchase price paid by the Investors for each 30 day period following the
deadline in which the Registration Statement is not declared effective; provided, however,
that the aggregate liquidated damages paid to the Investors shall not exceed 8% of the
aggregate purchase price paid by the Investors or $138,000; provided further, however, that
if the number of shares registered in the Registration Statement is reduced, then the
holders of the shares not included in the Registration Statement shall not be entitled to
liquidated damages. At September 30, 2007, the Company views the likelihood of having to
make any payments under the registration rights arrangement as remote, and therefore, the
carrying amount of the liability representing the Company’s registration rights
obligations is $0. The registration statement for the Offering was filed on November 9,
2007.
NOTE 12 - PREFERRED STOCK OFFERING
On May 18, 2006, the Company consummated its public
offering (the “offering”) of 1,200,000 shares of Series A 10% Convertible
Preferred Stock (“Preferred Stock”) resulting in gross proceeds of $12,000,000
to the Company. The underwriters were granted an over allotment option to purchase up to an
additional 180,000 shares of Preferred Stock with an exercise price of $10.00 per share.
The underwriters were also issued a warrant to purchase 120,000 shares of Preferred Stock
with an exercise price of $10.00 per share. The public price per share for the offering was
$10.00. The shares of Series A Convertible Preferred Stock are listed on the American Stock
Exchange under the symbol JVI.PR.
Each share of Preferred Stock is convertible into four
(4) shares of Common Stock. If after May 18, 2009, the Company’s common stock exceeds
the conversion price of the Preferred Stock by more than 35% and is traded on a national
exchange, the Company may terminate the conversion right. If the Company issues a
conversion cancellation notice, the Company will have the right to redeem the stock after
May 18, 2008 for cash, at the Company’s option, at $10.00 per share, plus accrued and
unpaid dividends to the redemption date. On May 31, 2006, the underwriters exercised their
over allotment option to purchase 180,000 shares of the Preferred Stock at $10.00 per
share.
F-22
VELOCITY ASSET MANAGEMENT, INC. AND
SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited for the information related to September 30, 2007 and 2006 and
audited for the information related to December 31, 2006 and 2005)
NOTE 13 - EARNINGS PER SHARE
Basic earnings per share are computed using the weighted
average number of shares outstanding during each period. Diluted earnings per share are
computed using the weighted average number of shares outstanding during each period, plus
the incremental shares outstanding assuming the conversion of preferred shares and
convertible debt to common shares and the exercise of dilutive stock options. Outstanding
options and warrants to non-employees convertible into 1,342,160 and 1,177,160 shares of
common stock for the nine months ended September 30, 2007 and 2006, respectively, and
1,177,160 and 1,127,160 shares of common stock for the year ended December 31, 2006 and
2005, respectively, were not included in the income per share calculation because their
effect would have been anti-dilutive. Convertible preferred stock, convertible into
5,520,000 and 2,487,033 shares of common stock at September 30, 2007 and 2006,
respectively, and 5,520,000 shares of common stock at December 31, 2006 were not included
in the income per share because their effects would have been anti-dilutive. Convertible
notes, convertible into 313,187 and 277,951 shares of common stock for the nine months
ended September 30, 2007 and 2006, respectively, and 208,463 for the year ended December
31, 2006, respectively, were not included in the income per share calculation because their
effect would have been anti-dilutive.
The following table sets forth the computation of basic and diluted
earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Nine Months Ended
|
|
For the Years Ended
|
|
|
|
|
|
|
|
|
|
September 30,
2007
|
|
September 30,
2006
|
|
December 31,
2006
|
|
December 31,
2005
|
|
|
|
|
|
|
|
|
|
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
1,560,149
|
|
$
|
703,723
|
|
$
|
1,318,690
|
|
$
|
473,867
|
|
Preferred dividend
|
|
|
(1,035,000
|
)
|
|
(506,005
|
)
|
|
(851,005
|
)
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to common shareholders - Basic and
Diluted
|
|
$
|
525,149
|
|
$
|
197,718
|
|
$
|
467,685
|
|
$
|
473,867
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares - Basic
|
|
|
16,176,207
|
|
|
15,980,409
|
|
|
16,008,653
|
|
|
15,937,002
|
|
Effect of dilutive instruments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options
|
|
|
1,693,029
|
|
|
1,304,932
|
|
|
1,268,224
|
|
|
1,803,108
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares - Diluted
|
|
|
17,869,236
|
|
|
17,285,341
|
|
|
17,276,877
|
|
|
17,740,110
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per common share - Basic
|
|
$
|
0.03
|
|
$
|
0.01
|
|
$
|
0.03
|
|
$
|
0.03
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per common share - Diluted
|
|
$
|
0.03
|
|
$
|
0.01
|
|
$
|
0.03
|
|
$
|
0.03
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-23
VELOCITY ASSET MANAGEMENT, INC. AND
SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited for the information related to September 30, 2007 and 2006 and
audited for the information related to December 31, 2006 and 2005)
NOTE 14 – INCOME TAXES
The provision for corporate income taxes consists of the
following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Nine Months Ended
|
|
For the Years Ended
|
|
|
|
|
|
|
|
|
|
September 30,
2007
|
|
September 30,
2006
|
|
December 31,
2006
|
|
December 31,
2005
|
|
|
|
|
|
|
|
|
|
|
|
Current:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
821,552
|
|
$
|
314,278
|
|
$
|
765,072
|
|
$
|
274,666
|
|
State
|
|
|
345,038
|
|
|
156,359
|
|
|
366,069
|
|
|
65,017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
1,166,590
|
|
|
470,637
|
|
|
1,131,141
|
|
|
339,683
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred tax (benefit) expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
(29,000
|
)
|
|
35,500
|
|
|
(103,000
|
)
|
|
49,820
|
|
State
|
|
|
(25,200
|
)
|
|
(23,600
|
)
|
|
(56,100
|
)
|
|
12,080
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deferred tax (benefit) expense
|
|
|
(54,200
|
)
|
|
11,900
|
|
|
(159,100
|
)
|
|
61,900
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current and deferred tax expense
|
|
$
|
1,112,390
|
|
$
|
482,537
|
|
$
|
972,041
|
|
$
|
401,583
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The tax effect of temporary differences that make up the
significant components of the deferred tax asset and liability for financial reporting
purposes for the periods ended September 30, 2007 and 2006 and the years ended December 31,
2006 and 2005 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Nine Months Ended
|
|
For the Years Ended
|
|
|
|
|
|
|
|
|
|
September 30,
2007
|
|
September 30,
2006
|
|
December 31,
2006
|
|
December 31,
2005
|
|
|
|
|
|
|
|
|
|
|
|
Deferred tax asset
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net operating loss carryforwards
|
|
$
|
178,400
|
|
$
|
584,000
|
|
$
|
176,100
|
|
$
|
506,600
|
|
Stock compensation
|
|
|
33,500
|
|
|
—
|
|
|
110,400
|
|
|
—
|
|
Accrued interest
|
|
|
52,800
|
|
|
—
|
|
|
30,000
|
|
|
—
|
|
Impairment of property held for sale
|
|
|
95,000
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Section 263(a)
|
|
|
47,500
|
|
|
—
|
|
|
38,700
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
407,200
|
|
|
584,000
|
|
|
355,200
|
|
|
506,600
|
|
Deferred tax liability
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
(20,900
|
)
|
|
(24,600
|
)
|
|
(23,100
|
)
|
|
(30,200
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net deferred income taxes
|
|
|
386,300
|
|
|
559,400
|
|
|
332,100
|
|
|
476,400
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Valuation allowance
|
|
|
(25,200
|
)
|
|
(423,500
|
)
|
|
(25,200
|
)
|
|
(328,600
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
361,100
|
|
$
|
135,900
|
|
$
|
306,900
|
|
$
|
147,800
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-24
VELOCITY ASSET MANAGEMENT, INC. AND
SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited for the information related to September 30, 2007 and 2006 and
audited for the information related to December 31, 2006 and 2005)
NOTE 14 - INCOME TAXES (Continued)
Velocity Asset Management, Inc. generated net operating
losses prior to its acquisition of STB. As a result of the reverse acquisition, the
ownership change of Velocity Asset Management, Inc. as of February 3, 2004 limits and
reduces the future utilization of the Company’s net operating loss carryforwards.
These pre-reverse acquisition net operating loss carryforwards will be limited and reduced
based upon the applicable Federal and New Jersey rules. Any net operating loss
carryforwards for future tax years will be available to offset future taxable income of the
consolidated group subject to an annual limit per the Internal Revenue Code Section
382.
At December 31, 2006, the Company had unused net
operating loss carry forwards of approximately $464,100 for Federal purposes and $203,600
for New Jersey purposes. These net operating losses may provide future income tax benefits
of approximately $150,900, which will expire between the years 2007 and 2023. The ability
to utilize such losses is dependent upon the Company’s ability to generate taxable
future income as well as the annual limit per the Internal Revenue Code Section 382 versus
the expiration dates of the losses. Because some of the losses are due to expire prior to
fully utilizing the carry forwards, a valuation reserve has been established equal to the
amount expected to expire unused.
At September 30, 2007, the Company had unused net
operating loss carryforwards of approximately $425,400 for Federal purposes and $373,000
for New Jersey purposes. These net operating losses may provide future income tax benefits
of approximately $153,200 which will expire between the years 2007 and 2023. The ability to
utilize such losses is dependent upon the Company’s ability to generate taxable
future income as well as the annual limit per the Internal Revenue Code Section 382 versus
the expiration dates of the losses. Because some of the losses are due to expire prior to
fully utilizing the carryforwards, a valuation reserve has been established for an amount
equal to the expected expired amount.
A reconciliation of the provision for income taxes
attributable to income on continuing operations computed at the Federal statutory rate to
the reported provision for income taxes follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Nine Months Ended
|
|
For the Years Ended
|
|
|
|
|
|
|
|
|
|
September 30,
2007
|
|
September 30,
2006
|
|
December 31,
2006
|
|
December 31,
2005
|
|
|
|
|
|
|
|
|
|
|
|
Tax provision at Federal statutory
rate
|
|
|
34.00
|
%
|
|
34.00
|
%
|
|
34.00
|
%
|
|
34.00
|
%
|
Utilization of net operating loss
|
|
|
-1.45
|
%
|
|
-3.27
|
%
|
|
-2.49
|
%
|
|
-2.26
|
%
|
State income taxes
|
|
|
9.00
|
%
|
|
9.00
|
%
|
|
9.00
|
%
|
|
9.00
|
%
|
Change in valuation allowance for deferred tax assets
|
|
|
-2.03
|
%
|
|
1.00
|
%
|
|
-8.24
|
%
|
|
-8.03
|
%
|
Permanent differences
|
|
|
0.32
|
%
|
|
0.68
|
%
|
|
0.00
|
%
|
|
0.00
|
%
|
Non-deductible expenses
|
|
|
5.89
|
%
|
|
1.13
|
%
|
|
12.37
|
%
|
|
10.73
|
%
|
Other (permanent differences, overaccrual,
etc)
|
|
|
-4.11
|
%
|
|
-1.87
|
%
|
|
-2.21
|
%
|
|
2.43
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
41.62
|
%
|
|
40.67
|
%
|
|
42.43
|
%
|
|
45.87
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NOTE 15 - OUTSTANDING WARRANTS AND
OPTIONS
At December 31, 2004, the Company had issued and
outstanding warrants to purchase 5,358,503 shares of its common stock at a price ranging
from $1.04 to $2.50 per share. A portion of the warrants (2,999,500, as adjusted for the
13:1 reverse stock split) were granted pursuant to the Merger Agreement effective February
3, 2004 and expire after a period of five years. The balance of the warrants (2,359,003)
was granted pursuant to private offerings and/or in lieu of services rendered and expires
after a period of five years.
At December 31, 2005, the Company had outstanding
warrants to purchase 3,965,839 shares of its common stock at prices ranging from $1.04 to
$2.50 per share. The first warrants (3,199,500 shares of common stock, as adjusted for the
13:1 reverse stock split) were granted pursuant to the Merger Agreement effective February
3, 2004 and expire after a period of five years. The second warrants (716,339 shares of
common stock) were granted pursuant to private offerings and/or in lieu of services
rendered and expire after a period of five years. The remaining warrants (50,000 shares of
common stock) were granted as compensation to an independent consultant in lieu of services
rendered and have an expiration date of September 30, 2009. The remaining warrant (200,000
shares of common stock) was granted in connection with the October 2005 convertible debt
financing and has an expiration date of October 10, 2010.
F-25
VELOCITY ASSET MANAGEMENT, INC. AND
SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited for the information related to September 30, 2007 and 2006 and
audited for the information related to December 31, 2006 and 2005)
NOTE 15 - OUTSTANDING WARRANTS AND OPTIONS
(Continued)
At December 31, 2006, the Company had outstanding
warrants to purchase 4,376,660 shares of its common stock at prices ranging from $1.04 to
$3.10 per share. The first warrants (3,199,500 shares of common stock, as adjusted for the
13:1 reverse stock split in April 2004) were granted pursuant to the Merger Agreement
effective February 3, 2004 and expire after a period of five years. The second warrants
(677,160 shares of common stock) were granted pursuant to a private offering as
compensation for services rendered and expire on September 30, 2009. The remaining warrant
(200,000 shares of common stock) was granted in connection with the October 2005
convertible debt financing and has an expiration date of October 10, 2010. On May 19, 2006,
the Company entered into an amendment to the Securities Purchase Agreement, effective April
1, 2006, for the October 2005 convertible debt financing, pursuant to which it extended the
initial payment due date of its outstanding Convertible Secured Debenture
(“Debenture”) and issued to the holder thereof an additional warrant to
purchase 50,000 shares of the Company’s common stock at an exercise price of $3.10
per share. The warrants became effective as of April 1, 2006.
At December 31, 2006, the Company had an option
outstanding to an independent consultant (issued in 2005) in exchange for services rendered
for 250,000 shares of common stock at an exercise price per share of $2.50.
NOTE 16 - COMMITMENTS
On May 2, 2007, the Company signed a lease with Donato at
Wall 4, LLC (the “Donato Lease”) with respect to its new business office
located at 1800 Route 34, Wall, New Jersey 07719. The Donato Lease covers 2,450 square feet
of office space and commenced on July 1, 2007 with an initial term of five years (the
“Term”). The Company has two options to extend the Term for a period of five
years each. The total annual lease payment is $43,488, payable in equal monthly
installments on or before the first of each month.
The future minimum lease payments for each of the twelve
month periods ended September 30 are as follows:
|
|
|
|
|
|
|
September 30
|
|
|
|
|
|
2008
|
|
$
|
43,488
|
|
2009
|
|
|
43,488
|
|
2010
|
|
|
43,488
|
|
2011
|
|
|
43,488
|
|
2012
|
|
|
32,616
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
206,568
|
|
|
|
|
|
|
The Company has entered into employment agreements with
several officers with terms expiring through December 31, 2009.
NOTE 17 - SUBSEQUENT EVENTS
On October 11, 2007, Velocity Asset Management, Inc.
consummated its second and final closing of its private placement offering of shares of
common stock and warrants to purchase shares of common stock to accredited investors. The
Securities were offered and sold pursuant to an exemption from registration under Section
4(2) of the Securities Act of 1933, as amended. In connection with the Offering, the
Company issued the Securities and also entered into a Securities Purchase Agreement and a
Registration Rights Agreement with the investors in the Offering (the
“Investors”). Together with the first closing, the Registrant sold an aggregate
of 862,500 shares at a purchase price of $2.00 per share and delivered Warrants to purchase
an aggregate of 172,500 shares of the Company’s common stock.
The Company received aggregate net proceeds of $1,596,500
from the placement, after payment of offering expenses of approximately $25,000 and
commissions of approximately $82,500. The Company retained a registered FINRA broker dealer
to act as placement agent. In addition, the placement agent is entitled to receive 2 year
warrants to acquire 41,250 shares of the Company’s common stock. The registration
statement for the Offering was filed on November 9, 2007.
The terms of the Securities are identical to the terms of
the Securities described in NOTE 11 - COMMON STOCK OFFERING.
F-26
No
dealer, salesperson or other person is authorized to give any information or to
represent anything not contained in this prospectus. You must not rely on any
unauthorized information or representations. This prospectus is an offer to sell only
the shares offered hereby, but only under circumstances and in jurisdictions where it
is lawful to do so. The information contained in this prospectus is current only as of
its date.
TABLE OF CONTENTS
Velocity Asset Management, Inc.
$7,500,000
Units
Anderson & Strudwick,
Incorporated
____________, 2007
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 24. Indemnification of Directors and Officers.
Our certificate
of incorporation provides that all of our directors, officers, employees and agents shall
be entitled to be indemnified by us to the fullest extent permitted under the Delaware
General Corporation Law, provided that they acted in good faith and that they reasonably
believed their conduct or action was in, or not opposed to, the best interest of our
company.
Our bylaws
provide for indemnification of our officers, directors and others who become a party to an
action on our behalf by us to the fullest extent not prohibited under the Delaware General
Corporation Law. Further, we maintain officer and director liability insurance.
Item 25. Other Expenses of Issuance and Distribution.
The following
table sets forth estimated expenses expected to be incurred in connection with the issuance
and distribution of the securities being registered. All such expenses will be paid by us.
The amounts listed below are estimates subject to future contingencies.
|
|
|
|
|
Securities and Exchange Commission Registration
Fee
|
|
$
|
487.26
|
|
FINRA Filing Fee
|
|
|
1,000.00
|
|
Printing Expenses*
|
|
|
15,000.00
|
|
Accounting Fees and Expenses*
|
|
|
37,500.00
|
|
Legal Fees and Expenses*
|
|
|
75,000.00
|
|
Miscellaneous*
|
|
|
5,000.00
|
|
|
|
|
|
|
TOTAL
|
|
$
|
133,987.26
|
|
|
|
|
|
|
|
|
*
|
Estimated and subject to amendment
|
Item 26. Recent Sales of Unregistered Securities.
On July 27,
2007, we consummated the final closing of our private placement offering of 10.0%
convertible subordinated notes in the aggregate principal amount of $2,350,000, due 2017 to
accredited investors. The notes were sold by us through Anderson & Strudwick, which
served as placement agent. The notes were offered and sold pursuant to exemption from
registration under Section 4(2) of the Securities Act. The notes will be subordinated in
liquidation preference and in right of payment to all of our existing debt and senior in
right of payment and in liquidation preference to any of our future “long term”
debt.
On October 11,
2007, we consummated our second and final closing of our private placement offering of
shares of common stock and warrants to purchase shares of common stock to accredited
investors. We offered these securities pursuant to an exemption from registration under
Section 4(2) of the Securities Act. In connection with this offering, we issued the
Securities and also entered into a Securities Purchase Agreement and a Registration Rights
Agreement with the investors in the 2007 Private Offering. Together with the first closing,
we sold an aggregate of 862,500 shares at a purchase price of $2.00 per share and delivered
warrants to purchase an aggregate of 172,500 shares of our common stock. We received
aggregate net proceeds of $1,596,500 from the placement, after payment of offering expenses
of approximately $25,000 and commissions of approximately $82,500. We retained a registered
FINRA broker dealer to act as placement agent. In addition, the placement agent is entitled
to receive 2 year warrants to acquire 41,250 shares of the Company’s common stock.
The registration statement for the 2007 Private Offering was filed on November 9, 2007 and
was declared effective on November 21, 2007.
II-1
Item 27. Exhibits.
The following
exhibits are filed with this registration statement.
INDEX TO EXHIBITS
|
|
|
|
|
|
Exhibit
Number
|
|
Title
|
|
Reference
|
|
|
|
|
|
1.1
|
|
|
Form of Underwriting Agreement by and between
the Company and Anderson & Strudwick, Inc.
|
|
**
|
2.1
|
|
|
Agreement and Plan of Merger dated as of
February 3, 2004, by and among Tele-Optics, Inc., TLOP Acquisition Company,
L.L.C., STB,Inc., John C. Kleinert, W. Peter Ragan, Sr. and W. Peter Ragan,
Jr.
|
|
A
|
3.1
|
|
|
Certificate of Incorporation
|
|
B
|
3.2
|
|
|
Amendment to Certificate of
Incorporation
|
|
C
|
3.3
|
|
|
Amended and Restated By-laws
|
|
O
|
3.4
|
|
|
Certificate of Designation
|
|
U
|
4.1
|
|
|
Specimen Common Stock Certificate
|
|
D
|
4.2
|
|
|
Form of Subscription Agreement
|
|
E
|
4.3
|
|
|
Loan and Security Agreement, dated as of
January 27, 2005, by and between Velocity Investments, LLC and Wells Fargo
Inc.
|
|
F
|
4.4
|
|
|
General Continuing Guaranty, dated January
27, 2005, executed by Registrant in favor of Wells Fargo Inc.
|
|
F
|
4.5
|
|
|
Security and Pledge Agreement, dated as of
January 27, 2005, by and between Registrant and Wells Fargo Inc.
|
|
F
|
4.6
|
|
|
Subordination Agreement, dated as of January
27, 2005, by and between Registrant and Wells Fargo Inc.
|
|
F
|
4.7
|
|
|
Form of promissory note issued on April 15,
2005
|
|
L
|
4.8
|
|
|
10% Convertible Debenture due April 27,
2005
|
|
O
|
4.9
|
|
|
Common Stock Purchase Warrant
|
|
O
|
4.10
|
|
|
Warrant to Purchase 100,000 Shares of Series
A Convertible Preferred Stock
|
|
T
|
4.11
|
|
|
Specimen Series A Convertible Preferred Stock
Certificate
|
|
T
|
4.12
|
|
|
Common Stock Purchase Warrant
|
|
V
|
4.13
|
|
|
Amended 10% Convertible Secured
Debenture
|
|
V
|
4.14
|
|
|
Form of Common Stock Warrant
|
|
Z
|
4.15
|
|
|
Form of Warrant to be issued pursuant to the
underwriting agreement by and between the Company & Anderson &
Strudwick, Inc.
|
|
**
|
4.16
|
|
|
Form of Underwiter’s Warrant to be
issued pursuant to the underwriting agreement by and between the Company &
Anderson & Strudwick, Inc.
|
|
**
|
4.17
|
|
|
Form of Warrant Agreement by and between the
Company and American Stock Transfer & Trust Co.
|
|
**
|
5.1
|
|
|
Opinion of Ellenoff Grossman & Schole
LLP
|
|
*
|
10.1
|
|
|
Business Advisory Agreement, dated as of
February 5, 2004, by and between Lomond International, Inc. and
Registrant
|
|
G
|
10.2
|
|
|
Employment Contract, dated as of September 8,
2004, by and between Registrant and James J. Mastriani
|
|
H
|
10.3
|
|
|
Independent Consulting Agreement, dated
December 16, 2004, between Registrant and The Del Mar Consulting Group,
Inc.
|
|
I
|
10.4
|
|
|
Non-qualified Stock Option Agreement, dated
December 16, 2004, Between Registrant and The Del Mar Consulting Group,
Inc.
|
|
I
|
10.5
|
|
|
Employment Agreement, dated as of January 1,
2004, between John C. Kleinert and STB, Inc. (n/k/a Velocity Asset Management,
Inc.)
|
|
J
|
10.6
|
|
|
Addendum, dated September 1, 2004, to
Employment Agreement, dated as of January 1, 2004, between John C. Kleinert and
Registrant
|
|
J
|
10.7
|
|
|
Employment Agreement, dated as of January 1,
2004, between John C. Kleinert and J. Holder, Inc.
|
|
J
|
10.8
|
|
|
Addendum, dated September 1, 2004, to
Employment Agreement, dated As of January 1, 2004, between John C. Kleinert and
J. Holder, Inc.
|
|
J
|
10.9
|
|
|
Employment Agreement, dated as of January 1,
2004, between Velocity Investments, LLC and W. Peter Ragan, Jr.
|
|
J
|
10.10
|
|
|
Addendum, dated September 1, 2004, to
Employment Agreement, dated As of January 1, 2004, between W. Peter Ragan, Jr.
and Velocity Investments, LLC
|
|
J
|
II-2
|
|
|
|
|
|
10.11
|
|
|
Employment Agreement, dated as of January 1,
2004, between VOM, LLC and W. Peter Ragan, Sr.
|
|
J
|
10.12
|
|
|
Addendum, dated September 1, 2004, to
Employment Agreement, dated As of January 1, 2004, between W. Peter Ragan, Sr.
and VOM, LLC
|
|
J
|
10.13
|
|
|
Retainer Agreement, dated as of January 1,
2005, between Ragan & Ragan, P.C. and Velocity Investments, LLC
|
|
J
|
10.14
|
|
|
Retainer Agreement, dated as of January 1,
2005, between Ragan & Ragan, P.C. and VOM, LLC
|
|
J
|
10.15
|
|
|
Retainer Agreement, dated as of January 1,
2005, between Ragan & Ragan, P.C. and J. Holder, Inc.
|
|
J
|
10.16
|
|
|
Addendum, dated January 1, 2006, to
Employment Agreement, dated as of January 1, 2004, between John C. Kleinert and
Registrant
|
|
J
|
10.17
|
|
|
Addendum, dated January 1, 2006, to
Employment Agreement, dated As of January 1, 2004, between John C. Kleinert and
J. Holder, Inc.
|
|
J
|
10.18
|
|
|
Addendum, dated January 1, 2006, to
Employment Agreement, dated As of January 1, 2004, between W. Peter Ragan, Jr.
and Velocity Investments, LLC
|
|
J
|
10.19
|
|
|
Addendum, dated January 1, 2006, to
Employment Agreement, dated As of January 1, 2004, between W. Peter Ragan, Sr.
and VOM, LLC
|
|
J
|
10.20
|
|
|
Form of Legal Collection Agreement
|
|
J
|
10.21
|
|
|
Real Estate Joint Venture Agreement dated
June 2, 2005
|
|
M
|
10.22
|
|
|
Business Advisory Agreement dated September
1, 2005
|
|
N
|
10.23
|
|
|
Securities Purchase Agreement dated October
27, 2005
|
|
O
|
10.24
|
|
|
Registration Rights Agreement dated October
27, 2005
|
|
O
|
10.25
|
|
|
Security Agreement dated October 27, 2005
|
|
O
|
10.26
|
|
|
Subsidiary Guarantee dated October 27,
2005
|
|
O
|
10.27
|
|
|
Amendment No. 1 to Business Advisory
Agreement dated as of November 11, 2005
|
|
Q
|
10.28
|
|
|
Form of Director Indemnification Agreement
|
|
Q
|
10.29
|
|
|
First Amendment to Loan and Security
Agreement by and between Wells Fargo Inc. and Velocity Investments, L.L.C.
dated as of February 27, 2006
|
|
R
|
10.30
|
|
|
Addendum, dated January 1, 2006, to
Employment Agreement, dated as of January 1, 2004, between John C. Kleinert and
Registrant
|
|
S
|
10.31
|
|
|
Addendum, dated January 1, 2006, to
Employment Agreement, dated As of January 1, 2004, between W. Peter Ragan, Jr.
and Velocity Investments, LLC
|
|
S
|
10.32
|
|
|
Addendum, dated January 1, 2006, to
Employment Agreement, dated As of January 1, 2004, between W. Peter Ragan, Sr.
and VOM, LLC
|
|
S
|
10.33
|
|
|
Amendment Agreement
|
|
V
|
10.34
|
|
|
Second Amendment to Loan and Security
Agreement, dated December 8, 2006
|
|
X
|
10.35
|
|
|
Third Amendment to Loan and Security
Agreement, dated December 8, 2006
|
|
X
|
10.36
|
|
|
Agreement of Lease, dated May 2,
2007
|
|
Y
|
10.37
|
|
|
Registration Rights Agreement, dated
September 26, 2007
|
|
Z
|
14.1
|
|
|
Code of Ethics
|
|
S
|
16.1
|
|
|
Letter of Robert C. Seiwell, Jr.
CPA
|
|
K
|
II-3
|
|
|
|
|
|
16.2
|
|
|
Letter of Robert C. Seiwell, Jr.
CPA
|
|
W
|
21.1
|
|
|
Subsidiaries of the Registrant
|
|
P
|
23.1
|
|
|
Consent of Ellenoff Grossman & Schole LLP
(contained in Exhibit 5.1)
|
|
*
|
23.2
|
|
|
Consent of Weiser LLP
|
|
**
|
23.3
|
|
|
Cowan and Gunteski & Co., P.A.
|
|
**
|
31.1
|
|
|
Certification of the Chief Executive Officer
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
|
|
S
|
31.2
|
|
|
Certification of the Chief Financial Officer
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
|
|
S
|
32.1
|
|
|
Certification of the Chief Executive Officer
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
|
|
S
|
32.2
|
|
|
Certification of the Chief Financial Officer
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
|
|
S
|
99.1
|
|
|
Audit Committee Charter
|
|
S
|
|
|
|
*to be filed by Amendment
|
|
|
**filed herewith
|
|
|
A. Incorporated by reference to
Registrant’s Current Report on Form 8-K filed with the Securities and
Exchange Commission on February 18, 2004.
|
|
|
|
B. Incorporated by reference to
Registrant’s Registration Statement on Form S-18 (File No. 33.13609A)
filed with the Securities and Exchange Commission.
|
|
|
|
C. Incorporated by reference to
Registrant’s Definitive Information Statement filed with the Securities
and Exchange Commission on March 19, 2004.
|
|
|
|
D. Previously filed with Registrant’s
Annual Report on Form 10-KSB for the year ended December 31, 2004.
|
|
|
|
E. Incorporated by reference to
Registrant’s Current Report on Form 8-K filed with the Securities and
Exchange Commission on October 7, 2004.
|
|
|
|
F. Incorporated by reference to
Registrant’s Current Report on Form 8-K filed with the Securities and
Exchange Commission on February 2, 2005.
|
|
|
|
G. Incorporated by reference to Schedule 13D
filed by Lomond International, Inc. with the Securities and Exchange Commission
on March 10, 2004.
|
|
|
|
H. Incorporated by reference to
Registrant’s Current Report on Form 8-K filed with the Securities and
Exchange Commission on September 14, 2004.
|
|
|
|
I. Incorporated by reference to
Registrant’s Current Report on Form 8-K filed with the Securities and
Exchange Commission on January 5, 2005.
|
|
|
|
J. Filed as part of Amendment No. 1 to the
Registration Statement on Form SB-2, File No. 333-122062, filed with the
Securities Exchange Commission on March 16, 2005.
|
|
|
|
K. Incorporated by reference to
Registrant’s Current Report on Form 8-K filed with the Securities and
Exchange Commission on January 16, 2004.
|
|
|
|
L. Incorporated by reference to
Registrant’s Current Report on Form 8-K filed with the Securities and
Exchange Commission on April 19, 2005.
|
II-4
|
|
|
M. Incorporated by reference to
Registrant’s Current Report on Form 8-K filed with the Securities and
Exchange Commission on June 22, 2005.
|
|
|
|
N. Incorporated by reference to
Registrant’s Current Report on Form 8-K filed with the Securities and
Exchange Commission on September 7, 2005.
|
|
|
|
O. Incorporated by reference to
Registrant’s Current Report on Form 8-K filed with the Securities and
Exchange Commission on October 31, 2005.
|
|
|
|
P. Filed as part of Amendment No. 1 to the
Registration Statement on Form SB-2, File No. 333-130234, filed with the
Securities Exchange Commission on December 29, 2005.
|
|
|
|
Q. Incorporated by reference to
Registrant’s Quarterly Report on Form 10-QSB/A for the quarter ended
September 30, 2005 filed with the Securities and Exchange Commission on
December 2, 2005
|
|
|
|
R. Incorporated by reference to
Registrant’s Current Report on Form 8-K filed with the Securities and
Exchange Commission on February 28, 2006.
|
|
|
|
S. Incorporated by reference to
Registrant’s Annual Report on Form 10-KSB filed with the Securities and
Exchange Commission on March 31, 2006.
|
|
|
|
T. Incorporated by reference to
Registrant’s Current Report on Form 8-K filed with the Securities and
Exchange Commission on April 18, 2006.
|
|
|
|
U. Incorporated by reference to
Registrant’s Current Report on Form 8-K filed with the Securities and
Exchange Commission on May 15, 2006.
|
|
|
|
V. Incorporated by reference to
Registrant’s Current Report on Form 8-K filed with the Securities and
Exchange Commission on May 22, 2006.
|
|
|
|
W. Incorporated by reference to
Registrant’s Current Report on Form 8-K filed with the Securities and
Exchange Commission on June 13, 2006.
|
|
|
|
X. Incorporated by reference to
Registrant’s Annual Report on Form 10-KSB filed with the Securities and
Exchange Commission on April 5, 2007.
|
|
|
|
Y. Incorporated by reference to
Registrant’s Current Report on Form 8-K filed with the Securities and
Exchange Commission on May 8, 2007.
|
|
|
|
Z. Incorporated by reference to
Registrant’s Current Report on Form 8-K filed with the Securities and
Exchange Commission on September 27, 2007.
|
|
|
|
In accordance with Rule 12b-32 under the
Securities Exchange Act of 1934, as amended, reference is made to the documents
previously filed with the Securities and Exchange Commission, which documents
are hereby incorporated by reference.
|
II-5
Item 28.
Undertakings.
The undersigned
registrant hereby undertakes:
|
|
|
(1)
|
To 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 Sections
10(a)(3) of the Securities Act;
|
|
|
|
|
(ii)
|
To reflect in the prospectus any facts or
events arising after the effective date of the Registration Statement (or the
most recent post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth in the
Registration Statement. Notwithstanding the foregoing, any increase or decrease
in volume of securities offered (if the total dollar value of securities
offered would not exceed that which was registered) and any deviation from the
low or high 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 20 percent
change in the maximum aggregate offering price set forth in the
“Calculation of Registration Fee” table in the effective
registration statement;
|
|
|
|
|
(iii)
|
To include any additional or changed material
information on the plan of distribution;
|
|
|
|
(2)
|
For the purpose of determining any liability
under the Securities Act, treat each such post-effective amendment as a new
registration statement of the securities offered therein, and the offering of
the securities at that time shall be deemed to be the bona fide
offering.
|
|
|
|
(3)
|
File a post-effective amendment to remove
from registration any of the securities that remain unsold at the end of the
offering.
|
|
|
|
(4)
|
Insofar as indemnification for liabilities
arising under the Securities Act may be permitted to directors, officers and
controlling persons of the small business issuer pursuant to the foregoing
provisions, or otherwise, the small business issuer 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. If a claim for indemnification against such liabilities (other
than the payment by the small business issuer of expenses incurred or paid by a
director, officer or controlling person of the small business issuer in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the small business issuer will, unless in the opinion of its
counsel the matter has been settled by controlling precedent, submit to a court
of appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act and will be governed
by the final adjudication of such issue.
|
II-6
SIGNATURES
In accordance
with the requirements of the Securities Act, the Registrant certifies that it has
reasonable grounds to believe that it meets all the requirements for filing on Form SB-2
and has authorized this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Ramsey, State of New Jersey, on the
19th day of December, 2007.
|
|
|
VELOCITY ASSET MANAGEMENT, INC.
|
|
|
|
By: /s/ John C. Kleinert
|
|
|
|
John C.
Kleinert
|
|
Chief
Executive Officer and President
|
POWER OF ATTORNEY
KNOW ALL MEN BY
THESE PRESENTS that each person whose signature appears below constitutes and appoints John
C. Kleinert, with the power to act without the other, his true and lawful attorney-in-fact
and agent, with full power of substitution and resubstitution for him or in his name, place
and stead, in any and all capacities to sign any and all amendments or post-effective
amendments to this Registration Statement, and to file the same, with all exhibits thereto,
and other documents in connection therewith, and in connection with any registration of
additional securities pursuant to Rule 462(b) under the Securities Act, as amended, to sign
any abbreviated registration statements and any and all amendments thereto, and to file the
same, with all exhibits thereto and other documents in connection therewith, in each case,
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 requisite or necessary to be done in and about the premises, as fully to all intents
and purposes as he might or could do in person, hereby ratifying and confirming all that
said attorneys-in-fact and agents or any of them, or their or his substitutes, may lawfully
do or cause to be done by virtue hereof.
Pursuant to the
requirements of the Securities Act, this registration statement has been signed by the
following persons in the capacities and on the dates indicated.
|
|
|
|
|
Person
|
|
Capacity
|
|
Date
|
|
|
|
|
|
/s/ John C. Kleinert
|
|
Chief Executive Officer, President,
Chairman of the Board and Director
(Principal Executive Officer)
|
|
|
|
|
|
December 19, 2007
|
John C. Kleinert
|
|
|
|
|
|
|
|
|
/s/ W. Peter Ragan Sr.
|
|
Vice President, Director
|
|
December 19, 2007
|
|
|
|
|
|
W. Peter Ragan Sr.
|
|
|
|
|
|
|
|
|
|
/s/ Steven Marcus
|
|
Director
|
|
December 19, 2007
|
|
|
|
|
|
Steven Marcus
|
|
|
|
|
|
|
|
|
|
/s/ Dr. Michael Kelly
|
|
Director
|
|
December 19, 2007
|
|
|
|
|
|
Dr. Michael Kelly
|
|
|
|
|
|
|
|
|
|
/s/ David Granatell
|
|
Director
|
|
December 19, 2007
|
|
|
|
|
|
David Granatell
|
|
|
|
|
|
|
|
|
|
/s/ James J. Mastriani
|
|
Chief Financial Officer, Chief Legal
|
|
|
|
|
Officer, Secretary, Treasurer (Principal
|
|
December 19, 2007
|
James J. Mastriani
|
|
Accounting Officer)
|
|
|
II-7
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