It is a conflict of interest for W. Peter
Ragan, Sr. to serve as a director and officer of our company and for W. Peter
Ragan, Jr. to serve as an officer of our company, while also being the
principals of Ragan & Ragan, P.C., our third party servicers in the State
of New Jersey.
As
officers and, in the case of W. Peter Ragan, Sr., also as a director, of our
company, Messrs. Ragan and Ragan have a fiduciary duty to our stockholders.
However, their position as the principals of the law firm Ragan & Ragan,
P.C., the primary third party servicers of our consumer receivable portfolios,
interests in distressed real property and tax lien certificates, may compromise
their ability to make decisions in the best interests of our stockholders.
Each
of Messrs. Ragan and Ragan devotes approximately 50% of his business time to
our affairs in accordance with the terms of his respective employment agreement
and the balance of his business time to his law practice which includes the
representation of companies that may be deemed our competitors. Accordingly,
there are potential conflicts of interest inherent in such relationship. The
current agreement by and between our wholly-owned subsidiary, VI, and Ragan
& Ragan P.C. is for one calendar year, and automatically extends for
additional periods of one calendar year each unless terminated by us. The
agreement provides for the payment to such firm of a contingency fee equal to
25% of all amounts collected and paid by the obligors. The shareholders of
Ragan & Ragan, P.C. are W. Peter Ragan, Sr., our vice president and a
director, and W. Peter Ragan Jr., president of our wholly-owned subsidiary, VI.
During 2007 and 2006, we paid Ragan & Ragan, P.C an aggregate of $1,134,345
and $1,241,244 respectively, for services rendered in accordance with the terms
of the agreements between our subsidiaries and Ragan & Ragan, P.C. Pursuant
to an employment agreement dated January 1, 2004, by and between W. Peter
Ragan, Sr. and us, Mr. Ragan, Sr. is entitled to an annual salary of $100,000
in consideration for his position as our Vice President and president of our
wholly-owned subsidiaries, JHI and VOM. In addition, pursuant to an employment
agreement dated January 1, 2004, by and between W. Peter Ragan, Jr. and us, Mr.
Ragan, Jr. is entitled to an annual salary of $100,000 per year in
consideration for his position as president of our wholly owned subsidiary, VI.
Our
subsidiary, JHI, has entered into a one-year retainer agreement with the law
firm of Ragan & Ragan, P.C. and such firm has agreed to provide legal
services at varying hourly rates in connection with the purchase and sale of
JHIs interests in distressed real property with a minimum fee of $1,500 per
each purchase and sale. In addition, such firm is entitled to receive a
finders fee equal to 15% of JHIs net profit, if any, at the time of sale of
any property interest referred to us by Ragan & Ragan, P.C. The retainer
agreement is for a one year period commencing January 1, 2005, and renews for
successive periods of one year each unless terminated by our subsidiary.
Each
of Messrs. Ragan and Ragan beneficially own approximately 13.7% of our issued
and outstanding shares of common stock.
Our
subsidiary, VOM has entered into a retainer agreement with the law firm of
Ragan & Ragan, P.C., in which such firm has agreed to provide legal
services at varying hourly rates in connection with the foreclosure of tax lien
certificates with a minimum fee of $1,500 per foreclosed tax lien certificate
and a commission equal to 15% of VOMs net profit, if any, at the time of sale
of any real property acquired by VOM upon foreclosure of a tax lien
certificate.
Ragan
& Ragan, P.C. is currently our third party servicer for collections in the
State of New Jersey. Our third party servicing agreements with Ragan &
Ragan, P.C. have terms no more favorable than our third party servicing
agreements with other third party servicers in other states.
The loss of any of our executive officers may
adversely affect our operations and our ability to successfully acquire
distressed assets.
John
C. Kleinert, our president and chief executive officer, W. Peter Ragan, Sr.,
our vice president, W. Peter Ragan, Jr., president of our wholly-owned
subsidiary, VI,, and Mr. James J. Mastriani, our chief financial officer, chief
legal officer, treasurer and secretary, are responsible for making
substantially all management decisions, including determining which distressed
assets to purchase, the purchase price and other material terms of such
acquisitions. Although we have entered into employment agreements with each of
such individuals, the loss of any of their services could disrupt our
operations and adversely affect our ability to successfully acquire consumer
receivable portfolios, interests in distressed real property and tax lien
certificates. In addition, we have not obtained key man life insurance on the
lives of Mr. Kleinert, Mr. Ragan, Sr., Mr. Ragan, Jr. and Mr. Mastriani.
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If we are unable to access external sources
of financing we may not be able to fund and grow our operations.
We
depend on loans from our credit facility and other external sources to fund and
expand our operations. Our ability to grow our business is dependent on our
access to additional financing and capital resources at acceptable rates. The
failure to obtain financing and capital on acceptable financing terms as needed
would limit our ability to purchase consumer receivable portfolios, interests in
distressed real property and tax lien certificates and achieve our growth
plans.
Our
agreement with Wells Fargo, our credit facility, is limited to $17,500,000. As
of December 31, 2007, we have approximately $3,100,000 of credit remaining
available. As such, we may have insufficient credit lines available to purchase
additional receivables, unless we successfully obtain additional credit.
We
also consider raising additional capital from time to time which financings may
take the forms of private placement offerings, pipes or public offerings of
equity or debt securities, or a combination thereof. Although we have no
specific capital raising transactions currently under negotiation, we may
determine to undertake such transactions at any time. Such transactions could
include the sale of equity at less than the market price of our common stock at
the time of such transaction, although we have no present intention to
undertake below market transactions, and could be for gross proceeds of as low
as $1,000,000 to approximately $10,000,000 or more. The terms of any such
capital raising transaction would be considered by the Board of Directors at
the time it is proposed by management.
We may incur substantial indebtedness from
time to time in connection with our operations.
We
may incur substantial debt from time to time in connection with our purchase of
consumer receivable portfolios which could affect our ability to obtain
additional funds and may increase our vulnerability to economic downturns. In
particular,
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we could be
required to dedicate a portion of our cash flows from operations to pay debt
service costs and, as a result, we would have less funds available for
operations, future acquisitions of consumer receivable portfolios, interests
in distressed real property and tax lien certificates, and other purposes;
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it
may be more difficult and expensive to obtain additional funding through
financings, if available at all;
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we
would be more vulnerable to economic downturns and fluctuations in interest
rates, less able to withstand competitive pressures and less flexible in
reacting to changes in our industry and general economic conditions; and
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if
we defaulted under our existing senior credit facility or other indebtedness
or if our lenders demanded payment of a portion or all of our indebtedness,
we may not have sufficient funds to make such payments.
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If an event of default occurs under our
secured financing arrangements, it could seriously harm our operations.
On
January 27, 2005, VI entered into a Loan and Security Agreement with Wells
Fargo, through which Wells Fargo agreed to provide VI with a three year
$12,500,000 senior credit facility (the Initial Credit Facility) to finance
up to 60% of the purchase price of the acquisition of individual pools of
unsecured consumer receivables that are approved by Wells Fargo under specific
eligibility criteria set forth in the Loan and Security Agreement. On February
27, 2006, VI entered into a First Amendment to the Loan and Security Agreement
with Wells Fargo (the Amended and Restated Loan Agreement). Pursuant to the
Amended and Restated Loan Agreement, Wells Fargo extended the Initial Credit
Facility until January 27, 2009 (formerly January 27, 2008) and agreed to
increase the advance rate under the credit facility to 75% (up from 60%) of the
purchase price of individual pools of unsecured consumer receivables that are
approved by Wells Fargo. Wells Fargo also agreed to reduce the interest rate on
the loan from 3.5% above the prime rate of Wells Fargo Bank, N.A. to 1.5% above
such prime rate. In addition, the amortization schedule for each portfolio has
been extended from twenty-four to thirty months. Wells Fargo also agreed to
reduce the personal guarantees associated with the line from $1,000,000 to
$250,000. On February 23, 2007, Wells Fargo increased the line to $17,500,000
pursuant to the Third Amendment to the Loan and Security Agreement. On February
29, 2008, Wells Fargo increased the line to $22,500,000
and extended the maturity date of the facility to January 2011, pursuant to the Fourth Amendment
to the Loan and Security Agreement.
Any
indebtedness that we incur under such line of credit is secured by a first lien
upon all of our assets, including all of our portfolios of consumer receivables
acquired for liquidation. If we default under the indebtedness secured by our
assets, those assets would be available to the secured creditor to satisfy our
obligations to the secured creditor. Any of these consequences could adversely
affect our ability to acquire consumer receivable portfolios, interests in
distressed real property and tax lien certificates, and operate our business.
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The restrictions contained in the secured
financings could negatively impact our ability to obtain financing from other
sources and to operate our business.
VI
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. As of December 31, 2007, VI has agreed to maintain at
least $6,500,000 in VIs members equity and subordinated debt plus 50% of VIs
net income for each calendar quarter. We have also agreed to maintain at least
$21,000,000 in stockholders equity and subordinated debt for the duration of
the facility plus 50% of our net income for each calendar quarter.
Our
loan and security agreement contains certain restrictive covenants that may
restrict our ability to operate our business. Furthermore, the failure to
satisfy any of these covenants could:
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cause our indebtedness to become immediately payable;
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preclude us from further borrowings from these existing sources;
and
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prevent us from securing alternative sources of financing
necessary to purchase consumer receivable portfolios, interests in distressed
real property and tax lien certificates and to operate our business.
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As
a result of our line of credit with Wells Fargo, we anticipate that we will
incur significant increases in interest expense offset, over time, by expected
increased revenues from consumer receivable portfolios purchased utilizing
funds under such line of credit. No assurance can be given that the expected
revenues from such purchased portfolios will exceed the additional interest
expense.
Our collections on unsecured consumer
receivables may decrease if bankruptcy filings increase.
During
times of economic recession, the amount of defaulted consumer receivables
generally increases, which contributes to an increase in the amount of personal
bankruptcy filings. Under certain bankruptcy filings an obligors assets are
sold to repay credit originators, but since certain of the receivables we
purchase are unsecured, we often would not be able to collect on those
receivables. We cannot assure you that our collection experience would not
decline with an increase in bankruptcy filings. If our actual collection
experience with respect to our unsecured receivable portfolios is significantly
lower than we projected when we purchased the portfolios, our realization on
those assets may decline and our earnings could be negatively affected. We use
estimates for recognizing revenue on a majority of our receivable portfolio
investments and our earnings would be reduced if actual results are less than
estimated.
We may not be able to acquire consumer
receivables of new asset types or implement a new pricing structure.
We
may pursue the acquisition of consumer receivable portfolios of asset types in
which we have little current experience. We may not be able to complete any
acquisitions of receivables of these asset types and our limited experience in
these asset types may impair our ability to collect on these receivables. This
may cause us to pay too much for these receivables, and consequently, we may
not generate a profit from these receivable portfolio acquisitions.
If we fail to manage our growth effectively,
we may not be able to execute our business strategy.
We
have experienced rapid growth over the past several years and intend to
maintain our growth. However, our growth will place demands on our resources
and we cannot be sure that we will be able to manage our growth effectively.
Future internal growth will depend on a number of factors, including:
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the
effective and timely initiation and development of relationships with sellers
of distressed assets and strategic partners;
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our
ability to efficiently collect consumer receivables; and
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the
recruitment, motivation and retention of qualified personnel.
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Sustaining
growth will also require the implementation of enhancements to our operational
and financial systems and will require additional management, operational and
financial resources. There can be no assurance that we will be able to manage
our expanding operations effectively or that we will be able to maintain or
accelerate our growth and any failure to do so could adversely affect our
ability to generate revenues and control our expenses.
Our operations could suffer from
telecommunications or technology downtime, disruption or increased costs.
Our
ability to execute our business strategy depends in part on sophisticated
telecommunications and computer systems. The temporary loss of our computer and
telecommunications systems, through casualty, operating malfunction or
servicers failure, could disrupt our operations. In addition, we must record
and process significant amounts of data quickly and accurately to properly bid
on prospective acquisitions of consumer receivable portfolios and to access,
maintain and expand the databases we use for our collection and monitoring
activities. Any failure of our information systems and their backup systems
would interrupt our operations. We may not have adequate backup arrangements
for all of our operations and we may incur significant losses if an outage
occurs. Any interruption in our operations could have an adverse effect on our
results of operations and financial condition.
Our inability to obtain or renew required
licenses could have a material adverse effect upon our results of operations
and financial condition.
We
currently hold a number of licenses issued under applicable consumer credit
laws. Certain of our current licenses and any licenses that we may be required
to obtain in the future may be subject to periodic renewal provisions and/or
other requirements. Our inability to renew such licenses or take any other
required action with respect to such licenses could limit our ability to
collect on some of our receivables and otherwise have a material adverse effect
upon our results of operations and financial condition.
Risk Factors Relating to Our Industry
Government regulations may limit our ability
to recover and enforce the collection of our consumer receivables.
Federal,
state and municipal laws, rules, regulations and ordinances may limit our
ability to recover and enforce our rights with respect to the consumer
receivables acquired by us. These laws include, but are not limited to, the
following Federal statutes and related regulations and comparable statutes in
states where obligors reside and/or where creditors are located:
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the Fair
Debt Collection Practices Act;
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the
Federal Trade Commission Act;
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the
Truth-In-Lending Act;
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the
Fair Credit Billing Act;
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the
Equal Credit Opportunity Act;
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the Fair Credit Reporting Act; and
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the Fair Foreclosure Act.
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We
may be precluded from collecting consumer receivables we purchase where the
creditors or other previous owners or servicers failed to comply with
applicable law in originating or servicing such acquired receivables. Laws
relating to the collection of consumer debt also directly apply to our
business. Our failure to comply with any laws applicable to us, including state
licensing laws, could limit our ability to recover on our receivables and could
subject us to fines and penalties, which could reduce our earnings and result
in a default under our loan arrangements.
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Additional
laws may be enacted that could impose additional restrictions on the servicing
and collection of consumer receivables. Such new laws may adversely affect the
ability to collect on our receivables which could also adversely affect our revenues
and earnings.
Class action suits and other litigation in
our industry could divert our managements attention from operating our
business and increase our expenses.
Certain
originators and servicers in the consumer credit industry have been subject to
class actions and other litigation. Claims have included failure to comply with
applicable laws and regulations and improper or deceptive origination and
servicing practices. If we become a party to any such class action suit or
other litigation, our results of operations and financial condition could be
materially adversely affected.
Risk Factors Relating to Our Securities
Our quarterly operating results may fluctuate
and cause our stock price to decline.
Because
of the nature of our business, our quarterly operating results may fluctuate,
which may adversely affect the market price of our common stock. Our results
may fluctuate as a result of any of the following:
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the
timing and amount of collections on our consumer receivable portfolios;
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our
inability to identify and acquire additional consumer receivable portfolios;
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a decline in
the estimated value of our consumer receivable portfolio recoveries;
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the
timing of sales of interests in distressed real property and redemption of
tax lien certificates;
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increases in
operating expenses associated with the growth of our operations; and
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general and
economic market conditions.
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Because three stockholders own a large
percentage of our voting stock, other stockholders voting power may be
limited.
As
of December 31, 2007, John C. Kleinert, W. Peter Ragan, Sr. and W. Peter Ragan,
Jr., three of our executive officers, beneficially owned or controlled
approximately 81.9% (including shares issuable upon exercise of warrants owned
by such stockholders) of our shares. If those stockholders act together, they
will have the ability to control matters submitted to our stockholders for
approval, including the election and removal of directors and the approval of
any merger, consolidation or sale of all or substantially all of our assets. As
a result, our other stockholders may have little or no influence over matters
submitted for stockholder approval. In addition, the ownership of such three
stockholders could preclude any unsolicited acquisition of us, and
consequently, materially adversely affect the price of our common stock. These
stockholders may make decisions that are adverse to your interests.
Our organizational documents and Delaware law
make it more difficult for us to be acquired without the consent and
cooperation of our board of directors and management.
Provisions
of our organizational documents and Delaware law may deter or prevent a
takeover attempt, including a takeover attempt in which the potential purchaser
offers to pay a per share price greater than the current market price of our
common stock. Under the terms of our certificate of incorporation, our board of
directors has the authority, without further action by the stockholders, to
issue shares of preferred stock in one or more series and to fix the rights,
preferences, privileges and restrictions of such shares. The ability to issue
shares of preferred stock could tend to discourage takeover or acquisition
proposals not supported by our current board of directors. In addition, we are
subject to Section 203 of the Delaware General Corporation Law, which restricts
business combinations with some stockholders once the stockholder acquires 15%
or more of our common stock.
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The issuance of authorized shares of
preferred stock and additional common stock may result in dilution to existing
stockholders, adversely affect the rights of existing stockholders and depress
the price of our common stock.
We
have 10,000,000 shares of authorized blank check preferred stock, the terms
of which may be fixed by our board of directors. Our board of directors has the
authority, without stockholder approval, to create and issue one or more series
of such preferred stock and to determine the voting, dividend and other rights
of the holders of such preferred stock. Depending on the rights, preferences
and privileges granted when the preferred stock is issued, it may have the
effect of delaying, deferring or preventing a change in control without further
action by the stockholders, may discourage bids for our common stock at a
premium over the market price of the common stock and may adversely affect the
market price of and voting and other rights of the holders of our common stock.
As
of December 31, 2007, there are 1,380,000 shares of preferred stock
outstanding. In addition to the preferred stock, we are authorized to issue
40,000,000 shares of our common stock. As of December 31, 2007, there were 17,066,821
shares of our common stock issued and outstanding. However, the total number of
shares of common stock issued and outstanding does not include outstanding
unexercised options, warrants, convertible debt or convertible preferred shares exercisable for
10,109,410 of shares of common stock. As of December 31, 2007, we have reserved
up to 10,109,410 shares of our common stock for issuance upon exercise of
outstanding stock options, warrants, convertible debt and convertible preferred
stock. We have reserved a total of 1,000,000 shares of common stock under our
2004 Equity Incentive Program. As of December 31, 2007, 232,000 shares have
been issued.
Under
most circumstances, our board of directors has the right, without stockholder
approval, to issue authorized but unissued and nonreserved shares of our common
stock. If all of these shares were issued, it would dilute the existing
stockholders and may depress the price of our common stock.
Any
of (i) the exercise of the outstanding options and warrants, (ii) the
conversion of the preferred stock, or (iii) the conversion by the convertible
debenture holder of such debenture into shares of our common stock will reduce
the percentage of common stock held by the public stockholders. Further, the
terms on which we could obtain additional capital during the life of the
options and warrants may be adversely affected, and it should be expected that
the holders of the options and the warrants would exercise them at a time when
we would be able to obtain equity capital on terms more favorable than those
provided for by such options and warrants. As a result, any issuance of
additional shares of common stock may cause our current stockholders to suffer
significant dilution and depress the price of our common stock.
Common stock eligible for future sale may
depress the price of our common stock in the market.
As
of December 31, 2007, there were 17,066,821 shares of common stock held by our
present stockholders, and approximately 14,247,720 shares may be available for
public sale by means of ordinary brokerage transactions in the open market
pursuant to Rule 144, promulgated under the Securities Act, subject to certain
limitations. 3,100,063 shares, 1,364,005 shares and 1,076,250 shares may be
sold pursuant to current registration statements effective on August 12, 2005,
December 29, 2005 and December 18, 2007, respectively. In general, pursuant to
Rule 144, after satisfying a six month holding period: (i) affiliated
stockholder (or stockholders whose shares are aggregated) may, under certain
circumstances, sell within any three month period a number of securities which
does not exceed the greater of 1% of the then outstanding shares of common
stock or the average weekly trading volume of the class during the four
calendar weeks prior to such sale and (ii) non-affiliated stockholders may sell
without such limitations, provided we are current in our public reporting
obligations. Rule 144 also permits the sale of securities by non-affiliates
that have satisfied a one year holding period without any limitation or
restriction. Based on the number of shares of common stock outstanding,
approximately 3,100,000 shares could be sold under Rule 144 during the next 90
days. The sale of such a large number of shares may cause the price of our
common stock to decline.
The limited prior public market and trading
market may cause possible volatility in the price of our securities.
There
has only been a limited public market for our securities and there can be no
assurance that an active trading market in our securities will be maintained.
In addition, the overall market for securities in recent years has experienced
extreme price and volume fluctuations that have particularly affected the
market prices of many smaller companies. The trading price of our common stock
is expected to be subject to significant fluctuations including, but not
limited to, the following:
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quarterly variations in operating results
and achievement of key business metrics;
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changes
in earnings estimates by securities analysts, if any;
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any
differences between reported results and securities analysts published or
unpublished expectations;
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announcements of new contracts or service offerings by us or our
competitors;
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market reaction to any acquisitions, divestitures, joint
ventures or strategic investments announced by us or our competitors;
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demand for our services and products;
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shares being sold pursuant to Rule 144 or upon exercise of
warrants; and
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general economic or stock market conditions unrelated to our
operating performance.
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These
fluctuations, as well as general economic and market conditions, may have a
material or adverse effect on the market price of our securities.
We have never paid dividends on our common
stock and do not anticipate paying dividends on our common stock for the
foreseeable future; therefore, returns on your investment may only be realized
by the appreciation in value of our securities, if any.
We
have never paid any cash dividends on our common stock and do not anticipate
paying any cash dividends on our common stock in the foreseeable future. We
plan to retain any future earnings to finance growth. Because of this,
investors who purchase our common stock and/or convert their warrants into
common stock may only realize a return on their investment if the value of our
common stock appreciates. If we determine that we will pay dividends to the
holders of our common stock, there is no assurance or guarantee that such
dividends will be paid on a timely basis.
We may be de-listed from the AMEX if we do
not meet continued listing requirements.
If
we do not meet the continued listing requirements of the AMEX and our common
stock is delisted by the AMEX, trading of our common stock would thereafter
likely be conducted on the OTC Bulletin Board. In such case, the market
liquidity for our common stock would likely be negatively affected, which may
make it more difficult for holders of our common stock and preferred stock to
sell their securities in the open market and we could face difficulty raising
capital necessary for our continued operations.
As
set forth in AMEX Company Guide Section 1002:
The
Board of Governors of AMEX may, in its discretion, at any time, and without
notice, suspend dealings in, or may remove any security from, listing or
unlisted trading privileges.
AMEX,
as a matter of policy, will consider the suspension of trading in, or removal
from listing or unlisted trading of, any security when, in their opinion:
(a)
the financial condition and/or operating results of the issuer appear to be
unsatisfactory; or
(b)
it appears that the extent of public distribution or the aggregate market value
of the security has become so reduced as to make further dealings on the AMEX
inadvisable; or
(c)
the issuer has sold or otherwise disposed of its principal operating assets, or
has ceased to be an operating company; or
(d)
the issuer has failed to comply with its listing agreements with the AMEX; or
(e)
any other event shall occur or any condition shall exist which makes further
dealings on the AMEX unwarranted.
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